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Martin Wolf Misses the Real Reason the Eurozone’s Unhappy Marriage Has Not Broken Up Yet

The normally astute and blunt Martin Wolf is either having an uncharacteristic bout of circumspection or is managing to miss an important, arguably determining reason why the Eurozone persists in inflicting destructive austerity on much of its population.

As his current column shows, Wolf is under no illusion as to the success of the Eurozone experiment and reminds readers it could still fail:

The currency union is supposed to be an irrevocable monetary marriage. Even if it is a bad marriage, the union may still survive longer than many thought because the costs of divorce are so high. But a bad romance is still fragile, however large the costs of breaking up. The eurozone is a bad marriage. Can it become a good one?…

If all members of the eurozone would rejoin happily today, they would be extreme masochists. It is debatable whether even Germany is really better off inside: yes, it has become a champion exporter and runs large external surpluses, but real wages and incomes have been repressed. Meanwhile, the political fabric frays in crisis-hit countries. Anger at home and friction abroad plague both creditors and debtors.

What, then, needs to happen to turn this bad marriage into a good one? The answer has two elements: manage a return to economic health as quickly as possible, and introduce reforms that make a repeat of the disaster improbable. The two are related: the more plausible longer-term health becomes, the quicker should be today’s recovery.

Wolf then proceeds to tell us that the Eurozone continues to be a resolute practitioner of austerity policies. Readers may recall that there was a huge kerfluffle in the economics-related media when the IMF admitted it was all wrong, that the fiscal multipliers in the Eurozone had turned out to be larger than one. In econ-speak that means you can’t starve your way back to health. Cutting fiscal deficits results in an even greater economic contraction, resulting in even worse debt to GDP ratios. But the rest of the European officialdom seems to be in shoot-the-messenger mode. Per Wolf:

In a recent letter to ministers, Olli Rehn, the European Commission’s vice-president in charge of economics and monetary affairs, condemned the International Monetary Fund’s recent doubts on fiscal multipliers as not “helpful”. This, I take it, is an indication of heightened sensitivities. Instead of listening to the advice of a wise marriage counsellor, the authorities have rejected it outright.

Wolf says the way out is more debt writedowns and restructurings, internal rebalancing, and financing national deficits as the rebalancing is in process. At this remove, I don’t see how this happens. Germany still wants to have its cake and eat it too. It does not want to give up running surpluses with the rest of the Eurozone and keep financing its trade partners. The fact that it insists on irreconcilable objectives is putting the periphery into a depression which will eventually infect Germany.

Wolf argues that the reason the Eurozone has not broken up despite pursuing such destructive policies is that a breakup would be worse. The question might be for whom. Greece has been the test case. Even though a Greek departure would not have significant economic ramifications for the rest of the Eurozone, the fear is that it would lead to contagion, since if Greece left, it would demonstrate to other periphery countries that it could be done too.

And one has to wonder why Greece has not left. By all accounts, the country is falling apart. Many medicines are in inadequate supply, sheets in hospitals are being re-used, and barter is becoming common as the economy is breaking down. Things are now so desperate that infrastructure is being damaged as desperate citizens try to pilfer metals. From Greek Reporter:

The thieves are accused of stealing industrial cable, power-line transformers and other metal objects – triggering blackouts and massive train delays. The profile of the metal thief is also changing, authorities say, from gypsies and immigrants living on the margins of society to mainstream Greeks who have fallen on hard times. A group of men were caught trying to take apart an entire bridge and droves of immigrants can be seen pushing shopping carts around Greek neighborhoods looking in recycling bins…

Athens’ nine-year-old light rail system has been a prime magnet for metal robbers, with at least five major disruptions reported in the past six months due to cable theft that forced passengers to hop on and off trains as diesel replacements were needed. The trend has had lethal consequences: In early January, the body of a 35-year-old man was found near Athens beside the tracks of a suburban rail system that services the capital΄s airport. He had been electrocuted while cutting live cables, police said.

It is hard to imagine how an exit could make matters any worse. Greece would get the Eurozone boot off its neck, be able to deficit spend to get its idle resources back to work, and depreciate its currency to make its goods more attractive on world markets.

So why are the periphery countries suffering this level of unproductive pain? Because the countries aren’t making the decisions. It’s powerful local politicians who are selling out their countries, working in cahoots with Eurozone technocrats. And I can assure you none of them are sharing in the suffering of periphery country workers.

This is the plague of our modern social order: detached and corrupt leaders, whether intellectually, monetarily, or both. The old code of noblesse oblige, which at lead required the elites to have some concern about what happened to the lower orders, is a dead letter. It’s curious that someone as incisive as Wolf is unwilling to factor the behavior of the ruling classes into his assessment. Perhaps, as Michael Thomas said of Punch Sulzberger, he is dining with people he should be dining on.

This piece is cross-posted from Naked Capitalism with permission.

One Response to “Martin Wolf Misses the Real Reason the Eurozone’s Unhappy Marriage Has Not Broken Up Yet”

DiranMFebruary 20th, 2013 at 1:06 pm

What can one expect from that curmudgeon Martin Wolf? He is a man of the "status quo", repeating all the unfortunate rhetoric that the Euroweenies have been saying to keep their Rube Goldberg system together. The problem with these idiots is that by kicking the can and increasing the costs of the break up, they are making the system ever more fragile and prone to collapse. Instead of rationally minimizing their damages, they keep pouring gasoline into the fire. Such is the dogmatism that has always plagued Europeans and led them to self-destruction. Yesterday it was the Soviet Utopia, today it is the Eurozone. Economic bullying can get you only so far when the entire Eurozone is getting poorer with mass unemployment and marginalization of your middle classes. Yes, Europeans love driving Corvair cars and crashing into walls….

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