Jamie Galbraith On The Global Economic Crisis and What Is Needed To Save Europe

Galbraith delivered this speech to a labor union audience in Germany. He argues that we are witnessing a global economic crisis that has three causes.  Energy prices have doubled since the good old days during the thirty years after WW ll.  The second factor is the computer revolution which is similar to what happened to horses after the invention of the internal combustion engine.  Office workers are being replaced by computers and computers along with the Internet have facilitated globalization.  The third factor is ideological.  The US and Europe embraced the ideology of free markets.  This led to the deregulation and de-supervison of industry.  In particular it led to fraudulent behavior of the international banks.  This, in turn, destroyed the real estate finance market as well as the public finance market in much of Europe.  The sovereign debt on the periphery is perpetual.  It will have to be paid off, or written off, and the prospects for paying it off in full are not good.

The US is in a better position than Europe for several reasons. Its automatic stabilizers kicked in and supported unemployed workers. Fiscal policy and monetary policy in the US has also supported the economic recovery. In Europe austerity was imposed on the periphery and monetary policy is not available to them.  In the US those who defaulted on their mortgage debt lost their investment, but they are free from their debt when they default.  In Ireland, for example, debtors cannot escape from their obligations by defaulting.

Europe has two models for breaking up the eurozone.  One is Yugoslavia which led to civil war.  The other is Czechoslovakia  which did it without warfare.  Neither of them were easy.  The only alternative for saving the eurozone will require leadership from Germany.  Its political leaders have not done a good job of selling the public on what must be done to support the rescue operation.  The result of a break up is hard to predict because there is no legal framework to deal with all of the things that will need to be done.  It will also be catastrophic for the North as well as for the South.