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European Wheels Spin Faster, Still No Traction

Governments in Greece, Italy and Spain are falling as the upheaval in markets spreads to the palaces and parliaments of Club Med.  But as has been the case throughout the long running euro drama, markets are moving faster than politics.  Even as Prime Minister Berlusconi announced his impending resignation, the yields on Italian bonds rose above seven percent, the highest level yet, and a level that just about everyone agrees will force Italy into a bailout sooner rather than later.

While Italy may not be too big to fail, it is too big to bail out; the IMF and the EFSF can’t handle the consequences of an Italian collapse.  An Italian failure would force both Germany and France into massive bailouts of their domestic banking systems, destroy France’s credit rating and generally wreak unspeakable havoc on the increasingly fragile underpinnings of both the single currency and the European economy.

Unfortunately, Club Med’s biggest problems can’t be solved by a change of prime ministers or even government coalitions.  There are deep cultural and historical reasons why these countries’ economies and political systems work the way they do.  Italy can’t become Denmark by an act of will or by passing a new legal code; Greece cannot become Germany and Spain can’t become Sweden.

Economic technocrats always think that if Russia, Argentina, Greece or Italy would just adopt the ‘right’ policies and carry them out consistently, miracles would happen.  In one sense they are correct; the laws of economics really do work, though often in surprisingly complex and indirect ways.  If those countries passed the right laws and implemented them appropriately, things would change.

But being who and what they are, these countries cannot produce electoral majorities to pass and sustain the ‘right’ laws — and much less can they put them consistently into practice.

There is no technical fix to the deep cultural divides that separate Nordic Europe from Club Med.  It seems less and less likely that there is a single currency that can fit the two groups of countries.  One member of the couple likes a hot room and plenty of blankets; the other likes to sleep under a sheet with the window wide open.  It looks more and more as if they will have to have separate bedrooms if they want to keep living together.

The coming changes of government in Club Med will not end the euro crisis.

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  • Mastro

    My sister was in in Italy a few years ago- turned a corner and was in the middle of a huge Communist parade- lots of Che posters.

    When they really did have Fascists (not what a university professor calls a Fascist)running things- having a Communist opposition sorta makes sense.

    Factor in the fact that the same families own the land for the last 300 years- free market economics have always been a hard sell- the left likes their jobs protected- they know the elites will get theirs.

  • JimGl

    It looks like our culture of freedom and free enterprise is changing too. Despite all the examples in Europe and here of states and companies failing Ohio voted to repeal the common sense laws that may have avoided what now will probably be slide into bankruptcy.Its sad

  • megapotamus

    I second Jim’s condolences for the state of Ohio but at least there can be no doubt at the next crisis, which will not wait long, how untenable the status quo was, especially because the unions will take their momentum to the bank, booking every increase they can possibly get away with while expanding their size and reach. You’ll love that, Ohio.

    It is curious about Silvio and Papandrou. What did their presence prevent from happening? As Meadia mentions, Italian borrowing became more costly, not less, meaning that people buying into Italy are haggling the price down. So Berlusconi was neither necessary nor sufficient for bad things to happen. And who goes in after Silvio? Who after Papandrou? As I understand it his fractious coalition partner is the Socialists and they look to benefit most. Will that bring more rational expenditures to Greece or any fiscal genius that can reverse, or even simply halt the spiraling debts and crashing revenues? Nope. I think we will enter a sort of a Lesser Ceasar period where governments will gestate, be born squealing and then quickly die of poor lungs or malformation.

  • Pashley1411

    The EU simply isn’t going to work, and the only question is how many virgins the EUrocrats will throw into the volcano before they throw up their hands and “blame” the Fates, or those lazy southerners, or whomever.

    They have noone to blame but themselves.

  • Wilbur Post

    The European politicians don’t want to give up their “dream” of Euro-topia but don’t want to lose power by forcing an unpopular concept down the public’s throat. So they dither and the crisis drags on, Europe’s people held captive to the grandiose desires of power-hungry utopian clowns.

  • anona

    Italy’s already gone over the edge. Bond prices over 7% guarantee that they are doomed. Too big to fail is also too big to save. The coming Eurozone crisis was inevitable; When I first heard of the (then proposed) EU, I commented that they should take out a map of Europe. See all of those lines on it? They are there for a reason.
    As to the stupidity that befell Ohio: congradulations!. You’ve just selected to join California, Michigan, Illinois, and other bankrupt states. Hope you enjoy the exodus of businesses when taxes are raised.

  • Rover

    It seems the EU is founded on a misinterpretation of European history. In order to prevent another violent chaotic century, European power brokers decided to try to snuff out nation states and something they derisively call nationalism. As Mr. Mead points out, that’s rather a fool’s errand.

    A better target for preventing war & chaos would perhaps have been the elimination of socialism: national socialism and international socialism while supporting individual liberty and free enterprise.

  • Ken Marks

    You made an interesting point that you didn’t further explore. You said that because of “who and what they are” Spain could not become Sweden, nor Greece Denmark. Fascinating! Exactly what does this mean? Does it mean that the country is the expression of the gene pool of its inhabitants and this gene pool is not capable of coming to the solutions that would make them prosper? Can you give another, less radical, interpretation?

  • crypticguise

    Rover makes excellent points. There will be no stability in Europe until each country assumes the responsibility for paying its own bills and the citizens of the country pay their bills. Socialism does not work, sloth does not work.

    Capitalism and self-responsibility WORKS for both individuals and Nations. Surprise!

    There never was a FREE LUNCH.

  • Spudislander

    @ #8 Ken Marks:
    I would offer the explanation that the stances to the market vis a vis fiscal responsibility is culturally driven, rather than genetic.

  • Martoz

    “One member of the couple likes a hot room and plenty of blankets; the other likes to sleep under a sheet with the window wide open. It looks more and more as if they will have to have separate bedrooms if they want to keep living together.”
    Congratulations – file that under all time classic quotes.

  • Ed Snack

    Ken, the reason is cultural, not genetic. People in Greece for example have a different culture to, say Germany. With exceptions, Germans pay their taxes; whereas with exceptions, Greeks don’t. Greek politics is far more “tribalistic” one could say, far more attuned to delivering major benefits to political families, the mechanism being through populist appeals that generally take the form of unsustainable public spending bribes.

  • dphorstick

    Thank god they are not Sweden and Denmark. More constipated societies do not exist.
    Socialism has brought population decline , low family formation, and structural unemployment at thirteen per cent. Sweden and Denmark get to play in that game too.

  • Cybrludite

    Ken Marks,

    It’s a question of culture, not genetics. Take a random Greek baby and raise them as if they were German, and they’ll act like a German, and vice-versa.

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