Serious Voices Drown Out Sensible Ones in Europe

(Image: MEDI; Albania / CartoonArts International / The New York Times Syndicate)(Image: MEDI; Albania / CartoonArts International / The New York Times Syndicate)I’ve just finished writing a review of Tim Geithner’s new book Stress Test. One thing I didn’t mention in it was something surprising and refreshing: Mr. Geithner makes fun of Simpson-Bowles syndrome!

“There was a lot of good policy in Simpson-Bowles,” he writes, “including cuts in wasteful farm subsidies and increased infrastructure spending to boost growth, but the benefit cuts and tax reforms were pretty regressive and the health care savings very modest. Nevertheless, the plan would attain mythic status among Washington elites as a symbol of noble bipartisan seriousness.”

Indeed. And this leads me to another thought: I know a place where noble bipartisan seriousness truly rules, where the great and the good come together to form a consensus about what must be done, and the public is then informed about what it will support. It’s called Europe – and it’s not working very well.

Admittedly, we have our problems in the United States too – mainly the fact that crazy people have de facto blocking power over policy.

But there’s this remarkable thing in Europe where critical voices simply aren’t heard. The economist Lars Svensson can spend years pointing out that the Riksbank is blowing it, and nobody listens at all until an outsider weighs in. Every economist with a lick of sense is terrified about the euro area’s slide toward deflation, but the orthodox are surprised to hear that it’s a problem.

It’s true that sometimes we do need to have people come together to do the right thing.

But in recent years it has been a reliable rule that when important people reach a consensus about something, they’re dead wrong.

Diminished Expectations

Spanish bond yields are now about the same as yields on American bonds. This is telling us two things, one good, one bad. The good news is that investors no longer have much fear of a euro crackup any time soon. The bad news is that they expect Europe to remain depressed for a long time.

On that second point, you do find people saying that because the euro zone has resumed positive growth, the crisis is over. I find it useful here to point out that Japan’s long stagnation consisted mostly of periods when the economy was growing. In fact, it spent most of the time growing faster than Europe is currently managing.

So when people ask me whether it’s possible that Europe will experience a Japanese-style lost decade, I tell them that the real question is whether it’s possible that it won’t; recovery, not stagnation, is the more difficult to predict.