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Europe Dodges Bullet, For Now

Late last night, world financial markets looked like toast; Asian markets were in free fall for a while and European stocks were sharply down at the open. (London is closed today for what the British call a Bank Holiday.) Falling futures prices in the US made it look as if we, too, were going to face a grim slide.

But as the hours dragged on, and markets reflected, the sense of panic seemed to fade. After all, the victory of the French socialist candidate François Hollande had been long expected. And if the Greek voters proved slightly more obstreperous than expected, does that really change the situation that much? Nobody much thinks that any Greek government, much less a weak coalition formed by two loathed and discredited parties, had much chance of enacting the reforms Greece would need to change its outlook.

More, the world’s central bankers haven’t converted to tight money overnight. The Japanese, the Fed and the ECB are not going to let the banks fail or let the world’s liquidity dry up. If markets are stressed by distressing election returns, the central banks, like good barkeepers, will simply pour another round.

And then there’s the reality that Hollande will press Germany for a more open handed approach to debtor European countries. Nobody thinks he can convert Germans into free spending Keynesians, but he will probably get something and, on balance, in the short run at least a little less austerity might be bullish rather than bearish.

That’s what they were thinking in France, Spain and Italy this morning; stock markets in those countries have actually gone up.

None of Europe’s big problems have been fixed. The Greek mess is both uglier and more urgent than it was a week ago. The impasse between Mediterranean and Baltic ideas about currency management remains; northern Europeans want hard money, and southern Europeans think the girdle is much too tight. Europe’s elites want to lead where Europe’s peoples don’t really want to go.

All this spells more trouble down the road, but it did not make for a panic today — and for that lucky break, we give thanks.

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  • Anthony

    Fragile and unbalanced the markets are WRM; human psychology (mind and behavior) will play significant factor going forward.

  • Luke Lea

    Inflation, break-up of the Euro, and continuing fall in Western standards of living are the predictable consequences. Not that there is much choice at the moment.

    In the long term our China trade and third-world immigration must be addressed, along with the problem of labor-saving technologies. Tariffs, restrictions, more progressive taxation, shorter hours (though delayed retirement) — those are the basic tools we have to work with.

  • Luke Lea

    I should have mentioned wage subsidies as part of the tool box (twinned with more progressive taxes).

  • Bart Hall (Kansas, USA)

    The core problem in Europe is demographic. They no longer have enough productive younger people to support them in the style to which they became accustomed. For some time they’ve been patching that over with borrowing, but that game is almost over.

    Money borrowed, spent, or “printed” by government creates no sustainable income, whilst interest on government-borrowed money subtracts from future revenue streams in the private sector.

    Attempts to inject even more debt will probably produce a few short-term benefits, yet increase overall indebtedness, worsening the problem yet again.

    You quite simply cannot solve an excess-debt problem with more borrowing. The result is (eventually) always a deflationary depression because as my grandfather (1885-1977) used to say “Every debt is eventually repaid, either by the borrower … or by the lender.”

  • Kris

    “the central banks, like good barkeepers, will simply pour another round.”

    Hoping that the customers are already drunk enough not to notice that the drinks are increasingly diluted?

    “All this spells more trouble down the road, but it did not make for a panic today — and for that lucky break, we give thanks.”

    Let us give thanks for the Munich Agreement. It may spell trouble down the road, but at least it avoids war today.

  • WigWag

    If Paul Krugman is right, and he almost always is, than the election of Hollande and the rejection of the austerity advocates in the Greek election is exactly what the European economy needs.

    The Germans righted their economy after integrating East Germany by going on an export binge to the rest of Europe, especially Southern Europe where the economies were red hot and inflation was moderate. Now it’s time for Germany to return the favor to the rest of Europe; it needs an expansionary policy and even a little inflation so that the European economies now in the doldrums can export their way to prosperity by selling to the Germans and other Northern Europeans.

    Germany is getting exactly what it deserves; its insistence on austerity has prolonged the current crisis for everyone; if Germans have to confront their historical phobia about inflation, it’s just too bad for them.

    Professor Mead says, “northern Europeans want hard money, and southern Europeans think the girdle is much too tight.” Other than Germany (and German speaking Austria and German and French speaking Luxembourg) it’s hard to know which “northern Europeans” Professor Mead is talking about. The Dutch Government recently collapsed over the policy of economic austerity and it might very well be replaced by a government that favors expansionary policies (especially if that government is led by a party suspicious of Islamic immigration). Is he talking about Slovakia, Slovenia or Estonia (each has a GDP far lower than the lowest American state)? Is he talking about Finland (with a GDP smaller than Tennessee?) It seems to me that Germany is friendless; it is alone and it’s about to get steamrolled which is precisely the fate that it deserves.

    One interesting question about all of this is how the new mood in Europe will impact the UK. While the UK is not a Euro nation, Prime Minister Cameron has been nearly as assiduous at promoting austerity as Chancellor Merkel. As the UK economy continues to falter and as periodic social upheaval in the island nation continues to rear its head, it will be interesting to watch whether the UK economy will begin to improve or whether it continues to stagnate. It will also be interesting to see what happens to Prime Minister Cameron’s popularity. We already know what Professor Mead thinks; he believes Cameron is a lion. He’s compared him to the greatest British Prime Ministers of all time; Churchill, Thatcher, Disraeli and Gladstone.

    To me, Cameron is little more than an ignorant pencil-necked geek. He reminds me much more of John Major than he does of Margaret Thatcher.

    It should also prove highly entertaining watching economic conservatives tie themselves in knots explaining why the recovery that comes from fiscal expansion is really bad news not good news. It’s the same argument they’ve been making for decades though the actual facts on the ground never seem to catch up with their anachronistic theories.

    In the meantime, the Nobel Prize winning Paul Krugman is entitled to a good laugh; he’s been proven right again.

    For more, go here,

  • Kris

    [off topic]

    Luke, trade with China is in itself a kind of subsidy to ourselves, by providing less expensive goods.

  • Kris

    “No boom today. Boom tomorrow. There’s always a boom tomorrow. What? Look, somebody’s got to have some damn perspective around here. Boom, sooner or later. BOOM!”
    Babylon 5

  • thibaud

    Good thing the author’s not dispensing investment advice.

    Krugman was right to question the eurozone’s viability in the early 1990s, and he’s dead-on correct now about the foolishness of German austerity.

    Germany’s policymakers are unable to pry their eyes off the rearview mirror, and see the disaster that austerity has created for the UK and Irish economies.

    The collapse of the US liquidity bubble – the one championed by easy-money advocates in the GOP as well as liberals, by Greenspan and Bush’s people no less than by Bernanke and Obama’s people – means that we now face the opposite problem: insufficient demand.

    This is combined with massively underwater bank portfolios for the huge banks of mainly the US and France – BoA/Countrywide and Citi’s US real estate portfolios, and BNP and SocGen’s Greek portfolios. The solution, which elites in the US and (before Hollande, anyway) France have resisted tooth and nail, is to force these TBTF banks to take a major haircut on their underwater portfolios so as to remove the dead weight on the economy and allow markets to reset.

    In the meantime, smart investors will look to profit from Mr Market’s hysterics and scoop up bargains among rock-solid European multinationals.

  • Kenny

    Europe is a mess and imagine how much a bigger mess it would be if the U.S. made them pay for their own defense.

    And that day is coming as we have our own problems.

  • thibaud

    The Europeans don’t face any significant military threats, which is why NATO is on its last legs and why the US is rapidly shifting its resources and attention to Asia.

    The biggest winners from the weakening of Europe will be the Eurasian powers, Russia and Turkey.

    Germany will in due course align itself accordingly – especially with Russia, which is Germany’s most important market now, both for exports and as a nearshore manufacturing location.

  • Anthony

    “Krugman’s theory could be right, it responds to an understandable urge to do something about the feeble recovery and the millions left without work and hope” but there may not be a proper policy response for every need (whether austerity or expansion) and that reality gives context to psychological human response to dynamic.

  • vanderleun

    “Let us give thanks for the Munich Agreement. It may spell trouble down the road, but at least it avoids war today.”


  • WigWag

    “The collapse of the US liquidity bubble – the one championed by easy-money advocates in the GOP as well as liberals, by Greenspan and Bush’s people no less than by Bernanke and Obama’s people – means that we now face the opposite problem: insufficient demand.” (thibaud; May 7, 2012 at 11:58 am)

    I am not sure that it is fair to say that Obama’s people are equally culpable with the Bush people. While Bernacke may have been skeptical about whether a housing bubble existed, he came to the party late. It was the acolyte of Ayan Rand, the uberconservative Alan Greenspan who was calling the shots that created the liquidity bubble. In fact, it’s hard to imagine a more archetypical conservative economist than Greenspan. While many liberals and neoliberals were happy to go along, some of the smarter ones like Paul Krugman himself warned constantly that the bubble would burst and that the effects would be devastating.

    When challenged that his policies were creating a housing bubble, here’s some of what Alan Greenspan had to say;

    “While local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely.”

    “American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.”

    Conversely, this is what Paul Krugman had to say as far back as 2005;

    “How bad will that aftermath be? The U.S. economy is currently suffering from twin imbalances. On one side, domestic spending is swollen by the housing bubble, which has led both to a huge surge in construction and to high consumer spending, as people extract equity from their homes. On the other side, we have a huge trade deficit, which we cover by selling bonds to foreigners. As I like to say, these days Americans make a living by selling each other houses, paid for with money borrowed from China.

    One way or another, the economy will eventually eliminate both imbalances. But if the process doesn’t go smoothly…we’re going to have an economic slowdown, and possibly a recession.”

    In retrospect, the only negative thing that can be said about Krugman is that he underestimated how severely Greenspan’s policies would devastate the economy.

    While there is plenty of culpability to go around, not everyone is equally culpable. Greenspan was the worst offender; he’s also the perfect metaphor for Republicans in general.

    More from Krugman’s prescient 2005 column can be found here,

  • Jim.

    Consider the problems: youth unemployment, demographic collapse, reduction in standard of living.

    There is a solution to all of these problems simultaneously, but the countervailing cultural trends are probably to influential (on this site as well as in Europe) to allow any discussion of it that would not be hysterically shouted down.

    The solution is this: encourage women to have and raise children instead of participating in the labor force.

    Unemployment drops. Demographic trends right themselves. Families once again benefit from the customized and tremendously personal time and talents of a beloved mother, raising their standard of living even as their income goes inevitably down.

    (Cue the howls of protest.)

  • thibaud

    @Wig – fair enough, good points. I probably should have written Clinton and his people instead of Bernancke and Obama.

    You’re right that libbetrarian par excellence Alan Greenspan bears as much blame as anyone for our bread-and-circus consumer credit debacle.

    But the roots of it go back to the 1980s, when our pols and wise men substituted cheap money for any state intervention to increase employment security or secure access to health insurance.

  • Jim.

    @thibaud, WigWag:

    Instead of seeking a sustainable system that will “rightsize” the economy, Krugman advocates a recklessly unsustainable policy of massive government spending (and debt).

    This spending would be controlled by… the likes of Krugman. He is not brilliant. He is a power-hungry hack.

    If you don’t believe it, look at his articles about the OWS sometime. He’s condescending in the extreme — his grasping, opportunistic little self believes that they’re good for keeping Washington’s feet to the fire, but they should “leave the policy declarations to the professionals”… in other words, the power should be his.

    Krugman is a wannabe tyrant, whose “vision” is incapable of seeing the time when we have to pay off the debts he encourages us to ever-more eagerly pile on.

    Outgrow them? Ha! No one’s ever outgrown even the degree of debt we already have, now without being at the top of a mountain of foreign dead and bombed-out foreign factories.

    No. Krugman is possibly the most dangerous man in the country right now. He is both Faust and Mephistopheles incarnate, tempted by the thought of having the influence (through government) to dispose of trillions of dollars of OTHER PEOPLE’S MONEY as he sees fit, and also tempting us to incur the scale and magnitude of debts that no one in our geoeconomic position could possibly pay off. (“What, this unaffordable stimulus isn’t working? It should have been even bigger and less affordable!!”)

    WigWag, it wasn’t that hard to see that what we had in housing in 2005 was a bubble. (Easy, really, if you were looking at buying a house back then.) That was not brilliance. And that is in no way evidence that his pronouncements today are anything but reckless, self-serving hackery.

    Krugman’s a dangerous fool. If he dies at the hands of an angry mob after the US falls into chaos for defaulting on its debt or experiencing Weimar-like inflation, it will be poetic justice.

  • thibaud

    Since 1983 we have chosen the path of serial asset bubbles engineered by the Fed as a way of avoiding any serious effort to intervene in the economy on behalf of working families. Old folks, union members, illegals: these groups are well-represented, or as Francis Fukuyama would say, these “clients” have their political “patrons” protecting their benefits.

    But ordinary families with school-aged children who do not work for powerful unions or have access to capital are left out. The Greenspan/libbetrarian answer is for ordinary folks to become the digital equivalent of hardy yeomen farmers, selling their labor as proudly independent free agents on the free market.

    For some isolated twenty-something single programmers, sure, that model’s fine, but not for tens of millions of grown-ups with mortgages and children.

    The solution here is for the government to start intervening every way it can to get US companies moving capital onshore and investing in US employees and US technology alike.

    Call it an “all of the above” plan to increase onshore employment and investment. Tax reform, reductions on poll taxes, shifting the health insurance burden from the backs of employers to the national risk pool that is the public option: ALL OF THE ABOVE.

    This need not blow out the deficit, so long as the process is fair, and our politicos resolve to close the huge loopholes that allow the likes of AAPL to reduce its tax bill by tens of * billions * every year.

    Get that capital back into the US and working for Americans.

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