I’ll admit to it if you will as well. I’m fascinated by the falling dominoes in Europe. It’s like watching a train wreck happening in slow motion while various commentators tell you what you’re seeing isn’t really happening.
Some of the better thoughts on the subject include:
In a nutshell, we’re watching the most pitched, highest-stakes, most determined battle between politics and finance which has been staged. I am expecting finance to win. It’s not just about PIGS and the future of the eurozone, it’s settling a very general question about the relative power of politics and finance. Either way, it is an event of momentous importance.
This has been said before, but in a way this crisis is the European equivalence of the American Civil War. Once the dust finally settles Europe will either be a unified country with fiscal sovereignty firmly established in Berlin or Brussels, or it will be fragmented with little chance of reunion.
The question is whether the Eurocrats can beat back the speculators. I find the whole situation much too complex. I can only come up with a list of things that I wish I knew.
1. What is the true state of the large European banks? In particular, if, they had to write down the principal on the debt of the PIGS by, say, 15 percent, which banks would still be solvent?
2. What does the option for inflating away European debt look like? How would the cost of that inflation be distributed? Can the inflation take place within the context of the euro, or does it require that some countries leave the euro?
3. Does a crisis create an opportunity for governments to make radical changes to the welfare state, or is that still not possible?
4. Suppose that governments have to choose between preserving their banks and preserving high levels of spending on public employees and retirees. Which choice is better for the economy? For political survival?
European leaders are desperate to shove billions of dollar in loans into the hands of the Irish government, not out of kindness, but to protect the Continental and UK banks that are exposed to Ireland. That much you know.
The real question is, however: Can Europe prevent the contagion with so much opposition to the bailout scheme among the public?
Today at least 50,000 protested (non-violently) in Dublin. That comes a day after it was confirmed that in a special election, the pro-default Sinn Fein won a seat from the ruling party.
Can Ireland actually pass an austerity budget by December 7, and can Europe’s leaders do nothing if the public revolts against the bailout? That’s what you have to figure out.
And what happens after Ireland? The Irish loan conditions—low in costs and long in term—will have to be offered to any other EU country that might still run out of funds. Who will be left standing to offer such loans if more dominoes fall? If Portugal or even Spain may need a bailout, the burden on the euro zone’s economic center, Germany, will increase further. How long will it be able to bear it? And how long will it be willing to do so?
At some point the markets will question the stability of the whole euro project. These doubts can be addressed in one of two ways. Either the union will end (or contract to a core), or there will be sudden political and fiscal centralization. Which is more likely?
I have no crystal ball, but it all comes down to two further questions: Would Germany want to remain in a union with slow-growing, fiscally irresponsible members? And would those countries in turn want to stay in a union in which they are no more than poor and subservient provinces? The answers to these questions will determine the survival of the euro.
I won’t go on. You get the idea and if you've been under a rock or just too preoccupied with other things for the past week or so, perusing the thoughts of these gentlemen will get you quickly up to speed.
A couple of things strike me. One, the make-it-or-break-it nature of the crisis. Either the technocrats get it right or they lose the European Union. Maybe more to the point, even if they do get it as right as they can, the ultimate resolution is probably more dependent upon the reaction of general populations than it is the elegance of their solutions. Two, there seems to be little optimism about a positive outcome.
I’m reminded that much the same sense of impending doom was about at the height of the financial crisis in this country. Ultimately, the solutions that were imposed--while heavily criticized at the time--did the job. Are we witnessing the same phenomenon once more? Possibly, but this seems infinitely more complex given the interplay of finance and the politics of multiple nations. There just seems to be much more room for the unexpected to occur.
I am on board with the contention that the outcome has tremendous import beyond Europe. Terribly destructive political movements have tended to follow severe economic distress. There is no reason to believe that we would escape that historical precedent if things do spiral significantly out of control, a potential that I suspect has driven Germany to accede to policies which are beyond their better instincts. Even if the EU manages to ring fence this crisis, the economic and political imperatives required to mitigate the negative effects of a new order are likely to be disruptive to economies around the globe.
So, there’s no good reason not to be terribly attentive to the resolution of this crisis. Regardless of the outcome, we will be coping with the repercussions for a long time.