I guess we knew this was coming, but in the face of the French and Greek election results and the broader evidence that Europe’s economic strategy is an utter failure, the usual suspects are, you guessed it, doubling down.
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Simon Wren-Lewis, an economics professor at Oxford, has looked on in horror as the Dutch have agreed on completely unnecessary austerity measures, as a way of showing their commitment to Europe’s totally misguided fiscal pact. “Towards the end of April the Dutch conservative coalition government collapsed when the far-right party refused to discuss further budget cuts,” Mr. Wren-Lewis wrote on his blog on May 7. “The prime minister resigned. And yet a few days later other parties rallied round to give their support to a similar package of austerity measures, which now have majority support in parliament.”
British Prime Minister David Cameron vowed “no going back” on his failed austerity strategy in a speech after the elections.
And Jens Weidmann, president of the German central bank, vowed to destroy the euro. O.K., that’s not what he said in so many words, but that’s the implication of his op-ed in the Financial Times on May 7. The meat is at the end: “Monetary policy in the euro zone is geared towards monetary union as a whole; a very expansionary stance for Germany therefore has to be dealt with by other, national instruments,” Mr. Weidmann wrote. “However, this also implies that concerns about the impact of a less expansionary monetary policy on the periphery must not prevent monetary policy makers’ taking the necessary action once upside risks for euro zone inflation increase. Delivering on its primary goal to maintain price stability is the prerequisite for safeguarding the most precious resource a central bank can command: credibility.”
Let’s parse this. “A very expansionary stance for Germany therefore has to be dealt with …” I’m pretty sure is code for saying that Germany will try to prevent any inflationary impact of low European Central Bank rates with fiscal contraction. Austerity for all! (And no help for peripheral economies in the form of above-normal German inflation.)
And then, a declaration that the E.C.B. will tighten to prevent any “upside risks for euro zone inflation” — even if the southern economies are facing deflation.
Put it together, and it’s a declaration that all of the burden of “internal devaluation” — the need to bring costs and prices in Spain and others down relative to the core — will be borne by deflation in the south.
This won’t work, of course; it’s a prescription for catastrophic failure of the euro.
What is Mr. Weidmann thinking?
My guess is that he isn’t — or at least that there’s no model there, just a series of central bankerish catch-phrases strung together, in a way that fails to reveal the underlying impossibility of the strategy.
All in all, nothing learned, and no willingness to reconsider.
DISCONTENT AT THE POLLS
In recent elections across Europe, voters rejected incumbent parties that have been pursuing spending cutbacks and deficit reductions as a response to economic troubles.
In France, the Socialist Party candidate François Hollande beat incumbent President Nicolas Sarkozy on May 6. Mr. Hollande campaigned on promises to emphasize growth, raise taxes on the wealthy and relax the austerity measures pursued by his predecessor. “Austerity is no longer inevitable,” Mr. Hollande said in his victory speech.
On the same day in Greece, voters defeated the nation’s two main political parties, who oversaw two years of agreements for bailout loans that came with harsh austerity requirements attached. The rejection of mainstream politicians left no party with a majority of seats in the Greek Parliament, and legislators have been unable to form a unity coalition, forcing officials to hold new electionsnext month.
Even in Germany, which saw a record low unemployment rate in April, Chancellor Angela Merkel’s conservative Christian Democratic Union was defeated by the Social Democrats in an election in the most populous state, which commentators have said is a sign of growing opposition to Ms. Merkel’s policies.
Despite defeats at the polls, leaders like Ms. Merkel who are committed to spending cuts and deficit reductions reaffirmed their beliefs in austerity programs, which they say are necessary to restore confidence in public finances. Ms. Merkel told parliament on May 10 that “growth through structural reforms is sensible, important and necessary. Growth on credit would just push us right back to the beginning of the crisis, and that is why we should not and will not do it.”
British Prime Minister David Cameron reaffirmed his commitment to deficit-reduction policies the day after the elections, saying that “there can be no going back on our carefully judged strategy.”
Greece and the Euro: Is the End Near?
Some of us have been talking it over, and here’s what we think the endgame looks like:
1. Greek euro exit, very possibly next month.
2. Huge withdrawals from Spanish and Italian banks as depositors try to move their money to Germany.
3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.
3b. Alternatively, or maybe in tandem, huge draws on credit from the European Central Bank to keep the banks from collapsing.
4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope it will need both guarantees on its debt to hold borrowing costs down and a higher euro zone inflation target to make relative price adjustment possible; or:
4b. End of the euro.
And we’re talking about months, not years, for this to play out.
Euro Reversibility
A brief blast from the past:
As [Barry] Eichengreen argued, any move to leave the euro would require time and preparation, and during the transition period there would be devastating bank runs. So the idea of a euro breakup was a nonstarter. But now I’m reconsidering, for a simple reason: the Eichengreen argument is a reason not to plan on leaving the euro — but what if the bank runs and financial crisis happen anyway?
What I hadn’t realized when I wrote that two years ago was the extent to which euro zone banks could float through a slow-motion bank run by borrowing from the European Central Bank. So the real moment of truth comes if and when the E.C.B. — or more accurately the Bundesbank, which may ultimately be on the hook — decides to pull the plug.
The point, of course, is that this moment may not be far off.
Exit and Exports
If Greece exits the euro, then what for the Greek economy?
Nobody knows!
But people do seem to know some things that aren’t so. In particular, I keep reading that Argentina’s example is irrelevant because Greece has hardly any exports.
I don’t know where that comes from, but it just ain’t so, according to data from the World Bank.
What is true is that Greece doesn’t export a lot of goods. But it exports a lot of services — shipping and tourism. How might these respond to the devaluation of the new drachma?
Shipping volumes presumably wouldn’t change much — but since the prices would be in euros and dollars, they’d be worth more relative to Greek gross domestic product, so that would be a boost.
Tourism — well, cheaper hotels — could attract a lot of British and German package tours, as long as the political situation isn’t that chaotic.
This isn’t a prediction that everything will be fine, but it is a caution that the pessimism about Greek prospects once the turmoil is past may be overdone.
