Saving the Euro

Greece and Italy have been handed over to technocrats, tasked with taking the difficult steps that politicians find impossible. Democracy, clearly, is incompatible with austerity. Make people suffer (most often for the sins of economic elites,) and they vote you out of office. It's as simple as that.

In Spain, the Socialists have been replaced by the center-right Partido Popular — not because Spaniards have suddenly become more conservative, mind you, but because the Socialists were presiding over the austerities forced on Spain by other Eurozone countries (mostly Germany.) Since the Popular Party will be obliged to continue the same unpopular policies the Socialists began, we can expect it to get a lot less popular in short order. Watch out, amigos, here comes another technocrat.

As for mes amis en France, your turn will come as well. Sarkozy is not long for power, and nobody in French politics will want to take responsibility for austerity measures. Yet another European technocracy would not be a surprise.

The source of all the unpopular austerity is Germany. The eternally anal-retentive Germans just can't stand it that their neighbors to the south were inclined to spend more than they earned. Their disapproval goes beyond the economic: it is moral disapproval. Since the southerners were so profligate and generally naughty, Germans feel, they don't deserve to be bailed out. Most Germans probably believe they ought to be birched on their bottoms.


As I see it, the most straightforward way to save the Euro is for Germany to drop out and return to the deutschmark. Maybe they can form a monetary union with the Netherlands, Europe's other economically responsible country. After that, the rest of the Eurozone can inflate its way out of debt.

Word is that there are some financial whiz kids in Germany quietly thinking through this solution. It's extreme, but if the German ants won't save their grasshopper neighbors, it may be the only remaining possibility.

Eurocrisis

It's been said many times that democracies are unable to deal with economic crises, but I don't mind saying it again. Voters always respond to promises of free lunch, despite having been told, over and over again, that there is none.

Keynesian economics really ought to work — and would, were it not for democracy. Stimulus really is necessary to pull an economy out of a recession, but the other side of Keynesianism never happens: when economies are booming, responsible governments should raise taxes and cut spending, building reserves to use during the inevitable downturns. Democracy makes that impossible. When there's extra money flowing in, pandering politicians delight in giving it away.

By comparison with most of Europe — especially the south — the USofA doesn't look all that bad. Greece, of course, is a total basket case. Word is out that bondholders will have to take a 50% haircut, although I'm inclined to think 50% won't be enough, and we should brace for the crash and burn. The Germans have approved about $600 billion in bailout funds, but most economists think that's not nearly enough. It's more than enough for the German voters, however, who don't want their tax money going to bail out those feckless, swarthy southerners.

One of the biggest problems central banks around the world have to deal with, as usual, is lack of transparency. Nobody is clear on how much exposure banks around the world are carrying — not only for Greek debt, but for sovereign debt from other shaky countries as well. Banks have been allowed too much power to hide their holdings, worldwide.

For Europe, moreover, getting a fiscal solution to the financial crisis is even harder than it is in the United States. If the Eurozone is going to survive, it needs fiscal as well as monetary union — and the usual democratic political restraints make that look next to impossible. The ECB, if it gets up the nerve, may just have to inflate Europe out of its dilemma. Bankers and bondholders, of course, will hate that — but the only way I can see for all that sovereign debt to be paid off is with a much cheaper Euro.

The Germans, of course, will hate it the most — but so will individuals whose savings, in Euros, are greater that their debts. It would, of course, also hurt all those trying to boost their economies by exporting to Europe. All in all, it's a mess.

Greece and the Eurozone

The street protests in Greece continue, as more and more Greeks figure out that they are being asked to transform themselves into citizens of a third-world country for a generation or so for the sake of minimizing losses by the banks of Europe. US exposure seems to exist mostly in the form of credit default swaps; how many, one wonders, were written by taxpayer owned AIG?

All in all, it looks like Greece, shortly followed by Portugal, Ireland, Spain, and Italy, soon will be forced to accept "bailouts" of the very rich by the middle classes and the poor.

Forced? Uh huh. If it turns out to be "politically impossible" to persuade ordinary outer-edge Europeans to vote for governments that will impose the requisite "austerity" measures needed to keep the super-rich fat and happy, the availability of governments (through coalitions and similar tricks) will be sharply reduced — leaving only those "democratically elected" governments willing to play along.

Can it be stopped? Can the megacorps be compelled to take "haircuts" for fear of far greater losses, perhaps to neck level? It may depend on the Greeks.

From my perspective, it would be better to take our chances on a Greek default — and see what shakes out — than to keep the bailouts going and spreading until the eventual default becomes devastating to the point of worldwide depression. The Greeks, of course, will not be letting me write their economic policy — but maybe somebody that somebody listens to will start the conversation, and quiet the whining of the Germans and the European Central Bank.

The Eurozone — like NATO, perhaps — just expanded too fast. Letting Greece in in the first place was a sure indication of poor oversight. Right now, Greece really needs the drachma, Portugal needs the escudo, and Ireland needs the Irish pound You can't have a unified monetary policy without a unified fiscal policy — and for the Eurozon, such a policy is far, far away.