Jun. 25th, 2012

peterbirks: (Default)
So, how's it all panning out? As I've written previously, this is moving away from an economic crisis and is becoming a full-blown political crisis. Even the politicians who can understand the economics of it all cannot speak the truth, because to do so is political suicide.

Three years ago, during the height of the 08/09 crisis, there was a delusional belief (originating in Germany, which has maintained various delusional beliefs about the crisis to this day) that governments could control things. The concept of democracy had kind of passed by the governments, the IMF, the ECB, and, well, virtually all organizations.

Those innocent days are long gone. Most European governments from 2009 are no longer in power. Indeed, to talk about "government" in the abstract has not been helpful. This is tactical rather than strategic. It's not "government", but "which government?" and "will that government still be here next month?". In other words, this is not high-falutin' principle-based generalist stuff (this is one of the German delusions that is being maintained to this day). It's nitty-gritty let's get down to the dirty details kind of stuff, and worry about principles later.

Why? Because it's becoming clear that, if Germany backs down and accepts the "mutual bailout" principle, then Merkel will be toast at the next election. The German people won't stand for it. That's how Democracy works.

But, if Merkel refuses to back down (working according to the view of the German people), then the euro is toast, the euro-economic system is going to collapse in a sudden financial conflagration, and everyone, (including the German people) will be much worse off.

Looked at this way, one could almost feel sorry for her. Almost, but not quite.

For the past three years Merkel has attempted to square this circle via fudging, and there's no reason to think that this strategy will stop anytime soon. Only when she realizes that she is staring down the barrel of a gun bigger than that of the German electorate will some kind of "solution" be found. That, as I have also written before, will be some kind of mutually backed "money" that the German government will try to pretend is not a mutual bailout. In other words it will be a eurobond, but it will be called something else.

This is called a "euro crisis", but I think that this is misleading. It's actually lots of different crises.

Greece, for example, is a basket case. It needs forgiveness rather than forbearance. Creditors can talk about moral hazard and such generalist matters but, as I say above, this is the time for practical matters. When you have people starving on the streets and a revolution just around the corner, it might just be a bit of an idea to swallow your fucking pride and do something that solves the problem rather than maintains your religious/economic beliefs (the two are closely interlinked, with the Protestant work ethic a driving force behind much of the "no surrender to the lazy Greeks" rhetoric).

Italy is a more slow-burner crisis tat could quite easily be kicked down the road for 20 to 30 years. Like the UK "pensions crisis", that doesn't make it any less real, and the solution is perhaps harder to find than that for Greece. But it's a strategic matter that can be worried about later. But, basically, if Italy could borrow at rates at which the market was willing to lend to it four years ago, there would be no problem for quite a while. It needs to be sorted out, sure. But not now. In that sense, it's a crisis of confidence.

Spain is the same. This morning it formally asked for €100bn in help, but this is a banking crisis of the type that China went through in the late 1990s -- except in the case of China the borrowers were party officials rather than property developers. But if Spain could borrow at rates that it borrowed pre-2008, it would actually be fine. Spain is, fundamentally, economically sound. It just suffered a mad property bubble and the structure of the euro makes it a harder problem to solve than would otherwise be the case.

The final "crisis" of the euro is the fundamental imbalance between various countries. If you have a fixed exchange rate, you can't solve this "in the old way", and there is no "new way" on the horizon. As Wolfgang Münchau writes in the FT today,
"There is ... a denial that the current account surpluses are even remotely a factor. In the German narrative, the economy is like a football game, which Germany is winning".


This is a superb analogy. Germany says that the "solution" is for other countries to play better football. To play, as it were, more like Germany. However, what Germany does not say is that, if the other sides try to play better football, then so will Germany. Germany, in other words, will fight to stop the efficacy of the strategy that it is urging other countries to adopt. It's hard to understand the logic of a solution that runs along the lines of "This is what you should do, but if you do it, we will do our level best to make it ineffective".

Anyhoo, as Münchau also points out, the worrying thing here is that parties such as Syriza in Greece think that Germany is bluffing. In Italy it seems clear that Berlusconi is planning a comeback at the next election with a Forza Italia that will be blatantly anti-Europe (i.e., anti-euro) and pro-Italian. Germany is not bluffing; it has in the past adopted policies that it thinks are for the best for Germany and which turn out to be the worst for all of Europe, and it looks likely to do so again (unless Merkel can miraculously persuade it otherwise through some economic sleight of hand).

If the "anti-euro/anti-Europe" sides start to win in elections, then the politics of the euro will become more confrontational. Far from looking to create a joint solution (which has been tried for three years and which has been rejected by Germany every time), countries will start looking to create a national solution, and fuck the rest of you. The first example of this might well come in Italy, a country well-versed in the art of self-delusion when it comes to interdependency with the rest of Europe. Sure, the South will stick to pro-euro, pro-Europe policies, but I suspect that the north, Berlusconi's heartland, is getting a tad fed up with it all. An anti-euro, pro-northern league, anti-immigration, pro-national rescue manifesto could end up being a winner.

And that, with luck, will be the barrel of a gun that Merkel will find herself looking down that is bigger than the current wishes of the German people.

August 2023

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