A Self-Inflicted Recession Threatens World Economy

The economic news out of the eurozone is getting worse every day, and so is the contagion to the rest of the world. The OECD (Organization for Economic Co-operation and Development), the club of 34 mostly high-income countries, has now lowered its projection for eurozone growth for 2012 from 2 percent (in May) to just 0.2 percent. According to their report, the 17-member eurozone economy already “appears to be in a mild recession.” For the U.S., the forecast for next year was lowered from 3 percent to 2.1 percent.

Forecasts for China, India, and Brazil have also been lowered significantly since May. From Asia to Latin America, the problems of the eurozone are reverberating as international banks contract credit, big investment projects are canceled or postponed, stock markets and real estate prices fall, and investor and consumer confidence drops.

And the OECD projections assume that Europe “muddles through” its current financial crisis without any significant financial disaster. But as the eurozone economy worsens, this assumption gets increasingly less tenable.

The simplest solution to the crisis is for the European Central Bank (ECB) to buy enough of the Italian and Spanish debt – and possibly other eurozone countries’ debt – to push down interest rates to a safe level. On Tuesday, Italy paid a record 7.89 percent yield for three-year bonds that it auctioned, well above the 7 percent level that was seen as a threshold for Greece, Ireland and Portugal to move from market financing to the International Monetary Fund (IMF) and European authorities. With lower borrowing costs, Italy and Spain would not be facing a “debt crisis.”

In fact, this whole crisis and recession could have been prevented very easily if the European authorities had simply intervened to maintain low interest rates on the Greek debt a year and a half ago. It is possible that some restructuring might still have been necessary, but the cost would still have been very small relative to the available resources of the European authorities. Because they refused to do this, and instead shrank the Greek economy, increased its debt burden, and allowed its borrowing costs to skyrocket – the crisis spread to the weaker countries of the eurozone, including Italy.

And now capital – including American money market funds – is fleeing Europe’s banking system, threatening a systemic financial crisis of unknowable proportions.

This failure to act – then and now – shows clearly that this is not a “debt crisis” at all but rather a crisis of failed policies. Eurozone finance ministers met Tuesday but failed again to come up with any credible solution that would stabilize the situation.

ECB intervention to stabilize eurozone bond markets is the most obvious, and possibly the only practical solution for several reasons. First, it is the only institution that can move quickly to bring the situation under control at a moment in which we really don’t know how far we are from a meltdown. Nobody anticipated that Germany, for example, would have trouble selling its bonds last week – there will be other unanticipated events that could possibly set off a panic at any time. Second, the ECB can buy the sovereign bonds of Italy or Spain at no cost to the European taxpayer. This is a serious issue, since the amounts of money involved could be large enough to present a political problem in Germany and other better-off eurozone countries. Just as the U.S. Federal Reserve has created $2.3 trillion since 2008 and used it to buy securities in the United States, the ECB could do the same in Europe where such buying is much more desperately needed. And just as there was no measurable effect on inflation in the United States, we would not expect any problem with inflation in Europe. Inflation in the eurozone is currently projected to fall to just 1.6 percent for next year.

The problem is that the ECB, and other European authorities led by the German government, are still playing the same game of brinkmanship that they have been playing for the past two years. They are more worried about forcing austerity policies on the weaker eurozone countries than they are about tanking the European and global economy. They continue to see the crisis as an opportunity to force through unpopular “reforms” – such as cutting jobs and pensions, raising the retirement age, privatizations, and reducing the size and scope of the welfare state. They have already caused a recession in the eurozone and seem more than willing to let it deepen in order to get what they want. The big question now is whether their recklessness will bring on a financial crisis that triggers a world recession.

Some of us have called for the Federal Reserve to intervene before this happens and do the ECB’s job for them. It has the capacity to do so, and like its prior quantitative easing in the U.S., would be costless to the taxpayers. It might cause a bit of a political storm, but that would be a small price to pay to avoid a recession that would throw millions more people out of work – in the United States, Europe, and much of the world.

Mark Weisbrot is an economist and co-director of the Center for Economic and Policy Research. He is co-author, with Dean Baker, of Social Security: the Phony Crisis.

This article originally appeared in The Guardian


More articles by:

Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C. and president of Just Foreign Policy. He is also the author of  Failed: What the “Experts” Got Wrong About the Global Economy (Oxford University Press, 2015).

March 20, 2018
Jonathan Cook
US Smooths Israel’s Path to Annexing West Bank
Jeffrey St. Clair
How They Sold the Iraq War
Chris Busby
Cancer, George Monbiot and Nuclear Weapons Test Fallout
Nick Alexandrov
Washington’s Invasion of Iraq at Fifteen
David Mattson
Wyoming Plans to Slaughter Grizzly Bears
Paul Edwards
My Lai and the Bad Apples Scam
Julian Vigo
The Privatization of Water and the Impoverishment of the Global South
Mir Alikhan
Trump and Pompeo on Three Issues: Paris, Iran and North Korea
Seiji Yamada
Preparing For Nuclear War is Useless
Gary Leupp
Brennan, Venality and Turpitude
Martha Rosenberg
Why There’s a Boycott of Ben & Jerry’s on World Water Day, March 22
March 19, 2018
Henry Heller
The Moment of Trump
John Davis
Pristine Buildings, Tarnished Architect
Uri Avnery
The Fake Enemy
Patrick Cockburn
The Fall of Afrin and the Next Phase of the Syrian War
Nick Pemberton
The Democrats Can’t Save Us
Nomi Prins 
Jared Kushner, RIP: a Political Obituary for the President’s Son-in-Law
Georgina Downs
The Double Standards and Hypocrisy of the UK Government Over the ‘Nerve Agent’ Spy Poisoning
Dean Baker
Trump and the Federal Reserve
Colin Todhunter
The Strategy of Tension Towards Russia and the Push to Nuclear War
Kevin Zeese - Margaret Flowers
US Empire on Decline
Ralph Nader
Ahoy America, Give Trump a Taste of His Own Medicine Starting on Trump Imitation Day
Robert Dodge
Eliminate Nuclear Weapons by Divesting from Them
Laura Finley
Shame on You, Katy Perry
Weekend Edition
March 16, 2018
Friday - Sunday
Michael Uhl
The Tip of the Iceberg: My Lai Fifty Years On
Bruce E. Levine
School Shootings: Who to Listen to Instead of Mainstream Shrinks
Mel Goodman
Caveat Emptor: MSNBC and CNN Use CIA Apologists for False Commentary
Paul Street
The Obama Presidency Gets Some Early High Historiography
Kathy Deacon
Me, My Parents and Red Scares Long Gone
Jeffrey St. Clair
Roaming Charges: Rexless Abandon
Andrew Levine
Good Enemies Are Hard To Find: Therefore Worry
Jim Kavanagh
What to Expect From a Trump / Kim Summit
Ron Jacobs
Trump and His Tariffs
Joshua Frank
Drenched in Crude: It’s an Oil Free For All, But That’s Not a New Thing
Gary Leupp
What If There Was No Collusion?
Matthew Stevenson
Why Vietnam Still Matters: Bernard Fall Dies on the Street Without Joy
Robert Fantina
Bad to Worse: Tillerson, Pompeo and Haspel
Brian Cloughley
Be Prepared, Iran, Because They Want to Destroy You
Richard Moser
What is Organizing?
Scott McLarty
Working Americans Need Independent Politics
Rohullah Naderi
American Gun Violence From an Afghan Perspective
Sharmini Peries - Michael Hudson
Why Trump’s Tariff Travesty Will Not Re-Industrialize the US
Ted Rall
Democrats Should Run on Impeachment
Robert Fisk
Will We Ever See Al Jazeera’s Investigation Into the Israel Lobby?
Kristine Mattis
Superunknown: Scientific Integrity Within the Academic and Media Industrial Complexes