I’ve had a little time to think more deeply about the Brussels summit and what was achieved. Germany emerges as the big winner in that tough fiscal rules will be in place in a manner consistent with a non-inflationary environment. What remains to be seen is whether these rules are truly enforced, and, if they are, what effect they will have on future economic growth in Europe. As I have indicated before, the immediate crisis facing Europe is insolvency: governments lack the money to honor their commitments to repay debts to those who own government bonds–banks, private investors, and other governments. The plan adopted on Friday essentially does nothing to address this problem.
Indeed, the plan enforces austerity as the official economic policy of the European Union. Such policies will only make the repayment of debts more difficult over time–economic activity will only decline as wages are depressed within the indebted countries. We’ll have to watch what happens to the yield rates on Italian, Spanish, Greek, and Portuguese debt as short-term indicators of how investors view the prospects for economic growth in those countries. If the rates rise, the investors are betting that economic growth will decline, thus reducing the likelihood of timely repayment of those bonds. In the longer run, we’ll have to watch the yield rates of French and German bonds as an indicator of the overall economic growth rates in Europe.
I don’t usually comment on US domestic politics, but Newt Gingrich’s comments about the Palestinians being an “invented” people deserves a small degree of attention. As we’ve discussed in class, all nations are determined by a sense of self-identity. That process, however, should not suggest that nations are not “real.” National identity is one of the most powerful emotions in politics.
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