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Status report on Europe’s slow re-birth (first, the current system must die)

10 November 2011

Summary of another status report on the crisis of Europe.  Its leaders repeat their mistakes during the 1930s (raising taxes & cutting expenditures in response to economic weakness) while attempting to save the structurally flawed EMU.  Their mistakes only accelerate Europe’s dive towards a political singularity, when the current structure collapses — beyond which lies a new shape for Europe.  They will scream at the transition, as a baby does at birth.  Nobody knows what shape the new Europe will take; most mainstream analysts forecast an easy transition to a unified Europe.

Note:  Today the endgame for Europe (in its current form) may have started.  More on this tomorrow.

Contents

  1. The positive feedback between economic stress and political instability
  2. Germany’s impossible hopes drive the crisis
  3. Slowly people lose hope, each one’s despair bringing the endgame closer
  4. Other posts about the crisis of Europe

(1)  The positive feedback between economic stress and political instability

The Euro-crisis consists of equal parts economic and political dynamics.  Now politics take center stage in Greece and Italy, as the foreign-imposed austerity programs crush their economies — without the promised gains.  Slowly their governments lose legitimacy.  Loss of legitimacy manifests itself in two important ways.

(a)  People lose respect for the nation’s laws.  Most importantly, with the tax code — as taxes are increased.  Less compliance, more evasion, even larger deficits.

(b)  Politicians become weak.  Changes in government create hope — but in fact reflect growing political instability.

  • Governments have already fallen in Ireland and Portugal.  Belgium’s fell in June 2010, with as yet no replacement.
  • In Greece the opposition conservative parties, led by Antonis Samaras, become reluctant to take office.  Under pressure from Germany and France, they have swung to support the austerity programs — but prefer to do so while in opposition.  Weak governments cannot impose harsh austerity or make broad reform measures.
  • A similar process might be starting in Italy.  However weak Berlusconi’s government, whatever replaces it might be weaker.

Europe’s elites fear their people, so they take strong measures to prevent elections or referenda on their policies.  This makes failure far more likely.  Their only hope for success lies in gaining public support across Europe.  Force elections on recalcitrant political leaders; trust Europe’s peoples to support unification.  This might sink the project, but is its only hope for success.

(2)  Germany’s impossible hopes drive the crisis

Germany’s eurozone trilemma“, Edward Chancellor, Financial Times, 6 November 2011 — Opening:

Economists have bigger brains than ordinary mortals. Whereas most people are flummoxed by dilemmas, economists wrestle with trilemmas. Nobel laureates Robert Mundell and Marcus Fleming, for instance, famously observed that it was impossible for a country simultaneously to maintain a fixed exchange rate and an open capital account while keeping inflation under control.

Europe’s crisis has thrown up another impossible trinity. The Germans have three ardent desires. First, they want the single currency to survive. Second, they wish to limit Germany’s financial contribution to any bail-out. Third, they insist that the European Central Bank keeps inflation low. These demands are mutually incompatible. Until Berlin relents on one of them, the euro crisis is likely to rumble on.

(3)  Slowly people lose hope, each one’s despair bringing the endgame closer

Can Italy save itself?“, Michael Gavin, Barclay’s Capital, 7 November 2011 — Summary:

  • The ongoing debt crisis in Greece is a legitimate concern for policymakers and investors, but growing concerns about Italy pose the real danger to Europe and the world economy. Yields on Italian government debt have reached new highs, and are at levels that we consider clearly unsustainable.
  • We believe that policy reforms in Italy are necessary to increase confidence in the Italian credit. However, historical experience suggests that the self-reinforcing negative market dynamics that now threaten Italy are very difficult to break. At this point, Italy may be beyond the point of no return.
  • While reform may be necessary, we doubt that Italian economic reforms alone will be sufficient to rehabilitate the Italian credit and eliminate the possibility of a debilitating confidence crisis that could overwhelm the positive effects of a reform agenda, however well conceived and implemented.
  • … We see little practical alternative to a strengthened commitment by the ECB to act as lender of last resort to precariously positioned eurozone governments.

(4)  For More Information

  1. The post-WWII geopolitical regime is dying. Chapter One , 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
  2. Can the European Monetary Union survive the next recession?, 11 July 2008
  3. The periphery of Europe – a flashpoint to the global economy, 8 February 2010
  4. A great speech by the PM of Greece. How soon until an American President says similar words?, 3 March 2010
  5. Governments cannot go bankrupt, 2 April 2010
  6. Our government’s finances are broken. How do we compare with our peers?, 8 April 2010
  7. The EU does Kabuki for Greece. Is it the next domino to fall?, 14 April 2010
  8. About the Euro crisis: the experts are wrong; the German people are right., 7 May 2010
  9. Former Central Bank Head Karl Otto Pöhl says bailout plan is all about ‘rescuing banks and rich Greeks’, 20 May 2010
  10. The Fate of Europe, nearing the point of decision, 13 September 2011
  11. Europe drifts towards the brink of a cataclysm, 26 September 2011
  12. Delusions about easy fixes for Europe, dreaming during the calm before the storm, 30 September 2011
  13. Every day the new world emerges, yet we see it not.  Like today, as Europe begs China for loans, 15 September 2011
  14. Is Europe primed for chaos, as it was in July 1914?, 7 October 2011
  15. We see the outlines of the next cure for Europe.  Will it work?, 14 October 2011
  16. Today Europe’s leaders took another step towards the edge of the cliff, 27 October 2011
  17. Where to from here, Europe?  Some experts share their views., 8 November 2011
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9 Comments leave one →
  1. whirlwind21 permalink
    10 November 2011 12:18 am

    Wonder if its similiar to our predicimate regarding debt and the on going recession? Take this jobs chart for example: {From Calculated Risk, 6 November 2011}.

    Like

    • 10 November 2011 3:28 am

      No, The global recession sparked the crisis – but Europe’s problems result largely from internal trade imbalances — although the EU as a whole runds a slight trade surplus. These caused a steady build-up of debt in the PIIGS. A crisis was inevitable. The lack of a central bank (a lender of last result) and central government meant that a serious problem would become an existential one.

      The European crisis foreshadows the future gobal crisis, as those of the world mirror those of Europe, but on a far larger scale.

      Like

  2. Greg Connolly permalink
    10 November 2011 5:28 am

    The EU is a Carnival (and was one at Birth) run by Political demagogues. Then captured by Financial hooligans most recently. “Unification” is a code word for overturning sovereign nations while crushing the citizens. What Treaty? Voluntary Haircuts are not a credit event? Referendums? Aahhh…such mastery!

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    • 10 November 2011 5:44 am

      Where do you get this stuff? Comic books?

      EU unification is a generations-long project, which polls show even now has broad and deep support across Europe (eg, the FDP ran on an anti-platform in the recent Berlin elections, and was crushed). It was born from revulsion at two horrific wars, furthered by the realization that the nations of Europe would be pawns on world chessboard unless they unified. Europe’s larger nations well know how great powers kick around small fry, as they’ve do so for centuries.

      It’s a difficult project, and they might fail. But they do not warrant your mockery. So far they’re doing better than nation-building in the United States, which climaxed in the carnage of the Civil War — followed by the century-long successful counter-revolution by Southern whites. Ending in a free and unified nation only in the 1960s.

      Like

  3. Greg Connolly permalink
    10 November 2011 7:03 am

    It is a Carnival due to demagogues. Failure at inception due to half a loaf and if you fail to concede that, you are in a Comic Book world. Re-read Krugman, for heavens sakes. Do you think you can only opine on the reality of an attempted political union with none of the rest of the monetary /fiscal ingredients? Disingenuous, at best.

    When was the last time you were in Europe and had serious discussions with 70-80 year old hopefull citizens ?
    Many trips for me, FM 15 or 16 . France, Denmark, Italy, Spain, Ireland. Many are in despair right now per my discussions with them. Mockery? Not them, sir, but you and your wishful incomplete analysis. These citizens have been reduced to bit players by typical Political Hacks

    You mock the USA with your Civil War analogy …culminating in a free and unified nation in 1960? You are too young to have any idea, first hand of what we went through with the Freedom Riders and Bobby Kennedy and his hand wringing episodes.

    Germany wins without firing a shot. Do you have any idea how THAT feels to an older European?

    Europe is the heartland and homeland of America. America is nothing without its roots. And you Americans glibbly sit around and offer analysis of what you so clearly know so little about. There are real people and lives at risk there just like here and the Clowns arrive at Cannes on red carpets. Clueless just like here.

    Like

    • 10 November 2011 7:25 am

      Almost all of this is wrong. You have not even read my reply correctly. To take one of the smaller examples, I said “the 1960s”, including Johnson’s civil rights laws thru the reaction to the massive race riots. Not “1960″. {What a weird reading FAIL. What unique civil rights event happened in 1960? 1965 or 1969, yes. But 1960?}

      And you guessed my age wrong.

      The rest is too confused to reply to, ESP as I have gone over this material at length in my posts about Europe.

      Like

  4. Mike Goldthorpe permalink
    10 November 2011 9:55 pm

    You will have to pardon my naivite here. I am a European – I have an English father and an Austrian mother. I believe in the European idea, the idea of a single currency and free and open borders but I can see the cracks that make this system difficult. Not all of Europe is the same which causes some contradictions in the process of integration, a state of affairs that has been thus for about, what, 1500 years? That’s a long time for regional governments to firmly entrench their cultures on the local population which aids separation rather than integration.

    A lot of Europe has deep democratic roots, though admittedly some are deeper than others. Those who have gained theirs centries ago through struggle don’t like the now alien idea of being ruled by fiat, of having people far away telling them what to do. Ask any Greek currently – it is Germany, and maybe France, telling, not asking, the people what to do over their elected government. Of course, those members that have recent democracy don’t want to lose that which they have so recently gained.

    So there we have, to my mind, a contradiction. Can Europe be a single entity, like an empire akin to China, India or the USA (for really, that is what they are, however you try and dress them up) after so many centuries of being separate? How long did it take Germany, Italy, Spain et al to become one country in the minds of their populations? This even though they were, in mind, a single people in their geographical context – they were still of different allegiances.

    What Europe needs now is a Garibaldi or Bismark of great enough stature to unite the polyglot peoples of Europe (they, the people have been linked, I think, long enough to think of themselves as a geographical entity, albeit with different allegiances). Would democracy give us that? I would love to say it would – and as it seems to in India (different peoples etc)…..

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    • 11 November 2011 3:17 am

      “What Europe needs now is a Garibaldi or Bismark of great enough stature to unite the polyglot peoples of Europe”

      How true! Unfortunately Europe is going the other way, as described in the editorial by Robert Shrimsley in the November 9 Financial Times:

      Stand by for the rise of the technocrats. Apparently, the answer to the huge problems of the eurozone is the replacement of elected premiers with economic experts – approved officials dropped from European institutions. In Greece, Lucas Papademos, a former vice-president of the European Central Bank, has been pushed hard for the job; in Italy, Mario Monti, another economist and a former EU Commissioner, is much mentioned. They may lack a democratic mandate but they’re fantastically well regarded in Frankfurt. It remains to be seen if either will clinch the role. But what exactly is the great attraction of technocrats?

      If ever modern Europe needed brave, charismatic leaders to carry their nation through turbulent times, it would seem to be now. Instead, it is as if the crew of the Starship Enterprise had concluded that Captain Jean-Luc Picard is no longer the man for the job and that it is time to send for the Borg. Efficient, calculating machines driving through unpopular measures across the eurozone with the battle cry “resistance is futile” are apparently the order of the day. Faced with a deep crisis, once-proud European nations are essentially preparing to hand over power to Ernst & Young.

      The last sentence looks wrong. It s/b “to hand over power to to the ECB (aka Germany)”. Since much of the problem is weak legitimacy of the unification project, and esp the doom-to-fail austerity programs, this is just another step on the road to failure, IMO.

      Locutus of the Borg

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  5. Krugman comments on the skill of Europe's technocratic overlords permalink
    11 November 2011 3:40 pm

    Crat Me No Techno, Continued“, Paul Krugman, NYT, 11 November 2011 — Excerpt:

    … But actually it’s worse than that. As I’ve tried to point out in the past, the trouble with the alleged technocrats we’re supposed to rely on isn’t just that they’re uninspiring — it is that they have been wrong about everything, again and again. Actually, not just that; on both sides of the Atlantic, but arguably even more so in Europe, the “technocrats” have consistently ignored their own economic models in favor of what amount to political prejudices, calling for fiscal austerity and higher interest rates when their own analyses say that unemployment will be high and inflation subdued.

    It’s a dubious idea to supplant democratic governance with allegedly non-political management even in the best of times. But to assign authority to unelected men whose actual record suggests that they govern based on prejudices rather than analysis is even worse.

    Like

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