"Apocalypse fairly soon" in Europe
By Gaius Publius on 5/21/2012 09:15:00 AM
Paul Krugman wrote a Friday column that gives us a chance to review and re-explain the current state of things in Europe. The state of the Europe is stark - poised on perhaps its last precipice.
Here's The Professor's summary (my emphasis and some reparagraphing everywhere; h/t The Stars Hollow Gazette):
Suddenly, it has become easy to see how the euro - that grand, flawed experiment in monetary union without political union - could come apart at the seams. We’re not talking about a distant prospect, either. Things could fall apart with stunning speed, in a matter of months, not years. ...
This doesn’t have to happen; the euro (or at least most of it) could still be saved. But this will require that European leaders, especially in Germany and at the European Central Bank, start acting very differently from the way they’ve acted these past few years. They need to stop moralizing and deal with reality[.]
In other words, we're at a tipping point. Krugman calls it "the moment of truth." Indeed.
Krugman offers an excellent walk through the history of this crisis - how they got to this place. I'll skip that, since we've written about it before, but do hop over if you care; it's short, concise and accurate.
Let's turn instead to where we are now. Krugman:
Greece is, for the moment, the focal point. Voters who are understandably angry at policies that have produced 22 percent unemployment - more than 50 percent among the young - turned on the parties enforcing those policies. ...
So now what? Right now, Greece is experiencing what’s being called a “bank jog” - a somewhat slow-motion bank run, as more and more depositors pull out their cash in anticipation of a possible Greek exit from the euro. Europe’s central bank is, in effect, financing this bank run by lending Greece the necessary euros; if and (probably) when the central bank decides it can lend no more, Greece will be forced to abandon the euro and issue its own currency again.
Now a look at that through our own lens:
■ It's sweet in a bitter way that the ECB is ultimately feeling the pain of its own policies. The ECB created the current crisis in Greece by backstopping the "bond market" - code for bankers holding bad (and uncollectable) debt - and forcing all the cost of debt recovery on nations of actual humans in the form of forced "austerity."
In effect, the ECB (proxy for Big Boy Bankers) says, "We placed bets on you. You failed. You make us whole" - where in this case, "you" is bunch of broken jobless desperate people. Nice folks, those Bigs.
This will end when the ECB decides it has felt enough pain and pulls the plug on the Greek banking system. At that point, Greece goes off the euro. The same process then plays out in Spain, Italy, and other burst-bubble countries. It's all in the hands of the ECB.
As I said, ironic - by turning the screws on the Greek public, the ECB turns the screws on itself as well. This will stop when bankers decide that their own pain is more important than the pain they're inflicting.
I'm going to call that The Sadist's Dilemma. An interesting situation if you're not involved in all that pain.
■ Krugman and others also call for higher inflation in Europe. Why? Because there must be an inflation differential between the collapsing economies of the eurozone periphery - Greece, Spain and others - and the more-or-less thriving economies in the core.
Why? Spain had a wage-and-price boom (bubble) when German banking money (with others) flowed into the hot Spanish economy. That bubble has now burst, and those wages and prices must fall relative to those in other countries. In other words, the collapsing Spanish economy means there is an inevitable wage-and-price differential between it and the Germanys of the world.
The question is how you get there. Let's say that a 3% differential between Spain and Germany (as proxies for the periphery and the core) is inevitable. You can get that in two ways:
- 2% inflation in Germany and -1% "inflation" in Spain (in other words, depressionary deflation, the current policy); OR
- 4% inflation in Germany and 1% inflation in Spain (in other words, slow growth).
I wish I could say that I was optimistic.
Apocalypse fairly soon. As I write, the euro is down to $1.27, close to its near-term low. Unless there's another cosmetic bailout attempt (which once more kicks the can down the well-trod road), this is the last round.
Real solution or a vastly different continent? Your call, ECB. Europe wasn't always a garden of peace.
Golden Dawn has 19 seats in the 300-seat Greek parliament (click here for the distribution), with new elections coming.
As I said, poised on the precipice.
GP