ECONOMY JUNE 23, 2011
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This is no time for gloating, neither for Americans nor for Europeans. For both sides are in deep economic trouble, only in different ways. The U.S. runs the worst deficit (as share of GDP) since World War II, and yet Keynesianism to the max won’t budge the unemployment rate—pace Professors Krugman and Stiglitz. What does fall is the dollar and the price of real estate, a double-whammy if ever there was one.
The euro, meanwhile, may be rising, at least against the greenback, but the common currency, now ten years old, is about as stable as was Confederate script back in the Civil War. “Civil war,” actually, is not a bad way to describe the state of Euroland. On one side, there are the “PIIGS”—Portugal, Ireland, Italy, Greece, and Spain—looking at bankruptcy. In fact, Greece is bankrupt. Its foreign debt exceeds its GDP by about one-half, and, as slices of it come due, it cannot possibly redeem the bonds without yet another infusion of cash from Europe and the International Monetary Fund (IMF). Government outlays keep rising, while tax receipts are falling (year-on-year). So austerity does not work—except in the streets of Athens, where the angry masses revolt against a tottering government.
On the other side are France and Germany, the two heavies of the E.U. economy (Britain is in as much trouble as the U.S., but outside the euro). Their banks groan under a hefty exposure to Greek debt, French banks more than their German counterparts. So neither Berlin nor Paris wants the Greeks to default. But the two of them have their own little civil war. Nicholas Sarkozy wants to put Greece on welfare as long as it takes, counting on Germany—the biggest and richest country in Euroland—to foot the largest part of the bill. Angela Merkel, well aware of this unending drain, wants to impose fiscal discipline and market reforms on Athens. In the latest spat, Merkel, who is not as enamored of state action as her French counterpart, wanted to drag in banks, pension funds, and insurance companies by making them roll over Greek debt by seven years. This would be a default in everything but name, and so the French balked. Merkel, always tougher at the outset than at the end, finally relented. Participation by the private sector now is to be “voluntary.” So far, though, there haven’t been too many volunteers.
This mano-a-mano is typical for Germany and France, who are always vying for the leadership of Europe. But it is patty-cakes compared to the other horrors the monetary union has wrought, and not for lack of warning. As many economists cried out in the run-up to the euro 15 years ago, in monetary policy, one size won’t fit all—certainly not a bunch of diverging economies untrammeled by common governance. And, indeed, the euro, instead of forcing member states into fiscal convergence, has only accentuated the bad habits of the PIIGS. These countries had always lived beyond their means. With the euro, however, they could suddenly spend like Italians, but borrow like Germans, at low rates. Bond spreads converged between the spendthrifts and the tightwads, but not basic policies. Indeed, cheap money encouraged even more profligacy—worst of all in Greece (which also managed to cheat on its financial statistics before and after entering the euro).
This is where we are now: With Greek two-year bonds fetching almost 30 percent, the markets are growling that Hellas is doomed. Both Merkel and Sarkozy dread the looming default as “Lehman squared“—and so, by the way, does Washington. So, too, does the IMF, which wants to withhold a critical $12 billion pay-out to the Greeks unless the E.U. swears a holy oath on bailing out Athens, come what may.
Europe will inevitably buy time by handing over a few more slices of bail-out money to Greece, even though, one day, the country will default. With 50 cents of the euro, it will halve its debt as well as its repayments and thus buy more time. The E.U., meanwhile, still won’t have any idea where it’s going or how to handle the crisis long-term. But what else is new? Twenty-seven governments do not a “more perfect union” make. Certainly not when the natural leader, which is Germany by dint of wealth and weight, sounds such an uncertain trumpet as it has under Chancellor Merkel. Yet what, exactly, is she supposed to do when the chickens of an ill-designed monetary union have finally come home to roost? Neither she nor Sarkozy can undo the mismanagement of the PIIGS in one fell swoop.
Meanwhile, back to the United States—to its still-sinking dollar and rising unemployment. It is hard to think of a time when both the U.S. and the E.U., the two biggest players in the international economy, were in such miserable shape. We are talking about two giants with a total of 50 percent of global GDP. Who will save them?
Josef Joffe is the editor of Die Zeit in Hamburg Germany. He is also a senior fellow at the Freeman-Spogli Institute for International Studies and Abramowitz Fellow at the Hoover Institution, both at Stanford.
9 comments
A reasonable question, except that per Krugman, the US hasn't even tried keynsian stimulus (as state a local spending dropped more than the Feds increased), let alone "Keynesianism to the max"
- Nari224
June 23, 2011 at 8:58am
US banks are exposed to about 50 Billion in CDS contracts for Greece alone, which the European banks took out on PIG defaults. What we saw with the "too big to fail" post Lehman policy with the banks we are now seeing with countries, which begs the question: Why pay out revenue for a CDS contact if your debtors are always going to be forced to pay due to political pressure? The British/German and to a lesser extent French banks all have exposue to Irish debt but they took out insurance with AIG and other American banks in case of default. When a 20 Billion "haircut" on holders of Irish bonds was agreed by the IMF and even George Osbourne, AIG's Director of Telesales - Timothy Geithner (who also works part-time for the US taxpayer) got on the phone and vetoed it. It's quite a scam for the US Banks. Sell insurance contracts knowing you'll never have to pay out because you have such a strong Telesales team working for you in the form of the US Treasury Secretary. I wonder what kind of calls per day target Geithner has to hit to get his commission?
- IggyPop
June 23, 2011 at 1:22pm
And, indeed, the euro, instead of forcing member states into fiscal convergence, has only accentuated the bad habits of the PIIGS. These countries had always lived beyond their means. Has Mr. Joffe looked at the time-series of the budget figures for the PIIGS? Spain had a 23.4 billion euro surplus in 2007. Ireland also ran surpluses in the public sector until the state took on bailing out the banks which actually were reckless. What the monetary union did do was encourage the bidding up of real estate in Spain and reckless behavior by the Irish banks. The real estate inflation in Spain set up a burst in the bubble, sparking a recession, hence Spain's current deficit.
- sighthnd
June 23, 2011 at 2:32pm
Exactly right Sighthnd. Well said. It's lazy journalism that equates the PIGS as all alike. In fact, Ireland has a private debt problem to Greece's public one. That is, if you ignore the banking scam that Irish taxpayers are being forced to bailout German, French and British banks. In fact, Ireland is second only to Germany in exports and highly a skilled labour force. But of course all that tax revenue is now going to make good PRIVATE gambling debts between PRIVATE banks. Moral hazard? More like a moral bungie jump.
- IggyPop
June 23, 2011 at 4:23pm
"Indeed, cheap money encouraged even more profligacy—worst of all in Greece (which also managed to cheat on its financial statistics before and after entering the euro)." You don't mention who helped them cheat, Goldman Sachs.
- Pnaut
June 23, 2011 at 4:43pm
Mr Joffe, You seem to subscribe to the common misconception held on the continent that Germany has to bailout Ireland because of reckless Irish banks. The reality is - Ireland is bailing out reckless German banks. There is no question that Irish banks were reckless in the extreme but so were the German banks that lend Billions to them. The German banks were happy to take the ponzi profits in the good times, seemingly free of any enquiries from European regulators. Where was the European regualatory system when these German banks were funneling Billions into Irish banks and the clearly overheated Irish property market? This question is never asked in the media. It is also conveniently forgotten that Ireland had to endure a low interest rate to enable German reunification and this was a primary cause of our crash. Now we are being asked to bail out your banks and to heap indignity upon indignity we have to take lectures from Europe in the process. Hard not to turn Euroskeptic during all this.
- IggyPop
June 23, 2011 at 4:54pm
Pnaut. Goldman was also betting against Greece while it helped them cook the books. It was loading up on CDSwaps, knowing the spread would explode because they had the inside info. Most of the markets work on inside info, or Market Making as they pretend it is. You'll be waiting for hell to freeze over before Obama's admin looks at this corruption. Christ. Even Reagen jailed some S&L scapegoats.
- IggyPop
June 23, 2011 at 4:56pm
I can't describe how depressing reading these comments is.
- Curran1
June 23, 2011 at 9:10pm
The only way out of the mess is to wipe out derivatives by fiat, wipe out bank capital as necessary, and stand ready to protect depositors and re-capitalize banks to do it. Capitalism requires that capitalists take the hit for their poor judgment, not that they take phony profits as long as they can and then stick the public with the loss of those profits when they turn out to have been phony. In the process it would be well if sovereign debt were no longer regarded as riskless so that government's had to manage prudently to be creditworthy. In the meantime, those who fecklessly extended credit to Greece should pay the price. Shame on the Irish for being gulled into guaranteeing the debts of their banks. They should have let the bank shareholders and bondholders sink. We are letting the tail, the financial economy, wag the dog, the real economy, and will not get out of the global mess until we stop.
- roidubouloi
June 24, 2011 at 11:38pm