Europe’s problem, in a nutshell, is the Blue Social Model. In labor laws & benefits, the EC has gone even farther than our Bluest states (CA, NY, IL etc.), and of course each country has fully socialized health care.
Some countries, such as Germany, haven’t gone as far as the PIIGS, and they have more workers working harder. But they’ve all been hampered by their Blueness.
Economics Nobel Laureate Robert Lucas gave a lecture on “The U.S. Recession of 2007
– 201?”at UWash in May. The accompanying slideshow illustrates a slowdown in economic growth that began in the 1970s for every major industrialized economy except the U.S. The result is that per-capita income in those countries is now 20%-40% below U.S. per-capital income.
Dr. Lucas attributes this gap to “European tax, regulatory structures discourage savings, work effort relative to U.S.” If he’s right, he says, “20-40% gap represents cost of larger welfare state.”
Slideshow available here
Lecture video available here
Professor Mead’s Trojan Horse metaphor is an apt one, but let’s not forget that after the Trojan Horse was wheeled into Troy, several Trojans tried to warn their kinsmen that bringing the horse into the city would be disastrous. Just as opinion leaders with backgrounds as diverse as Professor Mead, Paul Krugman and others have tried to warn the Europeans of the disaster that looms if they continue their current policies; the Trojans were not without members of an ancient pundit class begging for a different approach.
Here’s Virgil from Book 2 of the Aeneid:
After many years have slipped by, the leaders of the Greeks,
opposed by the Fates, and damaged by the war,
build a horse of mountainous size, through Pallas’s divine art,
and weave planks of fir over its ribs:
they pretend it’s a votive offering: this rumour spreads.
They secretly hide a picked body of men, chosen by lot,
there, in the dark body, filling the belly and the huge
cavernous insides with armed warriors.
Then Laocoön rushes down eagerly from the heights
of the citadel, to confront them all, a large crowd with him,
and shouts from far off: ‘O unhappy citizens, what madness?
Do you think the enemy’s sailed away? Or do you think
any Greek gift’s free of treachery? Is that Ulysses’s reputation?
Either there are Greeks in hiding, concealed by the wood,
or it’s been built as a machine to use against our walls,
or spy on our homes, or fall on the city from above,
or it hides some other trick: Trojans, don’t trust this horse.
Whatever it is, I’m afraid of Greeks even those bearing gifts.’
Helen of Troy, knowing the Greeks better than anyone, also guesses immediately that they are up to no good and that Greek soldiers are probably encased in the horse. To smoke them out she imitates the voices of their wives longingly calling out to their husbands. Her trick almost works until Odysseus covers the mouths of those who almost respond in despair.
Similarly, the Europeans have been warned; they are just unwilling to listen.
There is one small aspect of Professor Mead’s post that is just silly. Speaking of Greece he says,
“…its hostility to Turkish membership, and its insistence that the EU bring in the Greek Cypriots before forcing them to resolve their dispute with the Turkish Cypriots, paralyzed the EU when it came to Mediterranean policy.”
Opposing Turkish accession to the EU is the one thing that the Greeks have actually done to benefit the European Union. With all the current turmoil, does the EU really need a backwards nation with a per-capita GDP of $12,300 (CIA World Fact book), significant and growing inflation, high fetal mortality rates, low rates of literacy and life-span and increasing hostility to Western values as a member state? The EU would be weaker if Turkey was a member, not stronger. It would be less unified as a Union if Turkey was a member not more unified.
Moreover, it is ridiculous to claim that Greece forced the EU to admit Cyprus. Gaining admission to the EU is difficult, any EU member could have effectively blocked membership for Cyprus no matter what the Greeks thought.
Professor Mead is also incorrect in his implication that the problems of Cyprus need to be solved by the Greek Cypriots not the Turkish Cypriots. Virtually every nation in the world understands that it is the intransigence of the Turkish Cypriots not the Greek Cypriots that is impeding a settlement.
Perhaps Professor Mead has forgotten that it’s not the Greek army that has been illegally occupying a portion of Cyprus for decades; it’s the Turkish army that is doing that. To make matters worse, the Turkish navy is now threatening military action against Cyprus for exploring for gas in its own territorial waters.
It should also be pointed out that there are numerous European nations that have opposed Turkish accession not just the Greeks. The French have been anything but enthusiastic about admitting the Turks and it turned out that they were right.
Would Europe really be stronger if an increasingly autocratic and Islamist Turkish regime had the ability to veto EU decisions?
If the Greeks have done anything to deserve a bailout, it seems to me that opposing Turkish membership is that thing.
There will be much cheering in the streets if anyone manages to jail a Greek politician. Every time a scandal erupts the parliament scrambles to pass a narrowly defined law that somehow manages to exempt the culprit. They know that if the culprit speaks everyone else will go down, too.
Somehow, I suspect that this situation can be extended to the rest of the EU – a more apt classical metaphor might be the Augean Stables.
I see the Greeks are still the masters of the Trojan Horse Gambit.
I have said it before; the forces pulling the EU apart are far greater than the forces holding it together. I foresee a divorce as the responsible North and Eastern Europeans throw the freeloading South out of the house.
Bravo Professor Mead!
>>> What civil servants have had their careers ruined because of their gross neglect of duty?
LOLZ, like this happens EVER, really, in government? Not just European, but US as well (what high ranking official lost his job due to Challenger? Anyone? Anyone? Bueller?)
If a civil servant loses his job, it’s because of a change in the whole thing, not because of him screwing up OR off.
There ought to be legal limits for the length of time one can “be a public servant”, esp. if there are any benefits, pay, or other “perks”.
You want to work for free? Oh, OK, no problem… You want to get paid for it, ah, well, limit that to “x years of pay” in a lifetime.
I have to wonder if the coming 100 years isn’t going to see the demise of the entire Westphalian system.
While agricultural and industrial economies are naturally hierarchical, one may well argue that an IP & Services economy, which the US is fully into and many of the more advanced nations are beginning to fully find themselves in, may well lend itself to more of a network format — smaller, more nimble groupings that can take full advantage of new information in restructuring themselves to make use of it.
Perhaps this collapse will lead to Europe’s classical nations to break once again back down to larger regions that specialize in what they are best at, with France becoming four or five states, Germany five or six, Italy becoming four, and so on.
That’s mere speculation at this moment, but the events that will come in the next 20-odd years should be a major upheaval to compare with the great depression, and it may well be that different areas find their interests no longer coincide with that of their “home nation”, as the coming economic breakdown leaves some areas relatively unaffected but burdened by supporting the others due to “national” goals. Just as Germany is finding itself unhappy with supporting Greece, so, perhaps, will, say, Alsace-Lorraine find itself unhappy supporting, say, Bordeaux…?
I believe we live in “Interesting Times”, in the apocryphal Chinese curse sense of the term.
Greece’s problems are simply a harbinger of what lies ahead for the US if we don’t make a course correction. At some point, someone has to work (i.e. labor, sweat) to create the goods and services we need. We can’t just keep printing dollars and sending them abroad because one day the world will stop accepting them.
I am beginning to wonder whether we are only a few short months away from a run on European banks that might well rival the bank runs during the onset of the Great Depression. Very few of us are old enough to have experienced what it’s like to live through a run on the bank, but I understand it’s far from pretty. Imagine lines around the block consisting of people desperate to take out their life’s savings before it evaporates, only to be told the bank isn’t opening that day. Imagine going to the cash machine, inserting your ATM card and having the machine announce that no funds are available and that your card has been confiscated.
According to the Financial Times, French banks are already experiencing a “slow-motion bank run.” Just last week the European industrial giant, Siemens withdrew 500 million Euros from French banks. See, http://uk.reuters.com/article/2011/09/20/uk-siemens-idUKTRE78J21T20110920
American money market funds are also dramatically reducing short term investments in European banks. See, http://online.wsj.com/article/SB10001424052702303848104576383792509500446.html
Considering how reliant banks are on the liquidity provided by short-term and ultra-short term investments, this is a very ominous development.
Isn’t Europe in a damned if you do, damned if you don’t situation? If Greece pulls out of the Euro in the hope that it can recreate the drachma and escape its debts through inflation, won’t bank customers in Ireland, Spain, Italy, Portugal and even France line up at the banks to withdraw their money before their nations do the same thing?
In this interesting post, Professor Mead mentions that Greece’s bondholders might have to take a 50 percent haircut; but aren’t the European banks, Greece’s biggest bondholders? If they take such a big haircut in Greece, won’t depositors worry that the next nation to default will be far larger and that their bank’s solvency is seriously in question? In this scenario, isn’t a major bank run almost inevitable? And wouldn’t a Greek default even raise more serious questions about the solvency of European banks?
Of course, this situation is somewhat akin to what we experienced in the United States after the collapse of Lehman Brothers, but despite the criticism he often gets, Fed Chairman Bernanke did a brilliant job in providing liquidity needed to keep American banks afloat. Is there any reason to believe that the people who run the ECB will react as nimbly? It seems to me that it was only a few short months ago that these dimwits thought the biggest problem Europe faced was the potential for inflation.
I wonder what the effect of all of this will be on the American banking system. Have American banks (and money market funds) reduced their European exposure sufficiently to insure that they don’t face solvency problems? Despite Warren Buffet’s recent investment in Bank of America, can we be confident that the people who run that bank know what they’re doing? What about the record of Citibank; should we be confident that they’ve taken the appropriate steps to weather the storm?
Or is it possible that Europe’s loss will, at least to some extent, be America’s gain? Maybe the funds removed through a slow-motion run on Europe’s banks will be deposited in American financial institutions making them stronger than they are now.
If a slow-motion bank run in Europe turns into a more typical fast moving bank run where consumers line up desperately trying to get their money out as opposed to large corporations reducing their exposure in a relatively orderly process, how will American consumers react to watching the hysteria of the European depositors? Will Americans line up and ask for their money back so that it can be stashed safely in their mattresses?
It seems to me that these scary scenarios might easily come to pass; after all, they almost did about three years ago when financial institutions were so panicked that they refused to lend to each other and the U.S. Government had to step in to provide the liquidity needed to save capitalism.
Professor Mead has made a habit of criticizing the Europeans as feckless and incompetent; he is obviously right about that. But he’s short on offering solutions. Throwing a few Greek bureaucrats in jail might be a good idea, but it hardly seems sufficient to stave off financial disaster.
The only viable solution with any chance of working at all is for the relatively wealthy Northern Europeans, led by Germany and assisted by the United States to undertake the most massive fiscal stimulation that the world has seen in 80 years. Austerity is making things far worse and it will only lead to disaster not only for Europe’s profligate south but also for its frugal north. Without the needed fiscal stimulation we may be on the verge of a world-wide depression that few living human beings have ever experienced before.
Perhaps the proprietor of Via Meadia will tell us whether he has started making weekly withdrawals from his local bank branch in Jackson Heights and burying his money in plastic bags deep underground in the backyard of his palatial Dutchess County estate.
If he is, maybe his loyal readers should too.
Toni et al.The MAIN number is demographics.The EU like Japan had a fake model only an ivy league graduate would be too stupid to see through.EVERYDAY there are less Germans,Spanish,Italians and Russians (Japan isgone)-while they age they die.Importing Moslems to pretend you have children is as deceptive as pretending these aged out socities have a future.NOTHING they do can avert the demographic catastrophe already here.The US thanks to abortion has the same unfundable retirements but our immigration policies mask this.
Having reread this, I wonder. If the Greeks, French, Italians, Germans and presumably other EU nationalities are all together in that big wooden horse, it’s not a Trojan horse. Its inhabitants don’t intend to burst out and sack the EU.
The monetary union made tremendous trade and economic sense. Europeans and outside investors could do business across borners all in one currency. It was a valuable enhancement to what used to be called the European Common Market.
The real Trojans were the Eurocrats who decided that it really didn’t matter much if member states violated the Maastrich Treaty which governed the monetary union. Greece and other countries blatantly violated treaty restriction of deficits and total debt as a percentage of GDP. It also forbid bailing out a troubled member economy.
The Masstrich Treaty ended last year with Greek Bailout I.
Masstrich was a tremendous framework to keep EU countries’ spending and debt on the straight and narrow path of fiscal responsibility. What dunderheads Eurpean leaders were to avert their eyes as countries left that path, and as a consequence not to require their banks to get rid of the risky bonds issued by Greece, Italy and other financially profligate economies.
Instead of a Trojan Horse, Europeans set up a financial alarm system and then, when alarms started sounding, turned the darn thing off. Seems to me an equally effective to achieve a sack, but of themselves.
The Eurozone’s problem is the fundamental flaw in their currency system – it is a totally credit based system. All of the state sovereigns are currency users, not issuers, and not all that different from households and corporations. Since the ECB is only allowed to print money in the form of creating bank credit, the total amount of money owed is always greater than the amount owned, thus the aggregate amount is negative. Once the borrowers have levered up to their natural limits, there is no escape. The system must collapse. The only way to fix their system is to create a sovereign that can act as a currency issuer, and therefore be able to spend new money into existence. They can do this by either creating a Eurozone federal government similar to the USA, or they can break up the Euro and reestablish their own 17 national currencies again. The status quo is doomed.
Darn, once you dissect the intricate trade routes, the convoluted historical credit patterns, the national dynastic rivalries in the bedrooms, wily women are the cause for most wars; born to shop till they drop no matter what, the modern female with plastic in hand just makes it easier for it to happen. No wonder the Arabs are appalled at their Trojan future and seek solace in 72 virgins in heaven.