What is really wrong with Europe

That’s the subject of a recent column by the Financial Times‘ Martin Wolf.  It is a different diagnosis than is found in the US media:

What happened in Europe was that countries in its industrial core achieved massive export surpluses by combining high labour productivity with stagnant wages. The resulting revenues led to huge capital flows into peripheral countries that at the same time experienced matching export deficits. In the financial crisis, these capital flows came to a sudden stop. Potential investors saw insufficient demand for the products of entrepreneurial investments and preferred to park their money at near-zero interest rates.

Faced with a breakdown of demand, the peripheral eurozone countries had no currency that they could devalue. Financial operators saw the opportunity to drive up interest rates on bonds of vulnerable countries, cashing in revenues on their surging debt. European leaders have responded with fainthearted attempts to regulate financial markets and with aggressive steps towards austerity everywhere, causing particularly cruel economic and social costs in peripheral countries.

This will not work. The latest figures from the European Commission suggest that economic growth in the eurozone will come to a virtual standstill in the second half of the year. Employment policy has become a zero-sum game: employment gains in one country are possible only at the expense of other member states. What is worse, the expectation of inflation below 2 per cent will be matched by expectations of growth below 2 per cent.

It is well worth reading the full column here.

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