We’ve talked about how austerity simply doesn’t work in the midst of a recession. It certainly doesn’t help bring back the economy, and it can make deficits larger, because revenues collapse when austerity creates a deeper recession or depression. So when you see editorials like this, claiming that the “least bad option” for Greece would be internal devaluation – essentially wage cuts and higher taxes, pretty much austerity measures that “devalue” the currency by making everyone poorer – understand that this is a call for the masses to suffer to protect banks and elites. Couching austerity in terms of “competitiveness” is really disgusting.

Jeff Madrick has the best explanation I’ve read of how the hysteria toward austerity is really killing Europe:

Proponents of austerity claim that as nations take control of their finances businesses become more convinced that interest rates will not rise and that growth will resume. Their reasoning has been abetted by the financial markets, which drove up rates on Greek debt and soon enough on the debt of nations like Portugal, Spain and Italy. Should these nations not be able to pay their debts, bond buyers wanted a high enough interest rate to compensate for the risk.

But this is pre-Great Depression economics. How could the EU so misread history and treat with contempt the teachings of John Maynard Keynes, who argued that during recessions governments must expand economies through spending and tax cuts, not the opposite? In practice, making large-scale budget cuts or raising taxes, as Keynes showed, will reduce demand for goods and services just when an increase is needed. Faltering sales will undermine the confidence of businesses far more than fiscal consolidation will embolden them. By ignoring this, European policy makers will deepen, not solve, the financial crisis and millions of people will suffer needlessly.

Indeed, austerity economics has not worked in one single case in Europe in the last two years.

That’s the important point. We have the evidence, and austerity has failed. Yet Europe continues to try it. In this country, milder austerity has caused a public sector depression, yet the resistance to this kind of crisis-inducing policy has at least led to an economy treading water. I don’t think there’s any hope for Europe at this point. There doesn’t seem to be anyone willing to come to their senses.

Germany has the financial wherewithal to lead this rescue. But it is blocking the fiscal union from acting like a single nation with compassion for all Eurozone citizens. It is also refusing to underwrite a substantial new fiscal stimulus—good-old fashioned Keynesianism. Is this a new national arrogance? I hope not. So far, Germany is benefitting from the crisis as investors buy German bonds as safe havens from the turmoil. In fact, the failure to act will soon affect the German economy. It will take financial losses on its banks’ loans to the peripheral nations and its export markets will weaken. The bond buyers who are now gobbling up German debt, thus keeping rates low while they rise in Italy, Greece, Portugal, and Spain, will likely stop doing so.

The EU leaders must get over their obsession with eliminating deficits. They now want to reduce every country’s deficit to less than 0.5 percent. This is disaster. It will lead to very slow growth for a long time. Instead, they must use temporary deficits to restart growth. Rarely has policymaking been this poor. Sooner than later, the citizens of these nations will say, No more!, and political instability will result.

Indeed.