Is There a Case for Optimism About the Eurozone?

I know, we don’t generally do optimism here at Naked Capitalism. And truth be told, I’m having trouble accepting the Financial Times’ John Dizard’s argument that things are going to get better in the Eurozone. Admittedly, John has a taste for investing on the wild side: he’s typically recommending exotic trades in his weekly column. But his argument isn’t based on catching a near-term trading bounce; it’s based on…..fundamentals.

He has two prongs to his argument. One is that the Eurocrats realize that they have painted themselves into a corner, which is leading to a second development: they are getting more serious about promoting innovation.

Let’s look at Dizard’s first cause for cheer:

Contrary to the sentiment of most of my European friends, I’m becoming a euro-optimist. It’s not just that the current euro area policy “solutions” aren’t getting more ridiculously destructive; they are; it’s that I see more recognition of this on the part of the policy tribes at the national government level. That means that there is light at the end of the European growth tunnel…

we are now near the end of the game of pretending these sorts of fixes will result in a new growth cycle. Just below the level of headline making political players on both the right and the left, the next generation of policy leaders are putting together policies that could actually work. The career rewards for pretence and myth making are nearly exhausted; all that’s left is the recognition of reality.

Let me play devil’s advocate. Understanding reality does not mean you have the political degrees of freedom to change trajectory. Technocratic fixes on innovation policy, which is what Dizard is hanging his hat on (we’ll get to that soon) is not going to come even close to compensating for a Eurozone-wide austerity hair shirt.

I’m reminded of time when policy makers clearly knew that the course they were committed to was failed, yet they felt they had no option. For instance, the start of World War I, when no one save Germany wanted conflict, yet the what was to be the Allied Powers were locked into mutual commitments, and the communication methods of the day did not allow them to communicate and devise other approaches; they felt honor and treaty bound to declare war. Richard Bookstaber has used the onset of WWI as a textbook example of a tightly-coupled system, where a sequence of pre-progammed executed, with no possibility of human interruption of the sequence that unfolded.

Similarly, Daniel Ellsberg recounts how Vietnam and SouthEast Asia policy experts like himself believed if they could only get the ear of the President, they could convince him of the folly of continuing the war in Vietnam. In his book Secrets, Ellsberg tells how he came to have access to the classified record of the US decision-making regarding Vietnam, the documents he later released to the press.

He expected the history to be one of overoptimism, of Presidents making bad decisions because they had bad information. Instead, the record showed clearly that the the assessment from the very beginning had been that our likelihood of prevailing was zilch. Nevertheless, no President was willing to withdraw because they felt US prestige was at risk, until the domestic political costs became too high.

And what Dizard is missing it that even though the young elite technocrats may want to do things differently, they can’t make the biggest change that needs to happen, which is figure out how to write off and restructure debt, particularly debt held by banks, while providing enough stimulus to offset the deflationary downdraft. Yanis Varoufakis, in his update on the Greek negotiations, explains what the real logjams are:

To accomplish the task of taking Greece off the minds of markets and Northern European electorates for this space of time, Eurogroup ministers came to an agreement with the IMF on how to patch up their conflicting agendas on Greece by means of a joint communiqué according to which Greece’s de-railed Bailout Mk2 is, supposedly, back on track. The basis of their agreement is twofold:

• The IMF will pretend it believes Europe’s claims to have rendered Greece’s public debt viable without an OSI (i.e. a haircut in the loans provided to Greece by the troika, aka its European partners), while
• Europe will pretend that it can do this without an OSI.[1]

The idea here is that, yet again, the Eurogroup-ECB-IMF alliance is not ready, politically, to reveal the truth to its various constituencies.

• The German and Dutch governments (not to mention the Finnish) feel it is impossible to tell their Parliaments, and voters, the terrible truth that some of the money they have put up as part of Bailout Mk1 & Mk2 will not be retrieved.
• The IMF cannot admit that it allowed Europe to involve it in a country program that does not fulfill the debt-viability conditions that any IMF program ought to.
• The Greek government has invested its survival on misleading its constituency into believing that the tailspin of the Greek macro economy can be arrested under the current arrangements.
• And, finally, the ECB is struggling to maintain the illusion that it can remain faithful to its no bailout clause vis-à-vis governments, especially in view of the great challenge awaiting in relation to Spain and Italy.

….So, what will come of Greece, given the latest Eurogroup ‘decision’? It is my fear, and belief, that the country is becoming a version of Kosovo – a protectorate in which the euro remains the currency, sovereignty is minimal, the population is ruled over by a glorified kleptocracy with strong links to Berlin and, last but not least, a permanent migratory flow is established that sees the young and the skilled move to northern Europe and beyond.

Turning briefly to the significance of the latest ‘Greek Deal’ for the Eurozone as a whole, the omens are particularly troubling for Spain and Italy. First, there is the small matter of the inbuilt domino effect. The reader is reminded that the reduction in Greece’s interest rates (which will be enhanced in the not too distant future further, as the Greek state grows increasingly unable to repay its partners’ loans), will translate into losses by the Spanish and Italian governments (since other troika ‘program’ countries, i.e. Ireland and Portugal, have been spared). The fact that the markets’ expectation of some OMT assistance for Italy and Spain are keeping their bonds’ yields low, for the time being, does not alter the fact that the vicious contagion dynamic is gathering strength.

Beyond this ‘small’ matter, Rome, Madrid and, indeed, Paris must now reckon with a Eurogroup decision that demonstrates how bogus all talk of a Growth Pact really has been (since President Hollande raised it as an issue a few months ago). The fact that the Eurozone’s finance ministers declared, without the slightest hesitation, that substantial growth will come to depression-hit Greece without an iota of a smidgeon of a hint of fresh public investment reveals that Europe is truly blind to what it will take to deal with the recession it faces in aggregate and with the various depressions in its Periphery.

What is troubling about Dizard’s contrasting take is it has a rearranging-the-deck-chairs-on-the-Titanic feel about it. And Dizard is a very astute columnist. The fact that he can’t grok that the problem is demand and jobs is striking. It’s a weird sort of learned blindness. This is the cheery part of his current piece:

A few weeks ago I had an interesting meeting with Fleur Pellerin, the junior minister in the French government for small and medium enterprises, innovation, and the digital economy. While she came up through an established path to French political authority (schooled at Essec and the ENA), she is attempting to create what she calls “the right ecosystem for a start-ups”, particularly for technology intensive enterprises.

Politicians like to talk about creating successes, or companies of the future. Ms Pellerin, and, I understand, an increasing number of other French policy people, realise that they have to allow for failures, and, following failures, a path to restarts. Most new companies, including seemingly promising technology companies, don’t work out, or have to be folded into others on disappointing terms. Then the entrepreneurs have to be able to start over. That has to become as normal a path in Europe as it is in the US and Scandinavia.

As Ms Pellerin says, “What I saw in [studying technology entrepreneurship in] Finland was the de-dramatisation of failure. In France, we have cultural barriers to giving people a second chance. We need to make people understand that if you fail in starting a new business, your chances of succeeding in a subsequent start-up are much improved.
“There are also barriers on the regulatory side to having a second chance, as well as in the provision of credit. This is something we in the government can work on, and I am working with other ministries on doing that.”

The headlines, and French moans, about taxation of the successful, are pretty depressing. Yet the new government backed down on the taxation of capital gains on start-up enterprises. Particularly for the owners of tech-intensive new companies, capital gains taxes will remain low; after the new US budget, they could be lower than in the US. And working visas for skilled foreigners will be fast-tracked.

Venture-backed technology companies get much better political support everywhere than do older industries. At some point, though, a supportive policy model for this sector could be generalised to the rest of the economy. That is, when the politicians run out of excuses for what they are doing now.

Aiee. This sounds a lot like the Carter era promotion of deregulation as a spur for innovation when even his advisors admitted there was no proof that deregulation does promote innovation (in fact, regulation often produces innovation, witness air pollution control technology).

While reducing the cultural penalties for failure is a good idea, that’s a generation sea-change project. And notice that Denmark and Sweden rate above the US in innovation rankings; one of the reasons cited is their strong social safety nets, which is what austerity is in the process of tearing apart. It’s more attractive to start a business to know you won’t become homeless if you fail (and that is not an exaggeration: I know one failed entrepreneur, in fairly high end tech, who had her somewhat contained drink habit spin out of control and is now homeless, as well as others who would have been if they didn’t have family to fall back on). Similarly, if you don’t have demand, all the innovation in the world is mainly going to cannibalize existing markets. An innovator might also cannibalize markets outside your country, but everyone else is also trying to steal each other’s demand.

Moroeve, this tech/funding intensive assumed profile of new businesses is somewhat fallacious. Amar Bhide did the landmark study of new business creation in the US and ascertained that only 1% were funded by venture capitalists. And even the most successful, highest growth companies had only a minority funded by VC. The overwhelming majority of new businesses are not major innovators like Apple but are started by people who have some knowledge of a particular field and see customer needs that are not being filled well or at all by incumbents. These are advances and are a boost to teh business community, but they don’t make for sexy copy in IT magazines.

It would be much better if I were wrong, but the fact that a smart guy like Dizard can only make an unconvincing case for optimism confirm my outlook: things always look darkest before they go completely black.

If readers think this take is wrong or misses other causes for hope, I’d very much like to hear these views.

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  1. vlade


    Merkel said over the weekend that “euro leader might consider writing off debt [once the country is in primary surpluss]” (Bild am Sonntag).
    That is a subtle, but possibly important change in rethorics. I think it unlikely that Germany would write off the debt (visibly, reduction in interest already amounts to write-offs) before September elections, but after that I believe it likely. Of course, the big question is whether Greece will play to Germany’s timetable.

    The reality also is that at the moment there are two extreme views – full hairshirt austerity and no-or-little change. Quite a few countries do need change. The situation for young in Spain/Italy/France is terrible, but part of it is the structure of the job market there which does favour incumbents (the question is how much of that is structural, since your unemployment in the UK is high too – not as high as in Europe though and at least partially due to skilled immigrants willing to work harder to less). The crony economy in Greece didn’t even start changing as far as I can tell – see Papandreou’s mother having 550m EUR in swiss account, persecution of the journalist who published the tax dodgers etc.

    What we see at the moment is people diverging and their views of reality become more and more incompatible (I’d argue it’s different from WW1, where Austria wanted local war and Germany world war, or at least war with Russia who they saw as their principal competitor) – and way back harder and harder because to take a step back you have to admit that you made mistakes in the first place. When was the last time you heard “I made a mistake”? (I hear JFK did it after Bay of Pigs, so if true it may be good 40 years…).

    1. Dan Kervick

      Yves makes an important point about prestige and commitment. Even if people now realize they were wrong to reject the anti-Keynesian fantasy economics of pro-growth austerity, they ave personal prestige on the line. It is very hard to go to the public and say “I was wrong”. Self-effacement and critical self-accountability are not in the DNA of most politicians. For the same reason, here in the US, even if Barak Obama is of a mind now to think he was wrong to pivot away from growth and jobs toward public debt gloom and doom, and to turn toward catfood commission politics, he has invested so much of his political reputation into promoting that agenda that bailing on it now would require a courageous admission of failure, a level of courage he probably lacks.

      But back to the European scene, we also have to take into account that many of the people promoting austerity were never true believers in the expansionary contraction doctrine in the first place. Instead they are reactionary social engineers taking advantage of a crisis to destroy the European social welfare model of governance.

      1. john bougearel

        I like that Dan, “they were never true believers in the expansionary/contraction doctrine in the first place. Instead, they were reactionary social engineers taking advantage of a crisis to destroy the social welfare model.”

        Well said. In other words, they are neoliberal clones and are true believers of Milton Friedman’s Shock Doctrine, intent on exploiting an economic crisis for their own benefit and tearing up the social fabric of a country in the process.

        1. Synopticist

          I think I saw Wolfgang Shauble (Whatever he’s called) a while back, crowing that he was right that greece should have been allowed to default and leave back in 2009.

          Thats the closest I’ve seen to a recognition that the whole things a f*ck up.

      2. jake chase

        The Eurozone was always seen by the corporate elite as a market bonanza predicated on cheap southern labor, continental advantage and exploding bank credit. As in the parallel US situation, the game can continue only for so long as the debt can be serviced. When it can’t, the new lending stops, debtors cannot pay and the game ends. End of the game creates opportunity to justify dismantling the social safety net. The corporate predators and their political and bureaucratic flunkies prattle about renewal of growth, the corporate analogue to ‘hope and change’, but their real objective is smash ‘n’ grab, toot ‘n’ loot. Anyone who doesn’t understand this isn’t paying attention.

      3. Aquifer

        So let me get this straight – the European promoters of austerity are actually reactionary social engineers, but Obama is not a true believer, just someone who lacks the courage to say “I goofed” …

        Hmmm – so where does that take us? We just have to “buck him up” (forgive the pun) so he will find the courage to reveal his true self and then he will be all we want him to be?

    2. Shyster Sister

      “The situation for young in Spain/Italy/France is terrible, but part of it is the structure of the job market there which does favour incumbents”
      It’s pretty much a mantra endlessly repeated by Chicago-school economists, which makes it suspect in my eyes. Spain was a dictatorship until 1978 and is still suffering the effects of those years. Portugal was also a dictatorship, and there the elitists bastards refused to implement universal education, so there’s still hordes of analfabets of working age. Unfortunately there’s a pervasive defensive attitude about education not being a big deal, so the young keep failing school. Italy has had poor growth for twenty years and productivity per worker has actually decreased! In Italy it’s clearly the lack of growth and opportunities that are at fault. France is comparatively better off than the other Mediterranean countries, although unemployment among non-European immigrants is really high.

      1. vlade

        Well, unless we go the way quite a bit of right did (“they are lefties, so we won’t listen to them from principle”), the fact that someone is XYZ doesn’t mean their opinion is always wrong. We’d take the opinion and test it.

        The inability of young to get jobs is real, and the hard-to-fire is real too. Which is why I give UK, with more pro-business hiring laws, as something where in theory youth unemployment (all else being equal) should be lower than say France, if the theory that hard-to-fire=low hiring is true.

        It actually is, but only slightly so (the last comparable data I have is from 2009, where France is at 22.6% and uk at 18.9%, so about 3.7% difference). The problem is that quite a bit of low/mid skilled jobs (and it’s unlikely that 18 year old is going to end up with a highly skilled one) were going to immigrants in the UK (this is not a complaint, but a fact, being an immigrant myself), unlike in France, and I don’t have enough data (or time) to control for that meaningfully.

  2. Up

    I know, we don’t generally do optimism here at Naked Capitalism.

    I first came here after we blew up in 2008, continued awhile then stopped. I don’t have a clue what my handle was back then. I also can’t remember if the site was as dark then as it is now. Some of the links are difficult to read because of the unsettling subject matter; that’s not a complaint. My pet name for the site has become Naked Dystopia.

    1. Yves Smith Post author

      Um, if you were paying close attention, you would realize things ARE dark. The breaking of Greece on the rack? They can’t even import meds and hospitals are reusing sheets because they can’t afford to clean them. Obama’s serial selling out of his base, from the ACA (overpriced insurance and enriches Big Pharma) to the mortgage settlement and failure to do anything serious to help homeowners. to the plan to shred social safety nets known as the Grand Bargain? And what about our security state and the ongoing curtailment of civil liberties? The American elites have become openly corrupt in a remarkably short period of time. The need to keep the bad stuff behind closed doors and maintain appearances once put some limits on corruption. That’s not true any more.

      You want real dystopia/paranoia, go visit the goldbug sites or ZeroHedge. They make what you read here look tame. We are realists, when it’s well documented that most people have a cognitive bias called optimism (yes, optimism is strong enough to lead people to seriously overestimate the odds of things working out well).

      1. Up

        Indeed, no argument from me on the quick sketch of issues you outlined; as I said my observation was not a complaint.

  3. swedish lex

    I tie my hopes to the German general elections next year.

    Most likely a new setup where Merkel will have to rule with the social democrats who have a less suicidal economic world view.

    Hollande in France is impatiently waiting for a new grand German coalition that will not have as philosofy for Germany to trash the future of Europe.

    1. Ignacio

      Even if the SPD wins the elections, I’m afraid things won’t change much. As you say they migth be “less suicidal” but we need something more than that.

      Do you know if Mr. Steinbrueck looks like the appropiate person to change course?

      1. Synopticist

        There’s always an election coming up. September the who gives a f*ck.

        November the 7th was supposedly THE date. French parliamentary elections are coming soonish, then there’s the Spanish general, don’t upset the applecart before the US midterms, lets get the Euro parliament elections out the way…blah blah.

        Elections are just a series of punctuated excuses to kick the can and avoid taking actions which might damage the ultimate European and World welfare claimant, the bank bondholders, who CANNOT be expected to pay for their mistakes..

        1. diptherio

          Good point. I was in Nepal a number of times during their revolution and I remember once while I was there, the gov’t and the maoists called a cease-fire until the end of the Dashain festival…and then until Diwali was finished…and then Tihar…and then Sangraati, etc. (Nepal has a major holiday about every two weeks) Of course, both sides were just using the delay in hostilities to re-equip and regroup; it didn’t have anything to do with respecting religious holy days.

    2. Hans Suter

      Here’s what Muenchau has to say about this in today’s FT. Cunclusion:”The only real opposition to her policies comes from the post-communist left. With Mr Steinbrück, a former finance minister under Ms Merkel, the SPD has chosen the man least likely to offer a credible alternative. He was, after all, the architect of Germany’s anti-crisis policies until late 2009. Mr Steinbrück and Mr Steinmeier are not campaigning to get rid of Ms Merkel. They are campaigning to serve under Ms Merkel as a junior coalition partner.

      The political and intellectual implosion of the SPD also answers our initial question. What will happen after the German elections? The answer is: nothing.

  4. john bougearel

    As a starting point frame of reference, I think there is reason to believe that there is a case for the Eurozone to improve relative to the US economy in 1H 2013 because of the fiscal cliff, and there is reason for a cyclical rebound related to the latest attempt to hockey-stick save Greece from default ( we will know on Dec 13) until after 2013.

    But, it is a great leap of faith on Dizard’s part to conclude that just cuz the euro-gov’ts can see the destructive path that their policy solutions are on does not imply a tunnel therefore exists and that there is also light at the end of it. It could just be that they are just now looking at the trajectory of the hole they are digging and wondering how far until they reach China.

    I would also argue that we are nowhere near the end game of pretending these solutions will result in a new growth cycle. It is quite clear from the latest solution of Greece that we are to pretend all is well and will be well – at least until we get through the election. Jean Claude Junker stated it oh so well back in 2005 and is quite fitting for the latest Greek solution which Yannis Varoufakis described as an even more incredulous fantasy than the last one. From Juncker: ” “We all know what to do, we just don’t know how to get re-elected after we’ve done it.”

    Juncker’s observation 7 yrs ago is still prescient today, and underscores Yves observation that there are political constraints to changing the path dependency that Europe is on.

    As for drawing on observations from the aims of the Vietnam
    War, the movie Zeitgeist noted there were politically imposed constraints/goals that precluded the US military to ever win the war. Those political constraints/goal were designed to keep us fighting a war over there that we could never win, embedding us over there so that extricating ourselves required a Herculean effort. Then onto 911, and what does the US declare: a War on Terror. Here again is a political committment to engage in a war against the world, whereever terror might take root and proliferate, whether it be at home or abroad.

    A ‘weird sort of learned blindness’ indeed.

    As for ‘regulation produces innovation’ why yes, but these days much of that innovation is unwelcome, e.g. policies that encourage inefficient biofuels such as ethanol derived from corn, clean energy policies that lead to fracking, a tangible and real danger to our sources of food, water, and air.

    My take on this is that Dizard is simply going along with latest innovation of Europe’s political program of kicking the can and not so much his meeting with a junior minister in the French govt’ whose task is to promote small businesses and innovation. Every country in the world has their own cadre of junior ministers tasked with promoting small businesses and innovation, to create “the right econsystem for start-ups.” Shit, those soundbites are as old as the man on the moon. There is no game-changer there, not even, I suspect, on a generational level.

    1. JTFaraday

      Yeah, it’s kind of like thinking something like the following media business endeavor, from the NY Times this morning, stands a chance of putting even a little ping in the Rupert Murdoch empire:

      “Matter Ventures, a start-up accelerator that will provide four months of financial and logistical support for budding media entrepreneurs, will be unveiled Monday by its partners: KQED, a public television and radio station operator; the John S. and James L. Knight Foundation; and the Public Radio Exchange, known as PRX.

      KQED, based in San Francisco, and the Knight Foundation are each investing $1.25 million in the initial $2.5 million fund and will have an equity stake in any projects that become viable businesses.”

      The promotion of austerianism seems to arise out of the conviction that business can’t flourish when the state involves itself–in any way!– in delivering goods to the public.

      I guess it remains for them to discover that business can’t flourish against the multiplied force of a constellation of states bent on crushing the public–in their name and at their apparent behest–either.

      Oh, the irony.

      1. jake chase

        I can see the future of this: two or three minority con men with connections to important Congressmen will get station licenses and funded with a blizzard of publicity. They will air tired comedies from this guy Perry and some rapper talk shows. The advertisers will be blackmailed to support them and accused of racism if they don’t. Can’t wait for the programs, which can hardly be worse than the dreck on there now.

  5. William C

    I guess it depends how you define optimism. I do not expect a ‘departure’ of a country from the Eurozone at least before the German elections. If Merkel can form a coalition then with the SDP it may be easier for the Germans to take bold (i.e. unpopular) measures as the SDP would then be complicit in what is done. This could include writing off some German government claims on Greece. The Greeks would have to continue to play ball in some shape or form so it is no done deal.

    I believe commentators are now saying there is only a 40% chance of Greece leaving the EZ in the next five years.

    There was also an FT article the other day saying unit labour costs have fallen in a number of EZ countries.

    So if you call those grounds for optimism, then count me an optimist. But as for something called prosperity (remember that?).. er…No.

    1. Aquifer

      “Unit labor costs have fallen” – is that a fancy way of saying working folks are making less money?

      1. J Sterling

        So what? They’re only the majority. It’s good news for the minority who are employing-type folks!

  6. Jim Haygood

    ‘What is troubling about Dizard’s contrasting take is it has a rearranging-the-deck-chairs-on-the-Titanic feel about it.’

    What is troubling about the Mainstream Media biz is that they’re not paid to be right. Indeed, as Paul Macrae Montgomery has documented, the MSM is a near infallible contrary indicator at important inflection points.

    A journo who invents a quirky thesis, rounds up a couple of pithy quotes, uploads it, and generates page views could care less about forecast accuracy.

    Next year when France gets downgraded again (and again), likely he’ll gravely warn us that the sky is falling.

    Don’t feed the MSM trolls!

  7. The Dork of Cork.

    I don’t get the article.

    The purpose of the Euro experiment is to destroy all internal trade and connections and make these former nation states dependent on outside inputs for pretty much everything.

    It wishes to destroy us.
    Its quite clear now.

  8. RSDallas

    This may be too simple for you, but no. Europe, the US and the UK will not get better, they are all too sick. Their respective Fed’s may lower their temperature for several months or even years, but they can’t cure them. There is just too much debt and too many promises that are proving mathematically that they can’t and will not be honored. I project that due to our insane political participants that we will be moaping around for another 15 to 20 years. We are only in the early innings of our Japan like experiment.

  9. Hugh

    Again it is important to remember Europe has 6 major problems whose outward manifestations are high unemployment, collapsed real estate bubbles, recession, unmanageable debt, and fraying social safety nets:

    1) Lack of a democratic debt and fiscal union
    2) A weak central bank
    3) An insolvent, highly predatory banking sector
    4) Mercantilist trade patterns between Eurozone countries
    5) Thoroughly corrupt political classes
    6) A kleptocratic ruling class of the rich

    Anytime you see some umpteenth announced deal or, as here, an optimistic story about a turnaround in Europe ask yourself how well said announcement or optimism matches up against these problems and resolves them. Do this with Dizard and you can see he is mainlining hopium.

    1. tiebie66

      To ‘paraphrase’: (forgive me, I’m not being sarcastic, on the contrary, I found the post interesting).

      Again, it is also important to remember that the US has 6 major problems whose outward manifestations are high un/underemployment, collapsed real estate bubbles, weak growth, unmanageable debt, and fraying social safety nets:

      1) A democratic debt and fiscal union
      2) A strong central bank
      3) An insolvent, highly predatory banking sector
      4) Mercantilist trade patterns (e.g. of corporations) between States
      5) Thoroughly corrupt political classes
      6) A kleptocratic ruling class of the rich
      It seems to me one may now be able to rule out 1) and 2) as causative to these types of problems (i.e. similar outward manifestations). Perhaps the symptoms may finger the major culprit amongst the remainder. My ‘money’ is on 3).

      1. Hugh

        The US and Europe, indeed all the regional and national economies, are kleptocracies, but they play out in different ways. The US doesn’t have a small “d” democratic anything anymore. Like Europe, its central bank works against the interests of the many and in concert with its predatory banking sector. I would love to know what evidence you have found for mercantilist trade patterns within the US. If I had to put up a list of major problems for the US, it would look something like this:

        1) An insolvent, predatory financial system
        2) A privatized central bank, not serving public interests
        3) Hollowing out of the labor force through permanently high unemployment, anti-unionism, deregulation, offshoring, a poor educational system, and dismantling of an already weak social safety net
        4) A two-tiered justice system
        5) Thoroughly corrupt elites: political, judicial, media, and academic
        6) A kleptocratic ruling class of the rich

        1. tiebie66

          The exporting of subsidized business opportunities struck me as a form of mercantilism although it may not meet the technical definition of such. Would have a similar outcome on balance sheets I’d think.

          “Some officials, desperate to keep G.M., offered more. Ohio was proposing a $56 million deal to save its Moraine plant, and Wisconsin, fighting for its Janesville factory, offered $153 million.”

          (As Companies Seek Tax Deals, Governments Pay High Price; NYT, 1 Dec. 2012)

  10. docg

    “I know, we don’t generally do optimism here at Naked Capitalism.”

    Laughed out loud at that one. I don’t do much in the way of optimism either, and sometimes I worry about how friends react to my continual oracles of gloom and doom. Yet I consider myself one of the most optimistic, and also happiest, people I know. Is it schadenfreude, I wonder? I really don’t think so. I’m a Utopian dreamer I suppose, and am always hoping that under the rock of the latest horrible news will be found a diamond or two of solid hope. Guess that’s why I’m a socialist. The worse things get, the more likely people will finally get fed up and change things.

    1. gepay

      At a volunteer fireman’s dinner (2007 or 8) I sat across from a rich local landowner who was disgusted with Wachovia Bank in particular and the economy in general. His wife said, “Meet Mr. Gloom” to which my wife replied, “May I introduce Dr. Doom.
      We had finally found someone to listen as you can tell we had stopped talking on this subject to our wives long ago. I have been amazed at the cognitive dissonance I detect in NRR liberals who voted again for Obama. They just won’t face up to reality.
      Politically even the left mainstream parties in Europe seem hopeless. Wasn’t the elected Prime Minister Papendreou (deposed by the troika)a socialist, Spain’s socialist leader didn’t do any better. Hollande is supposedly a socialist and he is no different than Sarkozy in foreign policy. Italy’s mainstream socialist party is as corrupt as they come. Nigel Farage seems to be the only politician that will say the obvious. The Euro idea has failed and nobody has the will to make the banks and rich investors take the loss of failed loans and investments.

  11. Myshkin

    Optimism about the Euro zone economy (and similarly the US) may be illusory. However the chances of the Eurozone hanging together may not be quite as dire as some think. Probably the most formidable argument against members exiting is the ensuing cataclysmic pain that would be felt not only in the eurozone but globally. Also, for all it’s complaints, Germany, the locomotive economy in the zone, has been benefiting from the Euro devaluation through its exports.

    From the midst of our own serial economic dysfunctions, (currently Congress is again holding the debt ceiling gun to the head of the nation, wrestling a hostage country towards economic crisis) we see an imperfect, to put it mildly, European political process struggling through their own crisis. Are they handling their crisis so much worse than the US is handling the ongoing debt ceiling? It remains to be seen but it certainly is a competitive event.

    This was all explored in an interesting essay by Alain Minc in the Oct 25th NYRB. I hope this link gets you into the full article if you’re interested.

  12. craazyman

    There will be a light at the end of the tunnel, once the train comes through.

    You could have been a long-term optimist on Europe in 1938 and you would have been right.

    The thing about equilibrium is it doesn’t specify the individual people occupying the equilibrium wave function balance point.

    Is the source for the optimist’s case that one woman in the French ministry who went to Finland and saw serial IT entrepreneurs? Maybe she was on vacation. You know how that is, you go on vacation and everything where you then are is incredible. It can be infectious.

    How many IT start-ups can working people support? Maybe 1 for every 1000 working people. If the startup succeeds, then it’s 2000 to 1 because the technology takes over jobs that working people would have done and you need to spread your innovation over 2000 people, because half don’t have jobs anymore.

    It occured to me today why the sectoral balances approach to macroeconomic analysis is riddled with faulty logic. It has to do with sub-categories within categories. The corporate sector can dissave enough to offset private non-corporate saving and you can have investment that grows GNP even if private sector balances don’t change. For this, corporations need cash, that’s it. Somebody should figure this out soon. Maybe this is what’s coming after the train.

    1. jake chase


      I don’t see any reason to analyse errant nonsense. It’s like debating with somebody who believes in Biblical truth. He has an answer for everything and no information more recent than the year 33. Tech starups are like hope ‘n change: opportunities for some promoter to bootstrap himself, some trickle down to his henchmen, a black hole for everyone else. Enjoy your holiday.

  13. BondsOfSteel

    The solution is easy… it’s always been the political will that’s been the problem.

    The Eurozone needs to inflate itself out of debt. The ECB should be QE by buying debt… including german debt.

  14. Synopticist

    WE’RE SAVED !!!

    Tech start-ups and super-cheap Indian computer programmers will rescue the Eurozone!!!
    Obviously there are no unemployed programmers in France at the moment, or even in Europe in general, what with the massive pre-existing demand for computer guys in places like Spain, Italy, Greece and Ireland.

    That’s the new Socialist French govt there, BTW.

  15. Susan the other

    Three years. That’s how long the EU thinks it will take to come to a political consensus and form a fiscal union among 17 or 27 members. Until then the ECB can buy bonds on the secondary market (buy them back from China), keeping interest rates low. In 3 years if there is no Federated Europe, and no solution, there will be only impoverishment to show for having been impoverished by legalized ponzi finance.

    Probably the only reason any pundit in the UK would be “optimistic” about the EU is because they, UK, have decided to face reality and join the EU, give up their own separate banking “laws” and play by the Frankfurt rules. What was the tradeoff? The UK could always cast its lot with us. So are we changing too?

    Something tells me that the banks’ insolvency in the US and the EU will be resolved. There will no longer be private banking, only public banking. It would be a simple matter to write off the bank/bond debt now in the EU if the banking system were not private. But as it is, they still need them to send money to Greece and receive it back two minutes later because this allows Greece to get low interest rates as it helps the EU buy time. The really offensive thing is that they aren’t fooling anyone, not even angry right wing, conservative Germans.

    I saw a video on You Tube, in German, explaining the Eurocrisis to Germans. They did not depict Greece as the lazy spendthrift culprit; instead they blamed the banksters in Europe and the US and made the point that none of the bailout money was even getting to Greece. Interesting. The cartoon character (german blue collar) ended the video by asking when the banksters would be forced to pay for their mess.

  16. ChrisPacific

    I don’t find the optimistic part all that convincing either. It might be paraphrased as “I spoke to one of the players involved and it seemed like they were smart and had a good handle on things.” I used to get sucked in by this one quite frequently when I was young and naive. Now that I’m older and more cynical I believe that the ability to present well and impress people in person is not necessarily all that closely correlated with results (although it does correlate pretty well with an ability to gain power and/or backing for your pet projects). After watching several people who impressed me immensely go on to preside over some monumental cock-ups, I’ve learned to reserve judgement a bit more. (I remember Yves wrote on this subject as well after the Treasury blogger meeting).

    Promoting entrepreneurship and small business growth via favorable regulation and tax treatment is all well and good (although they might want to have a little chat with Ireland first) but doesn’t address any of the real problems, as enumerated by Hugh.

  17. steve from virginia

    @John Dizard:

    That means that there is light at the end of the European growth tunnel…

    we are now near the end of the game of pretending these sorts of fixes will result in a new growth cycle.

    Good grief! The reason for the ongoing unraveling is the growth we had in the past. Trying for more growth NOW unravels what remains of the current economic structure faster.

    Analysts believe that marketplace expansion costs nothing. This is incorrect, economic activity is a thermodynamic transformation of materials using non-renewable energy causing a flow of heat. (The process also results in waste into the atmosphere where it causes all kinds of problems but that is another story.)

    What the humanoids ‘earn’ for this process is (fake) convenience and some large-ish numbers on a rich guy’s computer.

    Best thing to is solve problem permanently: cut the rich guy’s heads off w/ samurai swords.


    The fact that he can’t grok that the problem is demand and jobs is striking. It’s a weird sort of learned blindness.

    The ‘demand’ problem is instead the inability to consume due to aggregated system costs. These costs emerge from the supply-side where there are capital shortages result in scarcity premia … these are added to the extraction costs of the capital. Extraction is more costly for physical reasons.

    When resources are priced properly they are too costly for both the resource supplier (he loses his market) AND the consumer (who IS the market). Our capital cannot be paid-for by the use waste of the capital.

    The difference between what capital costs minus the near-zero returns from the waste of the same capital must be financed with debt. The inability of waste to pay for itself is why the world is mired in hundreds of trillions of US dollars of debt in the first place! There is no hope of repayment. The wasting-process cannot repay for itself: there is now way it can repay the aggregated debt, too! We are approaching the point where waste cannot service the giant debts!

    The cost of capital is added to the cost of the credit needed to gain the capital and make use of it. Both costs added together are unaffordable. The demand exists wherever there is a TV and paper money: it cannot be satisfied because the costs are too high.

    We are over-committed to the false claims of insensible business expansion to think of other uses for capital other than to destroy it.

    Greece is an example: it cannot borrow because it has nothing to show for all the hundreds of billions of euros it has already borrowed. Greeks spent the money on consumer goods and petroleum: these ‘goods’ are worthless as collateral because they are unproductive or non-existent. The assets are now liabilities, they cannot represent ‘growth’ because they are nothing more than waste.

    We’ve painted ourselves into a corner with our crap and now we want out and to keep the crap at the same time.

    Sorry, Boss Lady, it cannot happen.

    1. diptherio

      “Greece is an example: it cannot borrow because it has nothing to show for all the hundreds of billions of euros it has already borrowed. Greeks spent the money on consumer goods and petroleum…”–steve from va

      Oh, I thought they spent it on bank bail-outs, corporate and government corruption, stuff like that. Thanks for clarifying. You should let Yanis Varoufakis know this, I think he must have got some bad information somewhere…

    2. tiebie66

      Spot on! (“The ‘demand’ problem is instead the inability to consume due to aggregated system costs.”) The lack of aggregate demand should -not- be compensated for by government spending, there is far too much risk that it will prolong and increase the waste. This is where I leave the MMT tracks (while acknowledging the insight that can be provided by its good parts such as sector balances).

      The only way to reduce waste is via austerity, but it seems fairly clear that there are both good and bad ways to apply austerity.

  18. jfleni

    RE: The universal blindness before WW1.

    In fact, the French knew perfectly well that a war with Germany would be miserable, probably with few or no gains. The Kaiser staring the war in the face, had second thoughts and frightening doubts, leading to his “Dear Nicky” (easily found online) letters to his cousin the Czar trying to stop or delay the rush to mobilization. The Austrians in their candid moments doubted the stability and durability of their multi-national empire, but did nothing to stop their silly squabble with a relatively insignificant Serbia.

    Nobody took careful counsel of their real fears, or foresaw eventual disaster, so doubts were reluctantly set aside, and the worst catastrope of the twentieth century happened.

    1. Mark P.

      So it goes.

      You’re right that some political leaders tried to draw back. It wasn’t so much that they were careless, though, as that nobody knew how to untie the alliances and treaties which had been constructed towards balancing off of powers, while the Austrians in particular had incentives to proceed. Nobody in power understood, too, quite how bad it would be.

      [1] Although, interestingly, they’d been warned that a full-scale industrial war in Europe would be just as WWI was as far back as 1898 when Jean de Bloch, a French-Polish banker and railway financier — who’d noted how the Franco-Prussian War of 1870 had been — devoted much time and money to distributing his IS WAR NOW IMPOSSIBLE?, a six-volume analysis in which he calculated in great detail how any full conflict between industrial states with then-modern weaponry would soon bog down into a war of entrenchment, then of attrition carried on over years.

      [2] And, of course, those — the professional European military — who most needed to hear Bloch’s message were those least disposed to hear it, as a small classic, THE SOCIAL HISTORY OF THE MACHINE GUN, (1975) by British historian John Ellis details. Essentially, the military had become the last social refuge of the old upper classes against the industrial nouveau riche; the generals were determined to ignore machine guns — the industrialization of slaughter — and preserve a feudal romanticism about war in which horse- and cavalry worship played a not inconsiderable part.

      At Hyde Park Corner in London is a memorial to the Machine Gun Corps, which consists of a statue of the Boy David, and underneath is written: “Saul hath slain his thousands/ But David his tens of thousands.”

      Sixteen million, as it turned out, with gas warfare added in.

  19. hari

    You guys are all muddled up in your either euro-centric thinking or anti-euro focus. For whatever reason, the bias against Euro is fundamentally anglo-american and London based ( +40% of Eurobonds are traded in the City!).

    Recent Eurostat figs demonstrate to EuroGroup decision-makers that (finally!) unit labour costs in the periphery are not only getting better (compared to Germany, in particular) but there is a success trajectory which gives them a sense of no-more-gloom!

    That’s why ECB is forecasting (some serious) growth 2013 – may be second-half. Draghi said that officially as his year end assessment of impact of EuroGroup’s structural reforms, in particular.

    Of course, austerity has been very painful in the periphery.
    But even here in Netherlands we’re impacted by growing unemployment and social budget programmes being cut by the new govt (Lib-Labour).

    I suggest you’ ve to (1) take into account the way EuroGroup has succeeded in re-structuring the Maastricht Treaty (which introduced Euro more than a decade ago).

    The four new pillars of structural reforms include (i) fiscal union (ii) banking union (iii) real economic union and (iv) political union.

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