I am not an economist nor a formal, paid pundit on Europe. Here are some of my thoughts on the economy, countries and people that are impacted by the debt crisis.
– The debt problem in Europe isn’t a problem of liquidity (i.e. short term cash flow); it is a problem of solvency (i.e. debt has risen to a point where interest payments are unsustainable, and raising more debt is problematic). Fixing a solvency problem requires structural changes (like defaulting on your house or declaring bankruptcy), while liquidity problems are due to timing. Few seem to be treating the issue like a solvency one, however.
– By European history standards (“hot” wars and “cold” wars) the military climate between nations is benign; with a few exceptions in the Balkans where the borders never were straightened out and occasional puffery from Russia (also mild by historical standards)
– Many of the problems between nations have been “solved” by breaking up countries into component parts (Yugoslavia into ethnic components, Belgium likely ultimately the same) along ethnic group lines, meaning a larger focus on their own ethnic kin and less on overall assimilation of ethnicities into larger, conglomerated countries (there is absolutely no appetite for putting multiple ethnic groups into a larger “whole”)
– The benefits of the Euro are real; lower interest rates, lack of currency risk, and an ability for smaller countries to raise funds similar to the terms of larger nations (due to the implicit backing of the financially weak countries by the financially stronger countries)
– The level of government intervention in virtually all European countries is very high, with the state controlling many institutions directly through armies of rules and bureaucrats while significantly “capturing” other areas of the economy (the banks buying government debt, the power sector, and export-oriented industries like aircraft)
– Growth is slow and there seems to be little chance of it significantly heating up in the near term; the economy is not dynamic and entrepreneurial and some of the formerly most vibrant sectors (real estate, finance, tourism) are in a post-bubble rut
– It seems very unpopular to transfer funds from the stronger to weaker countries given that it is obvious that these weaker countries are not going to “grow” out of their problems nor significantly open or fix their structural economic problems; even the mildest measures in those weaker countries are met with strikes and unrest and even these plans don’t reduce debt, they only reduce the rate of growth on debt
– Youth unemployment is the “flip side” of a large governmental sector and heavy-handed regulation. Youth unemployment is near 40% in some countries like Spain; angry, unemployed youth are often the spark that can set a dangerous situation in motion very quickly
While it may not be a perfect analogy I am struck at how the military alliances that used to be absolutely critical to the politics and even survival in the region (Britain, France & Russia vs. Germany) have now been replaced by a complicated web of financial alliances that are poorly understood by the average layman and not described to them in terms of “costs” only in terms of “benefits”. The Euro was sold as an unalloyed “good”; the man on the street was not told of the potential risks or costs of the strong economies propping up the weak (or those concerns were brushed aside by the “rules” that the ECB set for joining and remaining part of the Euro). Everyone seemed to grimly understand in Britain what the cost was going to be to support Poland when they were attacked by Germany in 1939 and the “benefits” of these alliances were only in the fact that if they didn’t stick together Germany could chew them up one by one.
Another interesting analogy is the fact that nations are all supposed to be getting together in the EU for the “super state” of which monetary union is but the first step, but meanwhile those same individuals are continually voting to “opt out” of nations where they are forced to co-habitate with other groups, even those that they have lived side by side with for hundreds of years. The fact that Belgium, home of the EU, cannot even form a government in their own country and seems likely at some point to split apart, yet everyone is going to put their loyalty into a higher power of the super state, makes this “super state” even more of a fantasy.
In the simplest of terms they threw down the barriers between nations, nations tended to split into smaller homogeneous units, the myth of a single currency THAT WAS SUSTAINABLE without major pains and monetary transfers was sold, and then everyone piled on debt and expanded government to a historically high level (short of times of total war).
But this status is immensely brittle; even bailing out a small corner of the EU area (Greece) is going to put huge strains on politics in Germany; certainly no one in Germany is going to run for office there saying that this is a positive or they will never be elected. It is quite easy to predict that in fact politicians running AGAINST these transfers will find great success.
The sum of all these items is that it would seem that the Euro will face great pressure and Europe is heading for difficult financial straits. The experiment of assuming that a common currency can be maintained without explaining the downside to the “man on the street” is exactly opposite of the way the military alliances and risk of attendant death on behalf of a nation that they may not ever have visited (how many French people visited Russia before WW1?) must have been understood. If the Euro is to survive, then people will have to be roused to a higher purpose, the stakes will have to be raised, and the average person who is making sacrifice must believe in the cause.
Realistically what will need to happen is that each nation will have to face their OWN debt demons and rouse their peoples to their unique situations. They won’t all end up in the same place; smaller, poorly run countries like Greece will end up with a weak currency, high borrowing costs, and likely see an exodus of productive citizens as the government bureaucrats hold onto power. All of this will likely happen post-default, and there won’t be investors lining up to make new investments without the backing of some sort of multi-lateral institution like the ECB so it will be much more painful.
Other countries could emerge stronger; after all someone is subsidizing the poor competitors.
The idea of high debt levels and high levels of youth unemployment will also likely result in some philosophical soul-searching. This debt isn’t being invested in structural improvements and productivity enhancements; it is being used for social transfers today to other citizens and to employ a vast government bureaucracy of selected citizens who are generally immune to market discipline (getting fired, working hard) while the unemployed youth sit idle. When the infeasibility of this system becomes apparent, how can they explain it to the jobless that their prospects must continue to be stunted in order to pay for an overseer class of government employees? The act of finding “real” jobs for youth will also take us back to a more entrepreneurial view of the world; hiring citizens as bureaucrats in lieu of a productive economy doesn’t work and something else will ultimately need to take its place.
This isn’t to say that the United States doesn’t face many crippling financial problems of our own, nor that in some areas we can learn from Europe (such as the French power industry, which is much more efficient and dynamic than America’s). Our problems are just different because they are mostly “within the family”; we have to clean up our own mess. We also don’t have this web of EU institutions and politicians over our own feckless government institutions; we only have one level of “leaders” to deal with and replace, not two.
4 thoughts on “On The Debt Crisis and Europe”
I would not be so sure. Many of these regional breakaways can hardly support themselves without the protection and cooperation of their neighbor regions (e.g. the reason Scotland sticks with England is because Scotland needs England – both financially and politically.) But when the nation state is subsumed under a superstructure like the EU, this dependency disappears. The Walloons can afford to separate from the rest of Belgium because they have the EU to fall back upon. This is one of the few cases where centralization at the top is not antithetical to rising localism at the bottom. The big loser in all of this is the middle – the European state itself.
Actually, it’s the Flemish trying to get free from the Walloons, who they consider to be free riders. And here’s the lesson for the EU — after almost 200 years of shared “nationhood” the richer still don’t have enough common feeling to be willing to support the poorer. How will it be before the Germans feel happy about bailing out the Greeks? (Hint — don’t be holding your breath or anything.)
And why is getting loans at an unrealistically low interest rate a good thing? All it did was allow them to put off economic reality until fixing it became a huge problem. Back when each of the PIIGS had their own currency, devaluations created an automatic austerity program quite quickly. That permitted them real economic growth.
All of which makes me wonder how come the Euro ranks better than the dollar. (Maybe I should reason the converse direction that the dollar is in far worse shape than I thought….)
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