The simple explanation of why night falls over Europe

Summary:  We cannot predict what happens next as the 11th meeting of Europe’s leaders winds to yet another disappointing conclusion.  We can only seek to understand how Europe got here, and what’s happening now.  Only this way can we learn, and so prepare for the choices ahead for America.  This is a summary of the 20 previous posts about Europe (listed at the end).

Update:  At the end of this post you will find a brief analysis of the proposals from the lastest euro-summit.

Millions of words have been spent describing the crisis slowly destroying the current political structure of Europe, making it seem complex beyond understanding.  While full analysis will require decades of study — with its combination of personalities, politics, national animosities, high finance, and economics — the basic elements are simple.

  • Europe’s leaders gambled, attempting monetary unification before fiscal unification as a step towards full political union.  The fatal flaw was its lack of a mechanism to modify the treaties, correcting design errors and adapting to changed conditions.
  • Germany exploited its control of monetary policy for its own benefit, allowing rapid growth in their exports to southern Europe — financed by its loans to southern Europe.  All prospered.
  • All good things eventually come to an end.  The system started to collapse from a combination of the too much accumulated debt AND malinvestment in southern Europe, plus the shock of the great financial crisis.
  • Banks are the vulnerable part of a capitalist system.  French and German banks hold much of the southern european debt; defaults (soft or hard) would bankrupt them.
  • Europe’s banks own Europe’s governments, as American banks own America’s government. Hence in 2009 recapitalizing the banks became the primary imperative.
  • The crisis might allow Germany to push Europe another step towards unification, giving Germany the power to influence individual national budgets in the EU or EMU, allowing them ever great ability to exploit their neighbors (this is the traditional way nations use power).

Since the Greek crisis began in early 2010 Europe’s leaders have sought ways to rebuild the banks.  Guarantees and loans from their government have proved insufficient.  The only remaining alternative to nationalization (as done in Sweden, Russia, and to US S&L’s) is ECB printing hundreds of billion euros for the debtors, so they can pay the banks.  Any resulting inflation would also help in this great work.

Not realizing that bankers are western civilization (or own it), Germany’s people refused to see the wisdom of massive ECB printing.  Europe’s leaders despise public opinion, but shirk from taking so large a step in the face of such strong opposition.  They see lamp posts and fear what the public might do.

Instead they resort to increasingly baroque proposals, hoping to create a facade behind which the ECB can print sufficient euros to save the banks. This effort ignores the actual problems afflicting Europe, burning scarce political capital and still scarcer time.  But they encounter two obstacles:

  • The creditor nations are not stupid, so they will not all monetization without some form of fiscal unification (otherwise the core nations finance fiscal deficits in the periphery without the ability to control them)
  • The debtor nations are not stupid, and so will not allow fiscal unification on Germany’s terms (as they did with monetary unification).

The end game will come eventually, as they pass some invisible tipping point.  Continued capital flight will create disorderly markets.  The coming recession will scuttle the austerity plans.  And the austerity programs will intensify the coming recession — drastically increasing social stress throughout Europe (imagine Spain starting a recession with 23% unemployment).

This will get interesting for Europe.  Survival is always interesting; all their political regimes might not survive.

Addendum

On a deeper level, a driver of this crisis is a misreading of history by the German people. They believe that the NAZI rise to power resulted from the hyperinflation six years earlier (1921-24). They don’t see the proximate cause: Weimar imposed austerity during 1929-32 (after the crash). For details see A lesson from the Weimar Republic about balancing the budget.


Update: About the results of the latest euro-rescue summit

(1)  The real results concern aid for the banks (see the Financial Times).  Necessary actions to improve bank liquidity, but ineffective without broader policy action.

(2)  Approval for more and deeper austerity policies.  In fact, locking EU fiscal policy into a straitjacket as a recession looms ahead.   Europe’s leaders have learned nothing from 1929-32, and nothing from the great progress in economic theory since then.  This could have horrific results!  Future generations will not understand.

(3)  They hope (again) to get more aid from the BRICs (Brazil, Russia, India, China) via the IMF.  This is delusional.  The BRICs did nothing earlier this year, when hopes were higher for effective EU action AND the BRICs were stronger.  Now all four BRICs have serious problems at home; substantial help for the rich folks of Europe from the poorer BRICs seems unlikely.

(4)  Most important, they have done nothing to address the imbalances within the EMU that caused the crisis — and drive the current downturn.

(5)  “Never let a crisis go to waste”, so they wisely use this opportunity to push for Treaty changes.  But the emphasis on this is bizarre.  It is, as others have said, like the Captain of the Titanic convening a seminar on metallurgy after they hit the iceberg (later analsyis showed that its steel became brittle when cold).

(6)  For details see Europe’s disastrous summit“, Felix Salmon, Reuters, 9 December 2011.

Articles about Europe

Here is the Plan:

  1. Letter from Angela Merkel and Nicloas Sarkozy to European Council President Herman van Rompuy about the European debt crisis, 7 December 2011
  2. Introductory statement to the press conference by the President of the ECB, 8 December 2011 — He explicitly refuses to help.
  3. Statement by the Euro Area Heads of State of Government, 9 December 2011

Reactions to the Plan:

  1. The Euro Debate Gets Philosophical“, GaveKal, 29 November 2011 — A look at the philosophical differences underlying the two sides of the euro-crisis.
  2. Anxious Greeks Emptying Their Bank Accounts“, Der Spiegel, 6 December 2011
  3. Europe Shudders at Germany’s New-Found Power“, Der Spiegel, 6 December 2011 — Europe hopes to imitate German’s success as an export power (every nation can become a net exporter if they try!)
  4. China to create $300 billion FX investment vehicle“, Reuters, 9 December 2011 — This story has been widely misunderstood. China probably plans to make equity investments in strategic industries, not buy Italian bonds. It is not a bailout of Europe, and perhaps a plan to take advantage of a bust in the developed nations.
  5. A Summit to the Death“, Kevin O’Rourke (Prof Economic History, Oxford), 9 December 2011
  6. Krugman explains one of the great misunderstandings wrecking euro-policy:  “The Long And The Short Of It“, New York Times, 10 December 2011
  7. Europe’s blithering idiots and their flim-flam treaty“, Ambrose Evans-Pritchard, The Telegraph, 9 December 2011
  8. No Draghi Ex Machina“, Paul Krugman, New York Times, 12 December 2011 — “So last week European leaders announced a plan that, on the face of it, was pure nonsense. … It’s remarkable how many sensible people base their analyses on the presumption that the ECB will do what has to be done. … But as far as anyone can tell, the monetary cavalry aren’t coming.

Other posts about the crisis of Europe

  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
  18. Status report on Europe’s slow re-birth (first, the current system must die), 10 November 2011
  19. Europe begins its endgame.  Watch and learn, for Europe’s problems are the world’s., 11 November 2011
  20. Looking ahead to see the new shape of Europe, 22 November 2011

37 thoughts on “The simple explanation of why night falls over Europe

  1. It’s a good thing the combination of high unemployment, an alienated populace, a dysfunctional political system and a feeling of being exploited by foreign and domestic enemies has never in the history of Europe allowed reactionary and disruptive forces to come to power and wreak havoc.

    1. Grimgrin – Your comment goes to the heart of the situation! The current situation involves two mistaken lessons from history.

      (1) By much of Europe: that the German export success (much going to southern Europe) can be imitated by southern Europe. It’s math: not everybody can have net exports.

      (2) By the German people: that the NAZI rise to power resulted from the hyperinflation six years before (1921-24). This ignores the proximate cause: Weimar imposed austerity during 1929-32 (after the crash). For details see A lesson from the Weimar Republic about balancing the budget.

  2. In Italy we have a saying: “Occhio di straniero, occhio di sparviero”: the foreigner has hawk’s eyes. Let me congratulate with you for your synthesis: it’s right to the point. I’ll try to add something from my vantage point inside Europe.

    (1) The original sin in the building of euro is the following: history says that there is no money without a prince who mints and guarantees it (with his sword).

    (2) Who is Europe’s prince? If being prince means having the longest sword, the answer can easily be found (try under “U”, like in “United States of America”, or under “B”, as in “Bases, American with nuclear weapons on Europe’s soil”)

    (3) Meet the pink mammuth in the cosy UE drawing board at Bruxelles. Until recently, it was peacefully eating its grass in the vast bureucratic pastures of Commissions and Subcommissions laboring under the strain of imposing uniformed weights and measures on bananas and salami all over Europe; but now it seems to be getting a little nervous.

    (4) Before running away and being substituted by a safer appointee by the Financial Powers That Be, the former Greek premier Papandreou, on the verge of imposing to Greek people an impressing and longlasting recession, has fired at once the equivalent of the Joint Chiefs of Staff (Heads of Army, Navy, Air Force), substituting them with OTAN verified officers.

    (5) In my home country, President of the Republic Giorgio Napolitano (a former communist who after having served well USSR has turned to be the best USA’a political asset in Italy, so much that recently, the NYT lavishly praised him on its front page) has kindly persuaded Prime Minister Berlusconi to resign so to be substituted by Professor Mario Monti, UE technocrat and Goldman Sachs Advisor for Europe – just like Mario Draghi, now head of BCE, was Goldman Sachs Vice-President for Europe. Secretary of State in Mont’s Government: Giulio Terzi di Santagata, former ambassador in Washington (and Tel Aviv). Secretary of Defence: Adm. Di Paola, who accepted his new appointment by sms from his current location at OTAN Headquarters in Afghanistan.

    In a parliamentary republic like Italy, a Premier resigns only if he loses his majority in Parliament, and Berlusconi never lost it; just like, according to the Constitution, the President of the Italian Republic should have no political role in chosing governments, being an institutional figure.

    Maybe an impressively hard speculative attack on Berlusconi’s firms (he is a billionaire) in the previous days has something to do with his unheard of decision. I suspect that maybe he received, too, a jovial phone call by Mrs. Clinton, something like “Hi, Silvio! How’s your business? How are your sons? You have five, don’t you?” but of course I have no evidence of it.

    (6) Once upon a time, when UE was a small child, General de Gaulle said that integration of Europe could be viable only if a) by treaties among sovereign nations b) by a federal government legitimated by the vote of European peoples c) Europe independence was guaranteed by European swords. After which, he d) took France out of OTAN e) built an independent nuclear armament, the “force the frappe” f) asked the US government to pay French exports in solid gold by monthly rates (Nixon and Volcker had not yet thrown away that part of the Bretton Woods’ treaties).

    (7) No doubt that M. de Gaulle was not an easygoing fellow, but he was not a dictator or a fascist (on the contrary, he bet his life and his fortunes against fascism when fascism had crushingly won his country). And when he told the things I have briefly resumed, economy in Europe was going very well.

    (8) Now, a friend of mine working in Greece tells me that in Athens’ hospitals (Athens, Greece, Europe) the inpatient’s relatives are beginning to bring in breakfast, lunch and dinner for their dear ones, because the hospitals have no more money to ensure a proper nutrition. Medicines are getting scarce.

    To sum up. As our kind host rightly says, Financial Powers ARE (or at least own) Western Civilization. But if the Financial Powers do not deliver the single good they produce (in effect, they create out of nothing), keeping it just for themselves, maybe Western human beings, even of the European brand, will begin to wonder why they should accept the yoke of such an ineffective and exacting prince, who reduces them in debt peonage while giving them just gay marriage and Iphone.

    If and when they realize this simple fact, I hope that we will find a leader such as M. de Gaulle, but I’m afraid that the historical record is not so comforting, and statistics suggest that slaves revolts have no good manners.
    Chi vivrà vedrà, who will live will see.

    And begging your pardon for so long a comment, I’ll add a little philologic note: we call ourselves Western Civilization, but if words have to keep their meaning, in our civilization and its ways nothing Western exists any more. Our fathers the Greeks (the ancient ones) built their and our civilization on the basis of a single concept, “metron”, which means “measure”, “limit”. Greek tragedy, architecture, political science, ethics, are all based on it; and in the plains of Marathon and Thermopylae, in the waters of Salamis, they fought Eastern “apeiron”, which means lack of limit, and chaos: a lack of limit which expresses itself by Emperors issuing orders at their whim, in peoples enslaved, their reason darkened by the drunkenness of fear and desire. I’ll add that the Greeks were horrified by the Phoenicians, too, because in their cities money was the absolute master, and because their God Baal exacted human sacrifices, especially liking the sacrifice of the firstborn.

    1. I read your comments with interest, Roberto. In general I agree with them but have a few comments of my own in response.

      The current financial mess most definitely started in the US but the Europeans as a whole took our craziness and multiplied it by at least 5 to get to their current position. The Icelandic banks, for example, went just a bit over the top.

      The behavior of the US government towards the European Union has mostly been benign neglect punctuated by odd unhelpful comments. We’ve got enough other problems on our plate that our government thinks are more important (War on Terror and the US economy in particular) that I doubt Ms. Clinton (or any other important US government official, for that matter) has the time or interest to make such a phone call. The US government, at least in the US media, presents itself as not understanding what the big problem is and just wishing that the it would go away. Based on their poor handling of the smaller problems in the US economy, I’d say it is possible that this is true.

      You make a better case by pointing out that the outgoing leaders in southern Europe are doing their best to make military coups less likely.

      De Gaulle lived in a completely different world than we live in now and looking back to him for advice may be comforting but probably won’t be helpful.

      Your eighth point (medicines beginning to be in short supply) is one of many disturbing little things that are beginning to happen in the US as well. The Obama administration’s actions stopped us from falling into Depression during the 2008 financial crisis but didn’t resolve the causes of the crisis. We haven’t really recovered since, regardless of the US news media tells everybody. It looks to me like we are setting ourselves up for an even bigger fall at some point in the not-too-distant future.

    2. Roberto, you said many things very well.

      On a more basic sense, the “discipline” which would need to exert on Europe flies in the face of its long, often tumultuous history, it’s diverse cultures, its polyglot economy, and so forth. In the United States, it took a Civil War for a cohesive and united rising industrial North to crush a decadent agrarian South. Europe has no such hammer smash the opposition that surely will arise.

  3. Update: About the results of the latest euro-rescue summit

    (1) The real results concern aid for the banks. Necessary actions to improve bank liquidity, but ineffective without broader policy action.

    (2) Approval for more and deeper austerity policies. In fact, locking EU fiscal policy into a straitjacket as a recession looms ahead. Europe’s leaders have learned nothing from 1929-32, and nothing from the great progress in economic theory since then. This could have horrific results! Future generations will not understand.

    (3) They hope (again) to get more aid from the BRICs (Brazil, Russia, India, China) via the IMF. This is delusional. The BRICs did nothing earlier this year, when hopes were higher for effective EU action AND the BRICs were stronger. Now all four BRICs have serious problems at home; substantial help for the rich folks of Europe from the poorer BRICs seems unlikely.

    (4) Most important, they have done nothing to address the imbalances within the EMU that caused the crisis — and drive the current downturn.

    This is, as many have said, like the Captain of the Titanic convening a seminar on metallurgy after they hit the iceberg.

    1. Fabius,

      Deja vu all over again. You wrote,

      “(2) Approval for more and deeper austerity policies. In fact, locking EU fiscal policy into a straitjacket as a recession looms ahead. Europe’s leaders have learned nothing from 1929-32, and nothing from the great progress in economic theory since then. This could have horrific results! Future generations will not understand.”

      In her 1943 book, “On The Problem of Full Employment”, British economist Joan Robinson wrote about England’s policy response to the Depression,

      “The National Government which was formed in 1931 went in for a great economy campaign. Local authorities were compelled to cease work on building schemes, roads, den drainage, and so forth. An emergency budget was introduced, increasing taxation, cutting unemployment allowances and reducing pay of public servants, such as teachers and the armed forces. Private citizens felt it was patriotic to spend less. […] Nowadays there is considerably more understanding of how things work and it is unlikely that such a complete idiotic policy will be tried again.”

      Alas, “complete idiotic policies” spring eternal.

      Hat tip to Dirk Ehnts for the Robinson quote,

  4. Re: “Europe’s banks own Europe’s governments, as American banks own America’s government”

    An interesting account: My Occupy LA Arrest, by Patrick Meighan, 6 December 2011

    If a “99% consensus” is going to coalesce, it needs to form around such issues as higher taxes on wealth, a critique of fakery in capitalism, the prosecution of fraud, and the public financing of elections.
    .
    .
    FM note: I strongly recommend reading Patrick Meighan’s account of police action to break-up the Occupy LA protest!

  5. Europe’s disastrous summit“, Felix Salmon, Reuters, 9 December 2011 — Please read the full article! Excerpt:

    I thought disasters were all meant to happen over the weekend? Somehow, in Brussels, EU leaders have contrived to pull defeat out of the jaws of victory on Thursday night, leaving Friday for finger-pointing and recriminations and wondering whether anybody who signed on to this deal has any chance at all of even getting re-elected, let alone being remembered as one of the leaders who saved the euro.

    … And yet, inevitably, another half-baked solution is exactly what we got. Which means, I fear, that it is now, officially, too late to save the Eurozone: the collapse of the entire edifice is now not a matter of if but rather of when.

    … The fundamental problem is that there isn’t enough money to go around.

    … It all adds up to one of the most disastrous summits imaginable. A continent which has risen to multiple occasions over the past 66 years has, in 2011, decided to implode in a spectacle of pathetic ignominy. Its individual countries will survive, of course, albeit in unnecessarily straitened circumstances. But the dream of European unity is dissolving in real time, as the eyes of the world look on in disbelief.

    Europe’s leaders have set a course which leads directly to a gruesome global recession, before we’ve even recovered from the last one. Europe can’t afford that; America can’t afford that; the world can’t afford that. But the hopes of arriving anywhere else have never been dimmer.

  6. Now that it’s crunch time, I suppose the discussion will come down to how we keep the lights on. The first principle in this regard is to avoid war. War was not escaped last cycle (1938) but with the internet at least the role of the banks and bankers is way more evident. I guess now the question is :How stupid are we? FM?

    1. “The first principle in this regard is to avoid war. War was not escaped last cycle (1938) but with ..”

      I believe Martin van Creveld (and others) are correct that large-scale warfare between developed nations is unlikely. This is the very essence of understanding 4GW, understanding the break with the past. We assume the future will be like the past, and the mass wars starting with Napoleon are seared onto our minds.

  7. FM: I strongly recommend reading Patrick Meighan’s account of police action to break-up the Occupy LA protest!

    Agreed. glad it was noted here and also noted by FM. I stumbled on this Link and thus Patrick’s solitary blog post in the comment section on another Blog a few days back. It is a stunning account with some very strong implications and full of import in considering the responses of the Authorities now and in the future to any type of civil disobedience or protest that is seemingly formless and “open sourced”.

    I was not surprtised by Patrick’s account. As a person who has attended 5 major OWS meetings/protests in my large Metro Area and witnessed the ever-increasing police presence and the eventual over reach/reaction by the same, it was clear to me that these Events were taken very seriously by the authorities and it was also clear that a plan existed to “make an intimdating statement” to those involved. The militarization of urban police forces is full and complete.

    In my view, this all (coupled with Patrick’s account) is a very dangerous response by the authorities. It is part of the sense that many are now seeing that “things are out of control” for the authorities in many areas of econ and financial life. In my experienced opinion, the authorities greatly miss the rising anger in the populace and many are of an age such that they have no experience with the power that resides in a small group of citizens who simply have had enough, are willing to say no more and further more are posied to act upon such sentiments

    As a Greek national friend of mine offered this PM, “… the EU used Greece as an Experiment and were surprised at the “result”….they better not try it in Spain with 50 Million people and 23% Unemploy nor in Italy! … and it has failed in Greece, rest assured …”

    We shall see. I do believe that “austerity” alone will never fly in the USA.

  8. If I may, I’ll ask our kind host’s permission and I’ll reply to Pluto’s remarks on my comment, thanking him for his kind words and useful insights.

    First: economy is not my cup of tea. I am a playwright, I have been an Army officer; I worked in Army Headquarters, and was not badly taught at the War School. So that history, mechanisms and psychology of power struggles are my cup of tea: and I try to understand economic struggles through the language of history and power. To sum up, my education and cultural reflexes are outdated: I can read Odyssey and The Peloponnesian War in the original text, I am familiar with Clausewitz and Sun Tzu, but I get a bad headache when I read the economy pages in the newspapers.

    I do not know in detail which economic mistakes, and worse than mistakes, European leaders have made in this crisis; looking at the result, no doubt that they are legion.

    One single thing is clear in my mind: that if Europe’s identity, her cultural and political future, is built on UE, then it is built on the sand – maybe even on a swamp. In my opinion, there is no identity, no future, no democracy for Europe without independence. No Athenian of V century b.C. could have thought that Athens were an independent, democratic polis if there had been Spartan military bases on Attica’s soil (N.B.: I am not implying that we are Athenians, nor that Americans are Spartans; I’m not so hooked on wishful thinking).

    But I think that our European situation is as simple as that. Simple does not mean easy, of course; on the contrary simple things, like life, death, love, hate, destiny, war, peace, etc., are the most difficult to understand, accept, manage. (Tragedy deals with simple things).

    When you say that M. de Gaulle lived in a completely different world, you are perfectly right; I do not think that we could photocopy his political program. But the political and historical situation of Europe is the same; it is even more clearly defined, since the end of USSR. Our main problem is America: i.e., our main problem is how we think ourselves in relation to the American Empire. There’s the British way (we follow, trying to make our best out of our “comparative advantage”, i.e. our longer history, our more nuanced culture, our better cheeses and cathedrals); there’s the UE way (we pretend not to see the problem of political and cultural independence, and we go on as usual, talking technobabble, pretending to be allies of a power which can display its armies on our soil while we cannot do the reverse); and there is de Gaulle’s way (our grand strategy is independence).
    No more, no less.

    Just some words about Mrs. Clinton’s phone call to our former Premier. Of course it was a joke. I do not think that it really happened, at least not this way. But unfortunately, please believe me: things like that, and much worse, do really happen.

    Example: In the Sixties, Enrico Mattei, CEO of ENI (oil and gas multinational, then completely owned by Italian State) was killed in a fake airplane crash after some bad “misunderstandings” with foreign, mostly American oil companies about his revolutionary deals about royalties with producing countries in the Middle East. His wife says that in the last months before his death, he had been receiving phone calls from the USA which worried him very much.

    In the Seventies, Aldo Moro, president of Democrazia Cristiana – the party which had been governing Italy since 1945 – wanted to include the Italian Communist Party in the parliamentary majority. Mr. Kissinger did not agree, and he very eloquently told him so in a meeting thay had in Washington. When Mr. Moro came back, he said to be sick, stayed in bed for some weeks, talked about leaving his political career. Then he changed his mind, and went on with his political agenda. Next year he was kidnapped by communist terrorists, the Brigate Rosse. The Italian government asked for help from the US, and an expert was sent, dr. Steven Pieczekick. The Italian government took a firm (and unheard of) stand in the case. Absolutely no dealing of any kind with the terrorists. (In that period, political kidnappings were common, and usually the government tried to save the kidnapped by unofficial dealings). Mr. Moro wrote many political letters from his prison, but the government and the mainstream media all said that it was a case of Stockholm syndrome, that he was not compos sui. After 55 days, Mr. Moro was killed by his kidnappers.

    In a recent book, dr. Pieczenick says that in that occasion, he accomplished the task he was given by his superiors in the Department of State: neutralize Moro. The said task could have been accomplished in three ways: 1) having him killed 2) making him lose his credibility 3) both.

    In the present days, Italy waged war with France and Great Britain, under the aegis of USA, against Lybia, a country with which she had signed an internation friendship treaty in 2008, and where she was the first foreign investor, so accomplishing the rarest of feats: to dishonour herself while seriously damaging her national interests (Italy will never be the first foreign investor in Lybia any more). The said war war waged without asking the Parliament. Mr. Berlusconi, then our Premier, disagreed, whined, let everybody understand that he was ashamed (he had very warmly hosted Gheddafi in Rome just a few months before) but did nothing. Mr. Napolitano, our President of the Republic, had immediately told the press and the Italian people that we had to bring democracy and freedom in Lybia. Mabe he had received a phone call?

    I thank you once more for your kind comments, and for your patient attention to my long (too long) reply.

  9. As Krugman said:

    Basically, European experience is very consistent with a Keynesian view of the world, and radically inconsistent with various anti-Keynesian notions of expansionary austerity and flexible prices.

    For an analysis see “A Summit to the Death“, Kevin O’Rourke (Prof Economic History, Oxford), 9 December 2011 — Excerpt:

    As many feared and most expected, the just-concluded European summit left much to be desired. Once again, Europe’s national leaders showed themselves to be in denial about what underlies the eurozone’s economic, banking, and sovereign-debt crises, and thus hopelessly unable to resolve them.

    One lesson that the world has learned since the financial crisis of 2008 is that a contractionary fiscal policy means what it says: contraction. Since 2010, a Europe-wide experiment has conclusively falsified the idea that fiscal contractions are expansionary. August 2011 saw the largest monthly decrease in eurozone industrial production since September 2009, German exports fell sharply in October, and now-casting.com is predicting declines in eurozone GDP for late 2011 and early 2012.

    A second, related lesson is that it is difficult to cut nominal wages, and that they are certainly not flexible enough to eliminate unemployment. That is true even in a country as flexible, small, and open as Ireland, where unemployment increased last month to 14.5%, emigration notwithstanding, and where tax revenues in November ran 1.6% below target as a result. If the nineteenth-century “internal devaluation” strategy to promote growth by cutting domestic wages and prices is proving so difficult in Ireland, how does the EU expect it to work across the entire eurozone periphery?

    The world nowadays looks very much like the theoretical world that economists have traditionally used to examine the costs and benefits of monetary unions. The eurozone members’ loss of ability to devalue their exchange rates is a major cost. Governments’ efforts to promote wage cuts, or to engineer them by driving their countries into recession, cannot substitute for exchange-rate devaluation. Placing the entire burden of adjustment on deficit countries is a recipe for disaster.

    In such a world, fiscal union is an essential counterpart to monetary union.

    … In the slightly longer run, such a deal, assuming that it goes ahead, will mean continued austerity on the eurozone periphery, without the offsetting impact of devaluation or stimulus at the core. Unemployment will continue to rise, placing pressure on households, governments, and banks. We will hear much more about the relative merits of technocracy and democracy. Anti-European sentiment will continue to grow, and populist parties will prosper. Violence is not out of the question.

    This summit should have proposed institutional changes to avert such a scenario. But if such changes are politically impossible, and the euro is doomed, then a speedy death is preferable to a prolonged and painful demise. A eurozone collapse in the immediate future would be widely perceived as a catastrophe, which should at least serve as a source of hope for the future. But if it collapses after several years of perverse macroeconomic policies required by countries’ treaty obligations, the end, when it comes, will be regarded not as a calamity, but as a liberation.

    And that really would be worse.

    1. “In such a world, fiscal union is an essential counterpart to monetary union.”

      That’s only one option, and an attractive one ONLY if fiscal policy momentum isn’t irreversibly set on larger scale austerity & contraction.

      The other option, is always return to distributed fiscal & monetary policy, where the quality of distributed decision-making has better chances of remaining a bit higher.

      Boils down to whether we have the coordination tools allowing our distributed decision-making quality to scale at the same rate as our population, economic capabilities, and institutional bureaucracy. No group can scale group agility beyond the quality of it’s organizational methods. We’re seeing that demonstrated once again.

      If we’re not ready, better to remain in in uneasy alliances rather than unsustainable unification attempt we’re not ready for.

  10. The Long And The Short Of It“, Paul Krugman, New York Times, 10 December 2011

    Olympia Snowe {Senator, R-ME} talks nonsense:

    Fiscal shenanigans such as permanent tax increases to pay for one-year temporary measures are precisely the problem that drove our nation into a $15 trillion debt crisis.

    Actually, it’s nonsense on multiple levels. A nation that can borrow at negative real interest rates isn’t exactly facing a debt crisis. We do have a $15 trillion debt — but that debt reflects a combination of

    1. permanent tax cuts, not paid for at all
    2. large temporary spending on wars, not paid for at all, and
    3. a severe economic crisis, which has depressed revenue (mainly) and required some emergency spending (which accounts for only a small piece of the debt)

    And another thing: short-term outlays offset by long-term austerity is precisely what macroeconomics 101 says you should do when faced with a depressed economy. It’s not “shenanigans”, it’s orthodox macro and the height of responsibility.

    1. Krugman: “A nation that can borrow at negative real interest rates isn’t exactly facing a debt crisis.”

      ?? Even this statement is totally out of paradigm. No country on a fiat currency regime “borrows” currency (unless they’re stupid enough to borrow in foreign-denominated currency, like the EMU states). Look up the definition of “F.I.A.T.” If you’re referring to Treasury Securities, you’d be well advised to read a bit more about currency systems. Gov securities are merely ways to drain reserves from the CB system. TSs occur post appropriations, not before. A fiat “deficit” is nothing more than necessary growth of a fiat currency supply, which is backed directly by public initiative rather than a constrained gold or other commodity supply. We never pay back fiat, anymore than we pay back “borrowed” initiative. That would be like math students trying to pay back all the numerals they borrowed as they advanced through their math studies! Ridiculous, if you’ll only stop and actually think about it. Olympia Snowe is a national embarrassment, as is the entire Deficit Commission, not to mention 99% of Congress & the Administration.

      If we can’t run out of public initiative, then we can’t run our of currency. Note also that the national “debt” is private savings, to the penny. Please read these:

      1. A Hands-off Central Banker? Marriner S. Eccles and the Federal Reserve Policy, 1934-1951“, Matías Vernengo (Assoc Prof Economics, U Utah), 2006
      2. Marriner Eccles testamony at HEARINGS BEFORE THE 1933 Senate COMMITTEE ON FINANCE, February 1933
      3. Taxes for revenue are obsolete“, Beardsley Ruml (Chairman of the NY Fed), American Affairs, January 1946
      4. The 7 Deadly, Innocent Frauds of Economic Policy, Warren Mosler (2010) — closest thing to the reincarnation of Marriner Eccles

      Most people still haven’t caught on.

    2. The references are nice, but your analysis is largely wrong. Just look at the opening.

      “No country on a fiat currency regime ‘borrows’ currency”

      This is wrong on several levels.

      (a) Your objection shows a major misreading of Krugman’s article. He was referring to the US. The US borrows in US dollars.

      (b) Your objection is false. Nations with fiat currencies often borrow in foreign currencies. The US borrowed in D-marks and Japanese yen during the Carter Administration. Emerging nations often borrow in foreign currencies. Recent examples are Eastern Europe borrowing in euros during the past decade, and Argentina borrowing in US dollars in the decade before the default in 2002. And a hundred times before that.

      In general, nations often borrow in foreign currency to fund imports. That’s often unpleasant, which is why nations traditionally maintained foreign reserves to avoid doing so.

      I’m uncertain what the rest says. You are referring, without specifically saying so, to Monern Monetary Theory: that the government can print almost unlimted currency without ill consequences. It is the mirror image of the austerian (not Austrian) obsession with gold and inflation. They are bookends. It is evidence of great social stress when such nonsense — fringe economic and political theories — become widely accepted.

      Afterwards, when the seas are calm again (as they will be, however horrific the storm), people look upon these as symptoms of the madness caused by the stress. But they seem logical at the time.

      Here are two clear explanation by Paul Krugman:

      1. Deficits and the Printing Press (Somewhat Wonkish)
      2. MMT, Again

      For a clear if somewhat long and technical explanation of Modern Monetary Theory, see “Understanding The Modern Monetary System” by Cullen O. Roche (professional money manager). It’s a complex theory.

  11. Europe’s blithering idiots and their flim-flam treaty“, Ambrose Evans-Pritchard, The Telegraph, 9 December 2011 — Excerpt:

    All this upheaval for a mess of pottage, a flim-flam treaty? The deal is not a “lousy compromise”, said Angela Merkel. Well, actually that is exactly what it is for eurozone politicians searching for a breakthrough. It tarts up the old Stability Pact without changing the substance (although there will be prior vetting of budgets). This “fiscal compact” is not going to make to make the slightest impression on global markets, and they are the judges who matter in this trial by fire.

    Yes, there is more discipline for fiscal sinners, but without any transforming help. Even the old “Marshall Plan” of the July summit has bitten the dust.

    There is no shared debt issuance, no fiscal transfers, no move to an EU Treasury, no banking licence for the ESM rescue fund, and no change in the mandate of the European Central Bank. In short, there is no breakthrough of any kind that will convince Asian investors that this monetary union has viable governance or even a future.

    Germany has kept the focus exclusively on fiscal deficits even though everybody must understand by now that this crisis was not caused by fiscal deficits (except in the case of Greece). Spain and Ireland were in surplus, and Italy had a primary surplus.

    …Given that Merkozy cannot bring themselves to accept that Europe’s debacle stems from the euro itself, from a 30pc currency misalignment between from North and South, and from an over-leveraged €23 trillion banking bubble that German, French, Dutch, Belgian regulators allowed to happen… given that, yes, I suppose they have to find a scapegoat.

    1. Yes, but the cast of characters is being drawn further into Germany’s fiscal bondage trap. Every step deeper makes it more difficult to reverse course & step back out. Germany may be simply making sure the hook is well set, before reeling them in to the Fiscal Union.

      See these for a well worded & insightful summary. {articles by Bernard Connolly}

      1. The Bright Side” of Disaster?, 26 May 2011
      2. Germany and Greece: Give Us All Enough Rope…?, 13 June 2011
      3. What is the ECB Playing At?, 7 July 2011

      Comically, even Slovenia, Croatia & Serbia all want in. :) Wouldn’t it be ironic if Northern Ireland secedes from the UK, in order to join the emu with Ireland?

  12. A Deep Seated Hostility Towards European Construction?“, Edward Hugh (economist living in Spain), Roubini Global Economics, 11 December 2011 — Excerpt:

    What Wolfgang is getting at here is that the core of the proposed EU agreement is the introduction of the so called “balanced budget amendment” as a binding principle across all the eventual signitaries. Naturally Germany already has this amendment in place. According to Wikipedia: “In 2009 Germany’s constitution was amended to introduce the Schuldenbremse (“debt brake”), a balanced budget provision. This will apply to both the federal government and the Länder (states). From 2016 onwards the federal government will be forbidden to run a deficit of more than 0.35% of GDP. From 2020, the states will not be permitted to run any deficit at all. The Basic Law permits an exception to be made for emergencies such as a natural disaster or severe economic crisis”.

    … What Wolfgang is getting at here is that the core of the proposed EU agreement is the introduction of the so called “balanced budget amendment” as a binding principle across all the eventual signitaries. Naturally Germany already has this amendment in place. According to Wikipedia: “In 2009 Germany’s constitution was amended to introduce the Schuldenbremse (“debt brake”), a balanced budget provision. This will apply to both the federal government and the Länder (states). From 2016 onwards the federal government will be forbidden to run a deficit of more than 0.35% of GDP. From 2020, the states will not be permitted to run any deficit at all. The Basic Law permits an exception to be made for emergencies such as a natural disaster or severe economic crisis”.

    … But I cannot help feeling many of the people and countries voting for the new agreement were only thinking about their financing needs in the short term, and were not fully cognisant of the fact that they were voting for a new beginning, a new type of Europe, where living standards may be lower, but the debt dynamics will be more stable.

    … Despite the fact that Germany has been quite clear, for example, the much respected Mario Monti is sure that Euro Bonds are almost within reach.

    The worrying thing is not only that Mario Monti believes this but, more importantly, that this is probably what he is telling the Italian electorate, leaving them with a very limited understanding of the kind of sacrifices they are actually going to be ask to accept. Last week’s round of 2012 austerity measures will be as nothing when compared with those that would really be required to get Italian debt back down to 60% of GDP.

    Thus many of those who were eagerly struggling to be first to sign on the dotted line last Friday didn’t get the gist of the point of what they were signing up to, and the agreement will only really be adding to credibility once it is tried and tested. In the meantime everyone is simply following the lead given by Mario Monti, and assuming that what is actually going on isn’t the death of Keynes, but the birth of German funded Eurobonds.

  13. Snags, diversions – and the crisis goes on“, Wolfgang Münchau, Financial Times, 11 December 2011 — Excerpt:

    The European Union last week destroyed the illusion that the eurozone and the UK could happily coexist inside the EU. That may have made it a historic summit. But the decision to set up a fiscal union outside the European treaties will do nothing whatsoever to resolve the eurozone crisis.

    There are different notions of a fiscal union – some more integrated, some less so, some obsessed with fiscal discipline, others with a joint bond. But whichever your preference, this is not something you would wish to do outside European treaties. The existing treaties form the legal basis for all policy co-ordination of monetary union. It gets very messy when you try to circumvent them.

    Changing a treaty is a big deal and I understand why there is not much appetite. Everybody still remembers the failed constitutional treaty of the last decade. What is now known as the Lisbon treaty took almost 10 years from inception to ratification. A new treaty requires every member’s consent, a convention, an intergovernmental conference, a final agreement by the European Council and the European parliament, and then ratification by each country, some by referendum.

    Germany understood perfectly well that its proposals would require a full-blown treaty change. The involvement of the European Court of Justice as an enforcer of fiscal rules cannot be achieved otherwise. I disagree with the content of the German proposals and the one-sided fixation on fiscal discipline. But I agree with the legal judgment: if you want a fiscal union, nothing less than a full treaty change will do. If the EU had accepted the idea, a treaty convention might have produced a much more balanced fiscal union that the one Germany and France now want to create in a fast-track separate treaty.

    Now David Cameron has blocked the option of changing the European treaties, the Brussels machinery is working hard at finding a legal way of making a separate treaty among eurozone members possible.

    … I think this is very unlikely.

    A fiscal union set up outside the European treaty would face severe legal and practical limitations. Unless a trick is found, it cannot make recourse to the resources and institutions of the EU. Nor can it issue eurozone bonds. The only conceivable counterparty for a eurozone bond is the EU itself.

    More important even, a fiscal union created through a legal trapdoor would not help solve the crisis. The eurozone is facing a generalised loss of confidence. Investors no longer trust its crisis management, the solidarity of its citizens, even the ability to conduct sensible economic policies. The EU is not going to restore confidence through legal gimmickry that will face numerous court challenges.

    Leaders should have admitted on Friday that the summit had simply failed, or perhaps have given it a few more days. Negotiations might have produced a compromise. With the fake pretence of another treaty, that is no longer possible.

    Remember what everybody said a week ago? To solve the crisis, the eurozone requires, in the long run, a fiscal union with a prospect of a eurozone bond and, in the short run, unlimited sovereign bond market support by the European Central Bank. What we now have is no treaty change, no eurozone bond and no increase either in the rescue fund or in ECB support.

    Policy changes the ECB announced last week will help banks directly and governments indirectly. But the EU fell short on every element of a comprehensive deal. On Friday, investors reacted positively to what was sold to them as a “fiscal compact”. But once the implications of a separate treaty are understood, I fear disillusionment will set in. …

  14. Euro will not fail

    “So if the ECB is not going to print, how are we going to have euro hyperinflation? The Eurozone does not have a trade deficit with the outside world the way the dollar zone does. The Eurosystem is not going to print for the profligate socialist governments the way the $IMFS is doing for the USG. And furthermore, the massive, monumental derivatives mountain as well as the overstretched paper gold market is mostly all denominated in dollars. The euro does not have that threat. So what makes you think the euro is even at risk of collapse? It’s not. Part of the cause of these problems is that the euro has been so strong for the last decade while the US and China debauched their currencies leaving the euro strong.

    The press is so confused thinking that the debt is the currency. If the debt fails, then the currency must fail, they think. No, the currency is simply a shared standard that everyone is using to express the relative value of things in Europe, including various debts. Debts can fail, and banks can be protected by the ECB because they are the credit transmission infrastructure for the economy, and they only require nominal balance. The politicians will have to work out their bad debt situation, but that is not of dire consequence for the euro as a medium of exchange and a unit of account.

    It is not the euro that is a poor store of value, it is the promises of governments like Greece and Italy. Anyone who held those bonds as savings was holding imaginary wealth, an illusion. That is not a flaw in the unit of account, but a flaw in the reasoning of the saver who lent his savings to a profligate government.”

    1. There are too many misconceptions in Nikon’s comment for any useful reply. Almost every sentence is wrong in some respect. I suggst that Nikon read the posts about the Euro-crisis to obtain a more accurate understanding of the situation and underlying dynamics. Here are a few brief comments about the opening.

      (1) “So if the ECB is not going to print, how are we going to have euro hyperinflation? The Eurozone does not have a trade deficit with the outside world the way the dollar zone does.”

      Hyperinflation can occur in nations with a trade surplus, or even in a totally closed economy. Also, what is the “dollar zone”? The US dollar is the world’s reserve currency, but the national currency only of the US. There are a nations with currencies pegged (more or less loosely) to the US dollar; I suspect (without looking at the numbers) the aggregate trade balance of the US and nations with USD-linked currenicies is close to balanced.

      (2) “The Eurosystem is not going to print for the profligate socialist governments the way the $IMFS is doing for the USG.”

      How nice that you can see into the future. Here on Earth many experts believe that the ECB might monetize some of the excess national debt of the GIIPS, following treaty changes (or agreements to change the treaties) promising to reduce future fiscal deficits. We can guess what will happen, but not know.

      Also, the supply of dollars is controlled by the US government (thru its central bank). The IMF does not “print” money for anybody.

      I could go on, but this illustrates the nature of the problem with nikon’s comment.

    2. ECB refuse to print money like the federal reserve, because they want the EURO to subsume the dollar as the world’s reserve currency.

    3. Can you cite any authorative evidence for this belief, that EU leaders want the Euro to become a reserve currency?

      In fact sensible nations do not want their currency to become a reserve currency. The US dollar remains the reserve currency largely because by now everybody understands that it is a “poisoned chalice” — leading to an overvalued currency and trade deficits. The successful nations tend to have undervalued currencies and trade surpluses. Only Americans retain their childish pride in the strength of the currency.

    4. The credibility of the Euro as a future world reserve currency is far more important to the European elite than helping some southern Europeans pay off debt

    1. A Greek default by itself would have near-zero effect on the Euro, since Greece has roughly 2% of EU GDP. A Greek default might change the dynamics of EU finance, as tossing a small pebble off a cliff sometimes starts a landslide.

      In general, definitive statements about the future such as nikon’s indicate someone who does not understand the situation — unless made by a major expert (who even then might be wrong, but are relied upon to make such forecasts).

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