Dumb Ideas From Both Sides of the Atlantic

European banks and American politicians are both making serious economic mistakes.

By Joseph E. Stiglitz
Posted Saturday, Aug. 6, 2011, at 6:50 AM ET

The Great Recession of 2008 has morphed into the North Atlantic Recession: It is mainly Europe and the United States, not the major emerging markets, that have become mired in slow growth and high unemployment. And it is Europe and America that are marching, alone and together, to the denouement of a grand debacle. A busted bubble led to a massive Keynesian stimulus that averted a much deeper recession but that also fueled substantial budget deficits. The response—massive spending cuts—ensures that unacceptably high levels of unemployment (a vast waste of resources and an oversupply of suffering) will continue, possibly for years.

The European Union has finally committed itself to helping its financially distressed members. It had no choice—with financial turmoil threatening to spread from small countries like Greece and Ireland to large ones like Italy and Spain, the euro's very survival was in growing jeopardy. Europe's leaders recognized that distressed countries' debts would become unmanageable unless their economies could grow and that growth could not be achieved without assistance.