The Euro Monetary Union, Europe’s experimental nose in the fiscal union tent, is disintegrating before our eyes, and it seems there’s nothing Europe’s financial elites are prepared to do to prevent its complete collapse. The financial elites know it; they’re all making contingency plans not just for Greece’s exit but others beyond. They’re also scrambling to blame everyone but themselves for what now seems inevitable, even as they tell their respective populations that they all want the Euro to survive.
Ambrose Evans-Pritchard, writing in the Telegraph, describes the catastrophic decisions of the European Central Bank to engage in “ferocious monetary and fiscal contraction on an economy [he's referring to Spain] struggling to deal with a housing bust” and how it led to a double-dip recession in Spain. As it raised interest rates too soon, ECB became the banking “enforcer” for the IMF and European Union policy of punishing austerity even while the private sector was shrinking:
This was not purist hard-money discipline. Let us not dress it up with the bunting of ideology, or false authority. It was incompetence, on a par with the errors of 1931.
But blaming the financial elites is not fashionable, so they’re inventing other stories. Two days earlier IMF Director Christine Lagarde dismissed Greek claims of suffering — after all, Africans are starving — so she blamed the plight of Greek children on the parents refusing to pay their taxes. That implies that putting money in the hands of the hard pressed families is exactly wrong, while cycling it through the government to pay off creditors is the correct policy. The Greeks are now using Facebook to express their outrage.
Lagarde’s obviously offensive rhetoric is not unique; others have been just as insulting for months, and it all seems calculated to increase Greek hostility to the austerity measures imposed by the IMF-EU-ECB Troika, thus leading Greek voters to reject parties in the June elections that support paying the Troika’s ransom for avoiding further default. So what’s the game, here?
Ever since Greek voters overwhelmingly rejected the parties that accepted the austerity measures imposed on them by Germany et al, various Troika representatives have tried to frame the next Greek election as a referendum on whether Greeks want to remain in the Euro Union. If you vote against the austerity package, you want out of the Euro. Of course, the Troika does not have the right to tell the Greeks what their internal elections mean.
Indeed, polls have consistently shown that while Greeks reject the punishing measures of imposed austerity, particularly in the absence of any plausible theory that the pain will lead eventually to some gain that makes it all worthwhile, they also overwhelmingly want to remain part of Europe and even its common currency. The Greeks very rationally want a path out of the depression but inside the Europe community. That’s not a choice the Troika has offered, so every time the Greeks are offered a choice between godawful A and godawful B, the rational choice is still NO. But the elites are not listening.
If the medicine promises no viable path out of the depression, there is no reason for Greeks to take it.
The troika threatens to force the Greeks into default if they refuse to accept the terms, but what they’re not admitting is that Greece likely faces default no matter what, as long as the terms preclude any means to grow out of the depression. So the message to Greece is: you’re screwed, no matter what. [cont'd.]
I’ve come to believe the Germans and other core countries reached this conclusion earlier this year, when we first heard German and other officials suggest insulting terms to the Greeks last winter. They realized Greece was doomed, so best to create the conditions to push them out and not be blamed for it, while trying to put in place all the means to hold the Euro together after the Greek exit. Ms. Lagarde’s statement can be seen as merely reflecting that strategy.
But even that strategy is failing. People and businesses are moving their money out — out of weak nations and their banks, and where allowed, out of the Euro system. It makes no sense to hold Euros in Spain if the Euro’s value is declining every day against the pound or dollar. There’s a Euro run going on, and even when the money is left “inside,” the transactions are being redirected to be within each country, not across the Euro zone. In effect, parties are starting to function as though each country had its own Euro, preparing the way for separate currencies.
Prescient observers, like Martin Wolf (or Wolfgang Munchau, Paul Krugman, and others), have been warning for months that if it really wants to save the Euro, Germany must accept the conditions that create an actual union, as opposed to merely a budget straight jacket. A true union needs a collective monetary authority that stands behind the union’s debts (or can print them away), a federal insurance scheme for bank deposits, a federal counter-cyclical support system for the less competitive regions, and a common arrangement for allocating the gains of trade. And they need a growth strategy to replace, not “balance”, their current system of austerity leeches.
There is little stomach for these necessary measures in the core nations, and little acknowledgment they even have some responsibility for solving the problem. So the game is over. What we seem to be watching is a theater in which those who created this disaster play out the dissolution and avoid getting burned by or blamed for what’s already happening.
UK’s Cameron warns of “dangerous voices” (read, Krugman) exposing whose policies are failing.
UK’s Clegg resorts to the “whocuddanode” defense.
Martin Wolf: Lunch with Paul Krugman
Simon Johnson, Peter Boone describe a scenario of dissolution.