Eurogeddon redux: What will happen to the European Project?

[Nessus]

Apocalypse Fairly Soon

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. And the costs — both economic and, arguably even more important, political — could be huge.

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; they need to stop temporizing and, for once, get ahead of the curve.
I wish I could say that I was optimistic.


The story so far: When the euro came into existence, there was a great wave of optimism in Europe — and that, it turned out, was the worst thing that could have happened. Money poured into Spain and other nations, which were now seen as safe investments; this flood of capital fueled huge housing bubbles and huge trade deficits. Then, with the financial crisis of 2008, the flood dried up, causing severe slumps in the very nations that had boomed before.


At that point, Europe’s lack of political union became a severe liability. Florida and Spain both had housing bubbles, but when Florida’s bubble burst, retirees could still count on getting their Social Security and Medicare checks from Washington. Spain receives no comparable support. So the burst bubble turned into a fiscal crisis, too.


Europe’s answer has been austerity: savage spending cuts in an attempt to reassure bond markets. Yet as any sensible economist could have told you (and we did, we did), these cuts deepened the depression in Europe’s troubled economies, which both further undermined investor confidence and led to growing political instability.


And now comes the moment of truth.


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. And because the entire Greek political establishment was, in effect, bullied into endorsing a doomed economic orthodoxy, the result of voter revulsion has been rising power for extremists. Even if the polls are wrong and the governing coalition somehow ekes out a majority in the next round of voting, this game is basically up: Greece won’t, can’t pursue the policies that Germany and the European Central Bank are demanding.


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.


This demonstration that the euro is, in fact, reversible would lead, in turn, to runs on Spanish and Italian banks. Once again the European Central Bank would have to choose whether to provide open-ended financing; if it were to say no, the euro as a whole would blow up.
Yet financing isn’t enough. Italy and, in particular, Spain must be offered hope — an economic environment in which they have some reasonable prospect of emerging from austerity and depression. Realistically, the only way to provide such an environment would be for the central bank to drop its obsession with price stability, to accept and indeed encourage several years of 3 percent or 4 percent inflation in Europe (and more than that in Germany).


Both the central bankers and the Germans hate this idea, but it’s the only plausible way the euro might be saved. For the past two-and-a-half years, European leaders have responded to crisis with half-measures that buy time, yet they have made no use of that time. Now time has run out.


So will Europe finally rise to the occasion? Let’s hope so — and not just because a euro breakup would have negative ripple effects throughout the world. For the biggest costs of European policy failure would probably be political.


Think of it this way: Failure of the euro would amount to a huge defeat for the broader European project, the attempt to bring peace, prosperity and democracy to a continent with a terrible history. It would also have much the same effect that the failure of austerity is having in Greece, discrediting the political mainstream and empowering extremists.


All of us, then, have a big stake in European success — yet it’s up to the Europeans themselves to deliver that success. The whole world is waiting to see whether they’re up to the task.

From Paul's pen.

It has all but happened; the Euro is a failed project. At this point I don't even really care whose fault it is, there's always plenty of blame to throw around. What matters is what follows.

If Europe re-Balkanizes, the same rationale will apply as it did a hundred years ago. Right now, Berlin is the master of Europe but this time the situation was created peacefully, once the economic and then the political union falls apart at the seams, Berlin will have to reach some conclusions. The final down-fall of democracy in Europe seems inevitable, as various parties scramble to appease the markets and the suffering populations down south.

What we seem to be lacking are powerful and focused extremist movements. There is a vacuum of power and influence (the Greek neo-Nazis notwithstanding), and we all know nature abhors vacuums. I suppose my question is, how fast can the situation deteriorate? The cultural waste-land created by consumerism simply is not interested in preserving democracy; day in and day out observers like Loki and Wraith declare democracy a lost cause. It is possible they are right; the implicit agreement demanded by power by the people for the people is a politically aware and interested people. We seem to lack that. Can democracy be preserved if people simply do not want it? Should it be preserved, if that is the case? No one has shown that democracy is anywhere near the best way of organizing societies, it just seems pretty good at keeping the atrocities at bay... So is it about time we had some good old-fashioned European genocide? It's been a couple of decades, after all!

I am deeply troubled. I think horrible things are now on the verge of becoming possible. Do we really want to be that generation?

[Loki]

I think the hysteria is unwarranted. Greece will probably exit the euro at some point, but there are 16 other members within the currency union. Everyone but the Greeks are taking their responsibilities seriously, even if they waited a little too long to get to this point. It's not the smartest idea to make conclusions about the durability of an institution at the height of a crisis.

You also seem to be making odd conclusions on the basis of one case (and you overstate your case even there). I don't see extremist parties making much headway anywhere but Greece. And in Greece, the extremists are getting power as a protest vote, not because people actually support them. I'm also not sure I'd characterize Syriza as an extremist movement. The party is all talk as far as I'm concerned. They blew the chance to govern and seem to care more about making ridiculous statements than of taking power. The neo-Nazis got under 7% in the previous election and stand to make about 5% in the next one. It's hardly the end of the world.

[wiggin]

Nessus, I think you exaggerate. Yes, it seems more and more likely that Greece will exit the euro. Yes, the exit of Greece will place a lot of pressure on Portugal, Ireland, Spain, and Italy (in that order), and possibly even France. But there's a lot of firepower available to prevent a repeat of Greece in other economies. The firewall in the eurozone isn't yet adequate to handle a crisis, but it can quickly be made so. I'm skeptical that any country other than Greece will fall out of the euro - Portugal and Ireland have both made herculean efforts to meet bailout conditions, with relatively stable governments (at least compared to Greece). Spain elected in an energetic reformer who has not yet made a hash of things, and seems to be making a genuine effort at needed reforms and deficit cutting. Italy is run by a clever technocrat, and though they face a difficult political and fiscal climate (the recent local elections in Italy did not bode well), I think Monti has the time to fix things.

It appears that the ECB is already tending towards more flexibility under their new leadership, which will help insulate other countries from a Greek exit. The big question is Germany, and while I don't doubt Merkel is pretty intransigent on this issue, I think the loss of a major ally in her push for austerity (Sarkozy) will force her to moderate her tone. I don't like Hollande's policy ideas much, but he probably provides a needed balance to Merkel's single-minded devotion to austerity.

Is a breakup of the eurozone possible? Certainly. But I think it can - and will - be averted, albeit in a depressingly expensive and messy way. That being said, even if a breakup were to occur, I don't think it necessarily follows that democracy in Europe is doomed. Europe did okay for fifty years after the war without a common currency, and I don't see democracy going out the window just because of a difficult economic reality.

[LittleFuzzy]

I don't see the "European Project" collapsing. I can see it shrinking, shedding participants on the periphery *well, and possibly Italy, but Italy's been semi-masked dysfunction for. . . well over a century really* but the political and economic core will remain intact, and there are plenty of countries on the edge which may have the wherewithal and determination to keep up.

[earthJoker]

I don't see the "European Project" collapsing. I can see it shrinking, shedding participants on the periphery *well, and possibly Italy, but Italy's been semi-masked dysfunction for. . . well over a century really* but the political and economic core will remain intact, and there are plenty of countries on the edge which may have the wherewithal and determination to keep up.

In this case (Italy) I predict a breakup of the country. Honestly I doubt that the north just waits and watches how it is dragged down the drain by the south.

[LittleFuzzy]

In this case (Italy) I predict a breakup of the country. Honestly I doubt that the north just waits and watches how it is dragged down the drain by the south.

I am nowhere near familiar enough with Italy to speculate on the consequences of its internal divisions.

[earthJoker]

I am nowhere near familiar enough with Italy to speculate on the consequences of its internal divisions.

Well the Lega Nord has over 20% support in some regions. The Lega's only real stance is autonomy or independence of the north.

The antipathy between northerners and the rest is very open. But as it is, I don't think the arguments are sufficient. But in a scenario where Italy has to leave the core EU the Lega will certainly argue that it is only the fault of Rome and the south.

[earthJoker]

I don't really agree that the unemployment in Greece is a result of the austerity. The job market situation wasn't really good at the start of the crisis either. The article is a typical half-Keynes approach, run a deficit in the crisis, don't run a surplus in the boom. Actually I think it's not too bad that the Greek actually face the measurements they do. But it is probably too early to tell if the lessons are learned. Articles like the quoted actually help those forces in Greece that still live in a fluffy fantasy world, IMO they have something of a self-fulfilling prediction.

[wiggin]

The severity of unemployment in Greece very much has to do with austerity. That being said, their public sector was ridiculously bloated, so lots of jobs needed to go. It's just that in the current environment there, no private sector is stepping in to provide jobs and growth. This is not JUST due to budget cuts - obviously some very serious reforms are needed in Greece - but certainly higher taxes and lower gov't consumption have helped.

Greece is and will be a mess even without austerity, no question. But it's also no question that austerity is making the economy worse. Either way - with or without austerity - Greece will be insolvent, but at least without crushing austerity (coupled with sensible reforms) there's a chance they can get the country on the right track.

That being said, I have personally thought it's a lost cause for years.j

[Loki]

The severity of unemployment in Greece very much has to do with austerity.

There's little evidence that there were significant public sector layoffs. The austerity mainly entailed significant cuts to salaries. The government promised to cut 15k jobs out of 750k and it hasn't actually done that yet: http://www.nytimes.com/2012/02/07/bu...y-shrinks.html The Greek government has done virtually nothing that they promised to the IMF/EU. The only thing it kept on doing was slashing salaries. There were no privatization, no liberalization (it reversed the liberalization after protests), no significant public sector layoffs, and no reforms of any kind. Blaming the austerity measures for the current problems is absurd.

Similarly, government spending hasn't gone done enough to justify the severe drop in GDP. What happened was that lower public sector salaries empowered private sector employers, leading to cuts in salaries there as well. This led to lower consumption, with everything that entails. Regardless, the salaries weren't sustainable anyway, so the exact same thing would happen sooner or later even without the salary decreases. Furthermore, the unemployment rate was high and rising before the austerity, so it's very hard to blame the austerity for the continued rise. At worst, the austerity sped up the employment losses by a year or two. At best, it made Greek firms more competitive, and therefore saved jobs that would otherwise disappear.

In this case (Italy) I predict a breakup of the country. Honestly I doubt that the north just waits and watches how it is dragged down the drain by the south.

The Italians didn't fight for centuries to create a country to see it disappear for economic reasons.

[wiggin]

There's little evidence that there were significant public sector layoffs. The austerity mainly entailed significant cuts to salaries. The government promised to cut 15k jobs out of 750k and it hasn't actually done that yet: http://www.nytimes.com/2012/02/07/bu...y-shrinks.html The Greek government has done virtually nothing that they promised to the IMF/EU. The only thing it kept on doing was slashing salaries. There were no privatization, no liberalization (it reversed the liberalization after protests), no significant public sector layoffs, and no reforms of any kind. Blaming the austerity measures for the current problems is absurd.

I stand corrected, but I disagree with your last sentence. I remembered a headline number of 20% of public sector job cuts, but apparently that's just the goal by 2015, and who knows what will happen by then. IIRC they did freeze public sector hiring as part of an early bailout package, which will have a modest effect on jobs (bigger the bigger a portion it is on the economy), but I doubt it has done more than add a few percentage points to their unemployment rate. That being said, there's no doubt that slashing everyone's salaries and raising taxes will result in lots of lost jobs - with no one spending money, no one can sell anything.

Similarly, government spending hasn't gone done enough to justify the severe drop in GDP. What happened was that lower public sector salaries empowered private sector employers, leading to cuts in salaries there as well. This led to lower consumption, with everything that entails. Regardless, the salaries weren't sustainable anyway, so the exact same thing would happen sooner or later even without the salary decreases. Furthermore, the unemployment rate was high and rising before the austerity, so it's very hard to blame the austerity for the continued rise. At worst, the austerity sped up the employment losses by a year or two. At best, it made Greek firms more competitive, and therefore saved jobs that would otherwise disappear.

Are you sure private sector wages dropped? I can't find good data on this, but I'd assume they just fired people because of relative wage stickiness. I doubt there's good payroll data in Greece, though, given the ridiculous amount of e.g. tax evasion. Regardless, I don't understand why you think unemployment has little to do with austerity when you just gave a pretty good case for why it should. I do agree that they were in pretty awful shape before austerity, though, so sorting out the effects can be challenging.

I very much doubt that austerity has made Greek firms much more competitive. Making them more competitive requires things like labor market reform, removing uncompetitive subsidies, blah blah blah. Yes, they may have benefitted from leaner and cheaper workforces, but with no demand, a tottering financial system (I'm sure there's no credit to speak of), and higher taxes, I find it unlikely they have benefited at all. Real reform might benefit them in the long run, but this ain't it.

[Loki]

I stand corrected, but I disagree with your last sentence. I remembered a headline number of 20% of public sector job cuts, but apparently that's just the goal by 2015, and who knows what will happen by then. IIRC they did freeze public sector hiring as part of an early bailout package, which will have a modest effect on jobs (bigger the bigger a portion it is on the economy), but I doubt it has done more than add a few percentage points to their unemployment rate. That being said, there's no doubt that slashing everyone's salaries and raising taxes will result in lots of lost jobs - with no one spending money, no one can sell anything.

In case you haven't noticed, the Greek government is great at promising things, not so good at delivering. There were several stories of Greek parties finding ways around the hiring freeze as well. Like I said, the only substantive move by the Greek government was to sharply cut salaries (and pensions).

Are you sure private sector wages dropped? I can't find good data on this, but I'd assume they just fired people because of relative wage stickiness. I doubt there's good payroll data in Greece, though, given the ridiculous amount of e.g. tax evasion. Regardless, I don't understand why you think unemployment has little to do with austerity when you just gave a pretty good case for why it should. I do agree that they were in pretty awful shape before austerity, though, so sorting out the effects can be challenging.

I have it under good authority from several Greeks I know here. All of their friends/relatives had their wages cut by 20-50% (some were laid off), regardless of where they worked. As for the second point, I'm saying that the same would have happened due to more bankruptcies and inability of the government to pay wages.

I very much doubt that austerity has made Greek firms much more competitive. Making them more competitive requires things like labor market reform, removing uncompetitive subsidies, blah blah blah. Yes, they may have benefitted from leaner and cheaper workforces, but with no demand, a tottering financial system (I'm sure there's no credit to speak of), and higher taxes, I find it unlikely they have benefited at all. Real reform might benefit them in the long run, but this ain't it.

I fully agree that they'll never be truly competitive as long as they maintain their current guild system of labor. But cutting labor costs by 20-50% doesn't exactly hurt.

[earthJoker]

The Italians didn't fight for centuries to create a country to see it disappear for economic reasons.

We will probably never find out (as I don't think the scenario is likely).

[GGT]

Austerity affects Ireland, Spain, Portugal...and the UK....more than Greece. Greece is the red-headed step-child and EU outlier. That detracts us from looking at monetary, fiscal, and political policies (in coordination) that either makes matters worse, or makes a dent toward improvements. It's the type of short term + middle term + long term thinking we assume our 'Leaders and Experts' are considering.

It's a philosophical debate, and the role of government in economies / central banking / currencies / sovereign debts...and deficit spending. The negative connotations of "planned economies", compared with accolades of "freee enterprise" --- leaves a huge gap in reality. The average person (thanks to the Information Age) is getting a new whiff of this type of cologne-covered stinking garbage.

People in the Eurozone "experiment" are realizing that monetary and currency policies can't necessarily force a merger between disparate cultures/nations/political structures. In fact, it looks like many are now resentful of the whole project.

[Lewkowski]

Ah yes Paul Krugman. He has never seen an economic problem inflation can't fix.

[RandBlade]

I think Grexit is becoming more and more inevitable. If not this year, maybe next or the year after. The big question to me is what will it take to bring about the return of the Deutschemark. The irony is that the Euro was the French price for German reunification, to prevent Germany dominating Europe, and the Euro has caused Germany to dominate Europe.

On a domestic note, I don't expect it any time soon but suspect there's a decent possibility the UK will have an "In or Out" EU referendum sometime between 2016-19.

[wiggin]

I think Grexit is becoming more and more inevitable. If not this year, maybe next or the year after. The big question to me is what will it take to bring about the return of the Deutschemark. The irony is that the Euro was the French price for German reunification, to prevent Germany dominating Europe, and the Euro has caused Germany to dominate Europe.

On a domestic note, I don't expect it any time soon but suspect there's a decent possibility the UK will have an "In or Out" EU referendum sometime between 2016-19.

If the June elections turn out as much a disaster as the last Greek election, I think a Grexit will be nearly inevitable in the next few months. Without a government that can agree to austerity conditions, I don't see them staying in the euro. Even if Hollande has a significant effect on Merkel and moderates the demands, there's such a huge gap between what these new Greek parties are willing to agree with and what the bailout is demanding that I don't think it can be bridged.

[RandBlade]

Italy's historically unified? Paradox have been lying to me!

Not just back in the Eras of Crusader Kings and Europa Universalis was Italy not fully unified, but even in the age of Victoria I thought it wasn't?

Outside of Paradox, I thought Italy wasn't fully unified until AFTER WWI. Italy has certainly been unified for less time thank the UK has been.

[Loki]

I read my post and then I read your post, and I don't see how your post has anything to do with mine.

[RandBlade]

You said Northern Italians don't have their own historical identity/state. They do. Not only was there centuries of independent city states but there was also a major North-South divide, even once unification started. Look at a map of Italy in 1860, over half the time since British Unification. It took until after WWI before the final Northern states got unified.

[Loki]

You said Northern Italians don't have their own historical identity/state. They do. Not only was there centuries of independent city states but there was also a major North-South divide, even once unification started. Look at a map of Italy in 1860, over half the time since British Unification. It took until after WWI before the final Northern states got unified.

That's supporting my argument... The norther Italians never had a single state. So what makes you think there's such a thing as a north Italian identity? There might be a Venetian identity or a Lombardian identity, but certainly not a north Italian one.

[earthJoker]

Catalan nationalist parties get a majority of the votes in Catalonia, and that region is still part of Spain. The Quebecois nationalists also get a larger share of the vote. 20% of the vote by a party who has ambiguous goals regarding secession doesn't seem particularly threatening to me.

In the situation as it is today, I don't think anything like that will happen. The scenario that LF made will change the situation, as the north could then gain much more from splitting.

That's supporting my argument... The norther Italians never had a single state. So what makes you think there's such a thing as a north Italian identity? There might be a Venetian identity or a Lombardian identity, but certainly not a north Italian one.

Northern regions splitting from the rest and forming a Padanian country might be two different pair of shoes.

[RandBlade]

Actually by 1860 most northern states had unified and southern ones had, but separately.

Yes it was messy but there was also similarities. In the North you had the republics of Venice, Genoa etc and in the south you had the Kingdoms of Naples, Sicily etc. That North-South cultural divide still exists. The North being the more trading part, the south not. It is that present and historical divide Lega Nord plays to. There is plenty in history to be picked up on.

[Loki]

Actually by 1860 most northern states had unified and southern ones had, but separately.

Yes it was messy but there was also similarities. In the North you had the republics of Venice, Genoa etc and in the south you had the Kingdoms of Naples, Sicily etc. That North-South cultural divide still exists. The North being the more trading part, the south not. It is that present and historical divide Lega Nord plays to. There is plenty in history to be picked up on.

Um, there was a very short time period (1-year) before the unification of most of the north and the annexation of the Kingdom of the Two Sicilies. Furthermore, Italy became a state before it got Venice and and nearby areas (which they got a decade later). So again, northern Italy was never a state, there is no such thing as a northern Italian culture, and the region has no historical basis for statehood.

[RandBlade]

When nations merge and split they don't always go back to what they were before. Historically Italy has been divided, there is every basis for it to become divided again. Those divisions have regularly been different sizes and shapes, but there is plenty of history of division.

[Loki]

When nations merge and split they don't always go back to what they were before. Historically Italy has been divided, there is every basis for it to become divided again. Those divisions have regularly been different sizes and shapes, but there is plenty of history of division.

I still don't think you're reading what I'm writing. Yes, Italy was divided before. No, Italy wasn't divided into a north and south Italy. Once again, there is no north Italian identity. If you told me that Venetio would secede or Lombardy would secede, I might agree that there's at least some chance of that happening (albeit a really low one). But the idea of a north Italy becoming its own state in the foreseeable future is absurd. You're not going to get a state entirely on the basis of an economic imbalance; there has to be a strong identity preceding that economic imbalance.

Northern regions splitting from the rest and forming a Padanian country might be two different pair of shoes.

And that makes about as much sense as Germany and France merging to form one country.

[RandBlade]

I still don't think you're reading what I'm writing. Yes, Italy was divided before. No, Italy wasn't divided into a north and south Italy. Once again, there is no north Italian identity. If you told me that Venetio would secede or Lombardy would secede, I might agree that there's at least some chance of that happening (albeit a really low one). But the idea of a north Italy becoming its own state in the foreseeable future is absurd. You're not going to get a state entirely on the basis of an economic imbalance; there has to be a strong identity preceding that economic imbalance.

Venice and Lombardy were not themselves static states either though. I'd love out of curiousity to see some sort of video-graphic image of the city/nation states of Italy over the last Millenia. The region has been in a constant state of flux. Taking what we have now and making a split fits in with that notion. If these city-states had been stable until unification then you would be right, but nothing could be further from the truth.

There is also evidence of a northern-Italian culture throughout much of the last Millenia, that the Lega Nord gains inspiration from. For example there is the Lombard League.

And that makes about as much sense as Germany and France merging to form one country.

Which Hazir has long told us is happening/will happen.

Ultimately the Republics of Venice, Genoa etc no longer exist - so there is no question of whether they will merge. But there is a north-south divide that exists today. That is what is behind the current popularity for the Lega, there is no reason why in the future that current popularity may not expand due to perceived grievances. It won't be history that causes that though.

[GGT]

.....
Which Hazir has long told us is happening/will happen.....

Yet, a few of this forum's most vocal posters has managed to force Hazir into "exile", by being obnoxiously contentious. Way to go.

[earthJoker]

And that makes about as much sense as Germany and France merging to form one country.

What I am saying is, that the split off of the Lombardy is much more likely that that whole Padinia would split. Compare your numbers with those of the Lombardy (Lega Nord in %):
18,9 23,0 22,1 17,7 25,5 13,1 15,5 12,1 13,8 15,8 11,7 21,6 22,7 26,2 (1990 - 2010)

[Loki]

What I am saying is, that the split off of the Lombardy is much more likely that that whole Padinia would split. Compare your numbers with those of the Lombardy (Lega Nord in %):
18,9 23,0 22,1 17,7 25,5 13,1 15,5 12,1 13,8 15,8 11,7 21,6 22,7 26,2 (1990 - 2010)

That was my point all along. If there's going to be any secession, it will be by individual regions in Italy, not by an entity called "Northern Italy", which has no identity to speak of. It's one thing to support an abstract notion of a northern Italy, but once it comes time to go over the details, most supporters of the project would realize that they'd have the same problem in a northern Italian state as they do in Italy right now.

20% of the vote for a party that tends to call for autonomy isn't saying much by the way.