I didn’t think it was possible, but my confidence in the ability of European policymakers to pull the Continent out of crisis continues to fall. This is saying a lot because I had virtually no confidence to begin with.
Consider where we are at today. Greece once again is making the headlines, as it is increasingly evident that they have made virtually no progress on the last bailout package, and will therefore need another. This should have come as no surprise; it was increasingly politically impossible to engage in additional austerity with the Greek economy plummeting into the abyss. But bailout fatigue will finally hit this time, as there appears to be no more appetite to limp Greece along. Evan Ambrose-Pritchard argues that Germany is leading the drive to finally force Greece out of the Eurozone. Ambrose rightly places at least some, if not the lion’s share, of the blame for this outcome at the feet of the Troika:
This was entirely predictable – and was predicted by many critics – since Greece faced an IMF-style austerity package without the usual IMF cure of devaluation. The Troika’s ideology of “expansionary fiscal contraction” – which the IMF has to its credit since abjured, but the fanatics in charge still swear by – is breaking a whole society on the wheel.
The Greeks were never given a bailout plan that had any hope of success. And they deserved such a bailout, given the rest of Europe’s culpability in this crisis for letting Greece into the Euro in the first place.
Whether or not Greece can be forced from the Euro with little impact elsewhere remains to be seen. I doubt we will need to wait much longer to learn the outcome of Grexit. But the devastating train that is the debt crisis keeps rolling right along, currently crashing through Spain’s economy.
And make no mistake, European policymakers have learned nothing from the Greek experience. One gets the sense that policymakers think the prescription was correct, but that the patient was simply unwilling to take the medicine. Where Greece failed, Spain will succeed, or at least so it is hoped. Indeed, today Spanish Finance Minister Luis de Guindos met with his German counterpart, and the FT reports:
Germany on Tuesday threw its considerable weight behind the reform and austerity programme of the Spanish government, in the face of a continuing surge in the cost of borrowing for Madrid, and strong protests against its spending cuts.
Spain is doing the right thing, apparently. It’s just the markets that have it all wrong:
A joint statement by Wolfgang Schäuble, German finance minister, and Luis de Guindos, Spanish economy minister, condemned the high interest rates demanded for the sale of Spanish bonds as failing to reflect “the fundamentals of the Spanish economy, its growth potential and the sustainability of its public debt”.
The truth is exactly the opposite – market participants have looked at Spain’s fiscal and economic situation, including the issue of provincial bailouts, and concluded that another sovereign bailout is coming, complete with private sector involvement. The “voluntary” kind of involvement, of course. And in return for this bailout, Spain will be pushed further down the same path of never ending recession as Greece. Because if once you don’t succeed, try, try again. European policymakers will pursue the same path because they know of no other:
But after talks in Berlin last night on the eurozone crisis, the two gave no hint of any new initiatives to try to calm the markets, or prevent contagion from Spain affecting any other members of the eurozone, such as Italy.
This comes as Spanish 10 year yields hit 7.62% and the Italian equivalent lurches up to 6.60%. And unbelievably, the ECB is apparently out of the game, no longer willing to buy sovereign debt either to avoid being a victim of “public sector bailout” or because they believe that restrictions against monetizing the debt of member states trump imminent financial collapse. Meanwhile, the crisis is increasingly bleeding through to the supposedly immune German economy, with the Markit PMI continuing to fall. The deeper Europe slides into recession, the harder it will be to find solutions.
And it is already almost near impossible to find solutions, a fact proved by the seemingly pointless European summits that always seem to come too late and offer too little.
Yet despite what is obviously clear and present danger to the Eurozone project, and, more importantly than the project, but to the economy on which millions depend for their livelihood, there doesn’t seem to be any panic in official circles. No sense that policies need to be fundamentally reassessed. No sense that time is of the essence. No one is even bothering to leak unsubstantiated and false rumors of some “Grand Plan” in the works.
In my view, the lack of panic is downright scary. Is Europe completely devoid of new ideas? Or is everyone simply on vacation?
Bottom Line: Still a Euroskeptic, and an increasingly pessimistic one at that. I really, really want to believe that Europe will quickly coalesce around a solution to the crisis, and I hope to see a move in that direction soon. At a minimum, the ECB should throw in the towel and backstop sovereign debt. But all I see are the same failed policies again and again. Worse, no one is running for the panic button. Maybe there isn’t a panic button; I guess it was another piece of the necessary institutional framework forgotten during the creation of the Euro.
This post originally appeared at Tim Duy’s Fed Watch and is posted with permission.