One of the more common Republican talking points in response to the Eurozone crisis is to connect European debt to our debt. In other words, as the American right sees it, fiscal mismanagement and large welfare states have pushed an entire continent to the breaking point, and unless U.S. policymakers want to see a replay here, we should impose harsh austerity measures, shrink government, and focus on debt reduction.
The problem with the GOP talking points is that they’re wrong. For one thing, plenty of countries with generous welfare states — most notably, Sweden — are weathering the storm quite well, and are in some cases, thriving.
But as Paul Krugman explained in his new column, that’s the last of the trouble with the conservative argument.
First, if you look around the world you see that the big determining factor for interest rates isn’t the level of government debt but whether a government borrows in its own currency. Japan is much more deeply in debt than Italy, but the interest rate on long-term Japanese bonds is only about 1 percent to Italy’s 7 percent. Britain’s fiscal prospects look worse than Spain’s, but Britain can borrow at just a bit over 2 percent, while Spain is paying almost 6 percent.
What has happened, it turns out, is that by going on the euro, Spain and Italy in effect reduced themselves to the status of third-world countries that have to borrow in someone else’s currency, with all the loss of flexibility that implies. In particular, since euro-area countries can’t print money even in an emergency, they’re subject to funding disruptions in a way that nations that kept their own currencies aren’t — and the result is what you see right now. America, which borrows in dollars, doesn’t have that problem.
The other thing you need to know is that in the face of the current crisis, austerity has been a failure everywhere it has been tried: no country with significant debts has managed to slash its way back into the good graces of the financial markets. For example, Ireland is the good boy of Europe, having responded to its debt problems with savage austerity that has driven its unemployment rate to 14 percent. Yet the interest rate on Irish bonds is still above 8 percent — worse than Italy.
For the better part of the year, Republicans, including GOP leaders on Capitol Hill, have cried “Greece!” anytime they hear someone dare to suggest now would be a good time to invest in job creation. Whether the argument is the result of hackery, dishonesty, or ignorance is unclear, but regardless of the motivation, it’s nonsense.
Those who consider congressional Republicans credible on economic policy simply aren’t paying close enough attention.