So the governing coalition in Greece pulled out a narrow victory Sunday -- winning only a minority of votes, but getting a narrow majority in the parliament thanks to a 50-seat bonus the New Democracy party gets for coming in first. So they will now have the ability to continue pursuing an unworkable policy. Yay!
Joe Wiesenthal, a deputy editor at Business Insider, reported that there's a meme in Greece to the effect that the anti-austerity Syriza party didn't really want to win, because it would rather see the current government flail some more. Conversely, establishment types should actually be dismayed by this outcome: if current policies fail completely, which seems almost a given, and Greece exits the euro anyway, which seems highly likely, the entire Greek center will end up discredited; better, in a way, to be able to blame the radicals.
And I gather I'm not the only one thinking along these lines. Business Insider also reported hints that the Pasok party, which has suffered terribly from its identification with failing policies, might not continue in the coalition unless Syriza is also brought on board -- which then raises the question, why would Syriza do that?
The debacle rolls on.
The EuroTARP Cometh
O.K., Spain got a bank bailout. It's basically like the Troubled Asset Relief Program in the United States: a Spanish government agency will give banks cash, presumably in return for an ownership stake, with the goal of reassuring depositors and interbank lenders that their funds will remain safe even if the banks turn out to have big losses. The point is that these losses will initially come out of the new cash hoard, so that default on debts won't happen.
The twist is that the Spanish government itself is cash-poor and must pay high rates to borrow on the market, so this money comes as a loan from stronger European economies, presumably at below-market rates.
The question you should ask is, what problem does this solve? It may -- may -- put a temporary end to the "doom loop" of funds fleeing Spanish banks, forcing the banks to sell assets, driving asset prices down and creating further doubts about solvency. (It won't help even here to the extent that fears involve euro breakup rather than default). But it does nothing to restore Spanish competitiveness or lessen the suffering from austerity.
So the whole thing at best buys time -- just like the European Central Bank's lending program from last fall.
What will Europe do with that time? If past behavior is any indication, the answer is nothing.
A RESPITE, FOR NOW
Antonis Samaras, a Harvard-educated economist who has promised to keep Greece in the euro zone, was sworn in as Greece's prime minister on June 20, three days after his center-right New Democracy party won a contentious parliamentary election by a narrow margin.
His party improved slightly on its results from the May election, which ended in the dissolution of parliament after the parties failed to form a coalition government. Mr. Samaras said that he was committed to quickly forming a coalition government with the Socialist Pasok party and the Democratic Left Party.
While the pro-euro party's victory eased international concerns about a calamitous Greek exit from the monetary union, economists and political leaders are now focused on Spain, where borrowing costs continue to rise.
To recapitalize its struggling banks, Spain accepted a $125 billion aid package from European finance ministers on June 9 that was initially hailed as a remedy for the country's struggling economy. But the markets' initial enthusiasm for the bailout waned quickly. On June 11 the interest rate on Spanish 10-year bonds -- which is the rate Spain pays on its debt, and considered an indicator of investor confidence -- jumped nine points to 6.5 percent. One reason for the spike, according to Daniel Woolls of the Associated Press, was that "investors began to question the conditions of the loan package and whether the country could manage the extra debt or be forced to ask for more help."
A number of critics have also predicted that the bailout is likely to fail because it does not do enough to guarantee deposits in Spanish banks. Andrew Ross Sorkin, a columnist for The New York Times, wrote: "Customers of Spanish banks still have reason to worry about the solvency of their banks -- and their country -- making it reasonable for them to take their money from Spanish banks and send it to banks in safer countries like Germany."
Why This Economic Crisis Is Not Like the Others
A number of people have asked me to respond to a recent Wall Street Journal op-ed written by Phil Gramm, the former United States senator from Texas, and Glenn Hubbard, the dean of Columbia University's business school, about the Reagan recovery versus the Obama recovery, and why it proves that right-wing economics roolz.
But I already did respond. When? In February 2008 -- back when people like Mr. Hubbard and Mr. Gramm were denying that there was any recession at all. In fact, Mr. Gramm declared that all we had was a "mental recession," and that America had become a "nation of whiners" in an interview published in The Washington Times on July 9, 2008.
So, more than four years ago I predicted a very slow recovery. Why? Because recessions like those of 1990-1991, 2001 and 2007-2009 have very different origins from recessions like those of 1974-1975 or the double-dip recession of 1979-1982. The old recessions were more or less deliberately created by the Federal Reserve via tight money in order to control inflation, which meant that you had a V-shaped recovery once the Fed decided that we had suffered enough and it loosened the reins. The new recessions all reflected private-sector overreach, which is much harder to make up for.
Note that while I predicted a slow recovery way back when, it has been even slower than I expected. But that's no mystery; at that point neither I nor anyone else knew just how far the private sector had overreached, plus I didn't expect the unprecedented fiscal austerity that has been such a drag on recovery given the fact that we're in a liquidity trap.
And yes, it is frustrating that the economic crisis is redounding to the political benefit of people who have been wrong about absolutely everything, whereas people like me may not have been right about everything, but have accumulated a pretty darn good track record over the past five years.
Latvia and Romney's Record
Not a connection you expected anyone to make. But there's something there.
You see, there has been some back and forth over Mitt Romney's job-creation record as governor of Massachusetts. The truth is that governors don't have much impact on such things, but for what it's worth, job creation in Massachusetts was lousy. The response of Mr. Romney's campaign has been to cite the state's low unemployment rate when he left office; the response to the response is that this was due to people leaving the state.
Now, there's nothing wrong with labor mobility, but driving down unemployment by getting people to move someplace else isn't exactly a recipe for national recovery.
Which brings us to Latvia, where unemployment, though still very high, has come down. But this has a lot to do with a huge fall in the labor force, driven to an important extent by emigration. See the chart, with data from Eurostat.
Again, nothing wrong with labor mobility -- but if Latvia is supposed to be a role model, somehow having all of Europe move to someplace else in Europe doesn't quite seem like a sustainable proposition.
