Yves here. Because the European slow-motion train wreck is turning out to be particularly slow, it’s almost become background noise in the US, almost a lesser version of the now two lost decades in Japan. But what is happing in Europe is less benign and less likely to be able to continue anywhere near that long.
Japan, despite its economic malaise, continues to rank at or near the top of advanced economies in social wellbeing indicators. Part of that may be that the island nation exaggerated how bad things were so as to allow it to run a really cheap currency (at least until the financial crisis induced the unwind of the yen carry trade) and maintain a robust export sector. But another big element was that Japan opted for a model of shared sacrifice (particularly an even further narrowing of the gap between average worker and executive pay) in order to maintain employment levels.
By contrast, the Troika has lurched from the verge of crisis to verge of crisis so often that it’s not hard to adopt a “wake me when it’s about to be really over” posture. One can credit the Eurocrats with having perfected the art of doing the bare minimum to get them through successive emergencies without resolving any of the underlying issues. For instance, I’ve been remiss as far as commenting on the European plan, such as it is, for resolving failed banks. You might understand why after reading the money section of today’s discussion of it by Delusional Economics:
Reuters has more on this point…
…the new authority will be handicapped by the fact that it will have to wait years before it has a fund to pay for the costs of any bank wind-up it orders. In practice, this means it could be very difficult to demand any such closure.
Officials say the plan foresees tapping banks to build a war chest of 55 billion to 70 billion euros ($70 billion to $90 billion) but that is expected to take a decade, leaving the agency largely dependent on national schemes in the meantime.
So by 2025 there maybe a credible backstop fund. But seriously who is going to wait that long ? Spanish banks are already in serious trouble, and you’ll note that Spanish house prices continue to fall at pace, the Portuguese are also looking shaky, The Netherlands is on the beginnings of what looks to be a very slippery slope, and many other nations, Greece and Cyprus to mention just two, are still in significant economic strife.
But that’s not the truly immediate issue with this proposal. That, once again, is the German camp:
Germany has warned this may violate the EU’s basic laws by usurping national control over finances.
“We have to stick to the given legal basis, as otherwise we risk major turbulence,” German Finance Minister Wolfgang Schaeuble said yesterday in Brussels. “I would strongly ask the commission in its proposal for an SRM to be very careful, and to stick to the limited interpretation of the given treaty.”
Or in other words, German banks don’t want to be saddled with the burden of allocating capital to support the banking systems in other nations. This reaction should, of course, be no surprise to anyone following the European crisis for any length of time. German EU policy has always been about protecting domestic banks. Anything that levels the playing field against Germany, including things like EU-wide deposit insurance, has always been knocked back. With Basel pushing for further reform on risk-weightings, I can only see this getting worse because the German banking system has a significantly understated capitalisation issues that it would like to keep as quiet as possible.
This one certainly isn’t over, especially with just 2 months until the German elections.
So shorter: the banking resolution plan is not only certain to be too little, way way too late, but it’s not even a credible plan because the Germans haven’t agreed to the fundamental mechanism of sharing banking risk across the Eurozone. We are way way into the Herbert Stein land of “that which is unsustainable won’t continue” but the Eurocrats have managed to defy what ought to be inevitable for an impressively long period of time.
But all this increasingly expert can-kicking is coming at a cost, and that’s the destruction of democracy in the periphery, and potentially of functioning societies. Greece is being turned into a failed state. Basic services like garbage collection and hospitals are breaking down. If there was any logic in breaking Greece on the rack, one assumes it was meant to serve as some sort of example.
But even if the Troika harshly punishes the defiant, quiet submission to its dictates isn’t looking like a much better alternative. The obedient followers of austerity are simply digging their countries into deeper and deeper holes. What happens when you have a half a generation of young people who’ve spent the early part of what would normally be their early careers not working or barely working? They’ve lost time, skills, no doubt become demoralized. And if these economies were to miraculously start showing some life again, they’d not be the first one hired. It would be new and more recent graduates.
The behavior of the putative European leaders is wildly reckless and irresponsible. It’s a fundamental renunciation of what society is supposed to be about, which is a sharing of effort and burdens for the collective good. The elites may think they can stay in their cocoon while the masses suffer, but as social decay progresses, you’ll see a breakdown in services, in public health, and more and more difficulty in maintaining security.
Varoufakis argues that the failure to address the economic problems means the Troika will rely more and more on authoritarianism.
By Yanis Varoufakis, professor of economics at the University of Athens. Cross posted from his blog
This blog was initially established to discuss the global crisis of 2008 and, in particular, to promote our Modest Proposal for Resolving the Euro Crisis. As Version 4.0 of the Modest Proposal is being prepared (and will be published early next week), it is perhaps time to take stock of almost four years of Euro Crisis.
The Eurozone Crisis used to have three components. Now it has developed a fourth; possibly the most toxic.
As we all know, it all started with a banking crisis, which caused investment and liquidity to fall into a hole, which spawned a public debt crisis, which in turn reinforced the investment crisis, the result being more bank failures and higher public debt. In its infinite wisdom, the Eurozone decided to treat this multiple crisis as if it were just a debt problem, and to implement savage budget cuts and mammoth tax hikes. Incomes fell sharply reinforcing all three of the sub-crises: banks fell deeper into their black hole, debt to GDP ratios rose and, naturally, investment crossed into negative territory.
Our Modest Proposal, from its first version in 2010, identified these three crises and urged Europe’s leaders to deal with them in an integrated fashion; to avoid dealing with the debt problem as if it were independent of the banking malaise or of the dearth in investment; to desist from pretending that Greece’s crisis was separate from that of Ireland’s, Italy’s or indeed Germany’s. The Modest Proposal offered three simple policies, which could be implemented without Treaty changes, without fiscal transfers, even without troikas, haircuts or bank account confiscations (recall Cyprus).
Three and a half years passed and Europe remains in denial, committed to the same toxic remedy. While there has been movement along the lines of the three policies that we prescribed back then, Europe’s leadership always made sure that its baby steps in that direction would be cancelled out before there was a chance of making progress. On debt, they insisted on funding the EFSF-ESM with CDO-like eurobonds that came with the domino effect built into them. On direct bank recapitalisations, they chose to make these conditional on a banking union project which, naturally, ended up as the red herring that our leaders pretend to be chasing after; a ploy by which to avoid breaking up the cosy link between national politicians and local bankers. On investment, apartt from some interesting ideas from Mr Draghi (on how the ECB could incite the money markets to treat more kindly investment projects in the Periphery) all we have had was the re-labelling of unspent (pitiful in sum) structural funds as a ‘Growth Pact’. The only policy on which Europe has shown remarkable decisiveness is universal, self-defeating austerity.
Of course, by now, everyone sees that this policy is the century’s greatest own-goal. So, the only way of continuing with its implementation is by turning to authoritarianism; by turning nasty; by bending the rules of democracy; by persecuting the weak so that the less weak fall into line; by winking to the neo-nazis and closing down public broadcasters (re. the Greek government’s social policies and closure of ERT); by cutting the meagre support that the unemployed and the sick receive – all in the name of reform and efficiency.
In short, Europe’s governments must increasingly rely on authoritarianism in order to ‘maintain course’, both in the manner in which they treat their citizens and in the manner in which the treat each other; the Northern governments their Southern counterparts in particular. Thus we have the fourth crisis: the crisis of European democracy. And the longer Europe remains in denial about the systemic nature of its crisis the larger the democratic deficit and the more Europeans will look at Europe as the problem (rather than the solution)