European leaders met in Brussels and pulled an all-nighter, like sophomores cramming before a final. Their exam was a real-world project: restore investor confidence in the Eurozone. A lot of pressure was put on David Cameron to bring the U.K. into the new agreement, but he declined. The measures the Eurozone nations will take may restore investor confidence anyway--but they will fail miserably at staving off financial crisis. Why, you ask? Well....
For one thing, "restoring investor confidence" and "fixing the broken system" are two very different goals. If investors saw clearly the origin of the financial crisis, the two would line up a lot better. But investors, like the policy makers who met in Brussels, are working out of old-fashioned infinite-growth, infinite planet economic thinking. If people are stupidly confident, then restoring their confidence isn't going to fix a damn thing.
Instead of doing what needed doing to solve the problem of recurrent (and increasingly painful) crises of debt repudiation within the global economy, the policy makers who met in Brussels went after government deficits as the culprit. The new plan: the monetary union must become a fiscal union, meaning Eurozone member nations have to balance their budgets over the economic cycle (go into deficit in times of recession, run a surplus otherwise), submit their budgets to the European Commission for review and approval, and suffer larger penalties if they don't obey the rules.
This means "austerity budgets" -- cuts to social services, cuts to regulatory enforcement -- and a loss of national sovereignty (and citizen influence over national policy) within the Eurozone.
It's all straight-up neoclassical thinking. Sure, if you have a monetary union you'll eventually need a fiscal union. This necessity was, some say, well-known at the founding of the Eurozone, but wasn't included in the design because the nations of Europe weren't ready for it. (This makes the EU a lot like the US--the US Constitution contained some aspects, like the Commerce clause, that pretty much guaranteed the further development of Federal power as the economies of the several states became more integrated.)
This standard thinking may "restore investor confidence" (read, "reassure bankers that the necessary debt repudiation won't come as inflation, which would impose losses on banks"). But it won't fix the problem which is simply stated:
the system has a systemic need for some form of debt repudiation
If you bottle up that pressure for debt repudiation by controlling inflation--requiring that governments keep deficit spending in check--then the pressure will burst out as a crisis. You'll get defaults, bankruptcies, foreclosures; you'll get unemployment, stock market crashes, loss of expected benefits (pensions, health care, contracted raises), loss of paper assets of all kinds. These are all forms of debt repudiation.
A national paper ran an editorial a few days ago calling on the Eurozone to do pretty much what it just did. As I tried to explain it in a letter to the editor of that paper (which may or may not be printed):
The first step toward solving a problem is to define it accurately. Your editorial “The Wrong Fix” declares that the root of the European debt crisis is “lack of growth.” This is the conventional view, and while accurate as far as it goes, it is incomplete and obscures the path toward a successful resolution of the European Debt Crisis.
A fuller diagnosis: European economies haven’t been able to grow fast enough to pay back the burden of debt that has been wagered on them.
This diagnosis allows us to see another possible solution—limit the total creation of debt within the economy to the amount that we can reasonably expect to pay back through growth.
Because an economy deals in physical reality—matter and energy drawn from the planet—it is impossible for it to grow infinitely. But debt, being entirely imaginary, can grow however rapidly we choose to let it. A crisis of debt repudiation is the unavoidable result of a mismatch between the two. Your conventional framing leads straight toward regressive and destructive policies: elimination of the environmental and social safeguards that set limits to economic growth, but which give us a higher standard of living by protecting us from environmental harms and economic insecurity.
Since a higher standard of living, and not growth for its own sake, is the ultimate purpose of the economy, it makes sense to allow for the possibility that the solution to our system’s regular crises of debt repudiation lies in controlling the creation of debt. The alternative—demanding more and more economic growth, ever larger throughputs of matter and energy—is impossible to sustain on a finite planet. And in the short run the infinite growth model is counterproductive. It leads to a declining standard of living for the majority of the world’s population—Americans no less than Greeks and other Europeans.
Now, I happen to believe that we've reached the limits to growth. Further growth in throughput is uneconomic growth, because it costs us more in lost ecosystem services and other "disamenities" than we get in benefits. Pro-growth people are usually the ones who get those benefits by imposing losses on the rest of us.
But you don't have to believe that we've reached the limits to growth in order to see that the basic problem is that there's a mismatch between our rate of debt creation and the rate at which debt can be paid back. The question, "how much can real wealth grow under reasonable conditions of environmental safeguards and worker (and citizen) health and safety?" is in part an empirical question. (The non-empirical part has to do with environmental and health and safety rules, and I think only an out-and-out infinite planet theorist can argue that environmental constraints need to be lessened. That position has no support in evidence and rational argument.) Find the answer, and then limit the growth in debt--all debt, public and private--to that amount, and you will have fixed a broken system.
If more investors understood that the creation of debt, both public and private, is the driver of our crises of debt repudiation, reining in debt creation would be the only way to restore their confidence. Educating investors to finite-planet thinking is a huge task, but eventually they'll come around. They'll have to. The planet is finite, after all, so it's going to keep offering the lesson until we all get it.