Austerity and the End of the European Model. A May Day demonstration in central Madrid. (Susana Vera / Courtesy Reuters) Since the onset of the European sovereign debt crisis in 2010, countries across the continent have responded by imposing fiscal austerity. From Greece to Ireland, governments have cut spending by double digits. Spain, which is in the midst of a recession and has an unemployment rate nearing 25 percent, slashed its budget by eight percent and plans to shrink its deficit by an additional 27 billion euros this year. Even Germany, whose economy is considered the healthiest in Europe, has pledged to eliminate 80 billion euros in spending by 2014. It is unclear if these efforts will quell market contagion or stabilize European economies in the short term. Half of all Foreign Affairs content is now published online only.
To continue reading, please log in. Don't have an account? Register Register now to get three articles each month. As a subscriber, you get unrestricted access to ForeignAffairs.com. Have an account? Re-Define | An International Think Tank. What Really Caused the Eurozone Crisis? (Part 1) I've been doing some work on gaining a better understanding of the root causes of eurozone (EZ) debt crisis. As a point of departure, let's take a couple of dueling quotes. First, Wolfgang Schäuble, Germany’s finance minister, from his recent piece in the Financial Times: Whatever role the markets have played in catalysing the sovereign debt crisis, it is an undisputable fact that excessive state spending has led to unsustainable levels of debt and deficits that now threaten our economic welfare.
Next, here's an excerpt from a statement recently made by Greece's Deputy Prime Minister and Minister of Finance, Evangelos Venizelos: We should not be the scapegoat or the easy excuse that will be used by European and international institutions in order to hide their own lack of competence to manage the crisis and give a definitive and complete answer to the attacks against euro, the world’s strongest currency. Local Causes or Systemic Causes? Evidence 1. 2. 3. So... Germany: between and rock and a hard place. The eurozone's strongest economy—but is it strong enough to save the rest?
Greece and the other countries in the troubled “PIGS” quartet—Portugal, Ireland and Spain—have been the focus of recent debate about the eurozone’s survival. It was, after all, the relative weakness of their economies that exposed the eurozone’s limitations. But the future of Europe will be determined by Germany, not the PIGS. Because of its relative economic strength, Germany is the place where the real decisions are made in the eurozone—an increasingly undemocratic project. At the same time, Germany’s relative economic weakness is blocking solutions to this protracted debt saga. Although Germany is strong in comparison to the other eurozone members, it is weak relative to its own performance post-reunification in the early 1990s.
Germany’s slowdown began to. Is Europe On The Verge Of Another Great Depression – Or A Great Inflation? By Simon Johnson The news from Europe, particularly from within the eurozone, seems all bad. Interest rates on Italian government debt continue to rise. Attempts to put together a “rescue package” at the pan-European level repeatedly fall behind events.
And the lack of leadership from Germany and France is palpable – where is the vision or the clarity of thought we would have had from Charles de Gaulle or Konrad Adenauer? In addition, the pessimists argue, because the troubled countries are locked into the euro, there are no good options. Gentle or even dramatic depreciation of the exchange rate for Greece or Portugal or Italy is not in the cards. According to the September 2011 edition of the IMF’s Fiscal Monitor, 44.4 percent of Italian general government debt is held by nonresidents, i.e., presumably foreigners (Statistical Table 9). All of this is a serious possibility – and the lack of understanding at top European levels is a serious concern. Mr. Hokey Pokey - November 14, 2011. November 14, 2011 Hokey Pokey John P. Hussman, Ph.D. All rights reserved and actively enforced.
Reprint Policy The repeated waves of fresh crisis and temporary hope in Europe are starting to look a lot like the Hokey Pokey. Until last week, much of the concern about European debt focused on relatively small countries with high debt/GDP ratios. With Italian yields pushing past 6% and briefly passing 7% last week, Italy is actually very much in the situation that Greece was in about 18 months ago, when it was hoped that new "austerity" measures would shrink the deficit by forcing painful cuts in government spending.
As I noted more than a year ago in Violating the No-Ponzi Condition : "The basic problem is that Greece has insufficient economic growth, enormous deficits (nearly 14% of GDP), a heavy existing debt burden as a proportion of GDP (over 120%), accruing at high interest rates (about 8%), payable in a currency that it is unable to devalue. Think about that. Market Climate. Who's Responsible For the Euromess? A few days ago Tyler Cowen kicked off a discussion of whether or not Germany (and the core European countries in general) have acted more virtuously than Greece (and the periphery countries in general) during the decade since the euro was introduced. It was unclear how much he was simply presenting a debating case vs. how much he actually believed his own arguments, and in that spirit I want to present a different case.
This one is about how Europe got where it is today and who deserves a bigger share of the blame for its current mess. I'm not suggesting this is the only way to look at things, or even necessarily the best way, but I do think it's an instructive way. So here it is in seven easy steps. 1. Economies of the periphery. Most likely, both of these were part of what happened and both reinforced each other. 2. 3. 4. So all the current account deficit countries inevitably got one or the other or both. 5. 6. 7.
What does all this mean going forward? Creditors can huff but they need debtors. Just Another Goldman Sachs Take Over. On November 25, two days after a failed German government bond auction in which Germany was unable to sell 35 per cent of its offerings of 10-year bonds, the German finance minister, Wolfgang Schaeuble said that Germany might retreat from its demands that the private banks that hold the troubled sovereign debt from Greece, Italy, and Spain must accept part of the cost of their bailout by writing off some of the debt. The private banks want to avoid any losses, either by forcing the Greek, Italian, and Spanish governments to make good on the bonds by imposing extreme austerity on their citizens, or by having the European Central Bank print euros with which to buy the sovereign debt from the private banks.
Printing money to make good on debt is contrary to the ECB’s charter and especially frightens Germans, because of the Weimar experience with hyperinflation. Obviously, the German government got the message from the orchestrated failed bond auction. Strange, isn’t it. Why The European Debt Crisis Might Actually Be Over...
Last week we wrote a lot about what's rapidly becoming the hottest question in Europe: Did the ECB pull off a backdoor bailout of the various governments by making it super-cheap for banks to borrow money, with which they can then turn around and buy sovereign debt at juicy yields? Some people think a corner has turned. Economist Tyler Cowen wrote a post on this headlined: It is finally being recognized that the eurozone made a major policy breakthrough. Felix Salmon on the other hand is not convinced, pointing out that bankers themselves say they have no plans to buy more European sovereign debt.
And actually, most analysts on Wall Street who have commented don't buy it either. But something shifted in the market over the past several days, as evidenced by the sharp plunge in yields on short-term sovereign debt. Here's the Spanish 2-year bond, via Bloomberg. So is the crisis solved or not? But here's the thing. But nobody rang a bell at the end of the US crisis either. The Euro Crisis.