Summary: The slow fire in Europe slowly moves to a conclusion. From America we cannot foresee what will happen because the news media paints it as a morality play, obscuring the dynamics at work. While we cannot predict which path the peoples of Europe will choose, we can at least understand the causes of the crisis (it’s not a morality play) and the two alternatives.
European elites still hope the current crisis drives Europe to unification. The slow-building deterioration since August might result from a conscious decision, allowing events to spiral down, so that the eventual crisis (coming soon) provides the political conditions for bold policy action. Unification amidst mass panic.
Prime Minister Merkel tours Europe advocating unification, requiring large changes to the treaties defining the Union. It’s easy to see why German’s elites support unification. Germany used the European Monetary Union to impose interest rates optimal for Germany — with terrible effects on Europe’s periphery.
- Germany got strong growth and low inflation — at the cost of large loans to the periphery.
- The periphery enjoyed strong consumption facilitated by low interest rates — at the cost of large debts to the core EU nations.
That regime crashed, forcing either fragmentation or unification. Unification looks easier for the periphery, with fewer uncertainties compared to the leap into the darkness outside the EU. Plus Germany and France (desperate to save its banks) exert fierce pressure. The combination of bullying and fear might produce some form of unification.
The next step: a fiscal union
The news media acts as a mouthpiece for the financial industry, so we hear little but the wonderfullness of unification. Understandably so, since the banks see unification as another bailout of their potentially lethal loans to the periphery. Sometimes they explain the perspective of anti-unification German, and of the “technocrats” in the periphery who do the bidding of Germany.
The banks want immediate monetization by the EMU of sovereign debts. That’s not going to happen. A limited monetary union before political union was a bold gamble (now failed). A full central bank — able to directly finance national spending — without central fiscal control would be deranged.
The next step towards unification means central control (in effect, German control) of individual nations’ fiscal affairs. Since Germany used the EMU to rape the periphery (albeit with their ignorant consent), they should expect Germany to do it to them again in a fiscal union. As the AA teaches, insanity is repeating ones actions but expecting a different outcome.
The people of the periphery might as well be Martians, so invisible are they to American journalists. For variety we see the occasional description of venial politicians and photos of rioting unions. One seeks in vain in the US media for any facts and logic supporting their views. In fact leaving the union — devaluation and default — offers not just immediate pain (as does unification) but the prospect of future growth (instead of neo-colonization by Germany). If instead some of the periphery nations choose to leave (or are kicked out), here’s a roadmap: “On Technical Barriers to Leaving the Euro and Learning from Others’ Experience“, Ed Dolan, 20 November 2011.
What about those lazy profligate Mediterranean people?
The news media tell a simple story, a morality play fit for children (as our rulers see us). The victims in the periphery brought their troubles down on themselves. Weak characters, taking advantage of the thrifty hard-working Germans. It’s mostly nonsense. As so often the case, the underestimated power of monetary policy is the key factor.
For some simple facts blowing up the approved narrative, we turn to the estimable Michael Pettis (Prof Economics, Peking U): ”Germany Must Do It, Not China“, 7 November 2011.
Germany has benefitted tremendously from the euro. Nearly all of its growth in the past decade can be explained by its rising trade surplus which, given monetary policy driven almost exclusively by the needs of slow-growing and consumption-repressed Germany, came at the expense of the rest of Europe.
And why do I say that Germany benefitted from the euro at the expense of peripheral Europe? For one thing, take a look at the table below provided to me by Chen Long. It shows the top ten trade deficit countries for each of the indicated years. I have colored each of the spendthrift, deficit-loving countries of peripheral Europe red, and all the thrifty, deficit-hating countries green.
Notice that peripheral Europe in red shows up quite a lot – mainly thanks to Spain and Portugal and to a lesser extent Italy, in 1991 and 1992. In total they show up around twelve times during the decade, with an average rank of roughly six.
But notice that Germany shows up every single year among the leading deficit countries – with an average rank of around four, which makes it worse than the average for Spain, Italy and Portugal. Toss in Austria, a country with policies that mirror that of Germany, and the “virtuous” countries of Europe turn out in the 1990s not to have been much more virtuous than the vicious ones. They turn up fourteen times instead of twelve and have bigger deficits on average.
… Now take a look at what happened in the next decade to the top ten leading deficit countries. Once again the spendthrift, deficit-loving countries of Europe are colored red.
Pretty surprising, right? First off, notice that there is no green. It turns out that Germany and the thrifty Europeans largely learned to love thrift only after the euro was established.
Red countries, on the other hand, are everywhere. Although I am sure to be excoriated by some, not least by my French mother and her family, for including France among the spendthrifts, altogether they show up 42 times, with an average rank of around five. Their performance in the decade after 2000 turns out to have been abysmal compared to their performance in the decade before 2000.
The data for leading trade-surplus nations tell a similar story. In the decade before 2000, Germany shows up in the top twenty trade surplus countries only once, in 1990. But in the decade after 2000, Germany is the second biggest trade surplus country every single year except in 2001, and again in 2010, when it ranked third.
Among the spendthrift countries, on the other hand, France shows up in the top ten trade surplus countries every single year from 1992 to 2003, after which it drops off forever to become one of the major deficit countries after 2005. Meanwhile, surprisingly, presumed wastrels like Italy are actually in the top ten trade surplus countries every year from 1993 to 1999, while little Ireland managed to put in four showings in the top twenty trade surplus countries in the 1990s. In the decade after 2000, however, they too became major deficit countries.
So how do we explain the European crisis? One theory is that the European crisis was caused by the moral turpitude and spendthrift habits of lazy Europeans along the periphery, in sharp contrast to the hard-working and thrifty countries of the center. According to this theory it is unfair to demand that Germans clean up the mess.
If you believe this theory, you are going to have to explain what happened in 2000 that turned thrifty Italians, French and Irish into , and that turned ordinary Greeks, Portuguese and Spaniards into even worse spendthrifts. You will also have to explain why spendthrift Germans in the 1990s suddenly morphed into the stolid, thrifty creatures of legend.
An alternative theory is that the imbalances were caused by internal policies – perhaps the creation of the euro and the gearing of monetary policy to German needs at the expense of the periphery? – which led to the severe internal imbalances. These imbalances created employment growth in the countries that suppressed consumption, and forced the countries that didn’t to choose between debt and unemployment. Of course since the latter countries had no control over monetary policy, the choice was largely made for them by the ECB with its excessively low interest rates, and their debt levels surged.
I find this alternative theory a lot easier to understand, and if it is true it places responsibility for saving the euro squarely in Germany’s hands.</
Recent articles about the crisis of Europe
- “Neo-Calvinists and the Euro-Crsis“, Paul Krugman, New York Times, 22 November 2011 — Click through to the study by the Centre for European Reform.
- “Austrian Economics, the Real Kind, Paul Krugman, New York Times, 21 November 2011
Other posts about the crisis of Europe
- The post-WWII geopolitical regime is dying. Chapter One , 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
- Can the European Monetary Union survive the next recession?, 11 July 2008
- The periphery of Europe – a flashpoint to the global economy, 8 February 2010
- A great speech by the PM of Greece. How soon until an American President says similar words?, 3 March 2010
- Governments cannot go bankrupt, 2 April 2010
- Our government’s finances are broken. How do we compare with our peers?, 8 April 2010
- The EU does Kabuki for Greece. Is it the next domino to fall?, 14 April 2010
- About the Euro crisis: the experts are wrong; the German people are right., 7 May 2010
- Former Central Bank Head Karl Otto Pöhl says bailout plan is all about ‘rescuing banks and rich Greeks’, 20 May 2010
- The Fate of Europe, nearing the point of decision, 13 September 2011
- Europe drifts towards the brink of a cataclysm, 26 September 2011
- Delusions about easy fixes for Europe, dreaming during the calm before the storm, 30 September 2011
- Every day the new world emerges, yet we see it not. Like today, as Europe begs China for loans, 15 September 2011
- Is Europe primed for chaos, as it was in July 1914?, 7 October 2011
- We see the outlines of the next cure for Europe. Will it work?, 14 October 2011
- Today Europe’s leaders took another step towards the edge of the cliff, 27 October 2011
- Where to from here, Europe? Some experts share their views., 8 November 2011
- Status report on Europe’s slow re-birth (first, the current system must die), 10 November 2011
- Europe begins its endgame. Watch and learn, for Europe’s problems are the world’s., 11 November 2011
This post originally appeared at Fabius Maximus and is posted with permission.