Status Report on Europe’s Slow Re-Birth (First, the Current System Must Die)

Summary of another status report on the crisis of Europe. Its leaders repeat their mistakes during the 1930s (raising taxes & cutting expenditures in response to economic weakness) while attempting to save the structurally flawed EMU. Their mistakes only accelerate Europe’s dive towards a political singularity, when the current structure collapses — beyond which lies a new shape for Europe. They will scream at the transition, as a baby does at birth. Nobody knows what shape the new Europe will take; most mainstream analysts forecast an easy transition to a unified Europe.

Note: Today the endgame for Europe (in its current form) may have started. More on this tomorrow.

Contents

1. The positive feedback between economic stress and political instability
2. Germany’s impossible hopes drive the crisis
3. Slowly people lose hope, each one’s despair bringing the endgame closer
4. Other posts about the crisis of Europe

(1) The positive feedback between economic stress and political instability

The Euro-crisis consists of equal parts economic and political dynamics. Now politics take center stage in Greece and Italy, as the foreign-imposed austerity programs crush their economies — without the promised gains. Slowly their governments lose legitimacy. Loss of legitimacy manifests itself in two important ways.

(a) People lose respect for the nation’s laws. Most importantly, with the tax code — as taxes are increased. Less compliance, more evasion, even larger deficits.

(b) Politicians become weak. Changes in government create hope — but in fact reflect growing political instability.

* Governments have already fallen in Ireland and Portugal. Belgium’s fell in June 2010, with as yet no replacement.
* In Greece the opposition conservative parties, led by Antonis Samaras, become reluctant to take office. Under pressure from Germany and France, they have swung to support the austerity programs — but prefer to do so while in opposition. Weak governments cannot impose harsh austerity or make broad reform measures.
* A similar process might be starting in Italy. However weak Berlusconi’s government, whatever replaces it might be weaker.

Europe’s elites fear their people, so they take strong measures to prevent elections or referenda on their policies. This makes failure far more likely. Their only hope for success lies in gaining public support across Europe. Force elections on recalcitrant political leaders; trust Europe’s peoples to support unification. This might sink the project, but is its only hope for success.

(2) Germany’s impossible hopes drive the crisis

“Germany’s eurozone trilemma“, Edward Chancellor, Financial Times, 6 November 2011 — Opening:

Economists have bigger brains than ordinary mortals. Whereas most people are flummoxed by dilemmas, economists wrestle with trilemmas. Nobel laureates Robert Mundell and Marcus Fleming, for instance, famously observed that it was impossible for a country simultaneously to maintain a fixed exchange rate and an open capital account while keeping inflation under control.

Europe’s crisis has thrown up another impossible trinity. The Germans have three ardent desires. First, they want the single currency to survive. Second, they wish to limit Germany’s financial contribution to any bail-out. Third, they insist that the European Central Bank keeps inflation low. These demands are mutually incompatible. Until Berlin relents on one of them, the euro crisis is likely to rumble on.

(3) Slowly people lose hope, each one’s despair bringing the endgame closer

“Can Italy save itself?“, Michael Gavin, Barclay’s Capital, 7 November 2011 — Summary:

* The ongoing debt crisis in Greece is a legitimate concern for policymakers and investors, but growing concerns about Italy pose the real danger to Europe and the world economy. Yields on Italian government debt have reached new highs, and are at levels that we consider clearly unsustainable.
* We believe that policy reforms in Italy are necessary to increase confidence in the Italian credit. However, historical experience suggests that the self-reinforcing negative market dynamics that now threaten Italy are very difficult to break. At this point, Italy may be beyond the point of no return.
* While reform may be necessary, we doubt that Italian economic reforms alone will be sufficient to rehabilitate the Italian credit and eliminate the possibility of a debilitating confidence crisis that could overwhelm the positive effects of a reform agenda, however well conceived and implemented.
* … We see little practical alternative to a strengthened commitment by the ECB to act as lender of last resort to precariously positioned eurozone governments.

(4) For More Information

1. The post-WWII geopolitical regime is dying. Chapter One , 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
2. Can the European Monetary Union survive the next recession?, 11 July 2008
3. The periphery of Europe – a flashpoint to the global economy, 8 February 2010
4. A great speech by the PM of Greece. How soon until an American President says similar words?, 3 March 2010
5. Governments cannot go bankrupt, 2 April 2010
6. Our government’s finances are broken. How do we compare with our peers?, 8 April 2010
7. The EU does Kabuki for Greece. Is it the next domino to fall?, 14 April 2010
8. About the Euro crisis: the experts are wrong; the German people are right., 7 May 2010
9. Former Central Bank Head Karl Otto Pöhl says bailout plan is all about ‘rescuing banks and rich Greeks’, 20 May 2010
10. The Fate of Europe, nearing the point of decision, 13 September 2011
11. Europe drifts towards the brink of a cataclysm, 26 September 2011
12. Delusions about easy fixes for Europe, dreaming during the calm before the storm, 30 September 2011
13. Every day the new world emerges, yet we see it not. Like today, as Europe begs China for loans, 15 September 2011
14. Is Europe primed for chaos, as it was in July 1914?, 7 October 2011
15. We see the outlines of the next cure for Europe. Will it work?, 14 October 2011
16. Today Europe’s leaders took another step towards the edge of the cliff, 27 October 2011
17. Where to from here, Europe? Some experts share their views., 8 November 2011

This post originally appeared at Fabius Maximus and is reproduced with permission.