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Published on: May 24, 2012
Europe: The World’s Worst Dentist With the World’s Dullest Drill

The European monetary crisis is like a botched root canal: painful, expensive, interminable. Weeks, months and even years go by and the world helplessly sits in the chair as the incompetent dentists poke, scrape, bicker and endlessly, endlessly drill.  From time to time there are shots of Novocaine—usually in the form of liquidity injections from […]

The European monetary crisis is like a botched root canal: painful, expensive, interminable. Weeks, months and even years go by and the world helplessly sits in the chair as the incompetent dentists poke, scrape, bicker and endlessly, endlessly drill.  From time to time there are shots of Novocaine—usually in the form of liquidity injections from the ECB—that reduce the pain to a dull throb, but there are no signs of improvement, no signs that the long and futile European process is coming to any kind of successful conclusion.

We are frightened and bored at the same time: we can’t look away but we can’t bear to master the intricate details of this most tedious of world crises.

Yesterday yet another worthless European summit saw yet another series of posturing speeches as yet again Europe’s so-called ‘leaders’ failed to agree on any way out of the deepening mess. Yet again the world’s financial markets heaved and thrashed as traders and investors tried to figure out if the Europeans were really as inept as they appear — and, if they are, when and how will the catastrophe come.

The details change, but the underlying situation is the same. There are two games of chicken being played in Europe at the moment. One is the game between Greece and the rest of the eurozone. The Greeks believe, or at least they are doing their best to pretend to believe, that a Greek exit for the eurozone will be so catastrophic that in the end the EU will have no choice but to offer the Greeks substantially better terms than are now on offer. The eurozone authorities, on the other hand, believe, or at least they are doing their best to pretend to believe, that the consequences of a Greek exit can be managed for Europe as a whole, but that the devastation in Greece will be so great that the Greeks will have no choice in the end but to comply with the agreements they have already signed.

The other game of chicken is the contest between Germany and France. The Germans swear up and down that whatever happens they will never, never, never accept the ‘mutualization of eurozone debt’ or the ‘politicization of European monetary policy.’ They won’t bail out the debts of the Club Med countries and they won’t accept the classically Latin form of currency management in which the currency’s value is manipulated (generally downward) by the political elite. The French (politely and deferentially in the Sarkozy era and more confrontationally under Hollande) point out that this German policy will lead Europe into an interminable series of financial crises, and at each crisis point the Germans will have to accept new bail outs and new debt guarantees in order to stave off a general European financial collapse.

So far, the French strategy has largely worked.  The Germans say no, no, no until some new banking crisis peaks, at which point they grudgingly give way.

The trouble with this approach is that it condemns Europe and the world to one moment of crisis after another. Doomsday threats are now a routine part of eurozone economic governance.  There is a certain necessary European political logic to this. Given the politics of Germany, Angela Merkel can’t take certain steps until it is obvious that the alternative is a complete financial meltdown.  Given the politics in Greece, no Greek politician can accept anything like the current arrangements unless the financial equivalent of Armageddon is staring the country in the face.

But if this situation makes a certain perverse sense in the context of European politics, from the global standpoint it is outrageously irresponsible. The kind of doom that European negotiators regularly invoke in their routine financial conversations these days has horrifying implications for the world. Neither Asia nor the Americas can survive a full fledged European financial crisis unscathed. Meanwhile, the uncertainty in Europe hangs like a pall over the whole world, reducing growth everywhere and threatening the still fragile recovery from the Great Recession.

This is eerily like the irresponsible egotism and political incompetence that plunged Europe and the world into the great conflicts of 1914 and 1939. The recklessly incompetent design of the eurozone—a monetary union among quite different countries with no serious agreement on its rules—was widely noted at the time. The Europeans simply did not care. They wanted the euro and so they announced it. The irresponsible egotism is reflected in the casually brutal way in which the different European countries are ready to invoke a global financial Ragnarok to make relatively minor points in their internal squabbles.

European shortsightedness and European selfishness were the prime movers in the great catastrophes of the twentieth century. (The US, too, had its part to play in these disasters.) Now in the first grave crisis of the twenty first century they sometimes seem bent on demonstrating how little they have learned.

Part of the problem is the mismatch between the excruciatingly slow pace of the European political process and the rapid moves that financial markets make. Europe’s failure to achieve a viable federal structure to date means that “Europe” is as weak and inconsequential as the United States was under the Articles of Confederation. Endless debates are needed while deals are cut and compromises are painfully hammered out before even the simplest steps can be taken.

The ECB is the only body in Europe that can act quickly and decisively in the name of the eurozone. Beyond the central bank, there is no person or no committee in whom serious executive authority is vested; there is no one in the European system who can order its governments to act — and no European government has the authority to compel the others to do much of anything.

The weak and diffuse nature of authority in Europe condemns the EU to the kind of dilatory process that has marked the European response to the financial crisis. The hope among euro-federalists was that adopting the euro would ultimately force a political union on Europe. European optimists hope that that is what is happening now: that the crisis of the euro will force the emergence of a true United States of Europe.

There is not much sign of that yet, and no sign that it will happen quickly enough to shorten the agony of the current economic root canal procedure. The world is stuck in the chair for the foreseeable future while the world’s most incompetent dentist wields the world’s dullest and noisiest drill.

The most we can hope for at the moment is that he will keep the Novocaine coming. It doesn’t solve anything, but life would be very much worse without it.

The worst thing to fear?  The next great game of chicken where irresponsible and selfish politicians will gamble with the world’s economic future is now scheduled to be held in the United States after November. As the Bush tax cuts move toward expiration and automatic budget cuts are set to go into effect, the lame duck US Congress will see Republicans and Democrats engage in their own form of brinkmanship. If European brinkmanship and American brinkmanship come together, Katy bar the door. The mother of all meltdowns, a financial event that would make the Mayan apocalypse (also scheduled for next fall) look like a high school pep rally, could be upon us much sooner than we think.

[Image courtesy of Shutterstock.]

show comments
  • WigWag

    “As the Bush tax cuts move toward expiration and automatic budget cuts are set to go into effect, the lame duck US Congress will see Republicans and Democrats engage in their own form of brinkmanship.” (Walter Russell Mead)

    I’m not sure what Professor Mead is talking about when he draws a parallel between the European fiscal and monetary crisis and the pending automatic spending cuts and the phasing out of the Bush tax cuts.

    I agree that the coming cuts to DOD represent bad defense policy but do they auger an economic crisis? Professor Mead has spent the better part of the past 18 months writing blog post after blog post explaining why he thinks Keynesian policies that call for stimulus represent the worst of the worst of an anachronistic “blue” approach. The sequestration and termination of the tax cuts should cheer anyone who thinks that austerity is the way to grow the economy. Seemingly this should include Professor Mead and his cheerleading crew of “blue” model critics.

    Professor Mead, what exactly do you think political paralysis in Europe and the American political paralysis that will lead to budget cuts and more reasonable marginal tax rates have in common?

  • http://reverbnation.com/jasonsaltiel Jason Saltiel

    The end of the euro is coming. The only question is whether it will be Europacalypse Now or Europacalypse Later.

    For the good of the U.S. economy I hope it comes later; for the good of European democracy I hope it comes sooner.

  • Kenny

    1. Nice analogy of a root canal and the Erro mess.

    2. Mead says, “Neither Asia nor the Americas can survive a full fledged European financial crisis unscathed”

    I say, “True, but in the schemes of things, scratches are minor.”

    Heck, my arms are criss-crossed with scratches Tiger, the hell cat, has given me in play, all to no ill affect

    The point isthat the U.S. can (and surely should be willing to) absorb the ‘scratches’ of Europe since attempting to avoid them risks getting caught in the hyper-inflationary storm that the Euro-elites are cooking up.

    3. “European optimists hope that that is what is happening now: that the crisis of the euro will force the emergence of a true United States of Europe.”

    Those fools are doubling down on a losing hand. Pathetic.

  • Atanu Maulik

    This is getting very boring indeed.

  • http://planetpeschel.com/wp/ Bill Peschel

    This is reminding me of the runup to World War I, where there was crisis after crisis, each one leading up to the threat of war, then a backing-down, until 1914.

    What seems most despair-inducing is that there seems to be nothing happening that is causing a reduction in the problem. Each crisis and its passing seems to be delaying the moment when the house of cards is going to fall. But nobody seems to be trying to shore up the economies, to introduce measures that might alleviate the consequences of failure.

  • Some American

    Meh, we’re already diversifying holdings out of the Aurozone, and we’re smart enough to not rely too much on Europe for our export sales. All we have to really worry about is the idiots in DC feeling the need to “DO SOMETHING!” with taxpayer money, but if the Euros can hold out until November, that problem should take care of itself.

  • Chris Bolts Sr

    Maybe the apocalypse the Mayans foresaw was not the destruction the world, but the economic destruction of Western civilization. If that’s the case, then they were spot on.

  • Jack

    WRM,
    Always enjoy your writings and your insights. And you diagnosed the multiple problems in the article – divergent cultures with contrasting political attitudes were lumped into a single monetary union with no rules.

    Labeling the politicians as irresponsible and egotistical is always accurate, regardless of the age or country, but also unhelpful, as it provides no distinction. We already know from the first rule of economics that people will do what they are incentivized to do. And Greek politicians representing a significant portion of Greeks are behaving every bit as rationally and in their own self-interests as their German counterparts.

    The systems need to be designed to account for self-interested actors, or they will break down. As long as political managers do not face the consequences of bad decisions, they will continue to make poor choices, whether in Sacramento, Chicago, Athens, Berlin, or D.C.

    But more importantly: while the devolution of the European Union would cause a few years of economic distress, I have a difficult time believing it would result in Armageddon. The world has been through much more difficult financial crisis in the last 100 years and worked its way through them. This time, at least there are no tanks on anyone’s doorstep. A few years of sorting out new currencies, a mildly lower standard of living in most of the western world (a dramatic drop for the Greeks, but that is to be expected) and by 2022, we will be as interested in the events of today as we currently are in the dot com bubble – dramatic at the time, but life moves on. If you see more dire consequences, I would be happy as ever to read them, but just because institutions change, sometimes with dramatic speed, is part of the human condition.

    cheers,
    Jack

  • John Blake

    Where leaders lack character and integrity, regression to a dullard mean is a foregone conclusion. Not one of Western Europe’s much-credentialed dolts has ever operated to create wealth on his own, only to re-shuffle stacked decks of socialized tax-revenues to self-dealing partisan advantage.

    In wake of the longest general peace prevailing since the Fall of Rome, Europe’s utter malfeasance seems a generational consequence of global trauma through the late, unlamented 20th Century. Since 1700, every century has witnessed major conflagration sparked by this fragmented continent’s internecine conflicts. So, here we go again.

  • Mark Michael

    Today’s Wall Street Journal has an op-ed by David Malpass headlined “Greece’s False Austerity” in which he points out that the Greek “austerity” so far has fallen almost entirely on the private sector and not the public sector. See:

    http://online.wsj.com/article/SB10001424052702304707604577422083169648646.html

    (You need a subscription to read the full article.)

    Malpass points out that Greece raised their VAT to 23%. If you eat in a restaurant in Europe, you’re dismayed by the cost of even a simple lunch. That’s due to those high VATs. Greece so far as done very little to cut the pay of government workers, drastically reduce their numbers to something reasonable, reduce their pensions or retirement ages, despite being in a deep recession for 3+ years. The political class refuses to sacrifice. Instead, they force the private sector to pony up more & more.

    He goes on to point out that even our American macroeconomists who are Keynesians do not distinguish between economic activity created by the public sector vs. the private sector. So when Obama’s economic advisers analyzed the potential stimulative effect of that Feb. 2009 $800 Billion stimulus package, they made no distinction between funds that went to state and local governments vs. those that went to the private sector.

    Clearly, in the very short term, both boost the GDP, since money will be spent & logged as economic activity.

    But the really important aspect is, will it “stimulate” longer-term additional economic activity? Analyses of that $800B stimulus showed that big chunks of it went into the pockets of state & local government workers, into transfer payments (Medicaid, welfare payments, etc. since state budgets were in the red) which do not cause the development of new products, new services, or labor-saving techniques or software for the most part.

    Malpass says that Greece now spends 49.7% of their GDP on government, up from 49.6% before the severe recession started. In other words, the people “in the wagon” versus those “pulling the wagon” haven’t changed any, truth be told.

    Until more government workers are returned to the private sector where they can create goods, services, new ideas there will be no growth in Greece.

    Similar things can be said about Italy, Spain, Portugal, France.

    I’d say much of the public discussion of the EU, the euro, the idea of the need for a more “United States of Europe” before the financial crisis can be solved is mostly blithering nonsense, to be diplomatic about it! A collection of non sequiturs for the most part.

  • Jeffersonian

    If the Germans ever had thoughts of continental hegemony through Brussels, the events of recent months ought to disabuse them of that notion. Their role now is that of livestock, a cow to be milked whenever Club Med’s insatiable thirst for an unearned easy life runs the credit card up past its ability to pay.

    There’s only so much of that that can go on, politically, before Germans get sick of it, and only so much before the Euro implodes, no matter what Germans think of it. Europe is on rails for disaster, it’s just a matter of how long the trip will be.

  • http://abriefhistory.org Michael Kennedy

    I am reading the 5th volume of Pogue’s biography of General Marshall, the period when he was Secretary of State. I have just read the chapter on the foreign ministers’ meeting of 1947. The Europeans have not changed. The only change is with the Russians and that may or may not be for the better,

  • crypticguise

    Until the Citizens of the Nations of the world’s Nations understand the reality of basic Economics 101 and the common sense adage that “…there is no free lunch…” the Socialist-Marxist, Progressive Political class will continue stealing from the citizens who work in the private sector, where all wealth is created.

    Government does not create jobs or wealth; government takes the hard-earned dollars, or Euros of people who work in the private sector producing goods and services and transfers that currency to the parasites of our government bureaucracies.

    The European Union was always doomed to failure and the EU as a currency was never as strong as it seemed so long as the profligate parasites of the EU cooked their books and spent more than they earned.

    It is now OVER! All the up and down hoopla is meaningless.

  • cubanbob

    “As the Bush tax cuts move toward expiration and automatic budget cuts are set to go into effect, the lame duck US Congress will see Republicans and Democrats engage in their own form of brinkmanship.” (Walter Russell Mead)

    Since there is going to be an election in November and a new Administration and Congress In January, the lame duck stunt by the democrats means nothing. The republicans should not budge at all during the lame duck session, let the tax bit hit the the blue area the first of January and by the first of February the republicans will all the support they need to to comprehensive tax reform and spending reform and regulatory reform.

  • Steve S.

    “The other game of chicken is the contest between Germany and France.”

    What if it turns out that Germany gets tired of playing chicken like this? That Germany becomes completely frustrated with the unrelenting calls to save the Euro? That they, and only they, have the means by which to save the Euro – and decide ‘to [heck] with it’?

    That is, rather than fearing the turmoil of Greece leaving the Euro, perhaps we should fear the turmoil of the Germans leaving the Euro.

    “This is eerily like the irresponsible egotism and political incompetence that plunged Europe and the world into the great conflicts of 1914 and 1939.”

    Germany leaving the Euro, and going their own way – yes, that would be the next step in the logical progression of European history.

  • Observer

    Interesting article that seems to define the issues & players involved rather clearly – but what, exactly, does the potential “mother of all meltdowns, a financial event that would make the Mayan apocalypse (also scheduled for next fall) look like a high school pep rally” mean in terms of the day-to-day life of a citizen in the United States . . . how would our banks be affected (more specifically, how would my savings in my bank be affected), how would my home mortgage be affected, how would my bank lines of credit be affected, how would the price of my groceries, my gasoline, etc. be affected??

  • Snorri Godhi

    “The Greeks believe, or at least they are doing their best to pretend to believe, that a Greek exit for the eurozone will be so catastrophic that in the end the EU will have no choice but to offer the Greeks substantially better terms than are now on offer.”

    Not sure WRM is clear about the distinction between a Greek default and a Greek exit here. A Greek default might well be painful. (Though why postpone the evil hour?) A Greek exit would hardly be noticed.

    In fact, let me stick my neck out: a Greek exit is never going to happen de facto. The Greek public sector might well go back to the drachma, but the Greek private sector will stick with the euro, or switch to an even more reliable currency.

  • CatoRenasci

    There is no good reason the Germans should bail out their profligate neighbors. Guilt for the Second World War only goes so far and only lasts so long. Except for some pensioners in their late ’70s and older, no one in Germany today has any personal complicity with National Socialism or any hand in the German war effort. Even the boomers, the children of the Wirtschaftswunder years, are near retirement. Younger Germans simply don’t feel the guilt for the crimes of the grandparents or great grandparents.

    At some point, they will simply say NEIN! Kein Pfennig Mehr!

    And they will be right. Just as the rest of the US will be right to refuse to bail out California, Illinois and the rest of the blue states which have been running up debt for decades.

    Let them all go bankrupt!

  • EvilBuzzard

    Greece isn’t boring. It’s freaking hilarious. Reading about them is like watching NASCAR for the car wrecks. Good times all around.

  • Larry

    The best way forward is for both Germany and Greece to leave the Euro. Germany can create the “Neuro”, and let other strong economies join it.

    Greece is unsalvageable by any combination of policies that are politically acceptable to the Greek people. Once they nationalize the banks and default on public and private debt, the new drachma will crash and they’ll come out the other side, with real wages that reflect their competitive status vs the rest of the continent.

    Getting rid of Germany will allow the other countries to loosen monetary policy and let their economies grow again. The Euro will lose maybe half of its value against the Neuro, and life will go on.

    This will minimize the enormous and inevitable wreckage to come…

  • teapartydoc

    Great post. Blue hubris bringing itself to shame.

  • http://www.pacrimjim.com PacRim Jim

    Europe never gets what Americans learned long ago.
    Maximize human happiness–not in nirvana,however–by minimizing governmental control.

  • drjohn

    Hey, hey, hey there, Walter! That’s a little close to home! LOL

  • Dan

    Germany does not want Greece in the United States of Europe any more than America wants Haiti to become a state. This is the face saving way to get rid of Greece, who lied to join the euro. This will be an example for the PIIS that are willing to cut their spending, so that fiscal union can be established eventually.

  • Kris

    In principle, moving towards a more unitary Europe might be best. However, it seems painfully obvious that public opinion will not allow this. So what will it be, desperately trying to keep the lid on as the pressure keeps building, or arranging a peaceful and orderly dissolution of the Euro?

    Atanu@4: “This is getting very boring indeed.”

    As someone said, “Jump! Jump! Jump!”.

  • Ian

    Why don’t they devalue the Drachma before Greece exits? Say and exchange rate of 2 Drachma/1 Euro or 4 Drachma/1 Euro.. The average person has double or 4x their bank account and there won’t be a bank run, and the bankers and speculators will still argue and contemplate the true value which will eventually be known. In the short term this could alleviate the pain for the average person and not cause a panic. As for what is owed by Greece to the Germans 1/2 or 1/4 of the original amount is better than nothing, and the far left and far right in Greece don’t want to pay 1 drachma back on the loans already received from Germany.

  • Gary L

    The most tragic thing is that Europe’s current financial crisis is merely a symptom of a far more lethal disease. After the cataclysmic ideological conflagrations that engulfed the continent during the first half of the 20th Century, and the tense stalemate of the Cold War, <a href="”>Europe opted to neuter itself, making its Last Days as comfortable as possible for its happiness-inventing Last Men, and blatantly foregoing its responsibility to raise a viable European Generation Next. If adult Europeans were still creating infant Europeans at a frequency above the 2.1 replacement ratio, the current economic issues would be a minor impediment at best.
    Europeans are overwhelmingly voting “NO” at the fertility clinic, <a href="”>and the continent will be depopulated in a way not seen since the Black Death was in its heyday. Of course, there is one tiny minority that is increasingly prominent on the European scene, but it’s that old Lord Voldemort kind of thing that we cannot dare to acknowledge their alleged existence – all correctly-thinking personages will now place their hands over their ears and shout in solemn tones, “Coexist! Coexist! Visualize World Peace!”

  • http://www.freedentistfinder.com Robert Smith

    Great post, Nice.. Alert topic for Dentist . Well Congressional Democrats offered two attempts to extend the Bush-era rates for middle income families but restore the previous, higher rates for high income people.

  • Cunctator

    Whatever one else thinks about the post-Cold War era, the power of ideology is still very much evident. The EU-ideology explains much with regard vto the financial crisis and the refusal to abandon the Euro.

  • Eurydice

    I suppose it’s useful to be reminded every so often that things are exactly the same as they were yesterday, last week, last month, last year, last decade, last century….

  • Kris

    Eurydice@30:

    Same as it ever was
    Same as it ever was

    Into the blue again, after the money’s gone
    ..
    And you may ask yourself
    Am I right? Am I wrong?
    And you may say to yourself
    MY GOD!…WHAT HAVE I DONE?
    Same as it ever was
    Same as it ever was
    Same as it ever was
    Same as it ever was

  • uroshort

    l. Germany will never, never, agree to be responsible for the debts of Greece, Italy, Spain, Portugal, etc. Just because they foolishly and optimistically opted for a common currency, hardly means the several states of Europe have eliminated cultural differences. It is as ridiculous as the United States agreeing to pay off the debt of Mexico and the South American countries.
    2. It is not a question of whether Greece departs the Eurozone or defaults on its debt. Both are inevitable, and the piper will be paid. We should all be grateful Greece is too poor to invade Poland!
    3. The only solution is to let nature take its course. The Euro, or its successor currencies will be seriously devalued, which eventually, after a lot of suffering, will lead to a European recovery. Shouldn’t take more than 20 years or so.
    4. The impact will also be felt by the U.S. and China, which will lose markets, but hardly a catastrophe. Mercedes Benzes and European-built Fiats will become available to the middle class here, even with the end of the Bush tax cuts.

  • bdoran

    It’s inaccurate to compare America under the Articles of Confederation to the EU. We were already America and Americans before the Declaration of Independence – or it wouldn’t have been possible. We had fought a Revolution to obtain our freedom together, had common laws, language, history, culture, origin and had United in Common Purpose.

    The EU was a retirement home for a ruined Continent. It’s a Theme Park. Now it’s going under. C-Ya la vie.

  • http://facingzionwards.blogspot.com/ Luke Lea

    Instead of a common currency why not just a free trade zone in the form of a customs union (but not including free labor mobility) with admission to the union contingent upon the maintenance of an accepted set of constitutional principles: basic civil rights, free and fair elections, the rule of law. Tariffs would be used as a policing mechanism. There would need to be some kind of FBI to investigate violations of civil rights standards, but apart from that countries would pretty much maintain their sovereignty, certainly where taxes and monetary policy are concerned. They could continue to participate in NATO and the IMF, though probably not the WTO since the whole point is to make free trade contingent on certain political standards. A democratic league of Europe in other words.

  • Jim.

    When Hamilton argued for our national government to assume the war debts of each colony, that was an act of solidarity based on the trials and sacrifices that each colony had made.

    The case of Germans assuming the bar tabs of hard-partying Greeks is not so inspiring a narrative. The moral hazard that it implies makes it a very bad idea.

    The “bail out the Greeks” idea comprehensively fails as strategy — it fails on rational grounds, it fails on emotional grounds, it fails on traditional grounds, it fails on scriptural grounds.

    Why in the world does Via Meadia keep presenting this as if they’re 100% for it, and the Germans are just being stick-in-the-muds?

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