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The Great Game of Chicken Continues

This week IMF chief Christine Lagarde betrayed a hint of frustration with Europe’s leaders. She suspects they know how to fix the continent’s problems, but don’t quite have the will, the desire, or the domestic support to do what must be done:

“If I was able to do one thing, I would lock them in a room, take the key and let them come up with a comprehensive plan,” Ms. Lagarde said, when I asked what her fantasy scenario was for Europe. “I’m sure they can make it. I know the fundamentals are solid. The numbers on an aggregate basis are good. And, as I said, we have to take the key because they cannot escape unless and until they’ve firmed up the plan. But they can do it.”

Ms. Lagarde’s dream is frustrating and encouraging in equal measure because she is right: There is a clear, credible and widely accepted path to safety for Europe. But that car crash may still happen, because no one has the power to lock Europe’s leaders in a room, and, absent that forcing mechanism, they may not muster the will or the sense of urgency to act in time.

Here at Via Meadia we have pointed out the dangerous lag time between the market’s panics and action by Europe’s sluggish political elite. The author of the Times piece quoted above is right that, with some wriggling, Europe’s leaders would favor greater monetary and fiscal integration across the board and quick, decisive action by the ECB. That, however, is where their common ground ends: Germany has one vision, France has another, and Italy, yet another.

Compounding the problem is that these heads of governemnt cannot implement any recovery measures by fiat. Europe’s presidents, prime ministers and chancellors aren’t the absolute monarchs of old. They cannot sign a piece of paper and commit their countries forever.  Any major agreements they sign have to be ratified by parliaments — and there is the rub. According to EU law any new treaties would have be ratified by each individual member state (that’s 17 different parliaments) and in some cases would require a referendum. The leaders could all agree, but if they can’t persuade the voters — and there are a number of European countries where voters are likely to reject the kind of treaty Lagarde and others believe Europe needs — there is no deal.

There may not be a deal at all, and if there is, it will certainly take much, much longer than markets want to wait. Without a lot of good luck, something noticeably lacking in Europe these days, even the kind of united and strong leadership Europe has yet to develop will have a hard time fixing this mess before some very important things go badly wrong.

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  • Gene

    Assuming this analysis is correct, it comes down to democracy vs. expediency: Prevent near-term suffering (possibly very great suffering) by, over the long term, sacrificing the rights of ordinary people to have a say in the way they’re governed. I don’t claim that this is an easy choice by any means, but beware anyone who would jump too readily on the top-down, damn-the-parliaments bandwagon. Someone like Thomas Friedman, for instance, who swoons over the ability of the authoritarian Chinese government to “get things done.”

  • Luke Lea

    Let’s see, we’ve had 4 or 5 years of economic stagnation already, looks like 4 or 5 more years ahead. Those who predicted a lost decade (I wasn’t one) may have been right.

  • vanderleun

    Urr…. ahh….. “even the kind of united and strong leadership Europe has yet to develop….” We might not want to be so quick in urging that particular sort of political development as far as Europe is concerned. Remember what happened the last time “united and strong leadership ” became fashionable in Europe? Of course you do. Don’t you?

  • Otiose8

    The problem in Europe is that they have been living beyond their means for decades and financing the difference with debt, and when debt capacity became strained they structured banking rules so that they could stuff their banks with even more debt.

    Now the banks have reached their limits. So the problem has been magnified greatly. It has nothing to do with the common currency (except so far as it helped make using banks easier).

    The solution is to adjust the standard of living to fit income.

    Putting Europe’s leaders in a room until they come up with a solution won’t work primarily because the solution in this case means we want our cake and to eat it too.

    Like Dorothy they have always had the solution ready at hand. They just lack the will to implement it.

    “It is difficult to get a man to understand something when his job depends on not understanding it.” Upton Sinclair (1878 – 1968)

  • Eurydice

    I share Ms. Lagarde’s frustration but can’t help feeling that the IMF is one of the most misguided and destructive organizations on the planet, so I don’t place much value on her definition of a clear, credible path to safety.

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