The experts keep chipping in on European crisis giving their own perspective based on their speciality.
He begins really well with an amazing quote:
ABOUT FIFTY YEARS AGO, in 1961, Jean-Paul Sartre complained about the state of Europe. “Europe is springing leaks everywhere,” he wrote. He went on to remark that “it simply is that in the past we made history and now history is being made of us.”
Sen talks about the social impact of the crisis and austerity measures. He looks at three issues that have gone wrong in Europe:
SO WHAT HAS GONE WRONG in Europe in recent years? I shall divide my analysis into three broad subjects: the challenge of European unity; the requirements of democracy; and the demands of sound economic policy. These are all related to each other, analytically as well as empirically.
European unity means democracy was a must. For both to function, sound economic policy was needed.
On economic policy, he criticizes austerity as it leads to problems in democracy and finally to unity.
AND WHAT ABOUT the soundness of Europe’s economic policy-making? There are two issues that arise immediately: the viability of the common European currency, the euro; and the policy of austerity—chosen by or imposed upon—European countries in financial difficulty. On the first question, most of the attention has tended to be concentrated on the shortrun survival of the euro, through providing liquidity to the troubled countries, by one means or another. Many alternative rescue efforts are being considered right now, such as new bailout packages helped by the financially stronger countries, or the floating of guaranteed euro bonds, or the purchase of Greek, Spanish, and other high-interest bonds from troubled countries by Germany (thereby earning high interest, without much risk, so long as the euro survives in its present form).
In the absence of exchange rate adjustments, competitiveness for the countries falling behind can indeed be recovered through sharp wage cuts and other ways of cutting earnings, thereby reducing living standards more drastically than would be otherwise necessary. This would yield much extra suffering and an understandable resistance. There would also be political resistance to the other “solution” through increased migration of the population—for example, from Greece to Germany. A unified currency in a politically united federal country (such as in the United States of America) survives through means (such as substantial population movements and significant transfers) that are not available to a politically disunited Europe. Sooner or later the difficult question of the longrun viability of the euro would have to be addressed, even if the rescue plans are completely successful in preventing a breakdown of the euro in the short run.
HOW EFFECTIVE is austerity, or drastically cutting public expenditures, in steering the countries in difficulty out of their immediate problem of excessive deficits and huge debts? It is difficult to see austerity as a soundly reasoned economic solution to the European malaise today. And it may not even be a good way of reducing public deficits.
The policy package demanded by the financial leadership of Europe has been, despite its rhetoric, severely anti-growth. The economic growth of the euro zone has been undermined dramatically, and the GDP there has been falling rather than growing—so much so that the recent report that there was zero growth in the euro zone in the first quarter of 2012 has been widely greeted as “good news.” If Germany is taken out of the total, the result would be continued bad news of falling output for the rest of the euro zone. Spain, Portugal, and Italy continued to decline in these months, and while Greece tempered its free fall from a previousnegative 6 percent in 2011, the Greek economy has lost nearly a quarter of its production since 2008. While the economies and the people involved have suffered, the deficits have been quite resistant. The earning of public revenue is impeded by dampened—or negative—economic growth, and this directly cuts down the state’s ability to cut deficits.
He says austerity in unsuited not just for Keynesian reasons, it is more about social justice:
But I would also argue that the unsuitability of the policy of austerity is only partly due to Keynesian reasons. Where we have to go well beyond Keynes is in askingwhat public expenditure is for—other than for just strengthening effective demand, no matter what its content. As it happens, European resistance to savage cuts in public services and to indiscriminate austerity is not based only, or primarily, on Keynesian reasoning. The resistance is based also on a constructive point about the importance of public services—a perspective that is of great economic as well as political interest in Europe.
THERE IS A CENTRAL ISSUE of social justice involved here—that of reducing rather than enhancing injustice. The public services are valued for what they actually provide to people, especially to vulnerable people, and this is something for which Europe had fought. Savage cuts in these services undermine what had emerged as a social commitment in Europe at the end of World War II, which led to the birth of the welfare state and the national health services in a period of rapid social change in the continent, setting a great example of public responsibility from which the rest of the world—from East Asia to Latin America—would learn.
In order to understand the inadequacy of Keynes as a guide to solving the European economic crisis, we have to ask: what kind of an economist was Keynes in terms of his vision of a good society? Keynes did say—famously, and accurately enough—that paying laborers to dig holes and then to fill them up can be a very good thing, because of its impact on increasing effective demand to combat a recession or a depression. This is fine as far as it goes, but Keynes had extremely little to say on what social commitments a state should have—what public expenditure should be for, other than for just strengthening market demand through state intervention.
Going back to Adam Smith (and this is not invisible hand):
The guiding principle has to be, rather, what Adam Smith specified with clarity in The Wealth of Nations: how to work for a good functioning of the economy to be able to provide the public services that people agree are needed. Sound political economy, Smith argued, has to have “two distinct objects”: “first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the publick services.” Achieving the latter is just as much the goal of good economics as achieving the former.
Finally, and very importantly, the cause of necessary economic reforms has not been served by confounding that necessity with the policy of austerity. Indeed, serious consideration of the kinds of reform that are needed has been hampered, rather than aided, by the loss of clarity about the distinction between reform of bad administrative arrangements (such as people evading taxes, government servants using favoritism, banks being exempt from necessary discipline, or—for that matter—preserving a nonviable system of early retiring ages), and austerity in the form of ruthless cuts in public services and basic social security. The requirements for alleged financial discipline have tended to amalgamate the two, even though any analysis of social justice would view policies for necessary reform in an altogether different way from drastic cuts in important public services. Even if that distinction may have been lost in rather crude financial thinking, opportunities for adequate public reasoning, in “government by discussion,” could have brought out its relevance clearly enough.
Thoughtful essay by Prof. Sen…