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Michael Hudson
Jeffrey Sommers
The Death of "Social Europe"

"Be like Latvia,” bankers and the financial press are asking governments from Greece to Ireland and now Spain as well. “Why can’t you be like Latvia and sacrifice your economy to pay the debts that you ran up during the financial bubble?” The answer is, they can’t – without an economic, demographic and political collapse that will only make matters worse.

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So do Greece and Ireland, and now perhaps Spain and Portugal as well, understand just what they are being asked to emulate? The EU policy seems to be for wage earners and pension savers to bail out banks for their legacy of bad mortgages and other loans that cannot be paid – except by plunging their economies into poverty. How much “Latvian medicine” can these countries take? If their economies shrink and employment plunges, where will their labor emigrate?

Without public investment, how can they become competitive? The traditional path is for mixed economies to provide public infrastructure at cost or at subsidized prices. But if governments “work their way out of debt” by selling off this infrastructure to buyers (on credit whose interest charges are tax-deductible) who erect rent-extracting tollbooths, these economies will fall further behind and be even less able to pay their debts. Arrears will mount up in an exponential compound interest curve.

The EU’s creditor nations and banks are seeking to resolve the crisis in way that will not cost them much money. The best hope, it is argued, given the inability of the crisis countries to depreciate their currencies, is “internal devaluation” (wage austerity) on the Latvian model. Bankers and bondholders are to be paid out of EU/IMF bailout loans.

The problem is the austerity imposed by existing debt levels. If wages (and hence, prices) decline, the debt burden (already high by historical standards) will become even heavier. This is what the United States suffered in the late 19th century, when the price level was driven down to “restore” gold to its pre-Civil War (and hence, pre-greenback) price. Presidential candidate William Jennings Bryan decried crucifying labor on a cross of gold in 1896. It was the problem that England earlier experienced after the Treaty of Ghent ended the Napoleonic Wars in 1815. Aside from the misery and human tragedies that will multiply in its wake, fiscal and wage austerity is economically self-destructive. It will create a downward demand spiral pulling the EU as a whole into recession.

The basic problem is whether it is desirable for economies to sacrifice their growth and impose depression – and lower living standards – to benefit creditors. Rarely in history has this been the case – except in a context of intensifying class warfare. So what will Latvians, Greeks, Irish, Spaniards and other Europeans do as their labor is crucified by “internal devaluation” to shift purchasing power to pay foreign creditors?

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