It’s good to be writing on here again after being temporarily sidelined by a broken hand. Luckily for this website, my colleagues Edison and Marshall have stepped in to provide you all with great content. With my hand still wrapped up like Darth Vader, I’ll only make a short, yet necessary, post today.
I want to talk briefly about Europe since the debt crisis is currently the greatest obstacle to growth in the developed world. I’m not really surprised to see the news today that the German Bundestag bit the bullet and increased the powers available to the European bailout fund. As I’ve argued previously, the German policymakers have seemed more than content to demand two mutually exclusive actions from the recessionary Greek economy (lower debt, higher growth). This leads to the conclusion that most of what Merkel and company were saying was really just rhetoric meant to bolster poll numbers at home; the german taxpayer being considered to be Euroskeptic. As many of us feared, the Franco-German leaders of the euro, rather than being bold and proactive, have shown themselves to be far more interested in muddling through the crisis with the hope of some deus ex machina (China?) resolving the crisis. Much like what we saw during the debt-ceiling debacle over here in the US, politicians took the opportunity to rally their bases until suddenly passing the needed legislation at the last minute. It seems Europe really is not immune to American political theatre.
What does this portend for Greece and the rest of the troubled European economies? Pretty much nothing too great as far as I can see. I don’t think the action by the Bundestag has convinced anyone that Greece will surely not default. In fact, I think the number of people who think Greece will default is on the rise. Furthermore, If you check out the Reuter’s article, or really any news update out of Europe, you will find out rather quickly that 10-year yields on Italy’s ”too-big-to-bail” economy have continued their increase towards the 6% range. This is not good. By “muddling through”, the euroleaders run the risk of losing control of the panic in the bond market at which point exit from the euro (by one or many of the weaker economies) or some massive change to the eurozone function (transfer union) are the only options that will prevent huge losses from debt exposure and a weakened currency.
Frankly writing this article I feel as if I’ve written it one hundred times before. I think everyone has. I suppose we can gain some confidence that Germany won’t become the tea party of Europe, sacrificing economic stability for the sake of poorly understood ideals, and will continue to provide the least necessary engagement in order to prevent total collapse. But unless we start seeing Italian bond yields settling down, Merkel needs to take this as a signal that the eurozone is not safe from collapse and that more action is necessary. I’m not suggesting a transfer union, but there needs to be more direct action to show the markets that Europe can take of itself without resorting to divisive nationalism and self-righteousness.
I’ll try and post something else in the coming days, most likely on opinions of growth in China. So keep your eyes open and please leave a comment!
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Reading between the lines, I see more postings on the tea party in the near future..
glad to have you back
The EFSF needs to be bigger. $594 B may have been enough in early 2010 when the crisis started, but conditions have worsened. It probably won’t happen for a long while, but it will eventually be necessary.
Your unwarranted attack on the tea party is not central to your argument.
I agree with OFM, and while I applaud the attempted juxtaposition, I’m not sure it holds. Is our understanding of austerity a poorly understand ideal? I think both the Tea Party fiscal hawkishness and Germany’s brinkmanship of sorts over Euro profligacy are symptomatic of structural problems (i.e. the unsustainable fiscal future of the welfare state in all its gradations) that can only be addressed by complete and, most importantly, permanent structural reform. Rather than being agents of change, they are both the ideological mirror image of their opponents. Neither side of the spending-austerity argument wants their constituents footing the bill; however, cheap, easy wins are missed by the close-minded leadership of both sides.
Now, do we really need spending cuts right now? No, and anyone who doesn’t admit that is kidding themselves. However, cuts do not necessarily follow from reform. Tort reform would help reduce costs in the healthcare system in the US, yet I see no one outside of RIck Perry mentioning the idea. Tax reform, without using the discussion as a backdoor to raising “revenues,” is another easy win, as are trade deals with South Korea, Colombia, and Panama. These ideas would help create a more growth friendly environment without moving the spending needle much in either direction.
Why haven’t these easy wins been implemented? The poorly understood/poorly implemented liberal notions of “fairness” and “made in America.” Liberal trade policy amounts to little more than protectionism and subsidies for workers who lose there jobs as a result of moving towards freer trade which will benefit us all (by definition it makes everyone better off, otherwise it wouldn’t happen). Don’t misinterpret this as saying that new revenues shouldn’t be a part of tax reform; although obviously I’d prefer if they weren’t, I think that the tax base can be broadened through the closing of loopholes and elimination of subsidies (including green power and especially ethanol!!!!).
The Tea Party is the ideological counterweight to liberal overspending; while they aren’t perfect, neither are their opponents. They are a counter-movement, defined in no small part by their peers across the aisle. Does this get us closer to a real solution. No. But, it’s better than a de facto one-party where poorly conceived, half-written regulatory monsters like Obamacare sail through Congress.
Unfortunately, I think our understanding of austerity is far from perfect. I originally supported the tea party’s deficit reduction push during the summer because I believed the bond markets would punish us as they were punishing the other big deficit countries. I was wrong. The bond market responded in exactly the opposite direction from what the deficit hawks would have us believe and we were left with 10 year rates of less than 2%. I think this fits the definition of poorly understood.
And this is where the juxtaposition holds. In the same way that the tea party (and most of America to be fair) misjudged the bond market, now Germany runs the risk of misjudging its own power to contain the crisis given its high level of debt and exposure. It is slightly encouraging to see the Germans stepping back from the almost mindless rhetoric of retribution whereby high debt countries would need to get their just desserts. This made for good base-rousing soundbites for Merkel’s coalition, but it is poor economics and poor politics.
It’s very easy for the trade surplus countries to lecture the deficit countries about restraint, but does that lecture actually hold up to scrutiny? The short answer is “no”. China, Japan, and Germany rely on their export markets to maintain growth and so they profit when other countries run massive trade deficits with them. Furthermore, why hasn’t it occurred to our trade-surplus friends that the extreme conditions of massive deficits that helped cause the debt crisis were also accompanied by extreme surpluses. Perhaps the Germans and the Chinese should undertake more impor- friendly trade policies which might provide a little more demand in a world economy short of it. In a time of excess supply, it doesn’t stand to reason that those countries creating that supply and suppressing domestic demand should lecture anyone.
The reference to the tea party was less an attack on the tea party and more a warning that Germany can’t let its own (poorly understood) principles get in the way of preventing the collapse of Europe.
I buy the bond hawk argument. I suppose when (if?) the markets finally wake up, I’m afraid we won’t be able to make changes in time. It may be overcautious, but I think there are clear changes that can be made to improve things without lots of fiscal pain.
I think the bond markets didn’t strike simply because they couldn’t afford to. The only comparably liquid and deep bond market is Europe’s, but that is currently imploding. This leaves the American debt market as the only other place to dump forex or simply make safe investments. Until there is a viable alternative to the US debt market (Chinese?) I don’t think the world can afford to invest elsewhere.
Yeah, that’s been a new concept I’ve come to understand, the depth of a market. Same reason China can’t credibly threaten dollar dumping, at least for a while.