Europe's leaders are determined to repeat the mistakes of the past, but they've forgotten their own recent history.
It is not quite clear what the French president, Nicolas Sarkozy, and the German chancellor, Angela Merkel, agreed upon this week, but what we know is more than a little disturbing. They have baked austerity economics into the eurozone. Germany wants all of the eurozone to act like it does: get control of your finances, suppress wage growth, and subsidize manufacturing. In what seems like yet another monumental case of national egotism, they believe that a little discipline is all that is needed and that the profligate must pay the price.
Of course, the German model could not have worked if everyone had followed it. Someone has to buy the goods that are being made and exported. This requires rising wages.
Mr. Sarkozy seems to sympathize with the disciplinarian approach, though he advocates a softer form of it. The result is that everyone will have to abide by the deficit restrictions handed down. Never mind that France and Germany were the main violators of the Maastricht agreement that was supposed to hold deficits to 3 percent of GDP early in the previous decade.
The fantasy is that this will somehow produce growth, but it won't. To repeat, someone has to boost aggregate demand.
What gets one angry, in particular, is that most of the countries in trouble had their public finances well under control. This was true in Ireland, Portugal, Spain, and Belgium. Germany's deficit levels were not as well controlled. Where is the cause and effect here?
And then there is the nonsensical idea that private creditors will not have to take any losses. As many are now pointing out, Ireland refused to allow its remarkably irresponsible banks, which financed a property boom that made America's look fairly tame, to take any losses. Instead, the taxpayers took on all the debt themselves. As for Ireland's recent bounce back, GDP is still way below pre-recession levels and unemployment is devastating. The Irish people, who seem to believe sacrifice is a national fate, are leaving in droves. But the Irish government is praised, perhaps by those who advise Sarkozy and Merkel, for cutting social spending and forcing its people to suffer even more. Meanwhile, the business model of Ireland is all about tax breaks for international companies who don't really hire that many people in Ireland.
The point of all this is that it is supposed to give the European Central Bank, the world's tallest ostrich, cover to remove its head from the sand for a moment. Then it could perhaps support collapsing sovereign debt, which is a task it should be undertaking anyway.
Imagine it is 1931 or so. An enraged establishment of wise men (and perhaps a couple of women) think they know what's good for America in a depression. They say we should pass a law limiting the size of any deficit financing. Meanwhile, the Federal Reserve will continue to maintain vigilance lest inflation raise its head again -- which it will inevitably do. If that had happened, we might still be in the Great Depression.
Of course, no one will really abide by the new principles when and if this crisis passes. And that's the good news. The bad news is that it delays the day of reckoning when Europe must restructure sovereign debt, accept that the Greeks and Irish, and perhaps the Italians and Spaniards, have suffered enough penance, and issue some eurozone bonds to cover the financial holes and perhaps provide social transfers to the suffering countries. All this will require an ECB with its head facing the sun, willing to be the lender of last resort for a while.
They may get to this point. And after that? Will Germany begin to provide sufficient stimulus to enable the eurozone to grow again? I think the odds are slightly above 0.5 that the eurozone will develop an adequate rescue package. Austerity economics will not lead to growth, but the very opposite. Don't we all know that?
One of the great clichés is that those who forget history are destined to repeat it. More relevant and more interesting is that those who do know history repeat it anyway. The baser human instincts keep tugging us in the direction of monumental error. They are at work in Europe again.
Roosevelt Institute Senior Fellow Jeff Madrick is the author of Age of Greed.