Forum Left, 6/26

Austerity = Great Depression 2.0

By Rana Odeh

The most common confusion surrounding the Eurozone sovereign debt crisis is the assumption that the United States is heading towards the same fiscal cliff that the 17 Eurozone countries are facing right now. The best way to understand it is to imagine that each one of the 17 Eurozone countries is the equivalent of one of the 50 states in the United States. The state of Ohio cannot print its own money. It can tax its residents in order to spend on public infrastructure, education, law and order and whatever the public authorities decide to spend on. If the desired spending level of the state of Ohio exceeds its tax revenues, then Ohio must issue bonds to finance its deficit spending. When those bonds come to maturity, Ohio must be able to repay its debt by raising enough tax revenues to meet its debt service commitments. The same is true for the so-called PIIGS (Portugal, Italy, Ireland, Greece, and Spain), as well as their fellow Eurozone partners.

The Eurozone does not have a fiscal authority that can print money to engage in bailouts, redistribution policies and industrial policies. Such authority would be the equivalent of the U.S. Treasury, which operates at the federal level. The European Central Bank (ECB), which is the equivalent of the Federal Reserve Bank in the U.S., is the only agency allowed to print money in the Eurozone. However, the leadership of the ECB suffers from a severe inflation phobia, which prevents the ECB from financing a fiscal stimulus in Greece and Spain.

The problem with the Eurozone project is that it is not a fully developed union. The Eurozone countries gave up their financial sovereignty to the ECB, but they still retain a weak form of fiscal and political sovereignty. A country cannot be “kind of sovereign” and hope for any serious prospects for economic prosperity. You’re either fully sovereign or you’re not. That is what the Eurozone countries have to decide. You’re either pregnant, or you’re not, you can’t be kind of pregnant.

At this point, it is mainly Germany that insists on starving the Greeks until they pay their debt. As the strongest economy in the Eurozone, Germany dominates the ECB policy making as well as any discussions about potential bailouts or amendments to the Eurozone treaties. Can you imagine New York or California forcing Ohio or Michigan into severe depression because of some interstate trade imbalances? That would be unimaginable. As a matter of fact, nobody even cares whether Ohio has a trade deficit or trade surplus with the other 49 states in the union. We have a sovereign federal government that is responsible for managing the macroeconomy of the United States.

It is sad to watch the Eurozone countries muddle through a Great Depression with more aggressive austerity policies. Of all countries, Germany has the best experience with the challenges of monetary unions. After the fall of the Berlin Wall, West Germany managed a relatively smooth reunification with the East. Recognizing the significant wage, productivity, and infrastructure differences between East and West, Germany consistently transferred 4% of its GDP to the Eastern part of Germany. So, why can’t they recognize the necessity of doing the same for Greece or Spain?

The Eurozone project is the ultimate manifestation of neoliberal philosophy. The system is designed to automatically trigger austerity policies during economic crises. Why? Well, because crises are the best time for neoliberals to attack government programs in the name of sound fiscal policy, and to weaken the welfare state. So, the lesson we must learn in the United States from the Eurozone experience is clear: austerity will lead to a great depression. The U.S. must go back to the New Deal policies that saved us from the wreckage of the Great Depression of the 1930s. Direct public works job creation is the name of the game when the private sector is not spending and not hiring. A 2012 New Deal would create stable income for families to keep them in their homes, put food on the table, pay their bills and grow the economy.

Rana Odeh is a DCP Debate Forum freelance writer. She holds a BA in English and Philosophy from UD and is currently a graduate student in the ICP Program at Wright State University.  Reach Rana at or view her work at

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