Third and last (at least for now) in our series on the crisis in the Eurozone.
Our question for the day is simple: Who believes the Eurozone can survive as currently constituted?
As usual, Martin Wolf of the FT has some lucid observations.
He starts by noting the obvious, that the idealism with which the project was born in the post-war era has utterly dissipated. That leaves the question of whether self-interest is a sufficient replacement, and he opines that it is not.
The next question is whether an orderly wind-down of of the troubled member nations’ debts is feasible, and the prospects are grim. Most depressing on this score is simply to note the blinkered, narrow, and short-sighted reaction of most European leaders to date, who have consistently underestimated the scale of the crisis, played to domestic audiences, and focused on assigning blame ahead of forging a proper diagnosis, prescription, and course of treatment.
Jacques Cailloux chief European economist of Royal Bank of Scotland, argues that
“we cannot see any policy announcement … that could successfully reduce the risk premium on exit back to negligible levels”.
So does that mean “exit” remains taboo?
No: It simply cannot remain taboo. That is to deny reality. And once mentioned, its consequences and repercussions need to be examined. Were Greece (say) to unilaterally exit (there of course being no provision in Maastricht or anywhere else for an arranged exit, since the union was intended to be irrevocable), what would happen? First up would be a massive run on all its liabilities and debt, with immediate legal limitations on withdrawals from banks (assuming they were even allowed to remain open). Capital controls would have to follow, which would almost surely constitute treaty violations in their own right. And while a sovereign government can presumably redenominate domestic debt from euros to (say) drachmas, it can’t do so for debt held abroad. All in all, UBS estimates the first year decline in GDP would be 40-50%.
Nor would it stop with Greece. Infection spreading to other “peripheral” countries and perhaps beyond would follow as the night the day.
This is what you call a positive feedback loop, of the worst sort. Teetering banks, investors fear, may go under if a sovereign defaults, and the rickety financial system makes recovery of any country all the more difficult.
And if you’re like me, you have zero faith in the most widely offered “solution:” To have Germany, Finland, and perhaps a few brave other Nordic nations bail out Greece, Portugal, and a few other Mediterranean “what, me worry?” nations. Why have I no faith in this?
Simply put, Germans cannot control the Greeks. Bailed out once, what’s to stop them from needing to be bailed out again? If anything, the moral hazard is reinforced.
I believe this exposes the very heart of the Eurozone disequilibrium: You cannot have fiscal union without political union, but that’s what they currently have. They need to come closer together or split farther apart, and given the deflating of the dream of a unified Europe, the odds of ceding sovereignty to Brussels appear very long indeed. (Not that the track record of political judgment and courage being exercised in Brussels inspires additional confidence.)
The “Germans to the rescue” notion recognizes the first half of the Eurozone’s structural problem: That the fiscally weak nations cannot rescue themselves. It completely ignores the second half of the problem: There’s no mechanism whatsoever to stop those countries before they sin again.
Here’s a crisp, vivid, and deeply depressing chart from the FT showing the spread on sovereign debt over German Bunds, in April of last year and in August of this year. Blue is more than 200 basis points, red is less than 200 basis points (and the numbers in the pie slices are the % that country represents of total Eurozone government debt):
So Mr. Wolf concludes that the eurozen “cannot stay where it is, cannot undo what it has done, and finds it traumatic to go forward.”
Does this remind anyone else of a marriage gone terribly bad? There are no good options.
And yet, when the situation is utterly unsustainable, to paraphrase the late Herb Stein, it will not be sustained.
I predict Eurozone breakup.
Create your free online surveys with SurveyMonkey, the world’s leading questionnaire tool.
Here’s the perfect coda to this piece.
Yesterday’s Wall Street Journal, on the arts page, had a profile/interview with Fabio Luisi, the new Metropolitan Opera “Principal Conductor” (formerly the “Principal Guest Conductor,” but promoted on James Levine’s very sad physical setback as the result of a fall in Vermont this past summer). It sounds as though Luisi speaks about 17 languages (he won’t conduct an opera in a language he can’t speak, so he’s now learning Czech in order to conduct Janacek), was born in Genoa, Italy, studied in Paris, and has lived extended stretches of his life in Austria and Germany.
In any event, thanks to his elevation at the Met, he recently moved with his wife and youngest son (13) from Vienna to the Upper West Side of Manhattan (yes, where yours truly also lives and has for nearly 25 years). Here’s how he describes the difference:
“You can really smell and breathe the energy in New York all the time, even when I take our dogs to the park at midnight. There’s a feeling of wanting to be alive and be productive for oneself, family, neighbors and society. In Europe, the growing tendency is, ‘I don’t care, someone will provide.’ Here, I feel the taking of responsibility. It’s quite amazing for me-as an Italian, especially.”
