REICH: Europe trailblazing a double dip

REICH: Europe trailblazing a double dip

EUROPE is in recession. Portugal, Italy and Greece are basket cases. The British and Spanish economies have contracted for the last two quarters. It seems highly likely that France and Germany are in a double dip as well.

Why should we care? Because a recession in the world’s third-largest economy, Europe, combined with the current slowdown in the world’s second-largest, China, spells trouble for the world’s largest, which is still us.

Remember, it’s a global economy. Money moves across borders at the speed of an electronic impulse. Wall Street banks are part of a capital network extending from Frankfurt to Beijing. Notwithstanding their efforts to dress up balance sheets, big U.S. banks are becoming more fragile.

Meanwhile, goods and services slosh across the globe. If there’s not enough demand for them in the world’s second- and third-largest economies, demand in the U.S. can’t possibly make up the difference.

That could mean higher unemployment here as well as elsewhere. The U.S. economy is already showing signs of slowing.

Don’t blame Europe’s problems on a so-called “debt crisis.” There was no debt crisis in Britain, for example, but it is experiencing its first double-dip recession since the 1970s.

Do blame it on austerity economics â€" the bizarre idea that economic slowdowns result from excessive debt, so government should cut spending.

German Chancellor Angela Merkel, who has led the austerity stampede, and other European policymakers who have followed her have overlooked two big truths.

First, the issue isn’t debt, but the ratio of the debt to the size of the economy.

In their haste to cut the public debt, Europeans forgot the other part of the equation. By reducing public spending, they removed a critical source of demand at a time when consumers and the private sector are still in the gravitational pull of the Great Recession. Th e resulting slowdown is worsening the ratio of Europe’s debt to its GDP. Continued...

A large debt with faster growth is preferable to a smaller debt sitting atop no growth at all. And it’s infinitely better than a smaller debt on top of a contracting economy.

The second big truth they’ve overlooked is the social cost of austerity.

Cutting spending during a time of high unemployment and flat or falling wages doesn’t just worsen unemployment. It also removes public services and safety nets people rely on when times are tough.

This causes political upheaval. Last week, Dutch Prime Minister Mark Rutte was forced out. British Prime Minister David Cameron is on the ropes. In the upcoming presidential election in France, incumbent Nicolas Sarkozy could well be unseated by Francois Hollande, a Socialist.

European fringe parties on the right and the left are gaining ground. Across Europe, record numbers of young people are jobless and their anger and frustration is adding to the upheaval.

Such social and political instability is a drag on growth, too, generating even more uncertainty about the future.

Sound familiar? America is heading down that path.

Even if the U.S. economy survives Europe’s recession, we have our own big dose of austerity economics coming. In less than eight months, drastic spending cuts are scheduled to kick in, along with tax increases on the middle class.

The U.S. economy isn’t healthy enough to bear this burden. That means a double-dip recession.

Policymakers in the United States and in Europe should abandon austerity economics. Instead, set targets for growth and unemployment. Continue to increase government spending and reduce long-term interest rates until those targets are met. Only then adopt austerity. Continued...

It may be too late for Europe, but it’s not too late for us. We don’t have to follow Europe off the cliff.

Robert B. Reich is a professor of public policy at the University of California and former U.S. secretary of Labor. He blogs at www.robertreich.org.

ForexNews.com