by Simon Johnson at NYT:
Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”
Most experienced watchers of the euro zone are expecting another serious crisis in early 2011, tied to the rollover funding needs of its weaker governments. With debts coming due from March through May, the crisis seems much more predictable than what happened to Greece or Ireland in 2010.
And the investment bankers who fell over themselves to lend to these countries on the way up now lead the way in talking up the prospects for a serious crisis.
This situation is not more preventable for being predictable, because its resolution will involve politically costly steps – which, given how Europe works, can be taken only under duress. Don’t smile at the thought and think, “It can’t happen here,” because this same logic points directly to a deep and morally disturbing crisis in the United States.
The euro zone needs to, and eventually will, take three steps:
Step 1: Agree on greater fiscal integration for a core set of countries. This will not be full fiscal union but some greater sharing of responsibilities for each other’s debts. There is much room for ambiguity in government accounting and great guile at the top of the European political elite, so do not expect something completely clear to emerge.
But Germany will end up underwriting more liabilities for the European core; its opposition Social Democratic Party and the Greens are pushing Chancellor Angela Merkel in this direction, calling her “un-European.”
Step 2: For the core countries, the European Central Bank will receive greater authority to buy up government bonds as needed. Speculators in these securities will be badly burned as necessary. The wild card is whether the Bundesbank president, Axel Weber, will get to take over the central bank in fall 2011 – as expected and as apparently required by Ms. Merkel.
Mr. Weber has been vociferously opposed to exactly this bond-buying course of action. So the immovable Mr. Weber will meet the unstoppable logic of economic events. Good luck, Mr. Weber.
Step 3: One or more weaker countries will drop out of the euro zone, probably becoming rather like Montenegro, which uses the euro as its currency but does not have access to the European Central Bank-run credit system. Greece is probably the flashpoint; when it misses a payment on government debt, why should the central bank continue to accept Greek banks’ bonds, backed at that point by a sovereign entity in default?
The maelstrom will probably sweep aside Portugal and perhaps even Ireland; Spain and Italy will be threatened.
It would be easy to set up pre-emptive programs for Portugal and Spain with the International Monetary Fund, but this will not happen. The political stigma attached to borrowing from the I.M.F. is just too great.
The unfortunate truth is that despite its supposed return to pre-eminence and the renewed swagger of its senior officials, the I.M.F. remains weak and of limited value. It is an effective lender to small European countries under intense pressure — Latvia, Iceland, Greece and so on. But the I.M.F. does not have the resources or the legitimacy to save the bigger countries.
At the end of the day, the Europeans will save themselves, with the measures outlined above, only because there will be no other way to avoid wasting 60 years of political unification. But one or more countries will be forced out of full euro-zone membership (although they are likely to keep the euro as the means of exchange). The costs to everyone involved will be large – and largely unnecessary.
And when the financial markets are done with Europe, they will come to test the fiscal resolve of the United States. All the indications so far are that our politicians will struggle to get ahead of financial market pressure.
There are plenty of places in Europe where you can find an easy political consensus to cut taxes and increase budget deficits. Sadly, this no longer pacifies markets. The American political elite – right and left – believes that we are different from the Europeans because we issue the dollar and therefore have some special privileges forever.
But this is not the 1950s. Asia has risen. Europe will sort itself out and become more fiscally Germanic. The Age of American Predominance is over.
Our leading bankers looted the state, plunged the world into deep recession and cost the United States eight million jobs. Now many of them stand by with sharpened knives and enhanced bonuses – willing to suggest how the salaries and jobs of others can be further cut. Consider the morality of that.
Will no one think hard about what this means for our budget and our political system until it is too late?
Most experienced watchers of the euro zone are expecting another serious crisis in early 2011, tied to the rollover funding needs of its weaker governments. With debts coming due from March through May, the crisis seems much more predictable than what happened to Greece or Ireland in 2010.
And the investment bankers who fell over themselves to lend to these countries on the way up now lead the way in talking up the prospects for a serious crisis.
This situation is not more preventable for being predictable, because its resolution will involve politically costly steps – which, given how Europe works, can be taken only under duress. Don’t smile at the thought and think, “It can’t happen here,” because this same logic points directly to a deep and morally disturbing crisis in the United States.
The euro zone needs to, and eventually will, take three steps:
Step 1: Agree on greater fiscal integration for a core set of countries. This will not be full fiscal union but some greater sharing of responsibilities for each other’s debts. There is much room for ambiguity in government accounting and great guile at the top of the European political elite, so do not expect something completely clear to emerge.
But Germany will end up underwriting more liabilities for the European core; its opposition Social Democratic Party and the Greens are pushing Chancellor Angela Merkel in this direction, calling her “un-European.”
Step 2: For the core countries, the European Central Bank will receive greater authority to buy up government bonds as needed. Speculators in these securities will be badly burned as necessary. The wild card is whether the Bundesbank president, Axel Weber, will get to take over the central bank in fall 2011 – as expected and as apparently required by Ms. Merkel.
Mr. Weber has been vociferously opposed to exactly this bond-buying course of action. So the immovable Mr. Weber will meet the unstoppable logic of economic events. Good luck, Mr. Weber.
Step 3: One or more weaker countries will drop out of the euro zone, probably becoming rather like Montenegro, which uses the euro as its currency but does not have access to the European Central Bank-run credit system. Greece is probably the flashpoint; when it misses a payment on government debt, why should the central bank continue to accept Greek banks’ bonds, backed at that point by a sovereign entity in default?
The maelstrom will probably sweep aside Portugal and perhaps even Ireland; Spain and Italy will be threatened.
It would be easy to set up pre-emptive programs for Portugal and Spain with the International Monetary Fund, but this will not happen. The political stigma attached to borrowing from the I.M.F. is just too great.
The unfortunate truth is that despite its supposed return to pre-eminence and the renewed swagger of its senior officials, the I.M.F. remains weak and of limited value. It is an effective lender to small European countries under intense pressure — Latvia, Iceland, Greece and so on. But the I.M.F. does not have the resources or the legitimacy to save the bigger countries.
At the end of the day, the Europeans will save themselves, with the measures outlined above, only because there will be no other way to avoid wasting 60 years of political unification. But one or more countries will be forced out of full euro-zone membership (although they are likely to keep the euro as the means of exchange). The costs to everyone involved will be large – and largely unnecessary.
And when the financial markets are done with Europe, they will come to test the fiscal resolve of the United States. All the indications so far are that our politicians will struggle to get ahead of financial market pressure.
There are plenty of places in Europe where you can find an easy political consensus to cut taxes and increase budget deficits. Sadly, this no longer pacifies markets. The American political elite – right and left – believes that we are different from the Europeans because we issue the dollar and therefore have some special privileges forever.
But this is not the 1950s. Asia has risen. Europe will sort itself out and become more fiscally Germanic. The Age of American Predominance is over.
Our leading bankers looted the state, plunged the world into deep recession and cost the United States eight million jobs. Now many of them stand by with sharpened knives and enhanced bonuses – willing to suggest how the salaries and jobs of others can be further cut. Consider the morality of that.
Will no one think hard about what this means for our budget and our political system until it is too late?
