Greece Rescue Collides With the Policy Trilemma

A fair number of policy commentators are hewing to the view that somehow the EU will cobble together some sort of solution to the Greek fiscal mess because the alternatives look vasty worse. As Paul Krugman noted:

Now what? A breakup of the euro is very nearly unthinkable, as a sheer matter of practicality. As Berkeley’s Barry Eichengreen puts it, an attempt to reintroduce a national currency would trigger “the mother of all financial crises.” So the only way out is forward: to make the euro work, Europe needs to move much further toward political union, so that European nations start to function more like American states.

But that’s not going to happen anytime soon. What we’ll probably see over the next few years is a painful process of muddling through: bailouts accompanied by demands for savage austerity, all against a background of very high unemployment, perpetuated by the grinding deflation I already mentioned.

Yves here. Yet we have the spectacle of Greece signaling that it isn’t exactly up for what its creditors want from it, as the Financial Times reports:

Greece is expected on Monday to resist pressure for an immediate tightening of its current austerity package as it fights to win back the confidence of international financial markets and its eurozone neighbours.

Both Germany and the European Central Bank have been pushing Athens to strengthen its existing fiscal stability plan by adding measures such as a 1 to 2 per cent increase in value-added tax and further public-sector wage cuts in return for financial assistance.

In an appearance on French television on Sunday night Jean-Claude Trichet, the ECB president, called on Greece “to take the extra measures that will be necessary to make credible their turnaround plan”.

But Athens is fighting to postpone any decision on further measures until mid-March, when officials from the European Union, ECB and International Monetary Fund are due to carry out a forensic inspection of Greece’s deficit-cutting plans.

“It makes no sense to rush into additional measures until they are seen to be necessary,” said a senior Greek official.

Yves here. This is not exactly the way to win friends or bolster market confidence.

Ambrose Evans-Pritchard points to another wee problem: the EU made a commitment in advance of member states going along. And right now, they, like Greece, are not making the right noises either:

The EU has issued a political pledge to rescue Greece – and by precedent, all Club Med – without first securing a mandate from the parliaments of creditor nations.

Holland’s Tweede Kamer has passed a motion backed by all parties prohibiting the use of Dutch taxpayer money to bail out Greece, either through bilateral aid or EU bodies. “Not one cent for Greece,” was the headline in Trouw. The right-wing PVV proposed “chucking Greece out of EU altogether”.

Germany’s Bundestag has drafted an opinion deeming aid to Greece illegal. State bodies may not purchase the debt of another state, in whatever guise.

The EU is entering turbulent waters by defying these irascible and sovereign bodies. It had no choice, of course. Europe’s banking system was – and is – at imminent risk as Greek contagion spreads across Club Med. The danger of a “sovereign Lehman” setting off a chain reaction is very real, with Britain too in the firing line. I find myself in the odd position of backing drastic EU action, for fear of worse. We all go down together if this escalates.

The last two weeks have cruelly exposed the Original Sin of monetary union: that EMU was launched without an EU treasury or debt union. This will be tested again and again by bond vigilantes until such a mechanism is created. Europe’s hope of fending off markets with “constructive ambiguity” must fail, as will become obvious this week if EU finance ministers fail to flesh out rescue details.

Yves again. At the danger of taxing the patience of regular readers, I want to reintroduce a construct of Dani Rodrik’s which has direct bearing on the Euro struggles:

I have an “impossibility theorem” for the global economy that is like that. It says that democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full.

To see why this makes sense, note that deep economic integration requires that we eliminate all transaction costs traders and financiers face in their cross-border dealings. Nation-states are a fundamental source of such transaction costs. They generate sovereign risk, create regulatory discontinuities at the border, prevent global regulation and supervision of financial intermediaries, and render a global lender of last resort a hopeless dream. The malfunctioning of the global financial system is intimately linked with these specific transaction costs.

So what do we do?

One option is to go for global federalism, where we align the scope of (democratic) politics with the scope of global markets. Realistically, though, this is something that cannot be done at a global scale. It is pretty difficult to achieve even among a relatively like-minded and similar countries, as the experience of the EU demonstrates.

Another option is maintain the nation state, but to make it responsive only to the needs of the international economy. This would be a state that would pursue global economic integration at the expense of other domestic objectives. The nineteenth century gold standard provides a historical example of this kind of a state. The collapse of the Argentine convertibility experiment of the 1990s provides a contemporary illustration of its inherent incompatibility with democracy.

Finally, we can downgrade our ambitions with respect to how much international economic integration we can (or should) achieve. So we go for a limited version of globalization, which is what the post-war Bretton Woods regime was about (with its capital controls and limited trade liberalization). It has unfortunately become a victim of its own success. We have forgotten the compromise embedded in that system, and which was the source of its success.

So I maintain that any reform of the international economic system must face up to this trilemma. If we want more globalization, we must either give up some democracy or some national sovereignty. Pretending that we can have all three simultaneously leaves us in an unstable no-man’s land.

The EU tried to have all democracy, national sovereignity, and economic integration, and the result is the unstable no-man’s land that Rodrik foretold.

Krugman’s assumption is that EU members will compromise national sovereignity to achieve the benefits of economic integration. But from Greece’s (and perhaps other nations if the Greece bailout flounders and contagion spreads) is that that giving up some measures of national sovereignity means also giving up aspects of democracy. So that plus the harsh austerity measures looks like a lose-lose-lose (although it may prove hard to persuade Greek citizens that the economic costs of defying the EU are even worse than submitting to its demands).

But we have had critical junctures in the past where an inability to manage politics led to disastrous outcomes. Consider Germany in 1931. The budget deficit had gone into the red as the recession deepened. Germany’s government faced a serious credibility problem in the international markets, embarked on a tough program of austerity measures, and a mere few months later, its bonds were trading at close to par. But it

Thomas Ferguson and Peter Temin argue why things went awry:

The German government found itself in an impossible position as the recession of the late 1920s deepened. Like so many other countries, the German government’s budget went into deficit as the recession progressed. The Weimar government lacked the political will to deal with the impending crisis, substituting rash statements about customs unions and Reparations for serious budgetary action. German banks failed in 1931, but the problem was not primarily with them. Instead, the crisis was a failure of political will in a time of turmoil.

Notice that the austerity measures were effectively imposed against the public’s will:

Pressed to get this mountain of debt under control, Brüning tried a variety of ploys. They all failed. Eventually, a budget calling for savage spending cuts, lower taxes, cuts in the pay of government officials, and smaller transfers to the Laender and municipalities had to be enacted by Noteverordung. But the move outraged deputies and key business figures on the right who wanted deeper cuts, while angering many on the left who considered the budget palpably unfair. As the big business oriented German People’s Party (DVP) committed binary fission, a majority of the Reichstag exercised its constitutional right to reject the decree. Hindenberg and Brüning reacted with a fateful
step: They dissolved the Reichstag, called new elections, and reenacted the Noteverordung with minor changes.

A disaster for the government ensued. In the September elections, amidst the highest voting turnout in the Republic’s history, the Nazis dramatically emerged as the second largest single party in the Reichstag, while the Communists made substantial gains…Not surprisingly, investors stampeded out of Mark assets….The Reichsbank was forced to raise its rediscount rate by a full point…..

What actually happened is that the government responded by redoubling its resolve to continue down the path of austerity so resoundingly repudiated by the electorate. Amid a flurry of sympathetic news stories in papers from Berlin to New York, Hindenberg immediately tapped Brüning to form a new government. Solemnly promising to make fiscal reform and deficit reduction his top priority, Brüning reappointed the entire cabinet. On the basis of more Noteverordungen and additional measures mandating a sinking fund for debt retirement, steep rises in workers’ contributions to the unemployment fund, higher taxes (including new levies on mineral water and individual citizens), and slashes in government spending, civil service pay, and inter-governmental transfers, the government floated a $125 million loan through a syndicate headed by Lee, Higginson.

Financial markets perceived “every sign of returning calm” and hailed “the cessation of the withdrawals of money, especially foreign withdrawals.” The spectacle of the government bowing to foreign creditors (whose connection to the austerity package government’s popularity still more. But the shock of the election and fears about what might happen if Brüning failed forced the SPD and other democratic forces into an agonizing reappraisal. Staring into the abyss, the party came reluctantly to the conclusion that while it could not openly support the Chancellor, it would have to “tolerate” his government as the lesser evil….International support for Brüning grew as his government moved to make good on its tough talk…

Other good news also trickled in. Widely reported indices of German industrial production rose slightly.(Table 1) Unemployment began to trend very slightly down. In an age that venerated gold movements as the ultimate test of economic sustainability, the Reichsbank’s holdings of gold and foreign exchange rose slowly but steadily from January to April. Bankruptcies — even now esteemed as one of the few clear external indicators of possible bank lending difficulties — started falling in February, rose slightly in March, and then fell sharply in April and May (Table 1). Indeed, almost every indicator that subsequent analysts have suggested might herald a banking or currency crisis improved modestly in the early months of 1931.

Yves here, this is a long-form account (the paper is fascinating but much more detailed) but I though this was worth providing to illustrate the difficulties of imposing stringent austerity measures in a democracy.

Ferguson and Temin discuss another key issue: the fact that France, the second biggest international creditor in its day, which had boycotted German bond auctions since 1929, decided to support the German government by making a large loan to Germany. Back to the paper:

Economic conditions in the early months of 1931 therefore did not give much hint of the crisis to come. Conditions were not good in these harsh economic times, but there was little anticipation that they were about to get a lot worse. Expectations appeared to argue the opposite, that conditions were on the mend, as suggested by the slight improvement in the economic data…

The authors looked at a variety of banking data in June 1931 and concluded it did not show the signs of contagion typical of a bank panic; instead, it was flight from the mark (see pages 20-27). And as the paper describes in detail, the trigger for the unwinding was a series of aggressive and nationalistic policy measures which undermined the international cooperation that had shored Germany up economically, in particular, but not limited to, a plan to build pocket battleships and the notorious proposed customs union with Austria:

While the Germans and Austrians were prepared to argue that a customs union did not infringe on these [treaty] prohibitions, internal documents indicate that they knew very well they might be flying into the eye of a hurricane. They were right. When news of the plan leaked, a storm of protest immediately blew up. As France moved convulsively to counter the German thrust, its chilling implications dawned on the press and financial markets. As the New York Times headlined in late March, 1931: “Paris loan market shut by Reich move. Union held to kill prospects for intermediate or long-term credit aid by French.
Outcry in press is fatal. Bankers fear customs plan will shatter regained faith of our investors in Europe’s stability.”

Political and financial machinations ensued for several months, but absent a German/Austrian climbdown, the outcome was inevitable.

Now some readers will argue that this little historical discourse has little to do with Greece and the Club Med woes, but I believe it does.

First, it illustrates what happens when governments try to uphold an economic paradigm (in the case of Germany, the gold standard, in the case of the EU, member states’ inability to conduct independent monetary and currency policies) that imposes strong deflationary pressures as the cure for cross border imbalances. The governments fail, with the risk of being replaced by more radical elements.

Second, it shows the difficulty of maintaining internationalist measures if domestic interests feel threatened. France tried to aid Germany, but as Germany looked more belligerent, France withdrew financial support to Germany.

Many readers will argue that Greece is not anywhere near as influential a force as Germany in the 1930s, but it is important to remember that Greece is merely the most immediate symptom of long-known structural issue in EU that need to be addressed. Unfortunately, while it usually takes a crisis to force resolution, at the same time, a crisis is generally the worst setting in which to undertake fraught and difficult political negotiations.

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  1. Rick

    It just come to me that noone made note about various little bleep in south asian currencies last month. Now I think it was a test/hedge fund attacks.

    But the asean+3 are cover with Chiang Mai loan agreement, plus all of their central banks have extra large reserve. Korean won didn’t budge, Yen is practically a straight line compared to old days.

    But still there were a quite unusual bleep and bump that can only happen from attack attempt (no political news, no major business transaction news, no reason some of those currency moving at all.)

    Poor club med, they are juicy target. Most of them are too small to handle current hedge fund attack.

    Also btw. French budget is not beyond currency attack. This attack will continue as long as it looks profitable.

  2. a

    Second attempt to post this…

    Krugman has as much credibility in this matter as Evans-Pritchard – that means nada, zilch, none. All his comments are an attempt to say, “I was right, I was right” (or, even more succinctly, just “Me, me, me,”), about 80 million times in 80 million ways, when he wasn’t at all right about anything – as usual. WTF is “savage austerity”? Greek is running a deficit 12% of GDP, and that’s if you believe their numbers. Cut it in half and Greece is still living pretty well off the hog.

    Evans-Pritchard gets it wrong from the get go: “The EU has issued a political pledge to rescue Greece…” It has issued a pledge with a condition: if Greek plays by the rules, then Greece will be rescued. Obviously, that leaves enough wiggle room to do anything later on, so there is no stictly no problem in what the EU has pledged.

    “Now some readers will argue that this little historical discourse has little to do with Greece and the Club Med woes…” Um, right about that anyway!

    1. Richard Smith

      Well, for my part, I have a great fondness for wildly underresearched speculative historical parallels, and offer two more illustrations of “what happens when governments try to uphold an economic paradigm…that imposes strong deflationary pressures as the cure for cross border imbalances.”

      First is another part of the picture in 1931. When the UK started budget slash and burn in the April, one of the first targets was naval pay. In the July there was perhaps the first classic Sterling crisis, just to pep things up a bit. But successive cabinet meetings rejected various cuts in unemployment benefit and other spending cuts that would have reduced the budget deficit (that might sound familiar to a Greek politician of today I suspect, or to a Californian one, for that matter). On 24th of August the government fell. Still, the Navy gamely followed through on the naval pay cuts, which were leaked at the beginning of September; they were to go live 1st October. By 16th Sept the Atlantic Fleet was in mutiny (it seems that crews had all got into debt buying pianos, the pointless SUV/WII/flat-screen TV/condo of its day, and were in a panic). By 21st September the Stock exhange had crashed, Sterling had crashed some more, the pay cuts were pared, and Britain was off the Gold Standard.

      So – that little imbroglio consumed a Gov’t, the reputation of one of the world’s premier armed forces, and of its Empire, and numerous promising naval careers.

      The other parallel I have is more of an intra-country imbalance – between the industrial northern states of the US and the agrarian southern ones. Given the timing of the de facto adoption of the Gold Standard via dollar reform (passim, 1830s onwards, but most importantly perhaps in 1853) I am surprised American economic historians haven’t had more of a prod at the dollar. Not saying that dollar reform caused the American Civil War all by itself – but you can see why a state might secede, in those circumstances. The Greek (and other) tensions do look similar even though the range of outcomes is presumably different.

  3. Diego Méndez

    I love Krugman, but it seems he’s suspending reason when dealing with the Euro.

    I mean, read this excerpt from today’s post: “Now, if Spain were an American state rather than a European country, things wouldn’t be so bad. For one thing, costs and prices wouldn’t have gotten so far out of line: Florida, which among other things was freely able to attract workers from other states and keep labor costs down, never experienced anything like Spain’s relative inflation.”

    The problem is Spain’s population has grown from 39m to 47m (a 20% increase in population) in just a decade, which is considerably more than Florida’s surge. So Spain, in fact, was attracting more workers than Florida.

    I would have thought Krugman knew about this.

    1. charcad


      suspending reason

      A very popular activity. I happen to know one or two things about Germany myself. My family spoke German well into the 1960s. I went to Lutheran schools up through h.s. My mother-in-law has a Ph.d in German and used to work for the Federal Republic. My wife is a Volga German. Not your vast experience I’m sure, but just a touch with how German Lutheran and German Catholic culture thinks.

      “Suspending reason” is what is being done by anyone who has persuaded themselves that Germans with age 67 retirements (mandatory minimum age recently increased) can be browbeaten into subsidizing Greek retirement at age 61 and younger.

      But why not believe this? Especially when it means money in one’s pocket? Millions of extremely intelligent people recently persuaded themselves real estate prices would always and only go up, too.

      No German politician wants to try this. I renew my offer for you to go on tour in Germany and lecture the Germans why they must accept this. You can start in Brandenberg and other parts of former East Germany that are still recovering from Socialism. And with the braying of that corrupt ignorant jackass Papandreou ringing in their ears the whole way.

      The EU delusionists in Brussels and its various fronts were successful in subverting informed democratic consent to this Rube Goldberg project. So long as they could present their scam as being cost-free.

    2. Tortoise

      The population of Greece also went up by 20 percent during 15 to 20 years, symptomatic of a long period of boom. I guess this boom was all from the loads of euros per person that the hard working Northern Europeans spend on the South :)
      I sincerely find your comments most illuminating. Most other comments show lack of understanding about Southern Europe and a certain bias. (Not that the South does not have a ton of problems but they are not necessarily what the English speaking press identifies.) Keep informing us about Spain.

    3. charcad

      For one thing, costs and prices wouldn’t have gotten so far out of line: Florida, which among other things was freely able to attract workers from other states and keep labor costs down, never experienced anything like Spain’s relative inflation.”

      Glad you brought this up. A very large number of those workers in Florida became unemployed with the collapse in construction. They have since moved to other stateswith their families to seek work. And others even returned to Mexico where they belong.

      I pointed this out to Swedish Lex earlier. It’s an example of the fairly unhindered labor market the USA (dollar) has, along with the ruble, real and yuan. And which euro-land lacks.

      1. Diego Méndez

        A large number? Like 2m out of 18m people? Yeah, in your dreams…

        Some people, in Florida as in Spain, have moved to other states; many more will follow in the next few years.

        The real measure of US workforce mobility is Detroit: up to 50% of inner-city residents are unemployed… Can you see them suddenly moving into other states?

      2. IF

        Ruble and Yuan? I only have hearsay about the yuan, but traveled in Russia a few times. It requires connections and lots of stamps. I don’t think the peasants in either Russia nor China are free to chose their place of living. Europe has migration. Germans move in the south to retire, southern workers have always migrated to new construction sites. (Or also Gastarbeit.)

  4. Swedish Lex

    Kruman is right that the only way is forward, in principle, and that it will be a long period of muddling through.

    He is in my view wrong in that the introduction of the euro came too soon. The mistake was not to introduce the political and fiscal union right after the launch of the euro. This was argued by many but ignored by policy-makers.

    A happy, or at least a mediocre, ending is in no way guaranteed. It really depends on the responsiveness of political leaders. This is the most challenging moment for Europe since the fall of the Wall and the integration of the DDR into the BRD. It is probably one of those moments when policy-makers should realise that it is not their performance in the opinion polls or in the next elections that count, really, but the verdict of history.

    1. a

      Isn’t that just a tad bit too dramatic? Surely the attack on the (French) franc in 1992-93 was of far more importance than, so far, the attack on Greece, because the first threatened the French-German axis. The center is always more important than the periphery.

      The aftermath of the beginning of the Iraq war – with the whole new Europe vs old Europe thing – also strikes me as far more important than anything we’re seeing now, because it showed that old Europe was capable of standing down the Americans.

      With that said, one possibility in the current crisis is indeed that euroland muddles through. Muddling through is what the Europeans do best and they have elevated it to an art form. But it’s just one possibility.

      It is not, as Krugman says, unthinkable that the euro breaks up. It is thinkable, and certainly possible, that Greece will be forced from the euro. (And if Greece is, expect Krugman to write another “I told you so” column, as he cites a column he wrote fifteen years ago and conveniently forgets that he just called it “unthinkable”.) So Greece is forced from euroland. So there are losses at some banks, including British and American ones. There will also be big losses in bond funds. Pimco probably loaded up on Greek bonds, trying to replay it’s Agency debt profits a year or two back. So fricking what? Sh*t happens. The center holds and will hold, if the center wants to hold. Whether that is the case, doesn’t depend on Greece, but on China, and the U.S., and how bad this depression gets.

      The Anglo-Saxons wingeing about Greece are just trying to make a buck, or are shilling for those trying to make a buck. It’ll piss me off if they succeed, but, well, I’ve been pissed off before, so that’s nothing to go on.

  5. attempter

    Gee, the Euro elites are having a little problem with one of their junior members? The Greek local bosses are getting uppity?

    Yes, imposing totalitarianism by stealth and gradual economic strangulation is hard work.

    The trilemma returns!

    The EU tried to have all democracy, national sovereignity, and economic integration, and the result is the unstable no-man’s land that Rodrik foretold.

    Actually, the record proves that “free” traders always intend to smash democracy and the sovereignty of smaller countries the moment these become inconvenient.

    The only real goal is always integration on terms overwhelmingly favorable to the richest corporatist “countries”, and the only “sovereignty” to be maintained is that of these hijacked governments.

    As for democracy itself, i.e. the freedom and property of the people, anywhere, from the poorest African countries to Chile and Indonesia to America itself, it’s held in universal contempt.

    (Maybe I should go get my copy of Shock Doctrine to dig out some choice quotes from Rodrick himself on the matter.)

    So the trilemma idea, while more honest than most claims about globalization (I guess it’s a partial bowing to reality under extreme duress), is still a scam, since it pretends these mandarins really are valuing all three of these things, as opposed to trying to figure out how to extirpate two of them.

    “Austerity” measures, “structural adjustments”, like in Weimar Germany or those being demanded for Greece (and, increasingly, for America), are of course just other terms for socializing the pain once all the gain from the prior borrowing and spending has been privately looted.

    Indeed, they’re also intended to be the occasion for further, disaster capitalist looting, as we’re seeing with the Bailout America regime.

    Watch out, people of Greece! Beware, German taxpayer! The governments, in Athens, in Berlin, most of all in Brussels, are your enemies.

    As for Krugman finding anything other than a bailout “unthinkable”, well, that’s an old story with him, isn’t it? From day one he found anything other than the Bailout in America unthinkable as well, even though he whined about it more than most of its supporters.

    I imagine a system hack like him finds lots of things unthinkable.

    But I will give him a h/t for the information that it was mostly German banks who pumped up Spain’s housing bubble.

    I’ll remember that when German elites are whining about the Spanish Bailout.

    1. Swedish Lex

      Germans have bought vacation homes in Spain and Italy using euros(perhaps in Greece too, I do not know). Should we see a return to liras and pesetas, those Germans will have to take a hit to their family balance sheets.

      1. Diego Méndez

        WTF would Spain go to the peseta again? Even if we went nuts overnight, how on earth *could* we possibly go to the peseta again?

        We don’t have a currency pegged to the euro, we’ve got the euro. There’s no way to reverse that fact; moreover, nobody would reasonably want to reverse it. Please read Eichengreen’s take on this issue (rightly cited by Krugman).

        1. a

          Calm down, Diego! I think you’re entirely right that Spain will stay in the euro.

          The most likely break-up scenario, as I see it, is that Greece leaves the euro and tries to redenominate its government bonds (currently in euro) to the new Greek currency, at an artificial rate which gives lenders a significant haircut. If Greece tries to do this, it will probably be forced from the EU because it will piss everyone else off, but Greece in the end may not have a choice. If it doesn’t redenominate, then Greece may have to default.

          Either way, the interest rate of euro bonds issued by weaker countries still in euroland will go up, indeed go up significantly. That’s all. I’m not saying Spain is one of the weakest, but it is weaker than Germany, and so it will see higher interest rates than those of Germany.

          1. Diego Méndez

            There’s no point in sorting out European countries as “weak” or “strong”, if that sorting out changes every few years.

            It was Germany just few years ago which paid a higher interest rate than Spain and begged its neighbours not to put a many-billion-euro fine on them because of its fiscal excesses.

            Just 6 months ago, Germany was powering ahead of recession while Spain was preparing for a ten-year depression. Now, we know Germany has stagnated again while Spain is getting out of the recession.

            Who knows who will be the weak country just 6 months from now?

      2. pounds_in_spain

        Forget about the Germans and their euros – the British that bought Spanish property with an euro mortgage have been getting crushed as the pound slipped to almost parity to the euro at the end of 2008, and now hovering around 1.1-1.2 euros, after having spent most of the Spanish boom years around 1.4-1.5

        And yet, the fact that british banks with major exposure to euro markets have been watching the pound shrink in comparison to the euro seems to be a non-story. Especially in the likely truth that those same banks are hoping for something of a rebound in exchange rate values, otherwise the exchange rate losses on those eurobond holdings will be impossible to hide. The stresses in the system aren’t simply the ones which get the largest play in a media structure with a primary focus of supporting that same system.

        1. Swedish Lex

          So the problem is for the time being camouflaged by generous accounting rules and the UK bank bailout?

          1. Richard Smith

            That would be my guess. It is like living in the financial equivalent of a badly run bomb dump, over here.

            No doubt this particular situation will draw attention in due course.

    2. Diego Méndez

      It weren’t only German banks, but also German (and other Northern European) citizens directly buying into the Spanish real-state bubble to retire there.

      We’re talking about 1.5m Western Europeans living in Spain while getting their income mainly from abroad (mainly retirees, but also freelancers & international entrepreneurs). Now read Krugman again:

      “(If in the US) Spain would be receiving a lot of automatic support in the crisis: Florida’s housing boom has gone bust, but Washington keeps sending the Social Security and Medicare checks.” Well, much like Germany and Scandinavia keep sending those checks to retirees and health tourists in the Canary Islands or some heavily-depressed Spanish costas, so where’s the big difference?

      1. Swedish Lex

        Good point.
        My comment about Germans (and Dutch, Belgians, etc.) owning property in the Club Med countries (sometimes with mortgages denominated in euro, of course) was that the political decision-makers in Germany will have to include such not-insignificant facts when developing a macro policy response. The Germans may give a big, simple, Nein in the polls about helping Greece. But the issue is more complex both at the macro level, as pointed out by Yves in the post, and at the micro level, which is what I wanted to illustrate. I doubt that Germans would like to take a up to 50% hit on the value of their Spanish properties, in addition to what they already have had to endure, in particular if they have to make montly mortgage payments to Deutsche Bank in euros on those properties.

        1. Diego Méndez

          Germany has two options: to share the burden of a Greek bailout with other EU countries, or to be left out from important future decisions.

          If Greece needs a bailout, it will get it, with or without Germany. But history won’t reward Germany’s inward-looking behaviour.

          1. a

            “Germany has two options: to share the burden of a Greek bailout with other EU countries, or to be left out from important future decisions.”

            Nah, Germany has two options: to share the burden of a Greek bailot, or to block it.

            “If Greece needs a bailout, it will get it, with or without Germany.”

            Maybe from the IMF, but I do not see the French opening their wallets unless they see the Germans opening their wallets first and wider. The Dutch aren’t going to pay unless the Germans do. And the English aren’t going to pay even if the Germans pay. So who does that leave? Spain and Italy? Well, sorry, the Spanish and the Italians are in no shape to be bailing out Greece. Maybe they’ll try, don’t know, but it would be remarkably foolish.

            “But history won’t reward Germany’s inward-looking behaviour.”

            History isn’t going to reward anyone. History doesn’t give out rewards when things turn out badly, and things are going to turn out badly no matter what.

          2. Diego Méndez


            Germany cannot block other European countries bailing out Greece. Of course France, Spain and Italy (among others) can and will lend money to Greece if necessary.

            Spain (as measured in public debt, GDP and long-term demographic trends) is in much better shape than Germany, fiscally-wise.

            Germany does not make the rules; the whole of Europe does, and Germany (as any other country) obeys them. If Germany does not help its European friends now, it won’t receive help when needed, which will be earlier than most acknowledge.

            Should I remind you that Germany and France were spared a fine for its fiscal profligracy just few years ago?

          3. a

            Diego, Well we disagree about France. We’ll have to wait and see.

            “Spain (as measured in public debt, GDP and long-term demographic trends) is in much better shape than Germany, fiscally-wise.”

            I was talking about who would need to pay the higher interest rate, and I’m afraid my friend, Spain was, is, and will be weaker. CDS on Germany : around 45 bips. CSD on Spain: almost 4 times higher, around 130 bips.

            “Germany does not make the rules.” He who pays, makes the rules. If, as you say, France, Italy and Spain bail out Greece, then you’re right. But, as I’ve said, I don’t see that happening, myself. So, at least as I see it, Germany does make the rules. (Who will replace Trichet at the head of the ECB? Weber.)

            “Should I remind you that Germany and France were spared a fine for its fiscal profligracy just few years ago?”

            Exactly. Who made the rules then? Germany and France – not “all of Europe”.

          4. Dan Duncan

            Diego, last week you were convinced that the EU was rock solid and that this EU Mess was just a conspiracy and your vituperation was directed at those “Anglo-Saxon” imbeciles.

            This week, the EU seems a bit more shaky and you’re upset with those “autocratic Germans”.

            In fact, much of what you are writing is really from the perspective of Spain (and similarly inclined Club Med Countries). As such, your posts today confirm what many EU skeptics wrote about last week: As this Mess plays out, the EU solidarity will prove to have been an nothing but an Illusion of Prosperity from the Delusion of Credit. And as the pressure intensifies, the French will be French, Germans will be Germans and as you’ve demonstrated–Spaniards will be Spaniards. Just like the last 1000 years.

            You write: “If Greece needs a bailout, it will get it, with or without Germany.”

            I’m going to go “Ich bin Berliner” for a moment and respond: “Gut!”.

            As for the assertion that Germany better fall in line or “be left out from important future decisions”…

            Yeah, sure. Looking forward to Latvia stepping into that Leadership Void.

          5. Diego Méndez

            a, Germany paid a higher interest rate than Spain before the crisis.

            Rules are made at European parliamentary bodies; if you think Germany will impose a new rule favouring German interests after letting down the Southern half of Europe, you’re very wrong.

            Ön the “he who pays, rules”, I must say: well, Spain, France and Italy are all net contributors to the EU for the sake of Germany’s stability (Eastern Europe).

            Dan Duncan, I am pretty sure Germany will pay, as will every other European country. That’s how Europe works: you help me and I help you. The rules of the EU internal market are taken by the EU Parliament, which is the real leader in very important issues.

            And finally, I must stress there’s always the racist assumption in the air that Germany will be richer than Greece 20 years from now; and Greece will always be the “weak” country suffering from financial crises.

          6. C

            “Dan Duncan, I am pretty sure Germany will pay, as will every other European country. That’s how Europe works: you help me and I help you. The rules of the EU internal market are taken by the EU Parliament, which is the real leader in very important issues.”

            Pay with what????? Which are the creditor nations in Europe right now???

            “And finally, I must stress there’s always the racist assumption in the air that Germany will be richer than Greece 20 years from now; and Greece will always be the “weak” country suffering from financial crises.”

            I fail to see how that is a racist assumption. Please elaborate

          7. Diego Méndez


            Germany is not wealthier than Greece because of cultural values (which are fairly uniform throughout Europe) or because of racial superiority, but because of privileged geographic-historical conditions (e.g. it always had a huge internal market vs. Spain or Greece) and policies.

            Since geographic advantages are uniformly distributed all over the world and happen to change with time (e.g. Spain’s unfertile, windy mountains are an energy boon now), and historical influences tend to fade over time, only policies can make a difference.

            Now I ask you: why would Greece, in a state of development very similar to Germany, take the wrong policies over the next 20 years and not converge with, or even surpass, Germany?

          8. Sid

            Even if the EU could gather the political will and financial wherewithal to bail out Greece, then Greece will have no incentive ever to reform. Sure, “tough conditions” will be imposed, but how will the Greek government be forced to stick to the bargains it made?

            After all, Eurozone membership came with similar “tough conditions” which Greece and other flouted, and Greece is to be rewarded with a bailout?

            Of course, if Greece gets its bailout, then Spain (property bubble Ground Zero) and Portugal (the Land that Time Forgot) will get in line for their bailouts. Belgium and Austria may also line up for a piece of the action, and why not?

            By this point, Ireland will wonder why it has taken on austerity measures when all it had to do was make noises about financial distress and free money will fall from the sky!

            All the same, I believe that there will be bailouts, and if there will be, Germany will have to participate. The German elites live in fear of being condemned as “bad Europeans,” and giving Greece loans or guarantees now is easier than forcing Europe to take its fiscal medicine.

            The elites will go along, and in Europe, what the elites want, the elites get. But how do you sell that one to the voters?

          9. Diego Méndez


            Greece is a sui-generis case. There’s no other eurozone country where a huge recession and a fiscal armaggedon (public debt=120% GDP) are taking place at the same time.

            Spain, which you portray as next Greece, has far lower public debt than France or Germany (less than half Greece’s) and will share in the costs of a Greek bailout.

            Greece will submit to EU recommendations because: 1) the EU has power to put fines on the Greek government in the billion-euro range; 2) as a measure of last resort, the EU can shut Greek access to the EU market if fines are not paid or in case of default.

            But the Greeks are serious people and would comply even if no threats are imposed on them. You’ve got to understand that Greece is in this situation not because of inmorality of any sort, but because of very specific problems no other euro country has had.

    3. DownSouth

      attempter said: “Gee, the Euro elites are having a little problem with one of their junior members? The Greek local bosses are getting uppity?”

      I’m not so sure the local branch of the international criminal banking cartel is getting “uppity” as it’s experiencing problems controlling its helots.

      I doubt that the Greek members of the cartel would have any compunction in enslaving their fellow countrymen. Democracy can be a real bitch, no?

      Notice all the “austerity” demands emanating from the Euro-fascists entail wage cuts for working people and taxes on the productive sector? Also, have you noticed how all the wonderful talk about equality and Gini coefficients seems to have suddenly disappeared?

      Clearly, the plan is for the local peasantry to take the bullet to the head, and the local (and foreign) landed aristocracy to escape unscathed. The international criminal banking cartel does, after all, have to take care of its local branch managers, as well as any expatriot members who have wondered onto the preserve.

      Tortoise commented on this yesterday, with some rather enlightening data:

      Greece has its problems but consider just this: The value of commercial and residential (not agricultural or pastures) real estate is estimated to be somewhere between 3 and 6 trillion euros (trillion, with a T). (Not based on government statistics. The government could evaluate this number based on a form, E9, that everyone in Greece must fill with their tax return. For some reason, the government does not want to do that.) If a real estate tax of 1%, which is common in the US, were collected, that would bring 30 to 60 billions of revenue, more that enough to cover the annual deficit. Who owns this real estate? Perhaps 80 Greek residents, the rest nonresidents. Do the Greeks have the cash to pay so much money? Γιου βετ! Checking and savings accounts of Greek households and companies in Greece was over 190 billion euros as of last November.

      1. kevin de bruxelles


        I noticed the same thing about who was getting the bullet. The Greek government could also be cutting military spending which is extremely high considering that Greece is part of NATO (as is their presumed enemy Turkey).

        George Papandreou seems to be playing from the Barrack Obama playbook. The EU should not be in the business of telling the Greeks how to cut their deficit, only making sure they do, if that is the condition of a bail out. It is up to the Greek political system to decide how to allocate the pain. And I agree that up until now is looks like business as usual.

        As for a Greek default, one has to wonder who that will hurt more, the elite or the masses? It seems to me, unlike in more Northern European countries, where you see a more balanced distribution of wealth, the Greek masses are unable to discipline their elite, a bit like in America. I’m not sure how that would play out if it came to a default.

        By the way, I thought the original post by Yves was very thoughtful.

        1. DownSouth


          You ask: “As for a Greek default, one has to wonder who that will hurt more, the elite or the masses?”

          I believe that would depend on how strong Greece’s democracy is.

          If Greece is like Mexico—“the perfect dictatorship” the Peruvian poet Mario Vargas Llosa called it—then the masses would not fare so well. Of course if democracy was as weak in Greece as it is in Mexico, then the Greek government would have already thrown its masses to the wolves long ago. There wouldn’t be any crisis, except for the Greek masses.

          On the other hand, if Greek democracy can rise to the occasion as Argentina’s did in its crisis that began in 1999, then I think the masses would fare quite well. Following Argentina’s default,

          The government encouraged import substitution and accessible credit for businesses, staged an aggressive plan to improve tax collection, and set aside large amounts of money for social welfare, while controlling expenditure in other fields.


          Argentina has managed to return to growth with surprising strength; the GDP jumped 8.8% in 2003, 9.0% in 2004, 9.2% in 2005, 8.5% in 2006 and 8.7% in 2007. Though average wages have increased 17% annually since 2002 (jumping 25% in the year to May 2008),[3] consumer prices have partly accompanied this surge; though not comparable to the levels of former crises, the inflation rate was 12.5% in 2005, 10% in 2006 and is believed by private economists to have approached 15% in 2007 and to exceed 20% during 2008 (even if the Ministry of Economy refuses to acknowledge inflation greater than 10%). This has prompted the government to increase tariffs for exporters and to pressure retailers into one price truce after another in a bid to stabilize prices, so far with little effect.
          While unemployment has been considerably reduced (it’s been hovering around 8.5% since 2006), Argentina has so far failed to reach an equitable distribution of income (the wealthiest 10% of the population receives 31 times more income than the poorest 10%). This disparity, nevertheless, compares quite favorably to levels seen in most of Latin America, Asia and Africa.

          And yes, I agree the original post by Yves is quite thoughtful. For the past 40 years, Latin American has been a laboratory where many of the economic and political prescriptions that are now being urged upon Greece have been tried and tested. Much could be learned by a study of Latin America. But outside of a handful of researchers like Kaminsky, Reinhart and Rogoff, Latin America doesn’t even exist. So because of their arrogance and insularity, Americans and Europeans are doomed to have to reinvent the wheel.

          1. C

            DownSouth, I suggest you take a closer look at Argentina before lauding it as a model for Greece. Argentina simply jumped the leveraged bandwagon, and it too is going to fall–hard–again before too long.

          2. DownSouth


            You don’t explain yourself very well, so I will refer to your comment yesterday where you claimed that if Greece defaults:

            Nobody will lend them $ in the future. So no imports except for on, basically, a barter system. No oil or NG imports. No machinery imports. Nobody able to retire. All savings wiped out (you don’t really think other countries will let Greece wipe out their debts without freezing their assets, do you?)


            A few weeks (months?) after all this,S&P will also likely downgrade their debt rating ;o)


            You clearly live in a world where things like honor, reputation, honesty, character and trust matter. But classical and neoclassical economists have spent over two hundred years arguing that these things don’t matter.

            Question: Despite all the underhanded and despicable things Goldman Sachs has done to some of its clients, not to mention the devastation it has wrecked on the entire world, do you see it wanting for customers?

            I must admit that yours is a highly admirable worldview. But it is not a very realistic worldview. Unlike yourself, I predict that if Greece defaults, people will line up to lend money to a country with a balance sheet free of liabilities.

            The truth be told, classical and neoclassical economists have had their effect. Amitai Etzioni predicted the current moral meltdown over 20 years ago:

            A paradox arises to the extent that it is true that the market is dependent on normative underpinning (to provide the pre-contractual foundations such as trust, cooperation, and honesty) which all contractual relations require: The more people accept the neoclassical paradigm as a guide for their behavior, the more the ability to sustain a market economy is undermined. This holds for all those who engage in transactions without ever-present inspectors, auditors, lawyers, and police: if they do not limit themselves to legitimate (i.e., normative) means of competition out of internalized values, the system will collapse, because the transaction costs of a fully or even highly “policed” system are prohibitive…

            In short, because the neoclassical paradigm is part of the modern mentality, and not merely an academic field, it affects the way people see their world and themselves, and the way they behave… I do not suggest that neoclassicists (or anyone) should hide well-established truths from the public in order to keep them in ignorant innocence, mindlessly favorable to caring and sharing, to mutuality and civility. It does follow, however, that if it is true that people do seek to balance their pleasures with moral considerations, and if they are taught, to the contrary, that they are “really” only out to maximize their pleasure (and all that follows, that people behave morally only as long as it pays, and so on) there is likely to be a negative, anti-moral effect…
            –Amitai Etzioni, The Moral Dimension

          3. Skippy

            Ferdinand and Isabella have become impatient with the slow progress at hand, so much too acquire, taste, enjoy, carve our names in humanity regardless of the cost before deaths door knock.

            Conversion must not abate but, hasten forth with.

            Skippy…for all of Greece’s fortitude I fear much weight against them, the good years of Grenada would have been interesting….eh.

      2. attempter

        I have no doubt the Greek govt sees it as a helot problem, and if everything could be solved that way then I guess it would be no harm no foul from the point of view of the real bigshots.

        But even if they can put through these austerity measures, that would still take alot of time to get the deficit down where the EU says it needs to be, wouldn’t it? They’re still going to need some kind of outside, top-down support.

        So I’d still think Germany and the others would be displeased about this government’s shenanigans, even if in the end all the pain is successfully socialized on the Greek people.

  6. Alex

    In regards to national sovereignty, many European nation-states are going through a wee bit of a political crisis:

    1.No one can quite say for sure where the Republic will stand after the manic reign of Sarkozy.
    2.The UK is faced with a disheartening choice between Cameron and Brown. 3. No comment required on Berlusconi in Italy.
    4. Belgium speaks for itself too

    All this to say that national sovereignty is in play to some degree in Europe. The ground is shifting and it only requires the proper knight in shining armor to break down the walls or at least damage them.

    On the left in France, the most buzz worthy pol in the last year or so was Daniel Cohn Bendit. I think his success, besides being funny, is thanks to a promise of seeing beyond national sovereignty — of representing integration and democracy… if referring to the trilemna.

    With national figures of the right and classical left seen so distastefully in their individual countries the opening is there to diminish one of the poles of the triangle.

    The question is however, if the political machines, who dine off national sovereignty, will let things shift that way easily… Probably not.

    1. Stevie b.

      Alex “The UK is faced with a disheartening choice between Cameron and Brown”

      It’s not a disheartening choice when you have A Darling chancellor saying better put off the evil days of reckoning til next year (and after the election of course), when the UK recovery will be more assured. No-one has asked this idiot what will happen if the recovery is not more assured in 2011.
      Do we put off taking the medicine ad nauseam? Not ruddy likely! The markets will ensure that the medicine by that time will be cyanide.

  7. DoctoRx

    Tax evasion is the largest industry in Greece (or almost so).

    The idea that a rebalancing with greater cash flows toward the govt from people and businesses, or lesser flows from the govt outward to the people, is of earthshaking importance to the economic activity of Greeks is not logical.

    As Nathan Lane said to Matthew Broderick in The Producers: Greece, you can do it if you try.

    The prop traders who sort of run the world would prob love a Greek default, so they could move on and attack other countries. The commissions and trading profits on the way down and then back up are what they live for. And then the next endgame of course is yet more central bank and govt money-printing with debt that of course these same guys get to sell and repackage endlessly.

    If the banksters are to be stymied, Greece must hold.

  8. Diego Méndez

    So Krugman failed to acknowledge Spain attracted more workers than Florida and part of its retirees are foreign and got their checks from abroad.

    But then he makes the big mistake: “(…) between 2000 and 2008, the prices of goods and services produced in Spain rose by 35 percent, compared with a rise of only 10 percent in Germany. Thanks to rising costs, Spanish exports became increasingly uncompetitive, but job growth stayed strong thanks to the housing boom.”

    Germany’s economy was overvalued while Spain’s was undervalued, so the inflation figure is irrelevant to some extent. But Spanish exports didn’t become increasingly uncompetitive, the reverse fact is true: Spain and Germany were the only euro countries to increase their exports’ world market share in that period.

    Spain got more competitive, not less so, thanks to more internationalized companies, more export-oriented companies, more innovation and more R&D, all of which Krugman seems not to have ever heard of.

  9. killben

    “Unfortunately, while it usually takes a crisis to force resolution, at the same time, a crisis is generally the worst setting in which to undertake fraught and difficult political negotiations.”

    Do you really think any policy action would have been taken during boom times even if required. I think only crisis can make these people act .. in the case of US, it is not even that .. a crisis is used to bailout the crisis creaters- makes you puke!

    coming to Greece, when TARP is so unwelcome (rightly so) in the US, do you think there is even a semblance of a chance of bailout for Greece at German’s expense.. it will bring down govts all over EU.

    Greece being kicked out of EU seems to be the only thing that can happen which will at least presevere the govts.

  10. Jamisia

    Have you read the paper by CEPR on Latvia?

    One can’t help but think of Greece. Everything the government could have done under national sovereignty is now off limits. There’s a saying in Dutch that goes something like ‘if you eat someone else’s bread, you’ll also speak his words’. We can’t vote on helping Greece (parties are campaigning for the upcoming municipal elections). And the ECB can’t implement Mosler’s proposal (regardless of what you think of the man), to print €1 trillion and spend it per capita on national governments in the Eurozone, because it was never meant to be lender-of-last-rest. I’m not sure the policy trilemma holds for Europe.

    Slightly off topic: most people, I think, are in the grip of apocaphilia. More likely is a change of system: either back into gold-standard thinking or head on into fiat money. But it would help if we understood either a little better.

    PS. Diego Méndez: how much did Spanish & German wages grow? If they were overall flat, talk of increased competitiveness seems to be of little use (sorry). And if Spanish population grew by 20%, did the housing boom create enough jobs to absorb that?

    1. Diego Méndez

      Sorry, I don’t understand your questions. The price of labour grew more in Spain than in Germany, but other factors more than compensated for that (more capital per worker, more internationalized companies, better-educated workforce and more spending in R&D).

      I mean, African workers are cheaper than European ones, but Europe is still more competitive. The price of labour is just one in many factors.

      And yes, the huge growth in the past decade (housing made only about 20% of that growth) provided enough jobs for 8m “new Spaniards”.

      1. charcad

        I think you add enourmous value to the N-C commentariat.

        The price of labour grew more in Spain than in Germany, but other factors more than compensated for that (more capital per worker, more internationalized companies, better-educated workforce and more spending in R&D).

        I’m sure this is a sincerely held belief on your part. Perhaps most readers are wondering why, if this is true, Spain doesn’t lead German and Japan in the high-tech export sweepstakes. And also why it doesn’t have a net trade balance.

        I just take it as still another example of the fundamental mismatch between Nordic and Meditteranean thought processes.
        Greece'(and Europe’s) entire problem is the euro has turned into a Procustean exercise.

        1. Diego Méndez

          I think you misunderstood my comment. I wasn’t saying Spain’s capital per worker, etc. was higher than Germany; I said it had increased over the last decade in Spain, in contrast with Germany (where education levels, spending in R&D, etc. *decreased* over the last decade).

          That’s why, in some recent hi-tech industries (e.g. renewables), you’ll find more Spanish companies than Japanese ones (the biggest wind-energy utility in the world, Iberdrola Renovables; one of the largest windmill manufacturers, Gamesa, etc.).

  11. RueTheDay

    Perhaps a dissolution of the EU makes sense, at least from a monetary standpoint.

    Keep the positive aspects – ease of travel and labor mobility, but ditch the common currency (and the integrated monetary and fiscal policy it requires). It doesn’t really make sense to straight jacket the smaller countries into lockstep policy with France and (especially) Germany.

    1. charcad

      Keep the positive aspects – ease of travel

      The Schengen visa regime is not identical with the euro zone and has never depended on it. Schengen and the euro overlap each other.

      and labor mobility

      The euro zone has too little labor mobility already. As far as I can see the “euro” is starting to threaten both the Schengen visa regime and capital mobility in Europe. The government in Athens is only half a step away from instituting currency controls to prevent cash flight from the country.

  12. i on the ball patriot

    If you want a historical parallel for the EU situation you don’t really have to go to far back. Just look at the recent history in scamerica …

    Intentionally created credit bubble bombs, counterfeit derivative product bombs, and ‘Too Big to Fail Bombs’, all created by the super wealthy ruling elite ‘financial industry’ — which has been allowed, aided, and abetted, by bought and paid for sell out politicians and sold by an equally hijacked media and its puppet pundits (of which slime ball Krugman is particularly odious) — and all dropped on domestic scamerica. This is now neo-con formula and it is being intensely applied, carpet bombing style, to the EU.

    Forget the Vanilla Greed profit motive of the past its all about the Pernicious Greed motive of control now. Decimation of the global middle class, geopolitical gain, banking consolidation and global population/resource consumption reduction are the goals.

    Just as a now growing number of scamericans, who have learned they have been had by an illegal and immoral group of super wealthy ruling elite gangsters, are staying in their homes, not returning their keys, and saying, “Fuck you Mr. Usurious Slime Ball Banker!”, so too should the Greeks do the same.

    Aggregate generational corruption has rendered usury a now unbearable parasitic yoke on the bulk of humanity. Humanity must rise up and throw that parasitic yoke of usurious slavery into the dust bin of history.

    This is simple class war, rich against poor, masked in a newer more deceptive complexity.

    Simplify! Simplify! Simplify!

    Deception is the strongest political force on the planet.

    1. DownSouth

      Yep. The last time modernism and its firstborn child, classical economics, suffered heart attacks it took the Great Depression, sandwiched in between two world wars, to extract the world from the dilemma.

      Some of the worst abuses of classical economics, aka capitalism, were curtailed for a few decades, but it didn’t take long for the forces of greed and selfishness to reassert themselves.

  13. bena gyerek

    a possible fiscal federal arrangement for the eurozone:

    1) eurozone member states agree to set up a european debt management agency. the edma receives a joint and several guarantee from the member states in proportion to the amount of financial support they receive back from the edma (see below). the guarantee of the edma is made senior under european law to all other existing and future liabilities of member states.

    2) on the effective date of the agreement, the edma guarantees a pro rata portion of all of each member state’s existing liabilities, such that the total guarantee for each member state equals some fixed percentage of its gdp as of the effective date (let’s say [60]%, as this is the maastricht criterion).

    3) the edma will then enter into tender-purchase operations to exchange existing government bonds and other tradable debt of the member states for (i) senior edma “euro-treasuries”, and (ii) subordinated individual member state single-name bonds.

    4) in subsequent years, under normal circumstances, each member state will be able to finance itself via the edma by an amount equal to the incremental value that year of their [60]% of gdp borrowing cap (i.e. their senior financing cap will grow in line with their nominal gdp, but subject to a high water mark in case of a fall in nominal gdp).

    5) in exceptional circumstances, member states can collectively authorise the edma to grant additional financing to one or more member states, subject to whatever conditionality is agreed at the time. such authorisation would presumably require unanimity (hard to imagine germany giving up a veto on this).


    a) creation of a euro-treasury market. euro-treasuries would be super high credit quality, because of (a) the joint and several guarantee, (b) seniority under european law, and (c) market size cap at [60]% of gdp. this new market would provide major technical benefits (depth and liquidity, a single risk-free sovereign curve), and would consolidate the euro’s role as a rival reserve currency to the dollar.

    b) strong market-based incentive for member states to be fiscally responsible in the good times. member states with debt >60% of gdp would face a much higher marginal cost of borrowing, as they would only be able to borrow on a subordinated basis (beyond the increment in senior borrowing in line with growth of nominal gdp). this would resolve the credibility problem of the existing “stability and growth pact” (whereby fiscally irresponsible member states are penalised by fines – hard to imagine this being carried through in practice, particularly against a larger member state).

    c) a clear mechanism for crisis resolution that allows the eurozone to extend rescue financing combined with conditionality that can be agreed on a case-by-case basis. in the case of a single state in crisis, the financing can come with major strings attached. in the case of a eurozone-wide crisis, an agreement could be reached allowing all member states to temporarily increase their share of mutually-guaranteed financing.

    d) clarification of the implicit guarantee between eurozone states, which unfairly allowed fiscally less responsible governments to borrow more cheaply up until the financial crisis. first note that it is highly unlikely that any member state would ever default on its obligation to the edma, as its obligation is senior, and constitutes a manageable [60]% of gdp. a default on its liability to the edma would therefore only arise because of a political decision to renege on the entire european legal framework altogether, which would have catastrophic political and economic implications for the member state in question. secondly, note that the option of a “sovereign bankruptcy” is quite possible under european law, such that a eurozone member could default on its subordinated debt in a more manageable way, without this undermining the euro or the european financial system. also note that subordinated member state bonds would be considered much riskier investments than current (unsubordinated) government bonds, and would probably carry much lower credit ratings. as such (one would hope) investor appetite will be much more limited, with investors instead holding senior euro-treasuries as their “risk-free” staple investment.

    1. Diego Méndez

      Of course that’s the obvious solution in the long term. But I think European leaders are playing to let the euro depreciate a bit and relieve the euro economy via higher net exports.

    2. Sid

      Essentially, this a mechanism allowing the EU to issue bonds in its own name. This is something Europhiles have long craved.

      Without going into the niggling issue of whether such an arrangement is legal under EU law or existing bond covenants, the structural problem with this arrangement is that it does not clearly spell out a way to force member governments to adhere to its terms.

      After all, had Greece not misrepresented the true size of its budget deficits all these years, we would not be having this discussion now.

      1. Diego Méndez

        Greece misrepresented its deficit in two ways: 1) through perfectly legal accounting tricks (e.g. the so-called “German method”); 2) through illegal forgery, because no one audited them. But rules will change so that national accounts may be audited by Eurostat. Problem 1 solved.

        Regarding enforcement, you’ve got fines (in the billion-euro range), and, in extreme cases (e.g. default), exclusion from the EU internal market. These are the same measures used in any other EU decisions (e.g. tariffs, discrimination against foreign companies, lack of competition, etc.) with outstanding results. Problem 2 solved.

      2. bena gyerek

        the legality is whatever is agreed and ratified by the eu27 by treaty. any new treaty supercedes all existing treaties and all existing national laws. i think it would only be a problem where existing debts are governed by a non-eu law, e.g. yankee bonds. note that all existing debts would be granted a “free” pro rata guarantee on the effective date of the treaty, and tradable debt would then be subject to a voluntary exchange into the new senior and junior bonds, so investors would be treated more than fairly.

        payments to the edma should always be manageable for every eurozone member, because total edma debt would constitute only [60]% of their gdp (subject of course to deflation/recession), the cost of borrowing would be super cheap, and the maturity profile of edma debts very long. if a government ever failed to meet a payment to the edma, then it should forfeit the right to any further financing from the edma. that in itself would be sufficient incentive to maintain payments, let alone the ultimate sanction of expulsion from the eu (which would be a logical consequence of such a gross violation of european law, causing major direct financial pain to the other eurozone members). it would also be sensible to regulate to ensure that the ownership of national subordinated debts were dispersed outside the home country, in order to minimise the incentive for any government to renege like this in a crisis.

        i think the main benefit of this approach is that it makes totally clear what is the limit to the guarantee from other eurozone members. as such, it makes it much more difficult for a eurozone member to borrow heavily in excess of [60]% of gdp, because the market would assume that the eurozone will never bail out the incremental debt, because (a) it is subordinated, (b) it is expressly not guaranteed by the eurozone (in contrast to euro-treasuries), and (c) any exceptional bailout would need unanimity of the rest of the eurozone.

        re this being a long-term solution – yes that is quite right. but what is driving current speculation against greece is the apparent lack of direction and long-term thinking in the eurozone. greece’s debt position, though ugly, does not of itself warrant the high probability of default being priced in. but speculators are pushing greece over a cliff because they believe the eurozone is too disorganised to come up with a long-term structural solution. moreover, it is only in a crisis like this that you can concentrate the minds of 27 leaders in order to push through long-term change.

        i really hope yves or somebody could elevate this discussion with a post. just like in the usa, the eurozone should be using this crisis to push through necessary change. surely a topic worth wider discussion?

  14. b

    Reading through the post and thread from German some questions:

    – Why should anyone in Europe take the discussion seriously when it conflates the EU with the Eurozone which is a very different beast?

    – Why should that quoted piece on Germany history be taken serious when the only German word it uses is written wrong (it is “Notverordnung” NOT “Noteverordnung” and a correct the translation is “dictatorial decree”)?

    – What is the Greek and maybe Spanish problem?
    Speculation against these countries by some Angloinvestors using CDS (see today FT editorial).

    – What is the solution to that?
    Declare all CDS null and void. Declare that no business entity that also operates in the Eurozone is allowed to buy, sell, hold or honor any CDS and similar derivatives.

    That can be done swiftly and without much trouble but for the speculators.

    1. Richard Smith

      Well, a less tendentious translation would be “Emergency Decree”. The Notverordnung mechanism was pretty thoroughly implicated in the downfall of Weimar and the rise of Hitler, which I guess is your real point.

      I don’t think the BRD wanted to go there again post war…but you might want to check out Article 18 of your democratic neighbour Austria’s constitution, where provision is still made for a Notverordnung, which would be issued by the President in what are meant to be well defined exceptional circumstances (it always starts like that). Creepy.

      Fortunately for your own points, spelling isn’t quite as critical to credibility as you claim. But I agree about the mush of sloppy thinking underlying the usage of the words Europe, EU, and Eurozone.

    2. ...---...

      Good to see b hanging out here, because the end of MoA left a gaping hole in the fabric of the cosmos.

  15. Mickey, Akron, Ohio

    [democracy, national sovereignty, and economic integration]

    Savage austerity will have to be imposed. So much for “democracy’. But the trick is to have the Greek elites do it at the behest of the “markets”. So much for national sovereignty. And wither the state? But not like Marx predicted!

    And with the first two of the trilemma sacrificed to “economic integration” welcome to the neofeudal corporate world order in which the technopeasantry labors on manors dispersed across the globe. Picture in your mind a map of pre-Renaissance Europe with principalities and duchies dotting the global landscape with no centralized authority, each being played off against the other by “market forces”. If the peasantry rebels, suppress it by simply moving the forces of production to a more conducive location. Don’t even need to club them or shoot them into submission. Depriving them of employment is much more effective. With time they too will learn the lesson and soon sing the refrain. All hail THE MARKET!

    Key to this of course, underlying it all, is the decoupling of investment from production; aka financialization/globalization of production that began in earnest some fifty odd years ago, if not sooner. Whereas investment was once focused on the territoriality of the nation-state, largely confined to it, now it is global in scope. Yes, there were multinational corporations before the Second World War but not on a scale and/scope like that of today. It is this decoupling of investment from production that increasingly pits the state against the nation – the decoupling of the nation from the state. All hail THE MARKET!

    Savage austerity precipitated by massive debt? It can’t happen here, right? When it does the real Greek tragedy will be the United States because, unlike their Greek counterparts, its citizen peasants have been drinking the corporate koolaid for so long that they have acquiesced to the other road to serfdom without even the slightest bit of resistance. Keep your eyes open and your ears tuned for when Social Security and Medicare have to be “reformed” in light of the new realities… Then the savage austerity will be upon US, as if the present austerity isn’t bad enough! But then it will be too late. All hail THE MARKET!

    I despair of this repetitive debate. Spin it in a new guise. Put a new twist on it. But we keep covering the same old ground. When you’re in a hole you have to know when to stop digging… Reform intended to prevent the “last crisis” will not prevent the next one. Nor is it intended to. I don’t know what’s the bigger problem: market confidence or confidence in markets. All hail THE MARKET!

    1. DownSouth


      Great comment!

      The global elite have finally figured out how to transform the “invisible hand” into the iron fist, no?

      It’s kind of like trading in your jackboots for an economics degree.

      1. Mickey, Akron, Ohio


        Thanks.. but really nothing we don’t already know. It should be obvious, but isn’t. Why is the question.

        But if the invisible hand won’t work the “duro mano” will…

        Vaya con Dios!

    2. MarcoPolo

      Nice, though I would argue the problem is not so much with globalization per se as with the parasitic nature of what we still refer to as investment and which should be seen as anti-investment.  I refer to the control of production by parasitic money funds which demand real productive investment be discounted to NPV – which they feed on.   And I date the transition to Reaganomics, somewhat more recent than 50 years.  Though I would be sure there were precursors.  The infection now seems complete as the owners of production, the parasites, have transformed the productive sector itself which now exhibits the characteristics of the parasite.  

      Once upon a time it was sufficient to just dilute the interest of shareholders. Now, in an age where that interest has been already consumed, it’s necessary to make off with the entire Corp. cash flow.  That can’t last long.

      1. Mickey, Akron, Ohio


        Reaganomics was only the nail in the coffin, if you will. The precursors were Direct Foreign Investment by US multinational corporations that began in the 60s coupled with the decline in employment in manufacturing across the industrialized countries of Western Europe and the United States that began around 1969-70. Japan lagged a bit but by the 90s evinced a similar pattern. [I know because I have the numbers for manufacturing employment from 1945 onwards – ILO, OECD, EUROSTAT, USDL – to the present for what their worth] These two forces went hand-in-hand. If the migration of manufacturing from the North of the US to the South after 1969-70 is viewed as the first phase of deindustrialization in this country followed by its subsequent relocation to Mexico and China, then all the clamor about it now is smoke and mirrors. It has been underway for well over 50 years. The rubber factories in Akron began to close in the 1970s before “Reaganomics” even became a household word. The steel mills in Youngstown/Cleveland/Pittsburgh/Sparrows Point were not far behind.

        As for investment/disinvestment, in the past many a company financed their expansion of plant and equipment with internal funds derived from profits. But it was largely within the borders of the nation within which it originated. With the globalization of production, finance is now dominated by banks who have the necessary expertise and “baksheesh” to grease to local machinery in return for a % of the cost – a rent or transaction cost? But no real value. It would appear that Goldman Sachs has developed this into an “art”.

        But if the maximization of shareholder wealth is and remains the mantra, then if ROI is 3-4% per annum here in the United States versus 10-12% in Mexico, China, or elsewhere where would you invest? Can any CEO afford to put patriotic fervor before profits when institutional investors [pension funds] are seeking the highest ROI on a quarterly basis? Such a short-term strategy [oxymoron perhaps] coupled with lucrative tax incentives is what drives this disinvestment. But to pretend that well paying blue-collar UNIONIZED manufacturing jobs will “return” to the US if these policies are repealed is an empty promise. Moreover, once the manufacturing techinique/process is standardized it will move offshore to low-wage countries. Witness the blades on windmills… now manufactured in China.

        I’m afraid the process is too far along to interrupt or will take time that we no longer have because it is CULTURAL, imbedded in the American character. The rest of the world will find it increasingly difficult to fund our consumption without some imposition of the “savage austerity” on US citizens in much the same way “we” demand it of other countries when their debts/obligations exceed their ability to pay. Why will our “leadership” be any different? After all they are the Washington Consensus… It’s just a matter of time before Social Security and Medicare feel the wrath of the budget ax brought about by the fiscal crisis of the federal budget deficit.

        Representative forms of government [democracy?] may coincide with capitalism, but the latter can thrive without the former. The authoritarian dictatorships of the ROK, Singapore, or Taiwan attest to how well capitalisn can be nurtured in such an environemnt. In fact, it really wasn’t much different in the West in the early stages of industrialization. The franchise and expansion of democratic rights only came after the capitalist production process was firmly entrenched. We have forgotten our history and may be condemned to relive it. [To paraphrase Jorge Santayana].

  16. pebird

    Just to put things in some numeric perspective – as of Q3 2009 the Greece GDP was 2.8% of Eurozone GDP, their total government debt was 3.9% of total GDP. Italy has 17% of Eurozone GDP, but holds 25.5% of total government debt.

    The analogy isn’t California default bringing down the US, but more like Iowa.

    If Greece reduces its government spending by half (impossible) – it barely moves the needle on total Eurozone debt to GDP. I understand precedent, but making a point on one of the weaker nations kind of blows up the reason for economic union.

    1. MyLessThanPrimeBeef

      Here is a Tsarist solution – why don’t they sell some islands to America or other rich nations?

  17. edward lowe

    Well, as some of your commentors have noted, the policy trilemma is nothing new. Every time Yves has mentioned these options, I am always reminded of Polanyi’s theory, and once again we are seeing evidence of its validity. The fact is the free market Utopianists cannot ever realize their dream of perfectly integrated global markets because it requires the perfect submission of the domestic market (i.e., the productive market). Inherently then there is a tension in the system of capitalism between these two forces … the productive economy and the international trading economy. Banking is always part of the latter. So, not surprising to see finance capital waging an attempt to force productive capital into submission. Democracy, in the long term, is as much an essential feature of capitalism as is these two economic forces in opposition. As is the modern nation state. All three will persist (economic forces, democratic forces, and national forces) in dynamic tension so long as capitalism is the dominant economic mode. And long cycles such as the one we seem to be at the peak of now will repeat the same troubles and solutions that have emerged before. There will be no “New World Order;” that is a Utopian fantasy of the free marketeers. It won’t happen, because it cannot happen. Instead we will witness patters that are familiar at the end of every long credit cycle (near term *devolution* of the transnational state formations, financial *deflation*, and economic *depression* in the productive and domestic sectors).

  18. dearieme

    There’s no point complaining that Krugman is unfair to Spain. It is his business to be unfair. The title of his column announces the fact.

    1. MyLessThanPrimeBeef

      Was that adjusted or unadjusted income?

      Maybe they all lost many ships to the Somali pirates?

  19. Kosta

    The historical review of Germany’s struggles with austerity in the 1930’s are very informative, but I’m not sure they are directly applicable to Greece. For Germany, “the crisis was a failure of political will in a time of turmoil.” This was, in part, driven by a political system where coalitions of political parties formed the gov’t, rather than a single party having a majority of representatives.

    Papandreou’s gov’t in Greece hold’s a solid majority in that country’s parliament. This affords Papandreou the ability to take political measures further than what the gov’t’s in Germany in the early 1930’s were able to do. This is an important distinction, which makes the analogy to 1931 Germany somewhat suspect.

  20. par4

    Shouldn’t we wait for Tommy Friedman and ‘Dean’ Broder to weigh in on this so we can make a more well informed opinion?

  21. Alfred

    wow, Together with traders on their desks and numerous hacks on their laptops, hanging on their very actions like an alcoholic on the next shot of whiskey, y’all seems to salivate on the prospect.
    I think it is fair to say that the EU and its monetary union have been a splinter in the eyes of anglosaxon financial wizardry since its advent. Over the years Ambrosy fans have gone from :The Euro is a bad idea and it will not come’ to ‘the Euro will come but it will not last’ to ‘what a surprise, its working’ to right where we are today ‘I told you so’. Lets calm down everybody shall we. The situation ion Greek as bad as it is dwarfs in comparison to the real estate failure in your markets (commercial is just getting started). Not to speak of the sovereign debt issues of the US and UK themselves. Its more than disturbing to learn that Government Sachs seems to have plaid a critical role in helping deceit the EU about Greek’s debt. Its just piling onto this moral and real dysfunctional financial and political system in the US and UK. I understand that liquidity and not moral is the high mark for Wall Street but aren’t you afraid that the tail will wag the dog.

    1. C

      Your references to the UK and US are accurate, but I think you’re missing the point: the entire West has spent the greater part of the last century on various forms of consumption and promises to enable people to consume well beyond their means until the end of their lives (eg: generous pensions). The Western countries have issued more and more debt to enable this, and the companies who enable this leverage have been increasingly well rewarded for enabling it.

      This couldn’t last forever, and Greece is one of the examples of this. It’s not “the Big One”–it’s just a reminder of the obvious underlying ***inevitable*** reality for the US, UK, Argentina, and much of mainland Europe (including Switzerland).

      On a longer trend, states have enabled leverage since their inception (I guess the Treaty of Westphalia in 1648 is as good of a reference point as any). A lot of western states basically justify their existence by being the only ones able to obtain the leverage to obtain “securities” of various sorts (the idea of welfare for its citizens as a state goal is very 20th century). This is coming to an end. Such endings occur on the peripheries first (eg: Greece, Latvia, Poland) and eventually spread to the center (UK, US)

      1. DownSouth


        You claim that: “A lot of western states basically justify their existence by being the only ones able to obtain the leverage to obtain ‘securities’ of various sorts (the idea of welfare for its citizens as a state goal is very 20th century). This is coming to an end. Such endings occur on the peripheries first (eg: Greece, Latvia, Poland) and eventually spread to the center (UK, US)”

        That pretty much sums up the game plan emanating from the Libertarian-Austrian-Neoliberal constellation, and the one adopted by Team Obama, not to mention the Republican Party.

        You are violently certain in your assertions, a trait you share with those of an earlier era who pretty much shared your views:

        They lived in a world that was not only harsh and cruel but that rationalized its cruelty under the guise of economic law. Necker, the French financier and statesman, said at the turn of the (19th) century, “Were it possible to discover a kind of food less agreeable than bread but having double its substance, people would be reduced to eating only once in two days.” Harsh as such a sentiment might have sounded, it did ring with a kind of logic. It was the world that was cruel, not the people in it. For the world was run by economic laws, and economic laws were nothing with which one could or should trifle; they were simply there, and to rail about whatever injustices might be tossed up as an unfortunate consequence of their working was as foolish as to lament the ebb and flow of the tides.

        The laws were few but final. We have seen how Adam Smith, Malthus, and Ricardo elaborated the laws of economic distribution. These laws seemed to explain not only how the produce of society tended to be distributed but how it should be distributed. The laws showed that profits were evened out and controlled by competition, that wages were always under pressure from population, and that rent accrued to the landlord as society expanded. And that was that. One might not necessarily like the result, but it was apparent that this result was the natural outcome of society’s dynamics: there was no personal ill will involved nor any personal manipulation. Economic laws were like the laws of gravitation, and it seemed as nonsensical to challenge one as the other. Hence a primer of elementary economic principles said: “A hundred years ago only savants could fathom them [economic laws]. Today they are commonplaces of the nursery, and the only really difficulty is their too great simplicity.”
        –Robert L. Heilbroner, The Worldly Philosophers

  22. Jim in MN

    I think this will blow over, more of a red herring than anything else. The fact is, debt markets are themselves ‘bailouts’ for entities that can’t operate within cash flow or have better investment ideas (in the private sector) than just using cash flow for operations.

    The Greeks can float their government bonds if it seems like they can pay for the float. It’s that simple.

    Sure, they got used to cheating the books, and then the economy goes South (heh) and their cheating is revealed at a bad time. OK, so what? They work out a deal, keep it quiet, pay it off/deficit down over time…not news, really.

    The real problem is that 1) the CDS market is not only a useless parasitic appendage but a signalling/information organ and 2) the larger economies have much worse problems involving cheating the books. So Greece sets off the alarm bells when the elites need it to be very, very quiet.

    Thus the attacks on CDS (just shut up) and hysterical tales of Europe-ending crisis (don’t look in our closet, there’s A METEOR COMING!).

    Let’s just wait and see how the unpayable debts of Europe are disposed of. Very very few are in Greece. Does it take 20-30 years like Japan and the (secret) US policy? That is clearly the intent. But the complex institutional and political structures of Europe may just prove to be….the….wait for it….Achilles heel after all, tripping up the zombification process and leading to a mix of zombies and corpses, not so neat as Japan.

    1. C

      “I think this will blow over, more of a red herring than anything else. ”

      Perhaps this one will be a red herring. But perhaps the next one won’t. Inevitably, there *will* be a situation that will *not* blow over. The point is that states will continue to leverage up until something *compels* them to stop doing so. That “something” is unlikely going to be a gradual tightening.

  23. Bill Wilson

    Of course the depreciation of the Euro is just what the doctor ordered for European competitiveness. Of course it is not going to help the US too much.

    Might be a smart move to drag this out as long as possible and keep the Euro weak. If there is a definitive solution the Euro soars and attention switches over to the US mess in waiting.

  24. Qafir Arnaut

    Is any of you aware that Greece pays pension to insured non-greek citizens (but who claim to feel Greek) who do not even live in Greece?

  25. Glen

    The “world” will have to decide if it’s better to have countries crashing down and falling apart, or it’s better to finally reform the financial system, clawing back ill gotten gains and throwing bankers in jail.

    It’s just my guess, but if we’re choosing between world chaos or a couple of bankers heads on pikes, the bankers better start drawing straws.

  26. DDT

    What is obvious, is that the entire world has borrowed too much money. The arrogance of the EU was in the supposed superiority of its unelected council of technocrats. But they botched this as badly as anyone, perhaps worse. In other words, the anti-democratic concept behind the EU isn’t working any better than Soviet Russia did.

    Debt just brings future funds forward. Done judiciously, it can enrich both the present and the future. Done profligately, it creates a bubble in the present but impoverishes the future. The transition from euphoric hyper-active economy to an impoverished deflationary one, is sudden and cruel.

    The choice for the EU is stark: they can reform a system that is not working, or let it come apart. I think it is obvious that Germany, and other wealthy states will not bail out Club Med unless they remake themselves in the teutonic image of fiscal discipline and self restraint. But this is too much like the third reich, or a benevolent fourth reich: Germany imposing its cultural will on the rest of Europe.

    The greatest flaw in the EU system, is that these countries have never gotten along, their cultural differences are just too great. There is the modern conceit that we are so civilized now, such things can’t happen anymore. But the EU is approaching the end of a period of borrowed prosperity, and the coming collective austerity will reveal a different truth.

    It’s too bad, because there are obvious advantages to having Europe unified. The open borders are great, and a single currency, while not as romantic, is much more practical. I still have a zip-loc full of Lire, Marks, Dracmas, Francs and Dinar from the 1980s. Perhaps the most important was the streamlining of regulation for trade and labor. Training in one country is accepted in another, industrial products and building codes are compatible.

    Unfortunately, the EU was architected at a time, when extreme leftist thought had not been shown for what it is, a total fraud. The EU’s philosophy is a kind a kind of gentrified communism, one that supposedly is immune to the excesses of a Stalin or a Hitler. The EU is a centralized government formed of unelected politicians, who try to plan the Union, both legally and economically, from a central place (Belgium). Was there any idea more discredited during the 20th century than “Central Planning”?

    So they must reform it. But the impulse of any politician is always to grab more power, and this will lead to less sovereignty for every country, not more. While they think they are emulating the US, by making European nations more like US states, they are really more like the old Soviet Union, which itself was really a colonial empire disguised as a modern state. The fact that the southern EU states are not competitive in the EU, shows that it can’t work. They will end up vassal states, more like colonies.

    Banks like Goldman can easily exploit this weakness. They can apply huge pressure on Greece just to see what the EU will do. Their suspicion is that they will force the EU to do something drastic. Goldman will find an opportunity to profit from it, whatever it is. Goldman is so agile compared to the EU, the southern countries may end up colonies of Goldman Sachs. Oops, wholly owned subsidiaries.

    In a world of predatory Corporations and predatory unelected Politicians, we know who will win. I just hope we can keep some democracies.

  27. Cynthia

    Just think, if Europeans would unify to form a single sports team, similar to the way you’ve unified to form a single currency, then they’ll take home more Olympic gold than all other nations combined. But it’s turning out that the same thing can’t be said about the Euro. Which leads me to say that Europeans probably would’ve never banded together to form a single powerful currency had they never believed that the only way for them to thrive in the global economy is to band together as a single economic force against the world’s economic giants — namely China, India and the US.

    There’s no question that Greece’s debt load is putting lots of downward pressure on the value of the Euro. The question is: will the EU bail out Greece? If the EU does, then Germany, given that it’s the wealthiest among the EU nations, will bear most of the brunt from this. Germany is also one of the thriftiest of the EU nations. So I guess the take-home lesson in this is that it doesn’t pay to be thrifty. Spendthrifts always find a way to suck the thrift out of the thrifty!

  28. Aristotles Eleftheris

    The real problem is for European politicians. Humiliation of the semi-socialist PASOK will push the Greeks to the left, not the right. The problem for the EU is not “invasion” by Greece but the leftward shift of European peoples lead by Greek resistance to austerity.

    Most European politicians don’t understand this possibility, especially the Germans, who are accustomed to imposing their will on a passive and mostly rightward shifted political base. That is not the case for Greece. As popular Greek resistance stiffens, this will become a domestic political problem for European politicians who want to impose similar measures on their own peoples.

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