The Simple Explanation of Why Night Falls Over Europe

Summary:  We cannot predict what happens next as the 11th meeting of Europe’s leaders winds to yet another disappointing conclusion.  We can only seek to understand how Europe got here, and what’s happening now.  Only this way can we learn, and so prepare for the choices ahead for America.  This is a summary of the 20 previous posts about Europe (listed at the end).

Update:  At the end of this post you will find a brief analysis of the proposals from the lastest euro-summit.

Millions of words have been spent describing the crisis slowly destroying the current political structure of Europe, making it seem complex beyond understanding.  While full analysis will require decades of study – with its combination of personalities, politics, national animosities, high finance, and economics — the basic elements are simple.

  • Europe’s leaders gambled, attempting monetary unification before fiscal unification as a step towards full political union.  The fatal flaw was its lack of a mechanism to modify the treaties, correcting design errors and adapting to changed conditions.
  • Germany exploited its control of monetary policy for its own benefit, allowing rapid growth in their exports to southern Europe — financed by its loans to southern Europe.  All prospered.
  • All good things eventually come to an end.  The system started to collapse from a combination of the too much accumulated debt AND malinvestment in southern Europe, plus the shock of the great financial crisis.
  • Banks are the vulnerable part of a capitalist system.  French and German banks hold much of the southern european debt; defaults (soft or hard) would bankrupt them.
  • Europe’s banks own Europe’s governments, as American banks own America’s government. Hence in 2009 recapitalizing the banks became the primary imperative.
  • The crisis might allow Germany to push Europe another step towards unification, giving Germany the power to influence individual national budgets in the EU or EMU, allowing them ever great ability to exploit their neighbors (this is the traditional way nations use power).

Since the Greek crisis began in early 2010 Europe’s leaders have sought ways to rebuild the banks.  Guarantees and loans from their government have proved insufficient.  The only remaining alternative to nationalization (as done in Sweden, Russia, and to US S&L’s) is ECB printing hundreds of billion euros for the debtors, so they can pay the banks.  Any resulting inflation would also help in this great work.

Not realizing that bankers are western civilization (or own it), Germany’s people refused to see the wisdom of massive ECB printing.  Europe’s leaders despise public opinion, but shirk from taking so large a step in the face of such strong opposition.  They see lamp posts and fear what the public might do.

Instead they resort to increasingly baroque proposals, hoping to create a facade behind which the ECB can print sufficient euros to save the banks. This effort ignores the actual problems afflicting Europe, burning scarce political capital and still scarcer time.

The end game will come eventually, as they pass some invisible tipping point.  Continued capital flight will create disorderly markets.  The coming recession will scuttle the austerity plans.  And the austerity programs will intensify the coming recession — drastically increasing social stress throughout Europe (imagine Spain going into recession with 23% unemployment).

This will get interesting for Europe.  Survival is always interesting; all their political regimes might not survive.

Update: About the results of the latest euro-rescue summit

(1) The real results concern aid for the banks.  Necessary actions to improve bank liquidity, but ineffective without broader policy action.

(2) Approval for more and deeper austerity policies.  In fact, locking EU fiscal policy into a straitjacket as a recession looms ahead.   Europe’s leaders have learned nothing from 1929-32, and nothing from the great progress in economic theory since then.  This could have horrific results!  Future generations will not understand.

(3) They hope (again) to get more aid from the BRICs (Brazil, Russia, India, China) via the IMF.  This is delusional.  The BRICs did nothing earlier this year, when hopes were higher for effective EU action AND the BRICs were stronger.  Now all four BRICs have serious problems at home; substantial help for the rich folks of Europe from the poorer BRICs seems unlikely.

(4) Most important, they have done nothing to address the imbalances within the EMU that caused the crisis — and drive the current downturn.

This is, as many have said, like the Captain of the Titanic convening a seminar on metallurgy after they hit the iceberg.

Articles about Europe

  1. The Euro Debate Gets Philosophical“, GaveKal, 29 November 2011 — A look at the philosophical differences underlying the two sides of the euro-crisis.
  2. Anxious Greeks Emptying Their Bank Accounts“, Der Spiegel, 6 December 2011
  3. Europe Shudders at Germany’s New-Found Power“, Der Spiegel, 6 December 2011 — Europe hopes to imitate German’s success as an export power (every nation can become a net exporter if they try!)

Other posts about the crisis of Europe

Update: : On a deeper level, a driver of this crisis is a misreading of history by the German people. They believe that the NAZI rise to power resulted from the hyperinflation six years earlier (1921-24). They don’t see the proximate cause: Weimar imposed austerity during 1929-32 (after the crash). For details see A lesson from the Weimar Republic about balancing the budget.

Other posts about Europe:

  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
  18. Status report on Europe’s slow re-birth (first, the current system must die), 10 November 2011
  19. Europe begins its endgame.  Watch and learn, for Europe’s problems are the world’s., 11 November 2011
  20. Looking ahead to see the new shape of Europe, 22 November 2011

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

4 Responses to "The Simple Explanation of Why Night Falls Over Europe"

  1. JohnMedaille   December 13, 2011 at 1:26 am

    Is it possible that the breakup of the EMU will contain a benefit for the United States, as billions of Euros flee to the States, and perhaps even actual refugees bringing, and spending, lots of money here?