Ratcheting Up The Crisis In Europe
Published on: May 19, 2012
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  • Russell Snow

    “This is one of those cases when what is good for one is bad for all.”

    The governments are saying “Market discipline for Thee, not for Me.”

  • Jacksonian Libertarian

    Some have been saying that if Greece leaves the Euro it would stabilize the rest of the PIIGS and ease the financial stresses. But I think it would just be the first domino to fall and would ease the way for the rest of the PIIGS would fall one by one and eventually the Euro would fall, followed by the EU just as the Soviet Union and Warsaw Pact fell apart 20 years ago.

    As for the G-8, these are the political elites that created this mess to begin with; they are incompetent to now fix the mess. Obama is telling them they should ease up on the austerity (they are all spending more each year so where is the austerity they speak of?) and just keep spending like he has, because that has work so well here (Welcome to Great Depression 2.0). The Capital markets cannot be convinced of governmental fiscal responsibility, when governments are spending like drunken sailors in a whore house. Credit ratings are dropping like flies and capital is running to where there is less risk, it’s no longer looking for a hefty return but only preservation.

  • Jim.

    Prudent strategy dictates that we stay out of these danger zones in the first place.

    This is possible, if people do not borrow more than they can repay, and do not live beond their means. This is possible if gains in standard of living are preceded and matched by gains in real productivity. This is possible if international trade is balanced.

    Getting from here to there is going to be painful, and many people will have a lower standard of living than they expected at the end of the crisis. Magical money bombs cannot solve the problem, and considering how they damage the prospects of those who are already practicing the virtues necessary to keep us out of trouble, should not be used.

  • Kris

    “they are always threatening to jump off the bridge but so far, no one has”

    At any such incident, if the potential jumper is sufficiently disturbing traffic, some passers-by will lamentably start urging him to jump.

    I have reached this point a while ago.

    Or to put it in more dispassionate terms, people are not, well, dispassionate. Trying to keep the lid closed on this mess will just lead to a bigger and very nasty mess later on. Even those who think that keeping the Eurozone intact is the best solution in principle need to recognize that public opinion in various countries is making such a solution increasingly unrealistic. It has become necessary for some countries to dissolve the monetary bands which have connected them.

    “Better to have your money in Swiss or German bank than in a Greek one, every sentient vertebrate in Greece has to understand”

    I have nothing to add to this; it already has reached maximum irony levels.

    “Sophisticated investors have been moving their money out of those countries for some time;”

    Let’s not ignore “super-sophisticated” investors who are trying to time the panic.

  • Kenny

    1. “But while governments can and will lie, ..”

    Indeed, Mr. Mead, just like the U.S. government has been constantly lying about our core inflation rate and the true unemployment rate. Of course, these statistical lies are all skewed in the direction to make the government’s life easier and to better steal its people’s money. Do you see a moral problem there, Professor?

    2. Money isn’t the only thing Europe is running out of. Seems those sophisticated ‘geniuses’ over there are short on energy due to their embrace of renewable. This could not happen to a more deserving bunch.


  • There is a old blues line that I think most of you would have heard: “Cocaine is for horses, not for men, They say it will kill me but they wont say when.” Satyajit Das (Author of Extreme Money) put it this way recently on a podcast: “Extend and pretend will not end well.” He doesn’t say when either.

    I have found myself thinking recently that this may go on and on yet for some time – despite the imminent signs of collapse. But I agree that when the end comes it will come swiftly precisely because those rat like officials have over controlled it for so long that when they lose their grip, it will all go the hades in handbasket overnight. Perhaps the Wehrmacht needs to step in.

  • fred17

    What’s new? B Government is the most professional lie machine ever. Here in the US the CPI and unemployment announcements are pure BS>

  • Gumby

    Coming soon to a country near you!

  • J. Pulley

    Greece will have to leave the monetary union, of course, but that won’t save the Euro or the EU. The disparity of both economic and political quality across the nations involved is too great.

    The preservation of this Frankenstein’s monster would require the departure of Germany as well. This is never considered because the rationale of the whole misbotten idea was to equalize matters by plundering Germany. The eurodiots never considered that national wealth, and its absence, comes from national character – money is a symptom, not a cause.

  • teapartydoc

    I guess one of the benefits of living in the information age is that we have more ways of voting with our feet. And we don’t even have to move our feet to do so. Unable to cash in on incomes and transactions in the ways they expected to be able to do, governments are attacking property. Soon people will abandon property and simply wait for things to change. And when they don’t change fast enough, they will rediscover an old, reliable, ’till now forgotten use for city lamp posts. I can’t wait.

  • Gringo

    For all the attempts of the Eurozone bigwigs to come up with a top-down, regulatory fix to the crisis, it appears that the “solution” will come from market moves generated from those below the Eurozone bigwigs.

    How many trillions will Obama loan the Eurozone to “fix” the problem?

  • Karl K

    Great summary, Professor.

    The ECB — or rather Germany — is filling sandbags in an effort to stop the rising waters. It’s a lot exertion for nothing, because in the end, the waters will crest and the flood will come.

    As the Blue State model is seizing up, so too in the non-productive, sclerotic cradle-to-grave European social welfare state. In the long run, this is a good thing, as Europe simply has to abandon this economic structure and trade it in for a Schumperteian economy of creative destruction. But in the short run, it will be catastrophic.

  • Steve W from Ford

    “Officials lie like rats in times of financial panic;”

    Totally and completely unfair to rats! We’ve had rats around our farm from time to time and there was never any question about what the rats were up to. Rats, in my experience, are FAR more trustworthy than politicians, in or out, of a financial crisis.

  • cubanbob

    The US isn’t immune either. Lots of wealthy folks have been parking their money overseas. Too bad the Spanish banks weren’t a little wiser, they could have made a lesser profit but a real profit all the same using the arbitrage scheme and buying bonds from top level northern european sovereigns and corporate bonds. That would really calm down the depositors. Interestingly the US with its new regulations and banking laws are making it far more difficult for Americans to move their cash out of the US. The pretext is always tax compliance/evasion but it really does look like creeping capital controls.

  • Mario Badino

    You forgot to underline that the three percent profit pocketed by banks on their loan to sovereign Spain is raised from taxpayers through taxes, i.e. the LTRO is nothing else than one more trick to socialize the banks’ losses originated by their greed and stupidity in inflating to the extreme the biggest housing bubble in human history.
    The LTRO is one more outstanding example of how the Euro common currency has been devised and is managed by nuts: sovereign have to borrow at four or five or even six percent the money that the ECB (i.e. their central bank!!)loans out at just one percent.
    Isn’t that crazy enough??

  • mark of Lombard

    “they will tell you a bank is rock solid until the moment they padlock its doors. This is all for your own good, of course. They don’t want you to panic — and they want to make sure that your money is trapped when they take it away or turn it from gold into straw.”

    Umm, yes… But I have a feeling that if they were to start announcing their secret deliberations like, “Gee, Bank XYZ seems pretty shaky, doesn’t it? Seems like one more shock and we’ll have to shut it down,” people would be complaining about that too. There’s just no satisfying some folks.

    • Walter Russell Mead

      @mark of Lombard: True: the destruction of a financial system by elite policy mistakes makes lots of people cranky!

  • Dutch 1960

    Welcome to the modern world. Bank runs are hidden, just like the wide use of food stamps, or the real unemployment or inflation rates. The survival instincts of TPTB have set in motion a number of techniques meant to hide the true nature of things.

    The truth will come out, on the virtual bank runs as well as these other markers of institutional failure in the areas of public policy. Thank you for pointing out the potential for hiding the bank runs from public awareness. When you know in your heart that something should be happening, and you cannot see it actually happening, one seeks an explanation. The scenario described here makes a lot of sense.

  • Richard Quigley

    Yes, anything invisible is VERY hard to watch!

  • econrob

    I don’t think these scenarios are correct. There is no need for Greek banks to convert euro deposits to drachmas. However, once withdrawn from Greek, or any other bank, would be converted into drachmas for spending in Greece for the most part. The legal tender for doing biz in Greece would be drachmas and that is what the government issues. But like when I go to Mexico I can typically spend in(or convert to) dollars).

    The other thing is the EU’s survival is NOT dependent on EZ survival, in whole or in part. The EU was a great idea. The EZ really messed things up.

    I think people are way over reacting to shrinking EZ membership.

  • Eeep! So at this point the only people with money in the negative-asset European banks are
    A) People who think they can get it out once they start to fail, and are enjoying the interest until the last moment.
    B) Clueless people who think their bank will not fail, despite having negative assets.

    The sad part is if these economies were to relax job-killing regulations, ease off a bit on taxes, and thin down their social programs, the economy would come back and this problem would go away. And their reactions are to do the exact *Opposite*, and wonder why things keep getting worse.

    Good thing the US has not fallen for this kind of idioc….oh wait.

  • thibaud

    In an interview with Barron’s this week, superstar hedge fund manager Ray Dalio (manages $120 billion) praises the US approach is equal parts
    1) fiscal stimulus
    2) monetary/quantitative easing, and
    3) “austerity” and retraction of credit


    Dalio – who’s written more profoundly and insightfully about deleveraging and the global economy during the past three years than anyone – points out how an austerity-only or austerity-heavy approach to the eurozone will fail.

    This is because, during a process of deleveraging, there absolutely must be significant fiscal stimulus and monetary easing, or else you will have a relentless, deflationary, downward spiral of falling demand.

    But in Europe, neither stimulus nor easing on any sufficient scale will take place so long as the eurozone lacks a single decision-making capability and is crippled by Germany’s obsession with austerity.

  • thibaud

    Dalio expects another QE to pump up stock and credit markets again, and then a series of upswings followed by brief downswings:

    Barron’s: “…how do you see world markets behaving as a result [of the eurozone crisis]?”

    Ray Dalio: “At the moment, there is a tipping toward slowing growth and a question of whether there will be a negative European shock, and that will favor low-risk assets.

    “But to whatever extent we have negative conditions, central banks will respond by printing more money. There will be a big spurt of printing of money, and that will cause a rally and an improvement in the stock markets around the world. It’s like a shot of adrenaline: The heart starts pumping again and then it fades. Then there is another shot of adrenaline.

    “Everybody is asking, “Are we going to have a bull market or a bear market?” I expect we will have both with no big trend. Typically, in these up and down cycles, the upswing will last about twice as long as a down swing. We are now in the higher range of the up-cycle.”

  • Jacksonian Libertarian

    “1) fiscal stimulus”

    The definition of insanity is doing the same thing over and over and expecting a different result each time. If government spending could provide economic growth then the US, Europe, and Japan would be going through a boom right now.

    The fact is government borrowing takes money from the capital markets where it would have been loaned to Consumers and Businesses which would have created jobs, improvements in productivity, and increased supplies.

    So Ray Dalio thinks the US Government is doing the right things? Why? Where are the results? I’m glad I don’t have any money being managed by him, he sounds as smart as the JPMorgan bozos that just lost $3 Billion.

  • Anthony

    WRM, there is an analytical term for your description of possible behavior of euro depositors in troubled countries: risk aversion. Many theroists (economic and financial) have expounded on the heuristic biases of individuals during perceived monetary crisis. We humans are hard-wired to succumb to cognitive traps vis-avis bank/market runs – you’re correct bank panics are contagious and hopefully Europe and euro are not contaminated by market psychology or wisdom of crowds. Yet, huge problems remain for zone and euro members.

  • Skep41

    Now let’s talk about California and Illinois…

  • Philip

    The truly frightening thing is that politicians still think that they’re in control of this monster. They’re not. They can talk however much they want, but the mutation has already grown out of hand.

  • @thibaud I see your remarks against my own big picture view – with which you may or may not agree. I think that the 20th century taught that making the public sector 100% of the economy did not work. Keynes’s Middle way worked in part because government could keep growing itself to take up the slack in the economy – until it ran out of head room. The difficulty we are facing, it seems to me, is that we don’t know how to back off this over extension of the public sector. Shut down a significant portion of the Federal Government all at once as some advocate and you would have massive social disruption and economic chaos. While I think the Tea Party is correct that government has to shrink the difficult bit is how to actually shrink government at a less drastic pace. Extend and pretend is not going to work, but certainly a significant portion of the population wants to believe it. Adjusting public pensions to financial reality the way Walker or Quinn are an example of backing off gracefully.

    I also believe a portion of the private sector has grown too intermingled with the public sector such that GM exists because it was bailed out even as Apple succeeded. Worse the US financial industry has, with the collusion of both political parties, treated us to a world economy ruining scam and gotten away with it without having spend a day in jail, never mind at the end of a pitchfork. I think the way ahead involves in part stopping the privileging of old corporations who’s business model is based on Government protection and making it easier for small business to succeed. We don’t know what the next step is, but perhaps we can crowdsource it if we have the cajones.

  • The slow motion death of the Euro as politicians jump through hoops trying to convince all of us that the Emperor really does have clothes is both comical and tragic at the same time.

  • thibaud

    @#24 – Ray Dalio’s flagship fund has earned about 23% annually over the last few decades. In other words, invest with him, and you’ll have about 10x your investment in 10 years – with very low risk.

    Dalio is one of the greatest investors of our age, which is why governments, corporations, endowments, sovereign wealth funds etc the world over invest with him. He defines “alpha.”

    If Dalio has good things to say about he US economic policy over the last four years, he’s worth listening to, very closely.

  • mnjam

    “The public not only doesn’t approve of the way Europe is handling its problems; it wants to hang, draw and quarter the people responsible.”

    That’s what they should do. So should we.

  • mnjam

    “Now let’s talk about California and Illinois…” They are like Germany, lenders to the American PIGS (Red States) who squander the money. Something has to give.

  • robert

    Skep41, is right to point out that some US states aren’t brilliantly stable at the moment. However the markets are more confident in the washington machine then they are in the european one. When the US had its debt crisis the market dropped but it got a ultimatum and certainty and knew that no-one was prepared to burn the house down to prove a political point. They don’t see that unity in europe its a terrible desicion making body there are 27 odd principals all coming to the table with separate national interests and you have to get all 27 to walk in a straight line, imagine trying to get 100 senators to do that. In a book by tony blairs cheif of staff he pointed out that just getting each principle to address the room required the best part of the day. Make no mistake the problem europe really faces is political more the economic, despite manifesting economically.

  • john werneken

    Once it was said that the Euro was an alternative to a dollar of increasingly untrustworthy value. Now I would say about the only good thing one could do to the world’s currencies is to declare them all worthless and start over.

    One wonders if humanity will survive the civil and international wars certain to follow the total collapse of all economies.

    I really did think that at some point some country somewhere would say ENOUGH and just refuse to inflate any further, but apparently apocalypse is preferable to saying NO to voters…

  • [email protected] – You’re simply assuming that Dalio’s motives are pure. The financial industry has benefited wonderfully from QE and “stimulus,” so of course he wants more!

    It’s the rest of us who have suffered, due to the “transferring of trillions” from real business investment (you know, that area where real jobs are created) into escalating financial speculation and endless government waste — all of it supercharged with nearly unbelievable levels of private and public debt. But yeah, I’m sure that’ll work out just fine in the end.

    And it’s all of us who are watching the EU head straight for a cliff. Excellent points, Professor Mead.

  • thibaud

    Ulysses – read the interview, or google Dalio’s brilliant article on deleveragings.

    Again, he calls for BALANCE, ie “all of the above”: not just QE or austerity or stimulus, but all three.

    It’s foolish to think that you can leave out one of these crucial backfills and still fill up the deep, multi-decade economic crater that was created by the excess leverage of 1980-2008.

    Also, anyone with a pension has benefited, hugely, from healthy stock markets over the last 3 years.

    You can’t have it both ways: you can’t moan about underwater pensions aka “the end of the blue model” in Mead speak and then cry when the government actually helps increase those pensions’ solvency by ensuring adequate liquidity for the markets.

  • Angel Martin

    Great article!

    there are a lot of professional investors that are watching financial credit spreads etc. to judge the degree of crisis risk. But professor Mead has correctly identified that the euro will collapse when the ordinary people lose confidence in the euro and try to exchange it for something else…

    my other point is that there is an aspect of how the LTRO worked that was so bizarre that when the eurozone blows up, people after the fact will say “of course if they were doing stuff like this it was destined to fail…”


    It’s described in the article above but the basics are that the periphery banks didn’t have enough acceptable collateral to put up as surety for their ECB loans so they did the following: issued debt to themselves; took it to their bankrupt or nearly bankrupt gov’ts and got it “guaranteed”; took it to the ECB who would now take it as acceptable collateral; borrow from the ECB at very low rates; buy the bonds of the struggling sovereigns which “guaranteed” the collateral…

    i can’t think of anything this bizarre in the financial world since the peak of the housing bubble when the demand for subprime was so great that unemployed fruit pickers were being given 700K mortgages…

  • [email protected] — Ah, there you go again! Like so many neo-Keynesians, you pretend that greater liquidity leads directly to greater solvency, despite a mountain of evidence to the contrary.

    Your “balanced approach” has been tried repeatedly, and it has failed repeatedly…because it doesn’t address the core problem of the broke “zombie banks” that stand between national governments and the people they’re (supposedly) trying to help, clogging national arteries and diverting capital to increasingly dangerous “gambling problems.” Nor does it address the banking-related problems (e.g. bad mortgages) that are drowning the masses in debt.

    Your solution is to fix a problem caused by easy credit and massive debt with more credit and more debt. That road leads to predictable and proven dead end. Fix the primary debt problems first, or matters will just get worse.

  • Toni

    Gee, imagine if the key actors, Germany and France, had taken a harder line at the start and forced Greece to renegotiate its debt — and taken the hits to German and French banks which had bought its debt.

    Imagine if, as the same overspending and overborrowing problems came to light in Italy, Spain and Portugal, they too had been forced to renegotiate debt and start balancing their budgets.

    Each of the four countries would get the debt rating it deserved. Borrowing would be extremely costly — if lenders could be found — and the countries could look only to themselves to rehabilitate their fiscal reputations.

    That is, what if the profligate countries had been forced from the get-go to take responsibility for their sorry finances, and to fix matters themselves?

    Instead, Greece has absorbed billions in subsidies and nonetheless is now on its way out of the euro, and nobody is sure about Italy, Spain and Portugal, except that they will surely require billions in subsidies the German people are more and more reluctant to provide.

    What a bureaucratic cock-up. It’s in the nature of power that the powerful want to draw ever power to themselves, and the EU has gathered ever more power — with zero responsibility to voters. The euro crisis shows what a sham is EU governance. The really important tasks, they either have no clue how to handle, or decline to acknowledge straight off how dire the situation is, i.e., how bad countries’ finances are.

    Would it really be so awful if the Mediterranean countries, maybe including socialist France, had to go back to their original currencies?

  • Great to hear from 4 of my particular favorites – #s 39, 38, 36 and 28 – and all on the same topic. You may not always have fool-proof answers (unlike our visionary politico-economic leaders of the past 20 years). But you seem all but guaranteed to raise some excellent questions.

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