Summary: The Euro-crisis began in March 2010, and yet its causes and basic elements remain widely misunderstood — including, based on their public statements, by many of Europe’s leaders. Here Prof Pettis gives a clear explanation of what’s happening, and of Spain’s only three ways out of this crisis.
Excerpt from “Three cheers for the new data?”
By Michael Pettis (Prof of Finance, Peking University)
November 12, 2012
Republished with his general permission.
Spain’s three options
Finally, and to turn away from China, we seem to be experiencing a renewed period of increased optimism over European prospects, but we should refrain from joining in. The optimism will soon fade. In the great debate over the economies of countries like Spain, we sometimes forget the simple arithmetic of economic rebalancing. This arithmetic, like it or not, severely limits the options open to these countries.
For many years, thanks partly to bad policies in Spain but mainly to aggressive attempts by Germany to achieve growth by forcing a trade surplus onto its European neighbors, Spain, and many other countries in Europe, ran enormous trade deficits. It is easy and popular to blame the greed of the Spanish and the stupidity of the government for the mess in which Spain has found itself, but the policies Germany put into place in the late 1990s guaranteed that Germany, a country that had run massive trade deficits in the 1990s, would run equally massive trade surpluses in the subsequent decade.
Because once they joined the euro the rest of Europe had no control over the value of their currencies and the level of their interest rates, it was inevitable that European countries that had joined the euro with higher-than-average levels of inflation would be forced to respond to German trade surpluses either by forcing up unemployment or by forcing up consumption, and so running the large trade deficits that corresponded to Germany’s trade surplus. No other choice was possible.
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These deficits as a matter of economic necessity had to be financed with loans from Germany, leaving Spain with an enormous debt burden. Just as Spain could not run a trade deficit without borrowing from abroad, Spain can only repay its debt if runs a trade surplus. What is more, since rich Spaniards are taking enormous amounts of money out of the country in order to protect themselves from the debt crisis they know is coming, the Spanish trade surplus must be large enough to accommodate both flight capital and debt repayments.
In practice there are only three ways Spain can achieve a sufficiently large trade surplus.
The first way
The first way requires that Berlin reverse those policies that forced a German trade surplus at the expense of its European neighbors. Berlin must cut taxes and increase spending so much that Germany runs a trade deficit large enough to allow Spain to run the opposite surplus, which it must do if it hopes to repay the debt.
This, by the way, is exactly what John Maynard Keynes demanded that the US do in the late 1920s if it wanted to avoid a global crisis. The US ignored Keynes, and the crisis occurred just as he predicted. Germany, with the same uncomprehending stubbornness today that the United States displayed in the 1920s, refuses to do what is necessary to prevent a crisis.
But, and this is the key point, if Germany does not move quickly to reverse its trade surplus, Spain only has two other ways of creating a trade surplus in spite of German recalcitrance.
The second way
One way requires that Spanish wages are forced down by many years of high unemployment. This will allow Spain to run a sufficiently large trade surplus.
Part of the reason Spain can then run a trade surplus is that as wages drop relative to those of Germany, Spanish goods will become more competitive in the international markets, but the real reason why Spain will run a trade surplus after many years of unemployment is that Spanish workers will simply be unable to afford to buy much.
The third way
Spain’s second option is to leave the euro and devalue. This will immediately force down prices and wages relative to Germany.
Neither option will be easy, but it is important that we realize that if Germany doesn’t adjust, Madrid has no choice but to pick one or the other. Both options will cause debt to soar in real terms, and will probably force Spanish businesses, and even the government, into default, but in both cases Spain will begin running large trade surpluses.
As much as leaders in Madrid, Brussels and Berlin hate to admit it, these are the only three options open to Spain. Any policy proposed by policymakers that is not consistent with one of these three ways will be impossible to achieve.
The path they’ve chosen
For now, Spain has implicitly chosen the option of unemployment, in the hopes that it will be able to adjust in one or two years and eventually resume normalcy. No country, after all, can bear the pain that Spain is bearing today without a serious deterioration in the social and political fabric.
But both history and common sense teach us that the idea that after one or two more years of adjustment Spain will have resolved its debt problems and can bring unemployment down is nonsense. It is going to take much longer than that. If Spain wants to continue along its current path, it must be prepared to suffer at least another five years of extraordinarily high unemployment, an erosion of the productive capabilities of its economy, and rising political chaos.
Or it can leave the euro. Given how rapidly the political environment is deteriorating, I have little doubt it will leave the euro. Unfortunately we will have to wait a few more years for Madrid to drive the economy into the ground and to rip apart the country’s social fabric before they choose to devalue. But I fully expect they eventually will.
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About the Author
Michael Pettis is a Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University, where he specializes in Chinese financial markets. He is also Chief Strategist at Guosen Securities (HK), a Shenzhen-based investment bank.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team.
Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
See his articles and posts at his website China Financial Markets. This is an excerpt from his About Page.
For More Information
For all posts about the Euro-crisis see Europe – on the road to division or unification.
Other posts about Spain:
- Written one month before the crisis began: The periphery of Europe – a flashpoint to the global economy, 8 February 2010
- Are Europe’s rulers copying the policies of Herbert Hoover in 1929, or the French Monarchy in 1789?, 26 January 2012
- The Fate of Europe has become visible. Only how and when the break comes remains uncertain., 6 June 2012
- The bailout of Spain’s banks shows the heart of our problem, 12 June 2012
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Ecuadorian Banking Crisis, New Economic Perspectives, 16 November 2012 — Opening:
Comment by Mark Robertson — Opening:
Yep. These bankster bastards are everywhere attempting to accomplish the same thing–and largely succeeding, thanks to venal and corrupt government officials and generalized ignorance of the kinds of economic and financial realities that Black tries to explain–mostly in vain–thanks to an entrenched and well-financed conventional “wisdom.”
Here’s an intelligent person trying to get through–bon chance! C-span Video: “Stephanie Kelton presenting on Fiscal Cliff” — “Stephanie Kelton’s presentation on the Fiscal Cliff with New America Foundation, Economic Growth Program, Economists for Peace and Security.”
In prior posts I have discussed Spain’s breakup into regions, such as Catalonia and the Basque area.
However, such breakup is only one aspect of the decline of the nationstate. The flip side of the coin is the emergence of transnational links. Accordingly:
“Spain Begs Former Colonies For Bailout“, Zero Hedge, 17 November 2012.
Duncan,
(1) “Spain’s breakup into regions, such as Catalonia and the Basque area.”
A quibble, but that sounds as if it’s a fact. It’s a possibility, nothing more at this time.
(2) Unless one is careful, reading Zero Hedge makes one more ignorant. It’s a highly unreliable source, excerpt for the material reposted from quality sources (often without regard for copyright laws). Simple math errors, gross mis-stating of the news cited, often bizarre mis-framing (eg, taking a strong economic report and focusing on one weak element, without regard for the whole).
At least they’ve stopped their practice of citing non-seasonally adjusted data — presenting annual dips in economic activity as NEWS NEWS NEWS. It feed the biases of its readers, an investment version of Fox News.
As in this case, the Zero Hedge headline is bogus. The AP story says nothing about begging or bailouts:
Ok, they asked for investments, the selling point being not that Spain was a great investment but rather that Spain had previously helped Latin America in its time of need.
However we characterize this, this episode is some evidence of how Spain qua Spain is being to some extent submerged in some broader Hispanic entity.
Duncan,
Reciprocal exchange is a common basis for association among equals, such as that among Bronze Age warriors. Don’t tell one that its “begging”. A bronze sword thru the gut will ruin your day.
That’s a great point about this — if it happens — being a step toward a broader Hispanic identity, perhaps equivalent to that among the Commonwealth or the English-speaking nations.
I would agree with that title “Spain Begs”, and LATAM countries should turn it down!
After the reading Alexander del Mar’s “History of the Precious Metals” the LATAM’s should ask for colonial reparations. It is gruesome confession of bestiality (being here very modest) of Spain.
Have you ever heard for El Requerimiento? Wikipidia entries here and here.
There is no “Reciprocal exchange” unless you have a nuclear tipped rockets; there is only power-relationship. Requerimiento is in force even today, actually I believe it is foundation of what is known as international relationship, and of capitalism in general.
In the comment of neretva’43 we see a major source of human evil: war, oppression, cruelty. He (or she) still carries resentment towards deeds of the long dead, and seeks revenge. Bestowing on the living penalties for those whose bodies have long rotted into dust.
And so the torch of injustice passes from one generation to the next, and the flickering sparks of humanity and charity suppressed.
“Reciprocal exchange is a common basis for association among equals, such as that among Bronze Age warriors.”
A crazy custom, as Homer noted when commenting upon the exchange between Diomedes and Glaucus in the Illiad. See Wikipedia.
Duncan,
Why is that a “crazy custom”? Especially compared to modern warfare? Is that, like WWI — or the prospect of WWIII which we so narrowly avoided — more rational?
re: “He (or she) still carries resentment towards deeds of the long dead, and seeks revenge.”
As stated previously, my late wife’s first memory as a small child in Spain/Catalonia in the mid 60s, was of public executions by firing squads of catalan dissidents, ON NATIONAL TV.
Not that long ago.
Spain is still full of villages and towns run by (what the Left calls) “Facists”.
FM: “In the comment of neretva’43 we see a major source of human evil: war, oppression, cruelty. He (or she) still carries resentment towards deeds of the long dead, and seeks revenge. Bestowing on the living penalties for those whose bodies have long rotted into dust. And so the torch of injustice passes from one generation to the next, and the flickering sparks of humanity and charity suppressed.”
What’s this? Some moral argument from you! Don’t be silly. Or, is it about “human rights” or Cognitive Dissonance?
No offense intended, but you are in no position to tell me about “resentment”, your comment is shallow. Since you have no idea what your are talking about I consider that you have major flaw: poor observation/cognitive ability – regardless of your “education”, and obviously disregard/disdain for the messages from history.
There is new book and 10-parts Showtime series from Oliver Stone: The Untold History of the United States started day or two ago, the first part you can find on the Internet. Just watch it.
Liang Qichao, China’s most prominent intellectual says this:
“In the world there is only power – there is no other force… Hence, if we wish to attain liberty, there is no other road: we can only seek first to be strong”
This is pretty much is line with German’s Friedrich List thought and writing in his books about relations among the countries.
Otherwise, weak are struck with El Requerimiento by those who are preaching “high moral conduct” and when their ships and aircrafts shows on the horizon.
Hegel’s students reported he said in his famous lectures on Reason in History: “What experience and history teach is this: peoples and governments have never learned anything from history and acted according to what one might have learned from it.”
neretva’43,
(1) “What’s this? Some moral argument from you! Don’t be silly. Or, is it about “human rights” or Cognitive Dissonance?”
That makes no sense to me. What are you attempting to say?
(2) “you are in no position to tell me about “resentment””
Why? It’s a common mode through which to see history. Do you have some privileged perspective superior to that of other people?
(3) Your comment is shallow. Since you have no idea what your are talking about I consider that you have major flaw: poor observation/cognitive ability – regardless of your “education”, and obviously disregard/disdain for the messages from history.
In my experience, personal insults are just chaff in the debate. A prelude to nonsense and fallacy.
(4) No surprise then that the rest of your comment is a reading FAIL. Your reply describes the horror show of history. Quite so. My point was that your comment advocates acting today — towards our fellow citizens of our time — on the basis of acts of people long dead against other people long dead.
This is one mechanism by which injustice today is justified. Your rant shows no awareness of this simple point, or that you even read what I said.
More on Spain’s outreach to its former colonies. ( Note that Portugal likewise is so doing):
http://www.nytimes.com/2012/11/19/business/global/spain-seeks-investment-from-latin-america.html?partner=rss&emc=rss
Re: the insanity of bronze age gift sharing.
I was making a literary allusion to a famous episode in The Illiad, Book VI, where Glaucos and Diomedes exchange armor.
” Diomedes, of the loud war-cry rejoiced at these words. Planting his spear in the fertile earth, he spoke to the Lycian general courteously: ‘You are, then, a friend of long-standing to my father’s house, since noble Oeneus once entertained peerless Bellerephon in his palace, and kept him there twenty days. Moreover they exchanged fine friendship gifts. Oeneus gave him a bright scarlet belt, and Bellerephon replied with a two-handled gold cup, which was there in the palace when I came away. But Tydeus my father I scarce remember, since I was a little child when he left, when the Achaean warriors died at Thebes. So I will be your good friend at home in Argos, and you will be mine in Lycia, should I come to visit. Let us avoid each other’s spear in the battle, there are plenty more Trojans and their worthy allies for me to slay, if a god lets my feet overtake them, and many Greeks for you to kill, if you can. Let us exchange our armour then, that those around may know that our grandfather’s friendship makes us two friends.’
At this, the two leapt down from their chariots, and clasped each other’s hands as a pledge of their good faith. But Zeus, the son of Cronos, robbed Glaucus of his wits, for he gave Diomedes, son of Tydeus, golden armour for bronze, a hundred oxen’s worth for that of nine.”
http://www.poetryintranslation.com/PITBR/Greek/Iliad6.htm
Yes,that was quite clear. Why is that “insane” by comparison with modern warfare?
A major theme of vanCreveld’s books is that war always everywhere has a hard core of irrationality. Esp see Technology of War , and Culture of War. He gives many examples.
People tend to see our society’s practices as rational, while irrational aspects of others ( past or foreign) are obvious.
They need to exit the Euro and go back to being the issuers of their own currency. However, the politician, ignorant and corrupt sob’s that they are will not do anything of the kind. In a normal world, the heads would literally roll: banksters, filthy politicians, and not forgetting the corporate heads of such glorious enterprises as the unspeakable low-minded media, fracking companies, BP Oil, Monsanto, and a few dozen more. Not in our stupidly and criminally sentimental “humanitarian” times. Has there ever been more murder, rape, and sheer degeneracy in history — on a global scale, thanks to our “advanced” civilization?
If you steal a Twinkie from a 711, you will do more time than a Robert Rubin or a Hank Paulson, etc. If you shoot a criminal entering your home, you are liable to do time and the criminal go away as the victim.
“Has there ever been more murder, rape, and sheer degeneracy in history — on a global scale, thanks to our “advanced” civilization?”
Don,
You’re living in a dream. No reading of history even remotely supports your comparison. For a start, I suggest reading about England’s Bloody Code. Or the ethnic conflicts, brutal internal oppression, and wars that make up the bulk of human history.
Then you can go further back and read up on the “Malleus Maleficarum”. Also, the Saxon raids and Roman incursions through out Western Europe were pleasant.
All great examples of the horrors of the past. Also see the description of the English chevauchee in France from Chaucer’s Canterbury Tales.
I forgot the link:
http://delong.typepad.com/sdj/2012/11/hoisted-from-the-archives-a-shiver-in-my-spine-chevauchee.html
Even the most cynical of us, need only take a brief glimpse into our rather grim, dark past to see that, even if the progress has been slow, there has been progress in our social evolution. Thanks for the link, quite cheerful.
times, Has–should be a period here.
Listed are three options for the government/politicians, yet there are no options listed for the people of Spain.
They could have a bloody revolution, with several possibilities opening up (good and bad). The police/military could join them, or fight against them. They could lose, or win- and if so, what would they be left with? Who will come to assist them in their struggle? Racial and traditional infighting could cause separationist moves evolving into smaller fiefdoms, thereby creating provincial rule.
I think that there is a small, but possible chance that this situation might end up as something that no one has foreseen. Either way, hard times ahead.
Sera,
I agree. During the last few months I’ve written that the current policies will continue until social unrest erupts. Predicting when or where such things happen is beyond difficult, but Spain or Greece are the obvious choices.
FM,
And when that happens, a tyrant dressed as savior will lead the way.
While Spain and Greece are indeed the obvious choices, I wouldn’t rule out Italy or Portugal.
Italy is stable so far, but what if it slides into recession? Will it remain resilient, as have Greece and Spain under such circumstances?
As for Portugal, it’s a bit if an enigma. Not much coverage in the English- language news. Does anyone here have any info on current conditions!
Follow-up note about Portugal.
Estimates of 2012 GDP are aprox -3%. Bank of Portugal forecast for 2013 GDP is -1.6%.
That suggests high odds of continued protests, like last week’s general strike.
IMF mission chief Selassie described Portugal as “one of the most important test cases of European solidarity.”
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Note that The Partido Popular’s direct ascendency is the fascist dictatorship
“The People’s Party {Wikipedia} was a re-foundation in 1989 of the People’s Alliance (Spanish: Alianza Popular, AP), a party led and founded by Manuel Fraga Iribarne, a former Minister of the Interior and Minister of Tourism during Francisco Franco’s dictatorship.”
Here are two links pointing to the elite’s efforts to seize control of public media in Spain and undo the democratic achievements since the end of the dictatorship.
“Spanish government accused of purging critics from national radio and TV“, Guardian, August 2012 — “Journalists who have questioned rightwing party’s austerity policy have lost jobs at RTVE” Excerpt:
“Media austerity: Spanish govt squeezes anti-cuts journalists“, Russia Today, 7 August 2012.
The Socialist Party (PSOE-PSC) disavowed its Marxist-Leninist “principles” at the time of the transition from the dicatorship. Its leadership is still drawn from the sons and daughters of Franco’s ministers. The Marxist-Leninist party (IU) does not suffer from that tag. As all the parties enshrined Franco’s corporate state in the Spanish Constitution, it became a simple matter to co-opt all social actors (unions, political parties, for example) through direct subsidies.
Unlike the Guardian, anyone else who is familiar with Spain understands that the newspaper El Pais reflects the line of the PSOE; ABC is conservative and pro-monarchy; La Razon is conservative, pro-monarchy, and reflects the line of the Church; El Mundo is conservative and periodically engages in significant investigational journalism (GAL, Unrdangarrin, Pujol).
The papers in Barcelona, for example, are subsidized by government of the autonomy (viz, La Vanguardia); Ars has always had an independentist line. The radio network Cadena SER (whose birth is a gift of Felipe Gonzalez and the PSOE) is a strong defender of the PSOE line; COPE is a voice of the Curch. Further, TVE as well as all other public channels always represent the line of the government (central or local). The newborn movement 15-M moved rapidly from populism to having those leaders who surfaced folded directly into the political system with IU.
The corrupt corporate state is the major cause of Spanish difficulties as well as the major block to resolution of the problems in Spain. It is not in the interests of those in control to alter the structure.
Sir,
as a german person I would like to give some comments:
1. Neither trade deficit nor trade surplus are made by the government, neither in USA nor in Germany or China, in my opinion. What counts are saving rate, consumption rate and the standard of living the different persons would like to have goods or who want to save.
2. Has Germany, the german people forced the people of Spain to have a housing bubble ? Even the word does not appear in the text. The spanish banks have given quite some loans to the different people sometimes in a reckless manner.
3. Germany has had a crisis in its economy in the 1990s and in the first years after 2000. Why ? The investment in Germany was low because of high wages and high costs of the social net. There was an Agenda 2010 by the social democrats and the greens (left wing parties!!) to reduce these costs. This was good in Germany since it has reduced for example the unemployment rate. How as a german citizen can I blame the government of Germany that it tries to enhance the economy ?
4. We need to ask how and why we have still some industries in Germany but not in Spain. Example automotive industry but even more important machinery and construction industry. Germany does not only have big companies like Mercedes but a lot of small innovative companies. Spain needs the same as well as Greece.
5. Neither trade surplus nor trade deficits are good. What is needed is a balance, in my opinion. But to enhance or stimulate now a trade deficit for Germany would mean that Germany joins the countries with people who make the mistake to live beyond their means. Debt is nothing that people live beyond their means. This should really be the solution ?
6. Germany is a federal state. There are states like the Saarland or – even worse- the capital Berlin (which is also a state by its own) who live beyond their means. Therefore Germany has something called Länderfinanzausgleich (equalization payments). The USA does not have this, so the standard of living is different in the different states, although – as I just have read – for Medicaid of food stamps the USA have a similar program or it is a federal program itself. If you want to have no discussion whatsoever about the standard of living you have two choices: Either breakup of the currency zone or a federal state. A federal state is needed if you want a common program for taxes-direct and indirect-, social security net, common private law, etc.
Do the people in Europe want a federal state of Europe? Referenda in 2005 show that this is not the case.
7. At the end I would like to come to the history: Name please one example of a currency union between countries which lasted more than 20 years without have a gold standard. I do not know or remember one. But if you have a metal standard (silver, gold, etc.) you get very soon the problems which we have inside the Euro-Zone. And we get deflation problems sooner or later. This is shown by history. As far as I remember it was the depression in 1931 which caused UK to abandon the gold standard and even the USA abandoned it it 1933.
At the end you can see, in my opinion, that the blaming of Germany is not the right way. Excuse me please if I have therefore a different opinion, Sir.
kali,
(1) Basic economic theory says otherwise to almost all your points.
The leaders of Europe are at war with Economics 101. Many economists said before the beginning that the structure of the EMU was fatally flawed (for details see Can the European Monetary Union survive the next recession?, 11 July 2008)
When the crisis began in March 2010 many economists said that the austerity programs were doomed to failure.
(2) “Do the people in Europe want a federal state of Europe? Referenda in 2005 show that this is not the case.”
That’s not accurate. Polls show widespread support for european unification, and even more strongly for the current federal state of Europe. The referenda were for a specific Constitution — one which was IMO an extraordinarily poorly designed document.
I have vivid memories of seeing family elders in spain pack up suitcases of cash to take to Andorra to deposit in “high interest” accounts about 10 years ago.
Germans should have been very aware that their exploitation of Spanish ignorance and weaknesses would create these huge problems. Take some responsibility or everyone is going to hate you for being disgusting capitalists/neoliberals.
There was plenty of resistance to “global economics” by the Spanish Left, but Aznar got in bed with Bush and the game was over.
re: “That’s not accurate. Polls show widespread support for european unification”
Everyone I talked to in Spain in my last two visits, especially last summer, agreed that more unification was an attractive solution if it was done to stop predatory economic activity by corrupt banks, etc.
In reply to kali:
(1) The decision to save vs consume depends on the interest rate. This was set by neither Spain nor Germany, but by the ECB.
(2) Probably a result of trying to imitate the “success” of US policies, prior to the 2008 meltdown.
(4) it’s because you guys are good at making cars. everyone knows that. if all the european countries had excellent industry, the German standard of living would fall a lot.
(6) Länderfinanzausgleich… how does that work?
Sir,
I would like to give some answers to the comments.
1. I am not arguing for the current policy of bailouts, ESM or printing money by the central banks. I think that this is the wrong approach and will bring huge costs. A so called haircut would be necessary at the end anyway. I also would argue that there are two kind of Euros: A North-Euro and a South-Euro..
2. I do not oppose the European Union. I am an favor of it. But the current system needs urgently democratization.
3. Yes, I am aware that the referenda in 2005 were done with respect to a special kind of constitution. Polls very much depend on the sampling size, very often statistical and sampling errors are neglected, values are “weighted” , etc. But anyway, here a number of polls like this: 2/3 of germans and a rising number of french people have problems with European Union “Most Germans oppose euro, French also losing faith: polls“, Reuters, 17 September 2012.
I also agree that in several other countries there is support for the EU – as it is. But does this mean that this is also support for a federal state ? Is the opinion only that the federal state means that the money is taken from Germany, Netherlands, Finland etc. ? Or does it mean that there is a true federation with one common foreign policy, one EU defense army, one direct and indirect tax level and one private law ? And then with a true parliament with true representation.
4. Länderfinanzausgleich: Please look in wikipedia “Equalization payments”. for a starter.
5. Yes, germans make good cars. The real question is : Why do the countries with the current problems do not have this industry ? I really think that for example Italy has it, in its northern part. What is there then the real problem ? I think especially corruption and issues with the state services and infrastructure in the southern part of Italy. The same for Greece.
kali,
You are conflating many different issues: the european unification project, the federal structure of the european union, the common currency (one aspect of the unification project), the proposed Constitution (one proposal for a future step). Your analysis is too confused for reply (although far better than I could do in a foreign language).
The Reuters poll does not say that “Germans have problem with the EU”, but rather that they have concerns with the European Monetary Union (ie, the euro). Which is just good sense, since by now it is obvious to most observers that the structure is flawed — as so many economists said at the beginning. Good concept, bad implementation.
Quiris: The Euro was thought to be a tool for more european unification, better understanding of the people, a first step in a real political union. Did it happen ? No. See the comments here and in the media. See the demonstrations with germans associated with Nazis/swastika again and again.
I do not mix the different issues up. I would say: Good idea, bad policy. Idea was: Prevent again wars in Europe, make peace between the peoples. The project was inspired by Kant: “Perpetual peace” Do we have this now ? Or are we going in the wrong direction ? My point was foremost to mention that the idea that the german trade surplus is the problem is flawed. The trade surplus is a symptom, not the cause. The problem is bad industrial competition, flawed internal policies and at least partially
corruption in the countries in the southern part of Europe.
Concerning the Reuters poll, citation: “French support for further European integration has fallen in the past year, according to Ifop, with the share of people saying they want less integration and more national control of budgets and economic policy rising to 60 percent, from 48 percent in a similar poll a year ago. The French were more positive than the Germans about the general benefits of membership of the European Union….”
“2. Has Germany, the german people forced the people of Spain to have a housing bubble ? Even the word does not appear in the text. The spanish banks have given quite some loans to the different people sometimes in a reckless manner.”
I think there’s a point here. It was the real estate bubble that triggered much of this. Spanish banks borrowed money, lent into the bubble, the bubble collapsed, but the debt still remains. If we had an actual capitalist economy these banks would just go bust, and then that debt would vanish. But, because banks are propped up, this debt lives on, and the nation suffer through austerity and other painful means to attempt to pay it all back. It’s possible that due to the exponential growth of bank loans that this money is never paid back — it just result in permanent enslavement.
Blaming this crisis on a trade deficit puts the blame on the workers for not working cheap enough, but it’s not about that. A trade surplus would help Spain fix the debt, that is drip by drip over many decades, but it’s not the cause of the problem. This is about a financial system that pissed away a vast fortune to make few people rich. Now, when the bill has come due the people are made to pay the price so that a few could get rich during the bubble.
This has all been said a thousand times before, obviously in vain. In a free market system, setting the value of the currency or interest rates at wrong levels will produce bad outcomes. All this discussion about “nobody forced them” is missing the point.
This insistence on defying Economics 101 — treating economic dynamics as a morality play — if continued long enough will destroy Europe in its present form.
The tellers of morality tales will then devise new stories to explain this. Think of this as Darwinian evolution, with societies run by people ignorant of economics run into the ground, becoming fertilizer for others to build upon. Perhaps future generations who learn from these mistakes. Or foreigners who take over those societies.
It’s all about morality. It’s about the too big to fail banks and the ‘*moral hazard’ issue. That is this financial system we’ve created where the large banks have privatized the gains but have socialized the risks — and Spain is suffering, suffering terribly because of a failure to address this problem.
Wikipedia
: “In economic theory, a moral hazard is a situation where a party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk.”
“It’s all about morality.”
We’ll never manage our economy well so long as people treat every technical decision as a morality play.
“It’s about the too big to fail banks”
That’s one element of a very large ball of economic and political issues. I doubt its even in the top 3 of issues in the Euro-crisis. As the comments to this post show, after years of moralizing, people cannot even see the core issues. it’s as if the cockpit of an aeroplane was empty while revivalists gave sermons in the passenger compartment.
Don: “Has there ever been more murder, rape, and sheer degeneracy in history — on a global scale, thanks to our “advanced” civilization?”
FM: You’re living in a dream. No reading of history even remotely supports your comparison. For a start, I suggest reading about England’s Bloody Code. Or the ethnic conflicts, brutal internal oppression, and wars that make up the bulk of human history.
I think perhaps you’re the one in the dream, caught-up in the illusion of “progress.”
Just count up the population of the earth as a whole, to start with, and then consider the condition of all those living not only in US and GB and other Euro slums, not forgetting all of Eastern Europe, and the “poor white trash” in the rural regions everywhere, but also all the millions of people living in the third world slums, the detritus of colonialism in large measure. Consider then the degree of daily crime and violence there. It literally dwarfs anything previously as to the sheer scale of the phenomena.
The number of daily rapes worldwide is enormous, and yet sexual violence, and rape in particular, is considered the most under-reported violent crime. Parallel to the global drug trade, there an a scandalous and enormous trade in prostitution and female slavery.
Then go on to consider the countless atrocities committed by Europeans on these countries over the last several-but in particular, the last 2 centuries, (without forgetting the slave trade), not excluding not excluding the current invasions of the NATO countries in the Middle East and our drone attacks and the Israeli genocide in Palestine. All signs of real human progress. Not the least of our atrocities is the exportation of insane political philosophies that have poisoned the world and created endless suffering and distress.
Of course, we can also count the dead in two world wars, the Korean war, and the Vietnam war.
Don’t forget the current astronomical figures involved in the drug trade and everything that implies
One could go on, but it is clear that, as far as sheer numbers of dead go, the last two centuries–19 and 20–take the cake. There was literally a hell of a lot of violence, and on a global scale never seen before. Even during the Mongol invasions no one had to endure the mass killings made possible by modern armaments and mass troop movements, missiles, bombers, tanks, machine guns, and the like.
That there has been a fragmentary amelioration in some quarters and for a short time is undeniable–but at what cost to those elsewhere, and just how stable? The fact remains, for sheer scale of violence and killing, our times are the worst ever. And frankly, when one sees the level of “culture” in the masses of people in the so-called “first world,” one is not very uplifted. On the contrary, has humanity ever been more trivial, more mortally stupid? We live in times when any dolt carrying a laptop and traveling on a jet airplane, with a smattering of knowledge of science, can fancy himself superior in every way that really counts to Christ, the Buddha, Lao-Tzu, and a galaxy of sages and saints through the world and the centuries. What an illusion! Of course, we have conquered death and know it all!
Americans are just too comfortable, self-satisfied, and decadent. Even those who have a knowledge of history have a kind of myopia owing to this. Perhaps if you had been around Dresden or Nagasaki or the Congo, or Vietnam, or Yugoslavia, or Chile, or Honduras, or Nicaragua, or San Salvador, or Russia, or Poland, or India, or China, or Indonesia, or Myanmar, or Cambodia, etc., etc., etc, at the wrong time, your opinion might be changed; or one could cite dozens of examples.
Churchill:
What I see here is an enormous impoverishment of imagination.
Gregory,
“I think perhaps you’re the one in the dream, caught-up in the illusion of “progress.”
Your long reply is a pretty gross misread of my reply. I didn’t use the word “progress”. I said nothing remotely like “progress”. Here’s my comment:
However, there is a theory that violence has declined. See Steven Pinker’s (Prof Psychology, Harvard) book The Better Angels of Our Nature: Why Violence Has Declined. Articles about his theory:
If I may add;
First to FM: I think Gregory’s remark, “I think perhaps you’re the one in the dream, caught-up in the illusion of “progress.” Was aimed at you and not quoting you.
Second to Gregory; your argument is weak at best and was destroyed before you even got your foot out the door with the statement, “Just count up the population of the earth as a whole, to start with, and then consider the condition of all those living not only in US and GB and other Euro slums, not forgetting all of Eastern Europe, and the “poor white trash” in the rural regions everywhere, but also all the millions of people living in the third world slums, the detritus of colonialism in large measure. Consider then the degree of daily crime and violence there. It literally dwarfs anything previously as to the sheer scale of the phenomena.”
Today’s population density, over 7 billion, during the time of FM’s listed reading recommendation the exact number is hard to pin down but in 1950 world population was only about 2.5 billion.
Of course “It literally dwarfs anything previously as to the sheer scale of the phenomena.” How could it not?
Anyone who can put in writing the idea that the world has not seen social evolutionary progress needs to hit the books. I will agree that it is not to the extent which it could and should be, but really come on?
Also if anyone is in a dream it is the person to out of touch (with all matters of scholarly pursuit) with the understanding that
a) the world can not support 7 billion people at an industrialized middle or even working class level substance.
b) even if (a) were not true, one cannot deny human nature in that there are those who will remain poor of living regardless of that which is available to them.
I would also like for Gregory to point to one period in history when there have been entire unified nations that extended equal rights to their citizens and did not utilize slaves.?
“First to FM: I think Gregory’s remark, “I think perhaps you’re the one in the dream, caught-up in the illusion of “progress.” Was aimed at you and not quoting you.”
Do you mean putting “progress” in quotes? I agree. Rather I was saying that conditions in the past — violence, injustice — were not superior to those of our time. That did not imply progress, but rather the past was not a “golden age” from which we’ve fallen.
Note that there are those that believe in this progress, such as Painter (note the references). He might be correct, but the most common rebuttal seems as yet unanswerable. The long peace in Europe from 1815-1914 also suggested a new era. The 1914-1945 era showed that to be a false dawn. The world’s too-close brushes with atomic war further showed that war remained a large part of the world order.
In brief, we might be experiencing pulses of mega-war rather than the more-or-less endemic warfare of most past eras. it’s too soon to say for sure.
FM;
“Rather I was saying that conditions in the past — violence, injustice — were not superior to those of our time. That did not imply progress, but rather the past was not a “golden age” from which we’ve fallen.”
I agree, and I think there are those who believe the past was golden because popular media has a way of painting it to be much more “romantic” and “heroic” then it actually was.
In the matter of progress, as it applies to social attitudes toward equality of rights, slavery and so on; there is most defiantly progress which, in my reading, Gregory seems to be refuting the idea of. I think often times people confuse “progress” with “utopia” and do not understand progress by its very definition is an on going process.
As far as wars go I am out of my league there. I might however take a stab and say that with the population soaring and so many either striving to become or maintain their industrialized comforts, one can hardly expect to not see increase in war. Will that lead to “mega-war” you say it’s to early to say and I will take your word for it because I have no ideas on that beyond “I hope not”.
I will also add (though it may be an inappropriate topic for FM threads) that if one is to take the Mayan long count calendar in to account (removing the “doomsday” “end of the world” misreadings). They claimed the long count commences with social upheaval and unrest; one might say we humans are doing our best to make that accurate. Which I think is a rather courteous tribute to pay the Mayan civilization.
“The long peace in Europe from 1815-1914 also suggested a new era.”
It is of course very difficult to break loose from the typical Western-European-centric view of history, but a quick look at a time-line will show that Poland, Russia and the Balkans were repeatedly raked by wars precisely during that period.
Understood, which is expressly why I limited the geographic focus to those nations — and their multi millennial quest to live in peace. Which was the subject of the discussion.
What was your point?
Correction to my comment — looking back, I see the scope of the discussion had broadened to violence.
Anyway, guest is of course right about global violence. Esp that inflicted *by* the European powers on non-European peoples during the 19th century.
Which was why I limited my comment to just Europe.
WTF
Could it be that people in Spain are so angry at local politicians that they are not seeing the forest for the trees, with political control of national media presenting the European Union as the only option.
In my view a transfer union will cause indefinite misery in Spain.
FM “Polls show widespread support for european unification, and even more strongly for the current federal state of Europe.”
Might it be that people in Spain favor trade and friendship within a European Union, but not necessarily a common currency. Professor Pettis suggests that it will take a few more years for the social fabric in Spain to break down. Perhaps after German political season (Fall 2013) the Union might be rethought to allow currency flexibility.
Rosycurler,
We only have polls to show us what the people of europe think about events. The polls across europe show broad and deep support for the Europe project, including Greece, Spain, and Germany. Even in Greece? In Germany PM Merkel is the most popular politician. The opposition party supports the EMU even more strongly than the ruling coalition.
Why do they so support the EUROPE project? Perhaps they see this as the only way to avoid another war amongst themselves. Perhaps they see this as a way for Europe to play a role among the great powers of the 21st century? After all, Europe’s nations know well what great powers do to small nations?
We can only guess.
The EU has survived politically in the south because of Schengen. Leave the EU and then the southerners, not only are they still stuck with the debt and high unemployment — but, then they can’t leave to look for work in other countries. This is last safety valve, the ability to hop on a train and head north and look for a job. If anything, I think what might happen is that it’ll first break politically in the Nordic countries who are overwhelmed by the tide of immigrants.
“Leave the EU and then the southerners, not only are they still stuck with the debt and high unemployment ”
Cathryn, That is not correct.
I think it’s obvious that Gregory read and understood what you said–there was nothing difficult in it–and it’s obvious his reply simply disagrees with your assessment. When you say there is no remote comparison in conditions, that implies progress. It’s this progress that both Don and Gregory seem to contest. There are plenty of people who see things this way. If you want to nitpick go ahead, but clearly, you meant more in your statement than the obvious advances in material comfort, machinery, and the like. If you had just said there is no comparison between the material development in past centuries and the modern industrial era, who would contest it?
Their assessments remind me of Dr. John Lodge’s remark, cited by the late Dr. Ananda Coomaraswamy in his famous essay, “Primitive Mentality”: “From the stone age until now, quelle dégringolade!” [http://www.gornahoor.net/library/PrimitiveMentality.htm]
Martin,
(1) “When you say there is no remote comparison in conditions, that implies progress.”
But I never said “there is no remote comparison in conditions”. I said:
(2) “If you want to nitpick go ahead, but clearly, you meant more in your statement than the obvious advances in material comfort, machinery, and the like.”
I said no such thing. You’re just making that up. And it’s an important point, not a nitpick.
(3) “If you had just said there is no comparison between the material development in past centuries and the modern industrial era, who would contest it?”
None of us — Don, Gregory, or myself — were talking about “material development”. The discussion was about violence and injustice.
(4) These repeated misunderstandings are easily avoidable. Please give quotes in your replies. That’s standard practice in high-voltage forums, like the Small Wars Council. It saves a lot of time and avoids all this wasted effort.
As someone not deeply entrenched in economics, I guess I have a simple question:
We keep hearing week after month after year that Europe is on the brink of a financial collapse, that horrible things will happen if the Eurozone comes apart economically, and blah blah woof woof. Yet, years into this alleged “crisis,” nothing catastrophic seems to have happened outside of a few countries at the fringe of the Eurozone like Greece.
An objective observer might be forgiven for concluding that all the constant scare stories about “economic armageddon in the Eurozone” are hype and crap, and nothing is actually going to happen that has consequences outside Europe.
Eerily reminiscent of the constant scare stories and ooga-booga propaganda about the alleged “terrifying consequences” of the upcoming “fiscal cliff,” which also seems to be a great deal of hype and B.S. in the service of a top-1%-led pro-austerity agenda.
“An objective observer might be forgiven for concluding that all the constant scare stories about “economic armageddon in the Eurozone” are hype and crap, and nothing is actually going to happen that has consequences outside Europe.”
That’s a very odd observer. Large social trends move very slowly. By the time they become obvious to casual observers, it’s too late to avoid their consequences.
More raises two important questions. First, when will the euro-crisis escalate? It began in March 2010, and has been fought by steadily increasing European aid. This has mitigated the pain from the crisis, but at the cost of expanding the possible consequences of something popping (or breaking) in Europe’s social, political, and economic fabric as a result of the long stress. We have no tools with which to measure either the stress on a society’s fabric or its breaking point.
Second, what might be the consequences of a European crisis? That depends on the condition of the world. Hence the fear.
Some east Asian nations are in or near recession (eg, Singapore, Japan).
China has massive imbalances, which must be addressed soon — and has a new governing team which might start this painful long process. As an exporter, a eurocrisis would provide another problem which they don’t need now.
The US is fat and happy with its fake prosperity, resulting from massive unsustainable monetary and fiscal stimulus (7-8%, $1 T+/year). Exports have been a booster, and a eurocrisis while we’re messing around on the fiscal cliff would be unpleasant.
A distinguishing feature of this crisis is our inability to make reliable predictions. IMO that’s because the post-WWII era is ending. We’re in a transitional period. The new era will have different characteristics, and without knowing those we cannot make good predictions.
Apart from the Euro, we should ask, are the EU rules of economic cooperation workable? The problems caused by the EU are far beyond the euro-caused problems. They simply didn’t make it possible for the poorer EU countries to catch up.
Study the economic history of Switzerland ! Western Switzerland showed a remarkable catch-up against Eastern Switzerland. with single currency, economic independence, competition and financial assistance among cantons. Not only the competition, also the assistance is high. Of course, the assistance is constantly under harsh political scrutiny. In the EU the assistance was never adequate, the political scrutiny too never adequate (how could it be, with no democratic base).
It looks, the the EU is a predatory enterprise, directed against the weaker EU states, and it works hard to ruin Switzerland, that by its sheer existence demasks the “rotten heart” of the EU.
housewife77,
Can you give us more detail on this, or point us to some sources? It’s not a subject many in America know anything about.
Press release on 15 November 2012 from the Euro Area Business Cycle Dating Committee of the Center for Economic Policy Research: “Euro Area Business Cycle Peaked in Third Quarter of 2011, Has Been in Recession Since”
Excerpt:
Their report has some excellent data and graphs!
Jim Hamilton (Prof Economics, UC San Diego) notes at Econobrowser: “This marks the first recession in CEPR’s business cycle chronology going back to 1970 in which Europe went into recession without the United States also being in a downturn.”
More sunny figures from our gloriously evolving society:
Scandal Rocks Washington (excerpted)
by Eric Margolis
UN officials assert that some 500,000 Iraqis, mostly children, died due to the US-led blockade under Saddam Hussein. At least another half million died from the US 2003 invasion until 2011. Yet after all this, the US forces were forced pull out of Iraq at the end of what Saddam Hussein vowed would be the “Mother of All Battles.”
Cost of Iraq: $1.6-2.4 trillion; almost 5,000 US soldiers dead, 35,000 seriously wounded. Some triumph. America has yet to accept the painful fact that while it won all the tactical engagements in Iraq, it lost the bigger war.
On the Eurozone crisis:
Marshall Auerback at Columbia Law School and on the Business News Network
http://macrobits.pinetreecapital.com/marshall-auerback-at-columbia-law-school-and-on-the-business-news-network/
http://bilbo.economicoutlook.net/blog/?p=21734
Thanks for posting. Auerbach is always has an interesting perspective on economic and financial developments!
“Elites Will Make Gazans of Us All“, Chris Hedges, TruthDig, 19 November 2012
Of course, Hedges is just dreaming. These things aren’t really happening, and besides, (properly massaged) stats show that violence is decreasing, and that in short it’s just a wonderful time to be alive compared to the Hobbesian past that such people like to portray to console themselves in the face of evident horrors.
Just read about Those Terrible Middle Ages – Debunking the Myths, Régine Pernoud (2000):
Hedges article is thought- provoking. Thanks for posting!
It’s not, however a rebuttal to Painter. His is an aggregate perspective — holistic, in a sense. That individual areas experience violence does not negate the global average, the big picture.
Understanding requires seeing both the particulars and the whole. To see only the former lacks context. To see only the latter lacks granularity, so that effective action becomes difficult or impossible.
I see, yes, we are missing the whole. How silly of us. Thank you for point this out. Context, granularity. Lots of bad granularities, but a nice holistic totality. Got it. Very good. Thank you.
Steve echos the great GOP war against numbers in the 2012 election, seen in feud with Nate Silver (at the NY Times). Steve’s feelings, the parts of the world he considers significant, are more important than Painter’s numbers.
Left and Right, this irrationality grows in America. It’s reduced the public policy debates about taxes and climate change to a cacophony. Unless we come to our senses soon, this will not end well.
Fortunately there are probably nations whose people and leaders see the world with clearer eyes. The leadership of the world might pass to them, for a nation’s power means little if its eyes are close. Perhaps China.
“The Catalans have voted: for what exactly?“, Open Europe, 26 November 2012:
.
It does not happen very often, but the final result of yesterday’s Catalan elections was almost completely unpredicted by polling. Artur Mas (in the picture) and his centre-right Convergència i Unió (CiU) party were always going to win – and they did so. However, according to most opinion polls, Mas was, at worst, going to consolidate the 62 seats that his party currently holds in the Catalan parliament – but he failed to do so, and by a wide margin.
CiU only secured 50 seats – 18 short of the 68 needed to command an absolute majority. Needless to say, Spanish Prime Minister Mariano Rajoy’s party has immediately described the result as a bofetada (a “slap in the face”) to Artur Mas – claiming he has failed in his attempt to lead Catalonia towards independence.
So have the Catalans suddenly given up on independence? Not quite. The exploits of the left-wing independentist, anti-austerity and anti-monarchic Esquerra Republicana de Catalunya (ERC, Catalan Republican Left) won them 21 seats – eleven more than in the previous elections. Therefore, Mas could certainly try to push ahead with his plans for a referendum on Catalonia’s independence with the support of ERC. 71 votes from a total of 135 seats in the Catalan parliament (without counting the smaller pro-independence parties) is not the “exceptional sovereignist majority” Mas hoped for – but is a majority nonetheless.
This is exactly what the Catalan President noted in his first remarks after the election results were made official yesterday night. He said,
However, CiU and ERC are hardly natural allies or the makings of a stable and durable coalition. In particular, the two parties clearly do not see eye-to-eye on the need for Catalonia to continue with fiscal consolidation. At this stage, it is difficult to predict how things will evolve within the next few weeks or months. But the following should be kept in mind:
Everything else, at this stage, is far from clear – especially given that the new Catalan government is not yet in place, and forming one may not be the easiest of tasks.
“2012 Catalonia Elections: Post-Election Report“, Laia Balcells (Asst Prof Political Science, Duke U), The Monkey Cage, 28 November 2012 — Opening:
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