It’s time for a euro . (I’ve been pretty focused on the American election, since it is, after all, my country; but am still keeping an eye on the other side of the pond.)
The basic story of the euro crisis remains the same: It’s essentially a balance of payments crisis that has been misinterpreted as a fiscal crisis, and the key question is whether internal devaluation is really workable.
What?
O.K.: the roots of the euro crisis lie not in government profligacy but in huge capital flows core countries (mainly Germany) to the euro zone periphery during the good years. These capital flows fueled a peripheral boom, along with sharply rising wages and prices in the GIPSI countries (Greece, Ireland, Portugal, Spain, Italy) relative to Germany (as shown on the chart on this page).
Then the music stopped. The combination of deeply depressed peripheral economies (which meant surging budget deficits) and fears of a euro crackup turned this into an attack on peripheral-government bonds. But the root remains the balance of payments/cost problem. And any resolution must involve getting costs and prices back in line.
This is the context in which we have to see Mario Draghi’s actions. Twice now — first with the long-term refinancing operations last fall, then in September with the plan to buy sovereign debt — the president of the European Central Bank has stepped in to limit runaway bond yields, short-circuiting a possible financial “death spiral” of falling bond prices, collapsing banks and high-speed capital flight.
Good for him. But you still need internal devaluation: a sharp fall in costs and prices relative to the core. And that’s a slow, painful process.
Where does austerity fit into this story? Mostly it doesn’t. Shaving an extra couple of points off the structural deficit will make very little difference to long-run solvency, nor will it do much to accelerate the pace of internal devaluation.
It will, however, depress employment even further and inflict a lot of direct suffering too, through cuts in social programs.
Why do it, then? Partly it’s because Europe is still operating on the false theory that this is essentially a fiscal issue; partly it’s to assuage the Germans, who remain convinced that those lazy southern Europeans are getting away with something. In effect, the policy is to inflict pain for the sake of inflicting pain.
Which brings us to the question: Can this go on? When will the people of the
afflicted economies say that they can bear no more?
The news Spain, with vast protests and talk of secession, suggests that this moment may be approaching fast. Also, while Greece has long since ceased to be the epicenter, things seem to be breaking down there, too.
I really do think Mr. Draghi has done very well. But he can’t make internal devaluation work on his own, and he can’t save Europe if its leaders continue to think that gratuitous infliction of pain is sound policy.
Capital Flows to the GIPSIs
A correspondent asks a good question: When I say that lots of money flowed into Spain and other peripheral economies during the bubble years, what kinds of capital flow are we talking about?
In brief, you should think of it as largely taking the form of bank-to-bank lending. For example, the German Landesbanken bought covered bonds issued by Spanish cajas; the cajas in turn used the money to finance real estate purchases. Other forms of cross-border investment, like direct investment by corporations, were a fairly minor feature. That’s also why the flip side of those capital flows was a sharp rise in Spanish private-sector debt.
I’d like to post a good chart, but I haven’t found a clean presentation of the data. If anyone knows how to do this, let me know! But the basic story seems clear.
And by the way, this makes it quite clear that to the extent that you want to talk about irresponsible behavior, it was really a collaborative, trans-European project.
German bankers knew what the Spanish banks were doing, and in fact took on quite a bit of the risk directly by accepting real estate as collateral.
A Campaign Season With Some Surprises
This really isn’t looking like the election anyone expected. Obviously it’s not the election Mitt Romney and the Republicans anticipated and wanted; but it’s also looking very different what Democrats planned for. What Romney & Co. expected was a simple rejection of President Obama because of the weak economy. As Greg Sargent, a commentator at The Washington Post, often reminds us, this isn’t how it has played at all. On one side, voters tend to react to recent trends, not the absolute level — and the economy has gotten better in some ways over the past year, though obviously not by a lot. On the other, people do remember the crisis of 2008, which they still blame on George W. Bush, and remain willing to cut Mr. Obama substantial slack. But as the polls move strongly in Mr. Obama’s direction (yes, I know, it’s all a liberal conspiracy that somehow even includes Fox News), it’s clear at least to me that there’s more going on. The conventional wisdom — which I too bought into — was that Democrats were going to support Mr. Obama, but grudgingly and without much enthusiasm. There had been too many disappointments; the golden aura of 2008 was long gone. Meanwhile, Republicans would show their usual unity and discipline, and at best it would be Mr. Obama by a nose. Instead, the Republicans appear to be in a shambles — while the Democrats seem incredibly united, and increasingly, dare I say it, enthusiastic. How did that happen? Partly it’s because this has become such an ideological election — much more so than 2008. The G.O.P. has made it clear that it has a very different vision of what America should be than that of Democrats, and Democrats have rallied around their cause. Among other things, while we weren’t looking, social issues became a source of Democratic strength, not weakness — partly because the country has changed, partly because the Democrats have finally worked up the nerve to stand squarely for things like reproductive rights. And let me add a speculation: I suspect that in the end Obamacare is turning out to be a big plus, even though it has always had ambivalent polling. The fact is that Mr. Obama can point to a big achievement that will survive if he is re-elected, perish if he isn’t. Health insurance for 50 million or so Americans (30 million the Affordable Care Act, another 20 million who would lose coverage if the Romney/Ryan Medicaid cuts happen) is enough to cure people of the notion that it doesn’t matter who wins. All of this in turn has an implication that Republicans won’t like — assuming that the Rasmussen polling company doesn’t have a special insight into the truth denied to all other pollsters, and that Mr. Obama does in fact win with a solid margin. The right is already set up to blame poor Mitt, claiming that he lost because he wasn’t conservative enough. But that’s not what we’re seeing; it looks as if voters are rejecting the right’s whole package, not just the messenger. As I said, not the election anyone was expecting — but a happy surprise for some, and a nasty shock for others. OBAMA GAINS TRACTION After the two presidential candidates spent the summer struggling to break out of a statistical dead heat, President Barack Obama’s campaign gained momentum at the Democratic National Convention in September and due to a series of high-profile gaffes made by Mitt Romney, his Republican challenger. With less than a month left until the election, many national polls show that Mr. Obama now has a slight lead, both nationally and in the major swing states. When it comes to individual issues, the president has made double-digit gains as voters expressed confidence in his abilities in areas such as foreign policy and social issues. And while Mr. Romney has argued throughout his campaign that job creation and deficit reduction are his major selling points, various polls show that he and Mr. Obama are statistically tied on these issues. Some Republicans have argued that the survey results are skewed by the polling firms’ including too many Democrats in the samples. However, even the polling firm Rasmussen, which uses methodology that is generally favored by Republicans, reports that Mr. Obama is in the lead in its polls. Some commentators contend that one reason for the shift may be Mr. Romney’s selection of Paul D. Ryan as his running mate. Mr. Ryan is best known for his plan to convert the government-administered Medicare insurance program into a series of vouchers. A poll released on Sept. 27 by The Washington Post shows that Mr. Ryan’s plan is deeply unpopular with seniors in swing states, a critical constituency for the Republican ticket.
