Originally Posted by
Free Exchange
LOTS of people around the internet have lots of things to say about the latest twists and turns in Europe. I've been letting events percolate over the last few days and trying to take a broader view. You should all know, by the way, that the print edition's coverage of the ongoing crisis has been excellent and very thorough (see especially this, and this). Buttonwood and Charlemagne have done a good job tracking the blow-by-blow.
In terms of the latest twists and turns, there are a few key questions. One issue is the solvency of various governments. Things became messy when Germany pressed for talks about debt restructuring in troubled economies, which spooked markets, especially with regard to Ireland, which had only recently announced a big jump in the cost of supporting its banks. Ireland didn't want a rescue and didn't think it actually needed one; it thought it could accept the austerity necessary to handle its debts, daunting as the prospect seemed. Maybe it could have at lower yields, but markets became nervous as yields rose a bit, which pushed yields up further. Worse, banks began leaking deposits (read Buttonwood on this dynamic) which worried Europe a great deal.
And so Europe got Ireland to take a deal which provided financing, but at rates that brought Irish solvency into serious question. More troubling, the deal didn't take the opportunity to hash out what restructuring might mean, particularly with regards to the other countries that had been increasingly involved in the contagion of rising bond yields. And so the Irish deal didn't calm markets, and now yields and default spreads are hitting scary levels in big, scary countries like Spain and Ireland, and leading to all kinds of musing about whether the euro area might not be doomed after all.
It's true: voters are unhappy everywhere. They're unhappy in Germany, which sees itself as preparing to foot the bill the crisis. They're unhappy in the crisis countries, where austerity is biting but failing to sway markets thanks to wagging German tongues. And they're unhappy in previously safe countries like France and Belgium, where the crisis is boosting debt costs and seemingly threatening the European project.
But people seem to underestimate the commitment to Europe. There is a great deal of pride on the line in every country involved, and pride is a powerful thing. Just as the Irish were willing to suffer greatly for several years to come to avoid a loss of sovereignty and the ignominy of default, so do the Spanish and Portuguese and Italians want to avoid the need for a rescue, and absolutely want to avoid being the derelict that breaks the union. European leaders across the euro zone believe in the project and the gains it has brought to their economies. Meanwhile, global influence within an influential euro zone is something worth having. Even Germany would be a diplomatic and economic lightweight if forced to deal with the world all by its lonesome. Setting aside the threat of financial and economic disaster were the euro zone to fracture, Europeans are serious about maintaining the union and the single currency.
It's interesting to hear what European Central Bank president Jean-Claude Trichet had to say today:
" Jean-Claude Trichet, European Central Bank president, has left open the possibility of the bank significantly expanding its government bond purchases and warned markets not to underestimate Europe’s determination to resolve the escalating eurozone crisis...
The ECB thinks financial markets are badly mis-pricing risk. Mr Trichet said that “pundits are under-estimating the determination of governments”. Eurozone growth was proving surprisingly strong, and Ireland’s bail-out at the weekend had shown the EU was capable of responding to crisis. “I don’t think that financial stability in the eurozone, given what I know, could really be called into question,” he said."
That's precisely the issue, isn't it? Markets are underestimating Europe's determination to resolve the escalating crisis. Exactly. And that, in turn, implies that Europe is not adequately demonstrating its determination. In particular, the European Central Bank, which could be killing two birds with one stone by engaging in quantitative easing through the purchase of European government bonds, is demonstrating something like outright hostility to the euro zone by acting the most hawkish of major rich country central banks.
A demonstration of commitment to Europe requires a little bit from everyone, and what it requires from the ECB is that it act like the European Central Bank, rather than just a Bundesbank that gets to impose unreasonably hard money on everyone in the single currency. Mr Trichet, who has had to earn his post by acting as German as a Frenchman can possibly be expected to act, seems to be realising that that's not actually what's required of the ECB.
As I've said before, this is a political crisis first and foremost. If the politicians want the euro zone to continue, then it will continue.
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