Tag Archives: european economic and monetary union

Spain’s’ only three options for recovery

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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The Fate of Europe has become visible. Only how and when the break comes remains uncertain.

Summary:   The last act of the EMU’s death throes has begun. We already knew the two possible endings: further unification or fragmentation.  Now we can see far enough to guess about when and how it will end.  Probably in a crisis, in which the odds of policy errors will be high — and the odds of unification are low.

“It is a national and imperative need to officially ask our partners in the EU for the activation of the support mechanism we jointly created.”
— Prime Minister George Papandreou, requesting a 45 billion euro loan from the Troika (EU, the European Central Bank, and the International Monetary Fund), 23 April 2010

A dream, perhaps soon to be real


  1. Summary of the Euro-crisis
  2. What will resolve the situation?
  3. What about the magic of Central Bank action?
  4. For more information

(1)  Summary of the Euro-crisis

Those words of Prime Minister Papandreous marked the beginning of the end for the European Monetary Union.  Now, two years later, it enters what looks like its final stage.  Here are forecasts about the next steps.  We cannot see the ending, but unification or fragmentation seem likely alternatives.  The current system is dying.

The European Economic and Monetary Union (EMU) was born on 1 January 1999 as a bold attempt to unify Europe by monetary policy as an intermediate step between a loose confederation and full political union.  Many experts said it would fail (see here for details).

The 2008 – 2009 crash exacerbated imbalances that had accumulated from the EMU’s flawed design (for details see the articles at the end of this post).  Each stage of the EMU’s death throes was a crisis, met by measures that were slow, late, incremental, and too small.  Each crisis larger than the previous in both euros and territory.

Each response was  known to be inadequate when made (despite the giddy applause greeting each new package).  Nothing more was possible. The leaders of the EU, ECB, and IMF — like ours — operate within narrow ranges of freedom.  Bold actions work only when a nation’s leaders and people will support them.  Europe’s elites and peoples want two incompatible things.

  • They want unification (to avoid war and control their destiny in a world of giants).
  • They don’t want what goes with it — the transfer payments (eg, as California taxes go to spending in Mississippi & New Mexico), the central control of spending (ie, by Germany), and the need to get along with one another.

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A note from Athens: Feeling on the ground has palpably changed

Summary:  The Greek people have locked themselves into a no-win dilemma since the first bailout in May 2010.  They want to stay in the Eurozone, but hate the pressures applied by EZ leaders as the necessary price for the aid that keeps them in the Eurozone.  Eventually the resulting damage will force them to leave, but the delay will weaken them — more unemployment, bankruptcies, capital flight, and social unrest.  They will crawl prostrate to a new future.  Today Megan Greene reports from the streets of this once-great nation as it sails to self-destruction.  It’s a powerful warning to America.


  1. A note from Nouriel Roubini’s visit to Greece
  2. The feature article:  Megan Greene reports from Greece
  3. About the author
  4. Other valuable recent articles about the Greek crisis
  5. For more information

(1)  A note from Nouriel Roubini’s visit to Greece

Excerpt from “Beware the Ides of March“, Nouriel Roubini, 28 February 2012 (subscription only):

I attended a public debate on whether Greece should exit the EZ; three-quarters of those who attended were against that option. One caveat is that most of the attendees were middle class folks who work in the private sector, speak English, are europhiles and blame the government and public sector for all of Greece’s problems. Lower-income individuals, employees of the large public sector and left-of-center voters have different views.

In my conversations with a large sample of private-sector businessmen — shipping magnates, other manufacturers, representatives of the financial sector — and members of the government, a similar view emerged: No one wants to even consider an exit from the EZ. Many forcefully argued — without any evidence — that Greece doesn’t have a competitiveness problem — despite data suggesting that unit labor costs rose by over 40% in the decade before the crisis — and blamed all of the problems of the private sector on the inefficiencies and tax burden of the public sector. Again, this sample of prominent Greeks is obviously as europhile as one could get, so can be regarded as somewhat biased.

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