Coronavirus Means Zero Hour for the European Union

Yves here. We wrote yesterday of our concern that Christine Lagarde, the new head of the European Central Bank, wasn’t bluffing when she said that the ECB job wasn’t to close the spreads of various state borrowers like Italy. Italian bonds plunged. Lagarde made what looked to us like a half-hearted walkback.

Understand how serious this is. If the ECB won’t support Italy’s borrowing, which is sure to rise due to the need to prop up the Italian economy as a result of the massive hit of the coronavirus shutdown, you can kiss the Italian banking system goodbye. And that conflagration will engulf undercapitalized European banks.

Tom Ferguson and Ed Kane describe how the European beggar-thy-neighbor policies are moving quickly in a bad direction. Germany is moving toward a “Germany first” approach when that the garbage barge known as Deutsche Bank will quickly go critical if Italian banks start falling over. While Ferguson and Kane say Germany has the capacity to rescue Deutsche (and Commerz Bank), I’m not sure how feasible that looks to deficit hysteric Germans if they are also having to bail out Main Street.

This important article includes a discussion of how various defects in Eurozone design create self-reinformcing doom loops. And unless the ECB, or a European level facility, intervenes, Ferguson and Kane signal that the European Union could fail to halt a Credit Anstalt-level collapse.

By Thomas Ferguson Director of Research of the Institute for New Economic Thinking and Professor Emeritus, University of Massachusetts, Boston; and Edward J. Kane, Professor of Finance, Boston College. Originally published at the Institute for New Economic Thinking website

In old Rome, debts were to be settled by the Ides of March – March 15. In Italy this year, as that legendary day of reckoning approached, questions about repayment obligations weighed on the minds of decision makers in the Eternal City.

In February, the European Commission issued another of its periodic warnings about Italy’s towering debt to GDP ratio – at 140%, after Greece, the second highest in the Eurozone. For a country that must go to markets to refinance a fifth of its obligations every year, the public admonition was awkward. But soon the swift and terrifying advance of COVID-19 across the historic towns of northern Italy brought new and much deadlier pressures. As emergency quarantines put out the lights in the piazzas and factories of one town after another in Italy’s industrial heartland, the economy ground to a halt and tax collections plummeted.

Italy’s fragile governing coalition now faces staggering budget challenges. A country already groaning under the weight of older debts now has to pile on still more liabilities to keep its people alive and to prevent sputtering businesses from collapsing.

A long time ago, Brutus and his accomplices delivered the “unkindest cut of all” to Julius Caesar on the Ides of March: In 2020, it came three days earlier. With markets in Europe and the rest of the world in free fall, Christine Lagarde, the new but very experienced President of the European Central Bank (ECB), emerged to sum up what the bank’s board had just decided to do. Anxious investors looked forward to reassurance in the style of Mario Draghi’s famous “whatever it takes” promise that had soothed turbulent markets back in 2012, when the Eurozone looked to be coming apart.

Lagarde did outline a series of measures to ease “liquidity” and encourage banks to lend. But then she added a remark that echoed around the world, declaring that the ECB “is not here to close spreads.”

Everyone grasped the implication: Italy, and perhaps other Eurozone countries facing similarly severe budget challenges down the road, had to watch out. They could not count on the ECB to hold down their funding costs.

The shock was global and profound: Eurozone stocks plunged yet again, while rates on Italian debt rocketed upward, in what some touted as the greatest one-day rise in the country’s history. The prospect that bond prices (and thus interest rates) of different countries in the Eurozone might diverge wildly, presaging a breakup of the zone itself, suddenly became real again.

Reaction in Italy was volcanic, with some angry economists comparing the new policy to a crime or an act of war. Elsewhere, press accounts of Lagarde’s performance were more guarded. Incredulous analysts struggled to explain it, usually opining that she must have made some kind of gaffe. The head of the Spanish central bank, who doesn’t run the ECB, jumped in to offer some reassurances, while Lagarde herself remarked delphically that she remained committed to stability, too, even if she was disinclined to spell out what that meant.

Soon it became obvious that talk of a mistake was misleading. In an interview with the Frankfurter Allgemeine Zeitung (FAZ), the head of the Bundesbank, Jens Weidmann, strongly defended the ECB’s actions: “We have done what a central bank in a crisis is supposed to do first and foremost: we have provided a generous supply of liquidity to the banks.” Asked a follow up question by the interviewer, Weidmann focused his response on Germany: “German banks have increased their capital and are well supplied with liquidity.” Then he changed the subject, adding that “precisely because of the budgetary discipline of recent years Germany has extensive leeway within the framework of existing European and national rules.”[1]

Within a day, what the German government (if not other countries in the Eurozone) could do with such leeway became starkly clear. Finance Minister Olaf Scholz and Economy Minister Peter Altmeier appeared together to announce measures that out-Draghied Draghi – but just for Germany. Scholz specifically invoked then U.S. Treasury Secretary Hank Paulson’s comment during the 2008 financial crisis that it was time to fire a big “bazooka.” The pair announced that the German government would make “unlimited” credit available to tide German businesses through the epidemic. Altmeier added later that the state might even take positions in companies if that were necessary. The German state, that is, was guaranteeing not just banks, but banks’ counterparties.[2]

In Eurozone, the situation is now untenable. Yes, European Union (EU) officials are offering to allow individual countries to breach temporarily the Eurozone’s constraints on budget deficits to allow emergency fiscal expansion. European bank supervisors and finance ministries are also signaling their willingness to go easy on individual banks as their debtors fall behind in payments. But those measures do not solve the basic problem confronting countries weaker than Germany whose economies are being decimated by COVID-19.

As many economists, (including more than a few writing for INET have recounted), the long running Euro crisis has created deep patterns of center-periphery dependence within Europe.[3] Basically Germany and a handful of other northern countries form the core, and everyone else, especially in the south, constitutes the periphery. Germany routinely ignores pro forma injunctions from Eurozone officials and outside analysts to rein in its current account surplus by expanding German domestic spending. This would stimulate imports from its partners and allow its own population to live better. Instead Germany keeps piling up enormous trade surpluses, while leaving many of its trading partners with even higher debts. With their economic growth slowed to a crawl, capital and younger workers in the periphery flee to richer countries, leaving behind economies whose productivity is too weak to make good their debts to foreign and domestic banks. When we factor in restrictions on budget deficits and state spending that the macroeconomic rules of the Eurozone prescribe, the result is deep, persisting austerity that cripples hope of effective state action in the south to stimulate growth and a vicious circle of demoralizing cuts in social spending and services, including education and public health, that afflicts even some northern countries.[4]

The refusal by Lagarde and the ECB to commit to stabilizing spreads within the Eurozone means that other, weaker countries cannot take measures like Germany’s to stabilize their economies and rescue the population. As the reaction to Lagarde’s announcement showed, absent Draghi-like assurances that the ECB will stand behind their debts, borrowing rates in the peripheral countries immediately take off.

At that point, thanks to the bizarre monetary constitution of the Eurozone, three doom loops all start operating. Firstly, as the weaker countries borrow more and more, their costs of borrowing shoot up. That requires them to shell out more for the same amount of principal and pulls down their credit ratings, adding to their refinancing problems.

But as Athanasios Orphanides, former governor of the central bank of Cyprus, has lucidly explained, the ECB also follows a perverse rule for bond buying that in emergencies can become deadly.[5] In 2005, when France, Germany and other countries pointedly ignored the fiscal restrictions enshrined in the original Stability and Growth Pact, the ECB responded by incorporating private credit-rating agency evaluations of debt into its decisions about what kind of collateral it would accept in return from individual countries in exchange for extending them support. That’s quite a shock: a supra-governmental agency leaving it to private parties to chart its course is the opposite of stabilization. It virtually defines the Eurozone as a bankers’ union and leaves private credit ratings swinging and forth over countries like the sword of Damocles.

When private ratings agencies signal thumbs down, the ECB is supposed to reduce or eliminate altogether its support for individual countries. That has a strong pro-cyclical effect: fear itself becomes a deadly force that can and has led private investors to dump bonds of weak countries even if their positions look collectable in the long run.

But there is more – the third doom loop. In times of pressure, private banks inside any country must rely primarily on their central banks for support. The strength of a central bank depends, in the final analysis, on the strength of the country that operates it. For the ECB to take away a central bank’s line of outside support just as a crisis hits mocks the term “European” in the ECB’s name.

As the Greek case vividly illustrated, if the ECB won’t do business with a country’s central bank, that country’s entire banking system faces collapse. As one of us has shown in detail, European and national banking authorities have done little to clean up their banks, including, famously, the two German giants, Deutsche Bank and Commerzbank.[6] Weidmann is simply blowing smoke in the FAZ interview about the strength of German banks, but Germany can, if it must, likely tide the two giants over with a little help from EU banking supervisors. Italy is not so happily circumstanced. It has many weak banks and the cost of resolving their insolvency now threatens the state itself again.

In the U.S., despite the chaos that has marked the Trump administration’s handling of the pandemic, what will happen with regard to troubled individual states is still pretty obvious. Even if the President’s disdain for the American state apparatus continues to make trouble, each state will be able to draw on the resources of the whole country. The federal government, the Federal Reserve, and other regulators will – finally! – be working together. A considerable amount of aid will be dispensed without any strings attached and states will not be asked to pay back most emergency funds. Impulses by better circumstanced states to aggrandize themselves at the expense of weaker states are likely to be held in check. The challenge, in other words, is to treat the situation as a special case of catastrophic social insurance.

The contrast with the Eurozone is troubling and not just because of the self-righteousness of some German leaders. In recent weeks, suggestions have surfaced indicating that somebody in the EU may be contemplating a large bailout program for Italy, possibly the largest in world history.[7] Such programs have usually been conditioned upon agreements for draconian supervision and “conditionality” by European and other international monitors, such as the International Monetary Fund.

We think the record of these programs is disheartening. So we pray there is no thought of patterning the rescue of Italy or other countries in this crisis on the sorry experience of Greece. But earlier episodes in which the ECB and other European authorities used the ECB to bludgeon weak countries and enrich banks in the core are well documented.

It is plain that Europe is now on the brink of repeating the dreadful 1931 policies that froze the financial markets of Europe and pushed the world into a new and terrible downward leg of the Great Depression. The precipitating event for that crisis and the disastrous 1931 “Standstill Agreement” that came out of it, as Ferguson and Temin showed, was not the bankruptcy of the Austrian Creditanstalt – it was German internal politics.[8]

Germany today is vastly different from that late-stage Weimar regime. Right-wing groups stand mostly on the outside looking in and are in no way comparable to those that made such trouble in the twenties. German big business today is also heavily committed to an internationalist strategy, though recent talk about the need to lengthen the work day and the obsolescence of social partnerships by some business leaders is unsettling.

But the righteous bluster about previous austerity now allowing Germany to spend — and by implication no one else — is economic nonsense. A disaster of the dimensions that Italy and (we suspect) other European countries now confront requires massive, sustained spending to support the life and health of the population and efforts to restructure supplies in ways reminiscent of war economies. Peripheral countries have little hope of repaying loans of the sizes required when their economies can barely function at all. Claims that the ECB’s principal problem is to preserve liquidity in the banking system is mistaken. The first priority is to prevent a debt crisis from turning into a macroeconomic disaster.

Some news accounts report that Lagarde has been apologizing to members of the ECB’s board for her earlier comments. But these stories say nothing about other members of the board who publicly defended those views and who represent very powerful countries. In this situation, private discussions and public affirmations about liquidity are not good enough. The ECB needs to do whatever it takes to support the efforts of Italy and other countries to sustain themselves so that Europe gets through this crisis. Equally importantly, it needs to say this loudly and clearly, so officials in the peripheral countries can act.

The ECB should not allow more fortunate countries to preach austerity or help their banks and corporations to gobble up assets in the south at fire sale prices. Europe’s richer countries – Germany above all – need to emulate the spirit of the U.S. Marshall Plan from which they benefitted so much.[9] Aid they provide must not deepen debt dependence of the countries of the south; countries in the Eurozone should instead act together and contribute according to their ability to pay. We can imagine a variety of ways this can be done, but efforts to shoehorn Italy into a Greek-style conditionality program will almost certainly fail. They will unify the country and bring anti-European political forces to power, much as the 1931 disaster did in Germany.

As Americans, we have one further hope – that the U.S., too, will act more in the spirit of Marshall and not that of “America First.” We closely follow the Federal Reserve’s activities as the world’s lender of last resort, especially its provision of dollars to other central banks through swap lines with the ECB and other central banks. We also track the efforts of American banks to enhance their positions within the Eurozone. We would not be surprised if somewhere down the road, the swap lines became a factor in decisions by European bank regulators about whether U.S. banks can lead rescues of troubled European financial institutions.

The use of the swap lines needs much more discussion. Their proper use now would be to encourage the ECB to do what is actually best for Europe as a whole and not shut out countries in deep trouble. And it is high time that instead of talking about the evils of government and benefits of laissez faire, citizens in both Europe and the U.S. realize that new governing mechanisms are urgently required for the financial system: Taxpayers and ordinary citizens are always the silent equity partners of big banks and central banks. Medicare for All does not exist in the U.S., but single payer insurance assuredly does – for banks courtesy of its citizens who rarely see any upside, but stand by at any moment to step in to absorb losses in a financial system that is now swollen far out of balance that it can function only through hidden public guarantees.[10]


The authors gratefully acknowledge comments from numerous colleagues in the U.S. and Europe, but considering the nature of the piece, we preserve all but one person’s anonymity. Of course we are not speaking on behalf of any institutions with which we are affiliated.

[1] See Weidmann interview by Gerald Braunberger in the Frankfurter Allgemeine Zeitung, March 12, 2012, accessed March 16, 2020,

[2] Guy Chazen and Sam Fleming, “Germany Wields Bazooka in Fight Against Corona Virus,” Financial Times, March 14, 2020, accessed March 16, 2020, the event was the day before. Available at See also Frankfurter Allgemeine Zeitung, March 13, 2020, accessed March 16, 2020,; Der Spiegel, March 13, 2020, Altmeier interview by Martin Knobbe and Gerald Traufetter, accessed March 16, 2020,

[3] See, e.g., the references and discussion in Servaas Storm, “Lost in deflation: Why Italy’s Woes are a Warning to the Whole Eurozone,” Institute for New Economic Thinking Working Paper No. 94, accessed March 16, 2020, Joseph Halevi’s series of papers analyzing the development of the Eurozone on the time are illuminating. See the collection at the INET website at

[4] See Giuseppe Celi, Andrea Ginzburg, Dario Guarascio, Annamaria Simonazzi, Crisis in the European Monetary Union: A Core-Periphery Perspective (London, Routledge, 2019); Orsola Costantini, “The Cyclically Adjusted Budget: The History and Exegesis of a Fateful Estimate,” INET Working Paper No. 24, accessed March 16, 2020,

[5] Athanasios Orphanides, “Monetary policy and fiscal discipline: How the ECB planted the seeds of the euro area crisis,” Vox, March 9, 2018; accessed March 16, 2020,

[6] Edward J. Kane, “Europe’s Zombie Megabanks and the Deferential Regulatory Arrangements that Keep Them In Play,” INET Working Paper, No. 64, accessed March 16, 2020,

[7] Ambrose Evans-Pritchard, “Fears Mount That Italy Will Require A Jumbo Global Bailout to Stem Broader Financial Contagion,” The Telegraph, March 10, 2020. We naturally use such sources with caution, but note the article quotes the former deputy director of the International Monetary Fund in Europe.

[8] Specifically, the decision of German political leaders, under massive pressure from right wing business and military forces, to repudiate reparations payments. See Thomas Ferguson and Peter Temin, Made In Germany: The German Currency Crisis of 1931,” in Research in Economic History, Vol. 21, Alexander J. Field, ed. (Amsterdam: JAI, An Imprint of Elsevier Science, 2003), pp. 1-53; Ferguson and Temin, “Comment on ‘The German Twin Crisis of 1931,’” Journal of Economic History, Vol. 64, No. 3 (Sept. 2004), pp. 872-76.

[9] Or perhaps more exactly, the myth of the Marshall Plan. This in fact contained various constraints designed to nudge recipients in directions the U.S. wanted them to go, including a network of local administrators. But many of its funds were lent out in local currencies. In countries whose currencies depreciated, repayment was accepted in that diminished currency. At the end of the program, countries whose currencies appreciated were allowed to keep the money and plow the funds into various educational and philanthropic efforts. Presumably supranational institutions like the ECB and EU can do better. Special thanks to Walker Todd for comments on this part of the discussion.

[10] See the discussion and empirical evidence of the value of government implicit guarantees for large banks in Armen Hovakimian, Edward Kane, and Luc Laeven, “Tracking Variation in Systemic Risk at US Banks During 1974-2013,” INET Working Paper No. 16, accessed March 16, 2020,

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  1. JBird4049

    I just don’t understand how anyone can think that a pandemic that has already caused major economic problems, never mind the other economic problems of much Europe, does not require real changes. Yeah, I can easily find quotes from Germans saying that all debts must be paid no matter what, but never any good explanation except empty moralizing that says that the beatings will continue until morale improves. Between Boris Johnson, Emmanuel Macron, and the Germans, President Trump is looking better?!? Considering how he has botched COVID-19 pandemic that’s not good. At least nobody is doing as interestingly as Prime Minister Scott Morrison.

    It is not ideology or politics that is the problem in the West. It is the overwhelming incompetence. No, the overwhelming incompetence coupled with an utter lack of awareness of just how incompetent, or even that they can be possibly so. Even an idiot can do a good job, if they have some self-awareness, a willingness to keep asking questions, and they make the effort to keep doing the changes needed to do their job. Instead, we have fools for leaders. I rather have Emperor Norton the First, Emperor of the United States and Protector of México back. He might have been crazy but he did not look like a fool.

    Who’s better and who’s worse? Does it matter? They all seem to rowing as quickly as they can to fly over the lip of the Niagara Falls as if their rowboats will all spread wings and fly.

    But back to being serious here. It does not take that much intelligence and education, or even just some little wisdom to see that what is being done now is failing and that the engine really is about to seize up soon. I can understand that the Italians just might say bye or more likely that their banking system’s likely failure will cause the other major banks to collapse. Like maybe this Summer. Certainly in a very few years. This is also true for countries like the UK, France, and Australia with their own problems. Are they truly not seeing the obvious? And can anyone in position of responsibility be made to see? Or are the Sirens for the next election making them impossibly deaf?

    1. Ignacio

      How right you are. All these guys with the helmets of monetary policy are the most denialist and the latest in reactive measures. They are completely out of bounds and may be the ultimate responsible for an euro breakup followed by an EU decomposition. This is infuriating for me. I no longer have stomach to have to read quotes from one of, IMO, the stupidest ordoliberal guys on earth (Weidmann). I don’t understand also why France (yes France) Italy, Portugal and Spain do not coordinate a response for this. They have the power to change things and if Germans (German leaders) are unable to pledge for a real change time has come to break it all.

          1. WobblyTelomeres

            IANAC(entral)B(anker), but I have always felt that the UK had the best monetary deal in the EU; they kept their currency. The monetary structure of the EU only works in happy times. Until Brussels/ECB can send vast sums of fiat money to the member states, as the US can and sometimes does, they are stuck in Austeria. Greece, as you and Yanis point out, is a prime example of where this fundamental flaw leads.

            1. Johnonomous

              Couldn’t agree more, Ignacio! EU has all the resources to solve this problem on their own. Other than dollar liquidity, they don’t need the U.S.–although we should offer help. Expecting them to fix this themselves isn’t jingoistic-isolationism, it’s simply expecting them to be who, and what, they say they are: a Union.

          2. drumlin woodchuckles

            All EUrope was united against Greece. Am I wrong to think that? Did any EUropean country arise to protect Greece from German bank-bailout aggression?

            If any one or another European country wishes to leave the EUroMoney-Zone, Germany will whip the others into crushing it down to a Greece level. The only way the other European countries can escape Germany’s EUroColonial Empire is to all conspire together to all leave at once.

            Much as Yeltsin quietly conspired with the leaders of Belarus and Ukraine ( I think) to all leave the USSR at once.

      1. CBBB

        As bad as Trump is, the European elite are utter, short-sighted morons. I think a lot of Italian/French elite buy into the German ordo-liberal propaganda. I mean most Germans think the constant trade-surpluses area sign of strength and don’t realize that the typical German worker isn’t very well off materially.

        1. bmeisen

          The “typical German worker” gets up to 30 fully paid sick days, extended sick leave with substantial (though not full) compensation, public health insurance that is cheaper and arguably better than any plan in the US (gesetzlich Versicherte get full medical, substantial dental, drug, mental, physio, and rehab coverage – all part of standard public German coverage), average 25 days of paid vacation from day 1, 10 – 12 paid public holidays, free often very good public primary and secondary education, virtually free often very good public higher education (total cost per student €1000 – €2000 per year maximum, including free regional public transit pass), a broad network of public transportation that is getting more and more affordable, paid maternity leave, subsidized parenting leave … the list goes on. In short, the German worker gets real, concrete, material benefits from the taxes she pays. While per capita income comparisons can provoke doubt, the average German worker enjoys benefits that dramatically enhance her quality of life and that can substantially increase her financial profile in comparison to for example the average worker in the US.

          1. CBBB

            I’m well aware of all that, but never-the-less from my perspective there must be a distributional problem and the workers still earn too little. That is indicated by the persistent trade surpluses. If the income of workers, particularly middle and lower income ones went up you would see increased domestic consumption of domestic production lowering exports or increasing consumption of imported goods raising imports thus narrowing the trade surplus.
            The savings rate is high in Germany but this is not the savings of the average German worker, rather it is a consequence of unequal distribution – far more equal than in the US but apparently still not good enough.

            1. JBird4049

              Well, this American almost wants to weep after reading all those benefits. For us it is a fantasy to ever have a list of benefits like that. I’m more likely to join the 149,000 homeless among my fellow Californians than to have in my life something as good.

          2. Massinissa

            I think CBBB was comparing them to other west european countries. Most first world workers are better off than the workers of the USA.

            1. CBBB

              And German workers are generally well-compensated compared to other European countries – compared to France, Italy, or the UK for example (although not compared to Switzerland – higher prices there though, no need to get into it). But the persistent trade surpluses indicate that wages are too low.

          3. Dirk77

            Hmm. It seems everyone should be moving there. Yet Merkel decided to bring in 1M refugees, presumably to shore up housing prices due to a falling population.

            1. deplorado

              A family of close friends, a German and a Mexican, who both have spent decades in the US, are leaving the Bay Area for Germany next month. This was planned for some time over the course the last year and now they decided to pull the trigger. They have 2 young children. She works for Google legal, he is a labor attorney. They live in Oakland and are literally barely covering their bills with preschool, rent, student loans for him, some health care spending that she needed, and a job change for him where he was looking for work for a couple of months.

              They dont have solid family in Germany to help them, but are leaving even without jobs lined up (by the way she said she was sick with how Google treated her over the course of here health issue and doesnt want to work there anymore. She was making a little over 100k). They believe they will be more secure in Germany starting from scratch, than in the vaunted Bay Area.

              They are Bernie fans and we joked once that Bernie’s slogan should be “Make America Livable Again”.

              I will follow their experience closely.

              1. drumlin woodchuckles

                That could be a slogan and a hat for whatever party ( if any) emerges from the ashes and rubble of events.

                The TrumpCo Organization would of course sue. So the MALA hat people could say ” Go ahead and please sue us! We need the publicity!”

                That is a meme-stub which Trump has bequeathed to the culture.
                MALA. already discussed.
                MAOKA. Make America OK Again.
                MAGoodA. Make America Good Again.
                MAGrA. Make America Green Again. Or if that looks too much like MAGA
                then . . . MAGRA. Make America GReen Again.


          4. Seamus Padraig

            Maybe, but it seems the typical German worker isn’t as typical as he used to be. I’ve lived in Germany for 13 years, and I see quite lot of people working on contract, or holding down ‘Minijobs’. Those secure, cushy Angestellter jobs don’t grow on trees anymore.

          5. stan6565

            It is very nice to see such a detailed list of benefits and opportunities that are laid out for the average German worker.

            If one then turns to the other countries in the E.U., one will find that such largesse does not exist anywhere else. It may have existed in USA back in 60s or 70s when USA manufactured everything for the world.

            Your detailed list, by itself, shows why the E.U. will not survive in it’s current iteration. Either all countries get these lovely benefits (not realistic), or all E.U. workers trend towards median ( including German ones).

            Entropy, my favourite word.

      2. lou strong

        ” I don’t understand also why France (yes France) Italy, Portugal and Spain do not coordinate a response for this”.
        The image I’ll try to use about the issue is that , from the very beginning ,Germany is the boss and France the deputy boss.Until now, they decide the rules , the observance of them and mostly the self-inobservance of them. Even when talking economics, it’s politics aka the exercise of power in its core .Europe based on the French-German axis is not an expression.
        Until now, to put France in the hypothetic “Southern or Latin countries front” is not realistic.To follow your line, I’m talking especially about France, but I’d add that even without France in the past nobody saw the “front” I’m talking about.
        Then, the incoming mess could change everything, but for the moment I don’t see signs .

    2. Mietzsche

      Germans have their own mentality, are fairly certain that they are always the best at everything and are only vaguely aware of the existence of the outside world. Buttslapped by dieselgate? France a whole generation ahead in diesel engines? Not gonna stop a CEO from confidently declaring that “don´t want to brag, but we might have the best diesel engines.” No architectural advances whatsoever since the 1920s and 10 years behind the technological curve? “We are the best and everyone copies us.” I work there right now. The office fridge is rigged to yell “Deutschland ist Weltmeister” every time it opens. In about a year they will slowly start to begin to consider to rethink the possibility of making a feasibility study. And then do nothing.

      1. CBBB

        “No architectural advances whatsoever since the 1920s”

        hahah I don’t know exactly what you mean by that but the architecture in Germany is pretty bad. I can understand the immediate post-war stuff as they had to put it up cheaply and quickly but the new buildings they build are extremely bland and ugly too. Incredibly badly designed apartments.

        1. eyebear

          Sheer nonsense.
          German cities like my hometown where destroyed up to 80 or 90% of the buildings.
          The people where shocked from what they had experienced during the war. It lasted around 10 years to get rid of these horrible feelings – and then they began to build new houses. Millions of people were in need for a decent living – and that was what has been build from ca. 1955 to 1975. This social housing is one of the pillars of the german economic succces, even nowadays.

          1. Mietzsche

            The quality of apartments peaked in the 1990s I think. I don’t fully unterstand what sort of drug induced insanity’s been happening since then. In Ulm, at least, the thought process (in which social housing cooperatives totally participate) goes sort of like this:
            1) There is a shortage of 2-room apartments.
            2) Most people live or want to live alone.
            3) Even more people will live alone in the future.
            4) We need more 2-room apartments.
            5) Let’s build a whole new city quarter with less than 20% 2-room apartments, those are like for tourists only or some shit.
            So, in essence:
            1) We know there is a problem.
            2) We researched the problem.
            3) We came to the right conclusions.
            4) We will just keep on doing what works.
            “The beatings will continue until morale improves.”

    3. David B Harrison

      It is not incompetence it is neoliberalism(the greatest cult in human history)which has been around for at least 47 years now(1973 oil embargo when everything changed).When I was in high school(78-82) I was already questioning everything and was getting push back from my teachers and fellow students because they said you don’t solve problems you profit from them.So it is a mindset making it nearly impossible to solve problems.Only deprogramming neoliberals from their beliefs will start us on the road to a better future. This in response to JBird4049 March 17,2020 6:50AM

      1. Massinissa

        Neoliberalism isn’t a cargo cult, well, except for economists and proles. For the actual elites, its doing exactly what it is supposed to do. Feature not a bug.

    4. Stevie Sugarman

      It is as if these ‘leaders’ are purposely driving entire countries into the arms of the far right. What could they possibly be thinking??

  2. Tom Pfotzer

    More of the same. Borrow big – from “others”, from the “future”, from the planet – and use the proceeds to support business-as-usual. This is the developed world’s modus operandi for the past 40 years.

    How many more examples of a policy that clearly hasn’t, isn’t and (therefore likely) won’t work do we really need?

    These seem to be our new realities:

    a. some people / cultures are way more productive than others
    b. the way we currently run our economies is killing the planet (quickly)
    c. the value of human labor in this centralizing / capital-intensive economy is dropping like a stone
    d. the capacity to generate economic value is rapidly concentrating into the hands of the few

    Most of the world’s econ problems can be traced back to a-thru-d above. I don’t see much (anything?) in the paper presented above that addresses these well-identified root causes.

    May I respectfully suggest to the world at large, starting right here at NC, that we:

    a. Name / affirm the core causes
    b. Generate some solutions
    c. Start implementing while we still can
    d. Adjust toward what actually seems to work

    Best wishes to all in these momentous times.

    1. Yves Smith Post author

      It appears you haven’t been reading what we’ve been writing on government spending, or at least not with any care. For a currency issuer like the Eurozone to spend does not require borrowing. The Eurozone ought to be helping member states, who indeed must borrow (they are currency users, not issuers). The ECB can stealth monetize, the Eurozone can create EU level programs, there are many ways to skin this cat.

      The constraint on the Eurozone’s spending is inflation, and since the Eurozone is in borderline deflation looking at a full bore depression, there’s no inflation risk. The fact that you say something which is inaccurate discredits the rest of your comment.

      It is also inconsistent to decry damage to the planet yet praise “productivity” which often entails carbon-generating activities.

      As to concerns about the planet, there are also numerous productive activities that a stimulus program could fund which are low carbon or even carbon sinks, like planting trees (some types of ground cover are even better, but “trees” illustrates the general premise).

      Finally, your “suggestion” is an assignment, a violation of our written site Policies.

      1. Clive

        Good luck building that “elsewhere”. If you try, you might want to come back in, say, a year or so and tell us all how easy you found it to get a blog off the ground, keep the quality levels up, keep the bills which roll in with depressing regularity paid to ensure the show stays on the road, endure the stress of providing content and the personal commitment in terms of time was manage.

        If you do, I suspect you’d say to Yves — and any of us who know exactly how hard it is to produce one semi-decent article (it takes my at least a day’s work and it is the hardest work that I set myself to do) — how sorry you are for having the nerve to have tried to dump yet more on her.

  3. Tom Stone

    That article is enough to cure anyone’s constipation.
    If LaGarde goes ahead the odds of Societal collapse have just increased substantially, and the odds of walking her statements back depend on her estimate of the political cost, to her.

    Time for a glass of my soothing potion, here’s the recipe.
    Start with a quart of everclear, measure out 1 cup and drink it (Waste not..), measure out another 1/4 cup and when you have your breath back, drink that.
    Add 1 cup coarsely chopped valerian root and 1/4 cup finely ground cannabis ( Use indica for a more soporofic effect, sativa if you want a smoother ride).
    Shake vigorously twice a day for 2 weeks while storing it in a cool dry place, strain it through cheesecloth and Enjoy!

    The remaining solids can be used to garnish salads or to spice up kale smoothies.

    1. CoryP

      Yikes, wow that sounds like a heck of a sleep aid. And here I’ve been consuming these ingredients separately like a dummy.

      1. Tom Stone

        Rob, not for about 20 years.
        I actually got that recipe from a co worker at the Fmali Herb Co about 45 years ago, he took a shot of it with breakfast every morning and functioned fine.
        I was head Garbler at the time and was the book keeper.

    2. LawnDart

      Got into my friend’s liquor stash years ago after a very stressful day (night) at work. Full bottle, I poured myself a stiff rum and coke, hoping to turn the lights out.

      I made another one: not working, still wired. So another. Spinning a bit but not in the slightest drunk or sleepy, figured it was the caffeine so I skipped that and poured another tall rum, straight on the rocks. Finished that and still not working.

      “To hell with it!” I thought, and maybe after a few more, laid on the couch trying to will myself to sleep– for the next several hours experiencing very vivid thoughts or dreams– don’t know which.

      Mid-afternoon, I realized that it was daylight and I needed to start my shift soon. I got up, and to my dismay, found my legs couldn’t carry me straight. “Damn, I must still be a bit drunk,” I thought, though feeling… … unusual, not drunk, not hung-over, but… … something else.

      Glancing at the liquor cabinet as I stumbled past, I looked at the bottle of rum– quarter-full. And most of that, a dark green lump of material. “Oh. Shiiii…”

      Running the shower hot-cold-hot-cold brushing teeth for 15-minutes and gargelling a half-bottle of mouthwash looking in the mirror and they won’t go away! “I am so screwed!” The smiles, they won’t go away!!! But gotta go, gotta go– can’t be late!

      I made it to roll call with minutes to spare. Somehow I managed to get into my body armor and remembered my weapon. I hid behind sunglasses but couldn’t hide the smiles. I was sweating… “Everyone knows! Everyone knows!” I thought to myself, smiling so hard my cheeks were numb.

      Roll call ended, and I could feel the eyes of a dozen officers lay their weight on me.

      I bolted. Gone. Got in my squad and disappeared, cooped for the next three days, smiles all the while, sweating and waiting to get called in to fill the cup. But that never happened.

      Such was my experience with your “soothing potion.”

      Never again. Never.


  4. Fraibert

    Ultimately, it seems to me that the EU is an economic subsidy for Northern Europe, particularly Germany and France, at the expense of less wealthy Southern and Eastern European nations. This subsidy provides artificially lower currency exchange rates, more convenient export markets, and a readily available supply of cheap labor. I suppose in turn Southern and Eastern Europe get lent money by the North (especially Germany) so the people in the less wealthy countries can actually afford those exports too–but these loans aren’t actually repayable.

    Somehow this outline does not seem to be the basis of a durable arrangement. Am I missing something?

  5. Matthew G. Saroff

    I would argue that this is more of a Eurozone issue than an EU issue, and as always, I suggest that the first move that should be taken as part of an attempt to fix the Euro is to kick GERMANY out of the Euro.

    There NOT be a capital flight from Germany, though there would be significant capital flows into the country, but that would drive up the Deutschmark, which would stabilize EU imbalances.

    Germany is a predatory exporter who deliberately depresses domestic demand in furtherance of those positions, and until the rest of the Euro countries deal with this, they will continue to face recessionary forces.

    Let their currency rise until things stabilize.

    1. CBBB

      In the absence of their own currency the Germans should be undergoing internal evaluation – just as they forced the Greeks to do through internal devaluation during the crisis – the Germans need to increase domestic wages but they refuse to do this because they are obsessed with their trade surpluses which are ultimately a source of weakness.

  6. Rob Dunford

    Governments pumping huge amounts of money into failing economies, isn’t that a precursor to high inflation or maybe even hyper-inflation?
    Have to admit a lot of this I don’t understand.
    How does the recent actions of Putin and oil supply, play into all this. If Russia can actually contain the virus there at minimal cost, then could Russia end up the strongest country in the Eurasia area.

    1. Larry Y

      When the economy is failing from demand destruction and the endgame is deflation… also it’s not a problem if all the debts are denominated in your own currency, essentials are large locally produced (food), and your currency is a reserve currency.

      Problem is Italy doesn’t have full control of its currency. If anything, Italy had better economic outcomes when it had the lira and higher inflation.

  7. oliverks

    I think COVID19 will cause Italy to break away from the Euro zone. The damage by Germany (initially banning mask sales) to the rest of Europe that didn’t help when Italy asked, is going to sting for a long time. The US slammed its door in the face of Italy (and Europe). China stepped up and offered to help (for a fee) but they have done more than any of the European counterparts.

    Conte has emerged as a leader. May be not a perfect leader, but he has inspired people to sacrifice for the good of the country. When I talk to people in Italy, they all talk about their shared responsibility, even the slogans and messaging people use is similar. He has managed to unify the country at least briefly.

    Lagarde’s comment is like rubbing salt in a wound.

    The 5 star and Lega Nord are both Euro skeptic parties. If Conte decides to take Italy out of the Euro zone, I think Italians will follow him, and frankly, I wouldn’t blame them.

    1. vlade

      Germany is generating a lot of badwill inthe EU right now. Not just by banning the mask sales, but by seizing already sold shipments. I heard at least three countries bought masks, and the containers were seized by the German government as “not allowed to export”.

      With this level of solidarity, who needs Brexit?

      Merkel and Macron failed big time, and the history (what will be there, anyways) will remember them as such.

      I now believe that the crisis-less evironment most of the first world lived for the last 30-40 years meant that the leaders were replaced by beaurocrats. The safety is its own doom device.

      1. jsn

        The absence of other existential threats under the MAD paradigm created a selection pressure in government for sociopathic social climbers.

        Combined with neoliberal markets where “shareholders value” justified any and all financial legerdemain, the pinnacles of business ended up occupied by psychopaths.

        We’re giving Kakistocracy a bad name!

  8. None

    The authors seem to be begging the northern countries not to raid and pillage the southern countries. To paraphrase: “we know every other chance they’ve gotten, they’ve robbed and looted the peripheral countries for as much as they could get, and have shown no remorse. This time they must not do that, because it could really hurt those victim countries, so we hope they won’t loot them.”

  9. Susan the other

    Germany only believes it is in good shape financially after imposing austerity on its citizens since the GFC to bail out DB with taxes. (It still sounds like DB is a goner.) So maybe they are still angry about how the GFC got started – by fudging debt and mishandling debt in the first place. But this is no time to turn into the world’s most egregious bond vigilante by setting the rules against their member states. When Lagarde says the ECB is not there to stabilize spreads she is saying two things: one, Germany can set it’s yields too low for the rest of the EU, and therefore two, create the spreads in the first place. How can she be so stupid? The ECB needs a mandate to protect the EU members from being plundered by Germany and Lagarde’s ECB itself. At the IMF she was generous to a fault to Argentina – so can I conclude that her ECB policies/attitudes are different because Germany originally imagined the EU to be its colony and is trying to still create this colonization? It really does look like a long term business plan. Would Germany be as destitute as the rest of the EU if it did not have this advantage? And what is going to happen to Germany when its auto industry goes belly up? Really, the question is, what does Germany have to give it any advantage at all?

  10. eg

    I sure hope somebody in the Italian civil service has Warren Mosler’s plan of how to dispose of the Euro squirreled away in a cabinet somewhere, because they are going to need it if this *family blog* keeps up …

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