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:
- Letter from Angela Merkel and Nicloas Sarkozy to European Council President Herman van Rompuy about the European debt crisis, 7 December 2011
- Introductory statement to the press conference by the President of the ECB, 8 December 2011 — He explicitly refuses to help.
- Statement by the Euro Area Heads of State of Government, 9 December 2011
Reactions to the Plan:
- “The Euro Debate Gets Philosophical“, GaveKal, 29 November 2011 — A look at the philosophical differences underlying the two sides of the euro-crisis.
- “Anxious Greeks Emptying Their Bank Accounts“, Der Spiegel, 6 December 2011
- “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!)
- “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.
- “A Summit to the Death“, Kevin O’Rourke (Prof Economic History, Oxford), 9 December 2011
- Krugman explains one of the great misunderstandings wrecking euro-policy: “The Long And The Short Of It“, New York Times, 10 December 2011
- “Europe’s blithering idiots and their flim-flam treaty“, Ambrose Evans-Pritchard, The Telegraph, 9 December 2011
- “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
- 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.
- Can the European Monetary Union survive the next recession?, 11 July 2008
- The periphery of Europe – a flashpoint to the global economy, 8 February 2010
- A great speech by the PM of Greece. How soon until an American President says similar words?, 3 March 2010
- Governments cannot go bankrupt, 2 April 2010
- Our government’s finances are broken. How do we compare with our peers?, 8 April 2010
- The EU does Kabuki for Greece. Is it the next domino to fall?, 14 April 2010
- About the Euro crisis: the experts are wrong; the German people are right., 7 May 2010
- Former Central Bank Head Karl Otto Pöhl says bailout plan is all about ‘rescuing banks and rich Greeks’, 20 May 2010
- The Fate of Europe, nearing the point of decision, 13 September 2011
- Europe drifts towards the brink of a cataclysm, 26 September 2011
- Delusions about easy fixes for Europe, dreaming during the calm before the storm, 30 September 2011
- Every day the new world emerges, yet we see it not. Like today, as Europe begs China for loans, 15 September 2011
- Is Europe primed for chaos, as it was in July 1914?, 7 October 2011
- We see the outlines of the next cure for Europe. Will it work?, 14 October 2011
- Today Europe’s leaders took another step towards the edge of the cliff, 27 October 2011
- Where to from here, Europe? Some experts share their views., 8 November 2011
- Status report on Europe’s slow re-birth (first, the current system must die), 10 November 2011
- Europe begins its endgame. Watch and learn, for Europe’s problems are the world’s., 11 November 2011
- Looking ahead to see the new shape of Europe, 22 November 2011
