While Greece is right on the razor's edge of default, and may yet be granted some overdue relief, the prospects for broader European recovery are still very bleak until the politics get a lot more radical.
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PARIS -- The good news: Austerity is finally on the defensive. At the Camp David G-8 summit, all the other national leaders pressed German Chancellor Angela Merkel to relent and to allow Europe's ravaged economy to grow.

The bad news: The shift is mainly at the level of rhetoric and token policy changes. Nobody in the political mainstream is seriously proposing the kind of radical reform that would allow growth to occur.

Two weeks of interviews with progressive leaders in Europe -- academics, the left wing of labor and social democratic parties, NGO groups -- suggest a remarkable consensus on what needs to be done. You can see it in any of several manifestos from groups like Social Europe, the European Trade Union Confederation, Re-Define, Foundation for European Progressive Studies, Finance Watch, the British group Compass, among several others.

The elements:

Drastic debt relief for Greece, so that the Greek economy can begin to grow again, coupled with real tax reform in Greece so that wealthy Greeks begin paying taxes owed. This means cancelling a lot of the Greek debt. Yes, the previous Greek government cooked its books, but do you think the government of East Germany didn't? Yet that didn't prevent the West German government from pumping about a trillion dollars into the former communist state. Oh, but these people were Germans, not Greeks.A makeover of the European Central Bank, so that it can lend directly to European countries, rather than using a subterfuge of low interest rate loans to Europe's commercial banks, which in turn buy government bonds. The problem with the present policy is that it is a house of cards that puts banks more deeply in debt.

Radical constraints on financial speculation, so that hedge funds and banks stop speculating against the bonds of weak countries and start financing the real economy. A combination of regulation and a financial transaction tax could achieve this.

Mutualization of sovereign debt through Euro bonds, so that weak countries are not made to pay exorbitant interest rates to finance crushing debt. This would also take a lot of the profit out of speculation. The behavior of money markets in the European depression is pro-cyclical -- it piles on vulnerable countries and deepens the slump. Government policy needs to be counter-cyclical.

Massive public investment financed at the European level, to improve green infrastructure and create jobs. This is a "supply-side" as well as a "demand-side" program. It improves productivity even as it boosts purchasing power

Suspension of the deficit reduction clause in the Stability and Growth Pact that requires EU member countries to move towards deficit reduction in a deep recession. The pact, in fact, has just such an escape provision, allowing countries to exceed the debt and deficit limits of Europe's Maastricht Treaty, which created the European Union, when they face an economic emergency. But Chancellor Merkel and the European Central Bank have been behaving as if that clause didn't exist, putting pressure on Greece, France, Italy and Spain to cut deficits in a deep slump.

The rhetoric has changed, but how many of these radical policy changes are seriously on the table?

Perhaps two.

European leaders are now talking seriously about cobbling together an investment program of as much as 200 billion euros, using mainly unused regional development funds. The funds haven't been used because peripheral countries such as Greece, Portugal, Spain and Ireland are under such pressure from the same EU to cut spending that they can't come up with the necessary national matching funds. These investment funds though not large enough to pull Europe out of its incipient depression; but if targeted at small countries, they could make a constructive difference.

There is also serious talk, belatedly, about suspending the austerity provisions in the EU's 1997 Stablity and Growth Pact, as embellished by the austerity compact agreed to by 25 European governments last December.

But because of the general conservatism of most European leaders, there is no agreement on the more radical and necessary measures.

There is little support for Euro-bonds, little support for converting the ECB to a true central bank, and not quite enough support for a financial transactions tax.

A financial transactions tax could do double duty. It could take a lot of the profit out of speculation against sovereign bonds -- and also raise revenue needed for public investment. But though most European national governments now favor such a tax, it would be difficult to implement without cooperation of the two biggest money centers, namely Britain and the U.S., whose governments remain opposed.

So while Greece is right on the razor's edge of default, and may yet be granted some overdue relief, the prospects for broader European recovery are still very bleak until the politics get a lot more radical.

Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is A Presidency in Peril.

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