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European Crisis Deepens

The bad news just keeps coming. Coming close on the recent revelation that economic growth is slowing faster than expected in France and Germany, British labor figures have disappointed forecasters and it seems that Greece is heading for yet another recession despite optimistic predictions to the contrary.

A familiar pattern is emerging here. European leaders attempt to paper over the problems afflicting their economies with unconvincing and half-baked measures and rosy forecasts about the future. Markets initially respond briskly when European leaders emerge from a huddle with a new “fix”; disillusionment sets in within a few days as the limits of the agreements become clear.

Over time, this approach loses credibility.  New communiques are greeted with slacker and shorter rallies.  Meanwhile, the underlying problems are getting worse, not improving.

The entirely predictable recession in Greece, for example, means that the Greeks are headed for yet another failure to meet the tough fiscal targets imposed by the EU.  Greece’s problems are severe, but Greece is very small.  Europe’s comprehensive failure after countless iterations to get Greece right suggests pretty strongly that it will be unable to manage bigger and more complicated problems in places like Italy, Belgium and Spain.

Breaking this cycle is going to require a more serious commitment to bold steps — perhaps like those proposed today by leading Euro Federalist Mark Leonard — towards overhauling a European system that is quite clearly broken. As Leonard notes, the only way out of the current crisis is both political and economic reform.

There are two problems, though, with this approach.  One is political.  While the concept of Eurobonds (in effect, having Germany co-sign all of the eurozone sovereign debt) offers the best and perhaps only hope of an economic fresh start, Angela Merkel simply cannot sell the idea of a “transfer union” in which Germans become responsible for the debts of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) unless Germans genuinely believe that the only alternative is a huge economic crash.  In other words, she can’t take the steps necessary to prevent a crash until the European house is actually falling down around her ears.  Similar problems exist in other countries, and one of the consequences of the long agony of the euro is that voters everywhere are becoming more populist and nationalistic in sentiment, and are less confident in and trusting of their elites.

The second problem is institutional.  Europe cannot act quickly.  France and Germany want every member of the eurozone to pass constitutional amendments mandating balanced budgets, for example.  (On this point at least, Europe is turning into Tea Party Heaven.)  That means that 17 different countries have to amend their constitutions.  Given that every country has a different process for doing that, and that some (as in the US) are deliberately cumbersome and slow to discourage random constitutional tinkering, this cannot happen on the kind of predictable schedule that jittery markets demand.

Big changes at the European level have never happened fast, and the pace of change in Europe has slowed as the Union has enlarged.  The last set of big changes were a nightmare, with referendums in France and the Netherlands killing a proposed constitution, and the watered down Treaty of Lisbon only barely making it to the finish line.  Balanced budget amendments are as controversial in Europe as they are here, and the idea of turning over control of national finance to foreign control is not an easy sell.  It’s hard to see how Europe’s current governmental processes could make the changes Leonard and others want in a timely fashion — even if national elites agreed, which they don’t yet, that these changes were necessary and good.

Europe is out of its depth in a raging river and without radical and almost unimaginable changes, it may not make it back to the shore.  Americans cannot afford to be complacent or smug.  Partly as a result of our own poor decisions and bad leadership (stretching back over many years and implicating both parties), partly because the world economy is so interconnected and Europe’s economy is so big and so open, we cannot prosper if Europe fails.

As they say in Newspeak: Double Plus Ungood.

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  • Kenny

    Affaires of nations take longer to play out than analogous situations in a person’s life.

    That is why a good argument can be made that Europe was gut shot in WWI. From then on, it was dead man walking and only now, over 80 years later is it near time to lie down and actually give up the ghost.

  • Meremortal

    The answer for America is to vote Democrat, and reelect Obama. Republican policies will
    slow-walk the country into a depression. The Democrats will get us there much faster. There will be no opportunity until we get past the crash, so let’s get it over with.

  • West

    Yes,the US has had some bad leadership over the years.

    Right now, we are lucky to be enjoying the most clueless, inept leadership since Jimmy Carter. Good times ahead.

  • Eric

    So what is the answer, and who backstops the German backed Eurobonds. And while the West is dithering, China (and India) will lap up what falls from the plate.

  • Craig Purcell

    So we have a global downturn in an interconnected world. No place to run no place to hide. Invest in commercial property in well located areas.

  • RichardAK

    Look, the problem here is the Euro. It was because of the European Monetary Union (EMU) that countries like Greece were able to borrow money on terms appropriate for countries like Germany. It is because of the EMU that Greece and the other PIIGS cannot inflate their way out of this crisis. And it is because of the EMU that this problem is a crisis for all of Europe. To salvage Europe, the monetary union must go.

    How to do it? First, everyone agrees to go back to their old national currencies, and for the same one-month period, all Euros held by Greeks get converted to drachmas on a one-for-one basis, all Euros held by Germans to Marks on a one-for-one basis, etc. All Euros held by non-Europeans should remain Euros, but should be declared to be no longer fully convertible; instead, they can be redeemed for Marks over staggered five-year schedule. Likewise, all debts denominated in Euros held by Greeks should be converted into debts denominated in drachmas, again on a one-for-one basis, etc. At the end of the month, the Euro is no longer legal tender anywhere, and Greece devalues the drachma. Greece then pays back its debts in largely worthless paper.

    Does that mean Greece’s creditors [absorb losses]? You betcha. Frankly, anyone who lent money to Greece as if Greece were Germany was asking for it. Does that mean that these creditors are going to see these loans severely devalued as assets on their balance sheets. Of course. But so what? Everyone already knows those loans are worthless at this point, so whatever effect this will have on these banks’ creditworthiness has already been priced in by the market.

    When you’re in a hole, you stop digging, and you don’t throw good money after bad. It is long past the time to admit that the money lent to Greece and the other PIIGS is gone, and it is never coming back. It is likewise time to admit that the EMU was a mistake, and undo it.

  • Sparky222

    So the world market is grinding to a slow crawl?

    Hmmm, seems like it’s time for something never tried with gusto before, laissez-faire-capitalism!

  • echarles1

    The “almost unimaginable changes” are imaginable if the focus shifts to making them happen. The break up of the euro can be accomplished to the benefit of most, though with pain in the interim (as if there was no pain now!). Man built the euro and man can tear it down and should.

  • Stu in SDGO

    Solution: governments and individuals live within one’s means. Maximum personal and economic freedom and least possible government. Reduce impedances to business growth. Return to the regulatory climate of 1982. Sunset most progressive legislation beginning with the stupidity passed in 1974 (e.g., the Budget Reform Act of 1974). End the practice of baseline budgeting at the federal level. Reform entitlements from top to bottom. Implement defined contributions plans for all government retirement programs (fed, state, county, and local), ensuring all Americans have skin in the game regarding economic growth. Cut/greatly reduce the EPA, DoEd, DoC, DoA, DoEn, HHS, etc. Pass a flat tax with no deductions, as well as a balanced budget amendment requiring super majorities in the House and Senate to raise taxes. Limited government and low taxes works every time it’s tried.

  • Andrew P

    The leaders of the EU need to do something really bold when the next phase of the crisis unfolds. They need to hold an emergency conclave and procalim the restoration of the Roman Empire and restore The Office of The Caesar as absolute European sovereign. They should appoint a Triumvirate of Merkel, Sarkozy, and Berlusconi to that office, and put all State-level military forces (including The Force De Frappe) under Caesar’s command. Opposition will have to be crushed with maximum and brutal force. By doing so, the EU can restore the system that ruled 2000 years ago. A truly unified EU will have no problem with public debt.

  • SpottyBush

    “A familiar pattern is emerging here. European leaders attempt to paper over the problems afflicting their economies with unconvincing and half-baked measures and rosy forecasts about the future. Markets initially respond briskly when European leaders emerge from a huddle with a new “fix”; disillusionment sets in within a few days as the limits of the agreements become clear.”

    ” … Europe cannot act quickly.”

    ” Big changes at the European level have never happened fast, and the pace of change in Europe has slowed as the Union has enlarged.”
    __ __ __ __ __

    Unfortunately we can substitute “European” & “Europe” for “American” & “America” which would adequately define our current state.

    France and Germany still maintain their AAA ratings for whatever that is worth. The same cannot be said for the USA.

    The Euro is not dead, the rest of the world wants and needs an alternative to the USD$. The Euro is not going away depite all the fiscal schadenfreude plastered across the headlines, particularly in our press.

    The E.U. may have to spin-off a few of PIIGS, take the hit and move on to a closer federal-like union with a central bank of sorts. So be it. The sun will rise the next morning.

    In the meantime we might want to focus on our dis-functional two-party system (one party slightly right of center and the other currently stroking the extreme right), our perpetual election mode which is threatening to take our economic prosperity and way of life over the precipice for political and corporate short-term gain.

    The Chinese are planning 30-100 years ahead.
    The Europeans are planning 5-20 years ahead.
    Our government can’t look much further than November 2012.

  • Hacimo

    The breakup of the euro will be difficult and cannot happen. Greece will simply default on their bonds in the near future. Banks that hold Greek bonds will become insolvent and depositors in these banks will lose their money unless the deposits are insured by a safe solvent government. There is no sense being a cry baby about it, this is reality and there is no escape. If you are an ordinary person with a few Euros saved for a rainy day then my advice is to move your money to gold or to a ultra safe bank while there is still time. American bank deposits of less than 250 thousand dollars are fully insured by the US government and will be absolutely safe. I am sure that Banks in Germany and Norway and Switzerland will also be quite safe. Probably UK banks also. Make sure the deposit is insured!!!

  • Jacksonian Libertarian

    Balanced budget ammendments everywhere, I like it. TEA Party Rules!!! Primary them!!! Never Ever Vote for a Big Government Politician.

  • Hugh Manatee

    I simply can’t imagine why the Germans would ever agree to underwrite the debts of the Greeks and the others. Why should the Germans work hard and maintain thrify lifestyles only to support profligate Greeks? The Germans will do the work, pay the taxes and the Greeks will loaf and get to spend money earned by othres. Gee. Doesn’t that remind us of another country….one where one group doe the work, pays the taxes and the others behave as if they have a constitutional right to benefit from the work of others?

  • Perplexed

    Here is the bottom line and no one wants to address it. After decades of social welfare programs that were not paid for and funded via debt, the chickens have come home to roost. Many countries in Europe will default on their debt and restructuring will ensue. Europe as an economic power will end.

  • SpottyBush

    Hugh Manatee wrote:

    “I simply can’t imagine why the Germans would ever agree to underwrite the debts of the Greeks and the others.”
    __ __ __ __ __

    Very true. But the reality is that northern Europeans have been carrying the south for decades. The E.U. is slowly building a federal-lite union. They need to get a central bank sorted and prevent the entry of any unsuitable nations in future. The E.U. grew too fast and took on nations that have never been fiscally prudent. Turkey, similiar to Greece has little if any chance of becoming a full E.U. member in it’s current state.

  • noahp

    Mr. Mead proves once again that he is a sucker for the conventional wisdom. The first Greek bailout was a triumph according to him and he has applauded every bandaid since.

    The euro is ðead. Time for Europe to take an icky dose of reality. Hopefully we are not far behind.

  • PacRim Jim

    “European crisis.”
    Seems I’ve heard those juxtaposed words before, and its resolution had unfortunate effects.
    Beware of mustachioed Austrians bearing facile solutions.

  • Tara SNF

    Generally I do not read post on blogs, however I would like to say that this write-up very pressured me to try and do it! Your writing taste has been surprised me. Thank you, very great article.

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