The failure of the European authorities to arrest the speculative run on Greek bonds and the sense of inevitable wider collapse reminds me of the diplomatic failures that led to World War I.
In the summer of 1914, myopic bluffing by Europe's key leaders produced a catastrophe that nobody wanted. It began in Serbia, a small nationalistic province of a decaying Austro-Hungarian empire, but the conflagration soon spread to all of Europe like a chain of firecrackers. No leader was farsighted enough to grasp the wider common stakes and head off disaster. Each pursued only narrow self-interest.
The impending economic collapse of Europe is looking like one of those avoidable calamities in slow motion.
Here are the elements of the Greek crisis, its wider ripple effects, the diplomatic paralysis, and the solution that seems beyond the grasp of European politics.
Greece, a small nation of just over 11 million people, has a government debt that it cannot service without external aid. Speculators expecting a default have been making bets that Greece will fail to pay, raising its interest costs and thus increasing the likelihood of the default they are betting on.
One can fairly debate how much the Greek fiscal woes are the result of earlier profligacy during the boom years, or failure to collect adequate taxes on Greece's gray economy, or overly generous protections for civil servants -- or the result of the recession itself. But these are questions for another day. When a house is on fire and threatens the whole neighborhood, it's not smart to dither about whether there was adequate fire-prevention while the place burns down. You put the fire out.
As a technical matter, it would not be hard to put out the fire that is consuming Greece and threatening the rest of Europe. Short term Greek debt needs to be exchanged for longer term, lower interest bonds issued or guaranteed by the EU. The current bondholders, Greek and foreign banks, as well as issuers of credit default swaps, would need to eat some losses. In the case of banks, that capital would need to be made up by some combination of the European Central Bank, the International Monetary Fund, and the European Union.
Greece would then be allowed to resume economic growth, instead of being pushed further and further into a self-reinforcing austerity (which is obviously not working) to reassure bondholders (who are not reassured). Then, with Greece spared either default or prolonged austerity, and the immediate threat to the Euro and the European economy prevented as well, leaders could then take a deep breath and pursue longer term structural reforms.
A negotiated restructuring along these lines was exactly what Nicholas Brady, the Treasury Secretary under Bush I, achieved with his Brady Plan in 1989. Several Latin American and other debtor countries were being denied the capacity to grow because they were weighted down with crippling debts, high interest costs, and austerity demands by creditors.
Brady, not exactly a left-winger, negotiated a deal that required creditors to take their feet off the oxygen hoses of struggling countries. Some creditors lost money in the grand bargain, but wider damage was contained. Latin America could put its "Lost Decade" behind it, and resume growth.
Why isn't something similar being done for Greece, a far smaller economy than those that got Brady Plan relief?
First, helping Greece is very unpopular with several constituencies, including German taxpayers, the German finance ministry, and leaders of the European Central Bank. The most that European leaders have been able to negotiate is a slow drip of financial aid -- just barely sufficient to enable Greece to keep current on its payments to bondholders.
As the proverbial pound of flesh to demonstrate that Greece is not being rewarded for past sins, Greece is being made to sink deeper and deeper into austerity. Just about every knowledgeable European leader recognizes the perversity of this policy, but nobody seems able to alter it.
A second political obstacle is the fear that helping Greece will lead to similar demands from Portugal, Spain, Ireland, and even Italy, to Europeanize their national debts.
A third obstacle to a solution is the political power of the banks and other financial players. The bankers who hold Greek debt don't really care if Greece gets bled dry. They just want to be paid and not have the capital value of their Greek bonds decline further.
The big financial houses that have issued credit default swaps (CDS) on Greek bonds have also resisted any Brady-style restructuring plan, which would technically be considered a default since bondholders would not be paid back at 100 cents on the Euro -- thus triggering payments under CDS contracts.
Normally, a country that got into a debt crisis and needed relief would have the option to include devaluation as part of a restructuring deal. That would make its exports cheaper and its imports more expensive, reducing domestic consumption and stimulating the economy. But Greece, as a member of the Euro zone, is stuck using the same currency as richer countries like Germany and the Netherlands.
So in addition to a short term plan to give Greece deeper debt relief, Europe needs several kinds of structural reforms. It needs a fiscal authority to issue bonds on behalf of national governments.
The overly inflation-phobic European Central bank needs to purchase more bonds to take the pressure off national governments.
And the power of bankers and other financiers to turn the financing sovereign debt into a speculative circus needs to be broken. Side bets -- "naked credit default swaps" -- on sovereign debt should be prohibited outright.
The financial sector needs to be both simplified and more effectively regulated. Before this crisis is over, many of Europe's large banks may need to be partly recapitalized by the ECB and European governments. And this time, unlike the US bank bailout under the TARP program, drastic regulatory limits on speculation should be part of the bargain.
The issue of whether the Euro was always a fatally flawed idea is also a separate question. Some will say that it was never possible to have monetary union without budgetary union, that the Euro was an accident waiting to happen.
I disagree. Until speculative private finance crashed the larger economy, the EU was dealing with strains of its weaker and stronger economies more than adequately.
Will European leaders pursue any of these remedies, most of which sound utopian in the context of the current political blockage? I hope so. European leaders should compare these policies with the alternative -- a Greek default spreading to defaults of other European government bonds, the insolvency of several of the largest European banks, a deep recession of the real economy -- and some kind of more extreme emergency rescue in even more dire circumstances. Maybe they will act while there is still time to head off deeper disaster.
Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is A Presidency in Peril.
Under fire, Europe works to bolster debt crisis fund
US Stock Futures Advance as Leaders Meet on Europe Debt Crisis
Euro crisis: three perspectives
US pressures Europe to act with force on debt crisis
Euro Rises on Optimism EU May Speed Fund to Stem Debt Crisis
Kudrin Prefers Greek Rescue to Prevent Italy, Spain Contagion
Australia 'Rock Solid' Amid Europe Debt Crisis, Swan Says
This concerns us all: is our money in danger?
Essen, September 20, 2011
Dear Mr Bartholomew,
Several Euro countries are in danger of national bankruptcy. Anxiety about the crisis, the consequences of which still can't be estimated, is also flourishing in this country [German]. Germany has already made many billions of euros available for the so-called 'rescue action'. What do you think? Must we continue to support the affected EU countries? ---or should we concentrate on our own interests?
How afraid are you of a euro crash, Mr Bartholomew?
The NRZ would like to devote a big special edition to this question. And we're especially interested in your answer. Please participate---it pays off.
Sincerely,
Dr Hanno Saade, publishing house manager
The survey questions are:
1. Are you afraid that the euro crisis is going to burn up our money sooner or later?
2. Do you believe that public interests will go by the boards in Düsseldorf because too much money is going into the rescue packages?
3. Is the euro-crisis making you worry about your job and your pension?
4. Can you feel the effects of the crisis during your daily life in Düsseldorf?
5. How satisfied are you with our government's performance during the euro-crisis?
How would you answer if you were a German citizen?
When the State controls the economy – hiring huge numbers of people, guaranteeing vast pensions, and promising elaborate welfare benefits – everything goes bankrupt at once. There is no gradual process of individual companies realizing that their business models aren’t working, or their benefit plans are unsustainable. There are no little failures that could warn of greater danger to come. There are no small austerities to help the populace understand the true value of their labor, and undertake the difficult process of seeking out genuine opportunity, where labor can be sold to those who truly value it. Lifestyles are not gradually adjusted when benefits are “guaranteed” in perpetuity.
One day, it all stops working, all at once. Greece will stop working any day now, with consequences ranging from horrifying social unrest at home, to a series of financial dominoes falling throughout the Eurozone.
1 : any of various economic and political theories advocating collective or governmental ownership and administration of the means of production and distribution of goods
2 a : a system of society or group living in which the means of production are owned and controlled by the state
3 : a stage of society in Marxist theory transitional between capitalism and communism and distinguished by unequal distribution of goods and pay according to work done
-- Merriam Webster´s Collegiate Dictionary, 2004, 11th edn. (Springfield, MA: Merriam-Webster, Inc., 2004).
Presumably the original poster is using the third definition in which socialism and the state co-exist. Only after full communism is achieved does the state disappear. Again, according to Merriam-Webster's, communism is defined as, i.a.:
2 c : a final stage of society in Marxist theory in which the state has withered away and economic goods are distributed equitably
-- ibid.
http://news.yahoo.com/greece-loans-time-avoid-default-100310893.html
The entire EU was a scam from the start. The entire reason for the common currency was to sell German and French goods to the countries they brought in to the EU. They did not demand that all the countries were equals, therefore the present problems were inevitable. Had they demanded that all of the countries had an equal ratio of manufacturing to GDP it would never have happened. But GE and FR only wanted customers not competitors.
So they made the mistake, now correct it. GE and FR can demand that companies within their countries that are using secondary manufactures from outside of the EU pull the contracts back and give them to Greece, Italy, Spain or Ireland. And continue this effort until all of them have and equal ratio of manufacturing to GDP to GE and FR. This will make all of the members of the federation equals and make the system work. It will also put a strict requirement on new members. Finally the bond market will see there is a rational and viable plan to work their way out of the problem and take the pressure off, Further when they succeed in making each of the lesser countries equal the price of bonds will go up offering an incentive to them to buy low and sell high.
The Greeks are either going to be backstopped by some entity funded by northern European taxpayers and become the wards of another state or they are going to have to fold, declare bankruptcy and get out of the union.
They begged the EU to join even though they did not meet the financial criteria and now they can't hang.
Boo hoo hoo.
Much like the United States is now thanks to liberalism, Greece is a country being bankrupted by cradle-to-the-grave entitlements which no amount of confiscatory taxation can finance. Don't expect the Left to learn from this though. Despite numerous case studies and precedents of failed socialist states around the world -- with new cases now coming to the forefront with the sovereign debt crises soon to hit Portugal, Spain and Italy -- the tax, spend and redistribution of wealth ideology must go on.
And has there ever been a bigger apologist for Marxism than Robert Kuttner? Attempting to deflect blame on bond speculators for a problem clearly caused by profligate government spending and overly generous public employee perks is rather thin at best and completely ridiculous at worst.
Back to the Marxist asylum with you, Kuttner. You can be cellmates with Barack Obama and Elizabeth Warren.
The analogy between the South American countries, i.e. Chile and Greece is irrelevant.
The South American countries had and still have currency sovereignty, Greece does not and as such has no control over it's fiscal or monetary policy. If they did, then yes, they would have more options. This is also what allows the speculators and commercial bankers to have so much sway.
The [P.I.G.S.] countries are unique as they have surrendered the sovereign currency by adopting the euro and being part of the Eurozone and now they are helpless to do anything about the shortfall in their nation's aggregate demand and hence the massive unemployment and other ills. That is why the Euro is flawed and the individual people of these countries will not stand for the wrong-headed draconian external punishment that is being forced on them. Nor should they.
The IMF and the current Northern EU leaders are driven by the failed ideology of neo-liberalsm, regardless of the colossal failures it has produced.
Greece, like the others should abandon the euro, default, leave the Eurozone, return to their sovereign currency and re-structure their obligations.
Nationalize all banks and set them straight.
That's not so hard either, now, is it?
In the end, the 20 Million dead proved them all wrong and that the only military theory that holds sway on the modern industrial battleground is speed-of-movement vs. rate-of-fire.
Mr. Kuttner does not want to address the actual failure of contemporary, Progressive theories in the European Social Democratic model. Rather, he would rather make negative comments about the market places need to protect investors by reflecting the higher risk of default in the price of borrowing the money. His comments in the article reinforce Hayek's point when quoting Mussolini (see above). The socialist understands the individual is less important in a centrally planned organization. Mr. Kuttner is advocating for greater control of the European economies by an ever shrinking group of people, greater central planning.
The Road to Serfdom....
The Progressive Experiment continues, to the detriment of the poor.
Why have the Democrats used continuing resolutions to fund the federal government? Whatever happened to passing an annual budget? Could it be more politically advantageous to 'create, a crisis ever month or so to allow the MSM to beat up on the Democrat's political opponents.
There must be explicit guarantees sufficient to make it possible to avoid implicit ones without a neighbors'-house-on-fire situation.
Winning and losing isn't sick and wrong it's just life.
naked shorts needs to regulated & a modern version of Glass Stegal needs to be in place to get the Casino out of Wall Street