In an interview with the New York Times about the Eurozone plan, Simon Johnson observes that “unless the troubled countries now show strong growth, there is still trouble ahead.” Carmen Reinhardt sounds a cautionary note on this score, noting that “the process of deleveraging, as Vincent Reinhart and I have stressed, is a multiyear process that takes up the better part of a decade in the wake of severe financial crises.”
I think that the history, though bleak, may even be creating false hope here. Ask yourself, under what circumstances would — say — Spain possibly start seeing strong growth? Given that Germany is already at full employment and the European Central Bank is already moving to tighten money, you need to imagine an increase in Spanish demand that doesn’t cause an increase in German demand that prompts an offsetting ECB tightening. It could happen, I suppose, but it’s difficult to spell a case out. Maybe the growing Chinese middle class will develop an intense, but incredibly specific, taste for Spanish wine and jamón serrano.
So you need reforms on the real side. Which is good. Obviously, real side factors are always important and countries prosper over the long run by improving their real economy. But austerity budgeting and high unemployment make it less likely, not more likely, that Spain is going to be able to improve its infrastructure and education system. Higher taxes and reduced services make it likely that Spain’s highest-skill citizens will tend to leave the country at a higher rate and reduce the rate at which foreigners want to come to Spain. So you have regulatory policy reforms to increase efficiency. Obviously, I’m a believer in such things. But in general, it’s a heavy lift politically. And it tends to get to be a heavier lift when you’ve already got mass unemployment. People become very resistant to any kind of efficiency enhancing reform that could cost them their job when there’s double digit joblessness, and understandably so. What’s more, these problems tend to be more of a “death by a thousand cuts” thing than a single problem you can easily fix. Of course if you have terrible pre-existing policies — think China in the mid-70s — you can get a giant real boost by letting farmers sell some surplus agricultural products at market. But is there some credible case that Spain and Portugal feature that kind of low-hanging fruit? How about the Irish Tiger? I’m not hearing about it.
This is a plan that only works with higher growth, but it has no path to create the growth or even create the conditions under which the growth is plausible.