

What really caused the eurozone crisis? - mhw
http://www.bbc.co.uk/news/business-16290598

======
gizmo
Pretty good analysis (for an infographic).

They correctly show that government debt did not cause the current crisis but
total debt did. By stating that the increase in private sector debt caused it
they almost (incorrectly) imply that therefore the private sector (and the
people) are to blame. Of course it's the responsibility of the government to
take corrective measures to ensure long term financial stability. The European
governments were completely negligent in that regard. Note also that the
financial sector is not mentioned at all in this analysis.

The nasty dilemma offered at the end is a false one. First the article
observes that government spending was not the cause of the crisis, and then
the solution revolves around government spending? The current eurozone debates
are about politics: the people in western Europe want to punish the countries
they see as irresponsible. That's why we have all the talk about austerity
measures. Austerity will only further cripple the economies of the GIPS
countries as we've seen during the Great Depression in the 30s. Austerity
doesn't work: it leads to criminal levels of capital waste: high unemployment,
low standards of living, poor liquidity, and so on.

So the question isn't "Should the GIPS countries spend money to prevent a
worse recession?" the real question is "How can the GIPS countries get the
money to prevent a crushing depression and a lost generation?". There are a
number of options: ECB bailout. Eurobonds. Bailout by the richer part of the
eurozone. Various forms of quantitative easing. Unfortunately this is
difficult as long as the people in Europe are angry at the GIPS countries. No
politician is going to support a bailout at the expense of the richer
countries if the people want to see blood.

~~~
jonnathanson
At the end of the day, the Europeans can't have their cake and it eat, too.
Either the Eurozone is a truly integrated, multinational superentity, or it's
a meaningless construct on top of a group of wholly independent nations. It
can't be the former when things are going well, and the latter when things are
going poorly. A fairweather EU / economic zone doesn't work, because it's
built on a foundation of quicksand.

How can these countries rely on a cooperative economic superstructure when,
beneath it all, they still see each other as competitors? Transnationalism
doesn't work when you're secretly a nationalist.

~~~
nl
It's hard to know exactly what a _truly integrated, multinational superentity_
is, though.

For example, in this case Spain did everything right. They even regulated
their banks so they wouldn't make risky loans. But they couldn't stop German
banks making the same loans - so does this mean that regulatory authority over
banking should be seceded to the EU too?

~~~
pdelgallego
Spain did a lot of mistakes. I.e. not to take any action to stop the real
state bubble, create unnecessary infrastructure, or the fact that a plenty of
youngster stopped their education in order to work as construction workers.

~~~
nl
My understanding is that they did try and stop the real estate bubble (to some
extent anyway) but regulating bank loans, but the German banks stepped in to
fund riskier projects.

~~~
pdelgallego
Unfortunately, many Spanish commercial banks and saving banks bet the farm on
the real state market. For example the Sabadell Bank just bought the CAM (a
saving bank) for one euro.[1]

The were some talking about burst the bubble in 2004, but Zapatero's
government never implement the reforms. The Spanish prime minister regret
later about not bursting the bubble earlier.[2]

Spanish banks are well protected against loans because, the asset pledge as
collateral" clause is rarely use in Spain.

[1] [http://www.businessweek.com/news/2011-12-08/sabadell-buys-
ca...](http://www.businessweek.com/news/2011-12-08/sabadell-buys-cam-for-one-
euro-as-spain-banks-bail-out-caja.html) [2]
[http://www.elmundo.es/elmundo/2011/06/28/suvivienda/13092749...](http://www.elmundo.es/elmundo/2011/06/28/suvivienda/1309274989.html)
(Spanish)

------
yummyfajitas
The drawbacks of the "cut spending" option are predicated on textbook
Keynesian analysis. Cut spending, you get an anti-stimulus, and a contraction.

But it's important to recognize the assumptions that go into Keynesian
analysis, sticky nominal wages in particular. Sticky nominal wages prevent the
necessary cuts in real aggregate wages, leading to unemployment (another way
of cutting real aggregate wages). Keynesian analysis typically treats sticky
nominal wages as given.

But is it? In the time of Keynes, government employment was a fairly small
sector of the economy. This is no longer true - I've heard estimates that the
public sector makes up 20-40% of Greece's economy. Further, even in the
private sector (particularly in Europe), a lot of wage stickiness is caused by
union contracts, minimum wages, and mandated benefits. Wage stickiness is also
created by welfare/unemployment/etc - why get a job paying less than your old
job if it only pays marginally more than unemployment?

So why not make use of this and impose wage flexibility by fiat? Cut the pay
of government workers, force renegotiation of union contracts, reduce benefits
and make welfare/unemployment/etc as unpleasant as possible?

I truly don't understand why Keynesians don't push for these policies.

(Note: I'm aware of the problem of nominal debts, these could be mitigated by
making it easier to settle debts. I.e., make foreclosure/debt collection
faster and easier.)

[edit: just curious, will those who are downmodding explain where my analysis
fails?]

~~~
Klinky
Good luck getting unions to renegotiate. Sounds like a long winded legal
battle & asking for large scale strikes.

Unemployment Insurance is insurance setup to help you transition to a job at
similar wage, that is it's purpose. Some tiers in the US are subsided but do
have stricter job acceptance & search requirements already in place.

Cut welfare for the disabled, elderly & impoverished? Talk about winning the
hearts & minds!

I think you'll also find it hard to get prosperously employed workers to take
a pay cut, especially a massive one meant to rebalance the entire economy. If
you do start to see it happening you'll probably have imbalances where
companies keep prices high to milk profit while worker compensation goes down.
You may also see certain sectors impacted more than others, causing an exodus
of talent in certain areas. This might just further destabilize the economy.

Also as far debts go, if people don't have the money to pay, they don't have
the money to pay. If the banks foreclose on property but people don't
eventually buy that property, that's not very helpful. Also banks have already
been foreclosing on properties too quickly & got in trouble for it.

~~~
yummyfajitas
_I think you'll also find it hard to get prosperously employed workers to take
a pay cut, especially a massive one meant to rebalance the entire economy._

The goal is not to impose a pay cut on currently employed workers, the goal is
to convince currently _unemployed_ workers to take a job at a lower wage.
Since unemployment benefits provide a disincentive for finding work, reducing
unemployment would reduce this disincentive.

 _If you do start to see it happening you'll probably have imbalances where
companies keep prices high to milk profit while worker compensation goes
down._

This is exactly what Keynesian stimulus is designed to accomplish: a reduction
in real wages. I'm glad you agree that if wage flexibility could be
engineered, then this would make Keynesian stimulus unnecessary.

 _If the banks foreclose on property but people don't eventually buy that
property, that's not very helpful. Also banks have already been foreclosing on
properties too quickly & got in trouble for it._

Homeowners and home-mortgagers seem to be the driving force in sticky house
prices, not banks. Banks tend to sell foreclosed properties at, well,
foreclosure sale prices.

As for foreclosing too quickly, that's why I would (assuming I believed in
Keynesian economics) advocate changing the law to make foreclosure faster and
easier.

~~~
Klinky
_Since unemployment benefits provide a disincentive for finding work, reducing
unemployment would reduce this disincentive._

Sounds like blaming the unemployed for being unemployed. There are many
factors regarding people who are unemployed long term. Most often it has
nothing to do with the minimum wage, people being lazy or feeling entitled.

>I'm glad you agree that if wage flexibility could be engineered, then this
would make Keynesian stimulus unnecessary.

Sounds like it's inviting companies to continue to profit while not hiring or
rehiring their workforce a lower wage. That or you get disparity between old
workers & new workers. Cost of living I doubt would adjust very quickly. Those
who would pay the biggest price are those coming back into the workforce who
will be making less, but probably paying the same living expenses.

>Banks tend to sell foreclosed properties at, well, foreclosure sale prices.

You assume they are selling. The housing market is flooded with foreclosed
properties going nowhere. If the idea here is to reducing wages for those who
are able to find a job.

~~~
yummyfajitas
_Sounds like blaming the unemployed for being unemployed._

Sounds like accepting reality. Moral hazard is real, and this has been
empirically demonstrated whenever a natural experiment presents itself.

[https://docs.google.com/viewer?a=v&q=cache:xdATBYGtHBcJ:...](https://docs.google.com/viewer?a=v&q=cache:xdATBYGtHBcJ:www.econ.upenn.edu/~hfang/teaching/socialinsurance/readings/Meyer90\(4.12\).pdf+%22unemployment+insurance+and+unemployment+spells%22&hl=en&gl=us&pid=bl&srcid=ADGEESijVugfxTMH8N17GpSU_u2JvA9mKUnU2-0yEbjnU4nwsZzfb6xylzJiPCE7EUAmsWycAgt74ZcB3dWYw4wZ-
JRBbT5DLbajcMt_A0VhvZTgz74ppJlG27NwAeZXcun3IjfAtx70&sig=AHIEtbRr14Z-jKd0rYrZD25qNSBSVWlWEg&pli=1)

<http://ftp.iza.org/dp2171.pdf>

(Note: I only read the first paper in detail, but the second is quite
popular.)

 _Sounds like it's inviting companies to continue to profit while not hiring
or rehiring their workforce a lower wage...making less, but probably paying
the same living expenses._

A monetary or fiscal stimulus does the same thing - the only difference is
that instead of making 10% less dollars, workers earn the same number of
dollars but prices go up 10%.

 _The housing market is flooded with foreclosed properties going nowhere._

This is because regulations allow banks to mark properties to a model, rather
than to market. This is also why banks are not foreclosing on a lot of
deadbeats - they don't have to admit to shareholders that they took a loss
until after they foreclose.

This is basically just a way for banks to cook the books, but for some reason
politicians and regulators don't seem to care. Strange.

~~~
GFischer
I'm not in Europe, but there was a very striking fact presented on the local
newspapers:

80% of those receiving "emergency" unemployment benefits in Uruguay rejected a
job offer

[http://www.elobservador.com.uy/noticia/214462/el-80-de-la-
po...](http://www.elobservador.com.uy/noticia/214462/el-80-de-la-poblacion-
del-mides-rechazo-una-oferta-de-trabajo/)

------
_k
Countries & institutions that weren't mentioned :

Greece 22% of the people in Greece work for the government. That's
unsustainable. They paid very little taxes and the government's debt ballooned
to a point where the market said enough. Greece asked the EU for a bailout &
they got it. There were no real austerity measures. Now they want the debt
holders to cut the debt in half.

Belgium's problems. Belgium's debt is ballooning out of proportion & bigger
than Greece's. Close to 10% of the people work for the government. Savings are
high and can be used to revive the economy. Instead, the government asked
everyone to buy up their bonds at prices lower than what's available on the
market. Crazy & stupid but real. 50% of all goods are export, even though
labour costs are twice as high as Spain's. The Netherlands is in a similar
situation. How is that possible? They just work harder. I don't know why that
isn't mentioned in the article as a possible solution.

The Netherlands They were able to handle the world economic slowdown that
started in 08. They came prepared, they paid down their debt with every
surplus they had. Exports have been holding up quite well, although the
slowdown is catching up. Savings are high and that's another bullet you can
use to revive the economy. Housing prices are a bit high though. Also, those
who work after age 62 can earn a bonus for every year they remain employed.

ECB & IMF The ECB says they aren't allowed to buy government debt. That's
correct but it's BS as well. They found a way around it. They gave money to
the IMF and the IMF gave it to Italy. With Germany & France's permission. Last
week the IMF tried to raise money from its members. They failed at it. Both
the IMF & the ECB are sitting on gold reserves. Not enough to bail everyone
out but perhaps enough for some quantitative easing. Not that I'm in favor of
it. Quite the contrary.

Inflation When everyone wants a bailout and the ECB blows through all
reserves, then they will have no other option than to do what Ben Bernanke is
secretly doing in the US. He's buying up all the debt and he's probably doing
it by printing more dollars.

Don't worry, don't feel sorry, there're other solutions.

1) Governments need to be smaller & more efficient.

2) Lack of discipline & brass balls In some EU countries you get paid $ 1,000
per month to take time off. You get to ride on the bus for free. You don't
have to pay taxes on your house. The list goes on and on. It's a luxury
problem. It's easy to stop. It's political suicide but it has to stop.

3) Retirement age. The worldwide average is 64 if I'm not mistaken. In Europe
it's something like 60 - 62. In Germany it's 65 to 67, so they already shot
that bullet. It used to be 50 something in Greece ...

I'm all for austerity programs because I want the craziness to stop. I want
our politicians to stop getting deeper in debt. Now !

------
chris_dcosta
I'm not so sure this tells the whole picture. Countries borrow money from
banks and wealthy individuals in the bond market. These same countries (and I
class Europe as a pseudo-country) want to bring in legislation to prevent
banks from doing what they did to create the first crisis in 2007.

But the interest rates are being set by the lenders, and this can be used as a
kind of weapon to retaliate in this game.

What's happeneing at the moment is that the bond holders are basically trying
to force the governments to raise taxes and cut public expenditure for no
other reason than so they can get their money back.

Governments are caught in this trap because it's rather unfair to punish the
people like this.

If you take a step back and look at the series of problems since 2007 you'll
see that the banks were responsible for selling worthless "structured debt" to
each other before realising they couldn't trust each other, then freezing all
lending causing liquidity problems, and now using bonds interest rate weapons
to effectively prevent governments from legislating against their bad
behaviour.

It's a game of poker with some very high stakes: the options are a few banks
choking or whole countries.

I'm not greek but the more I read and look at this the more I think they had
the right idea to stand up to the banks. In the end they got half their debt
removed, but unless all politicians stand together with the people and call
it, this will all end in tears.

~~~
justincormack
The Greek debt negotiations haven't finished, and while the private sector
bond holders may get 50% losses, Greece will not cut 50% of its debts, as the
official lenders are not taking losses. Greece would be better off simply
defaulting fully, as it will still end up with government debts of 150% of GDP
or so after default.

Also if the countries default the banks do too, as they hold a lot of the
government debt - it was a mutual game.

~~~
chris_dcosta
Agreed. Banks were previously bailed out on the basis that this would be
terrible for the people whose assets/savings were held at banks that failed
because they could not return those assets to the people.

But things have changed since then... firstly governments have guaranteed
people's assets in the event that a bank fails. In addition some countries
took charge of their banks, notably the UK, meaning that at least from a
"business as usual" case, it is not inconceivable nor technically impossible
to move the accounts from a failing bank into a nationalised bank.

So if the banks were to default now, the situation would be different. The
governments _could_ let a bank or many banks fail and with careful management
take back control.

One other point is that banks can make very large profits in a very short
space of time. LloydsTSB in under six months following the write-down of
massive losses in the crisis, made a first quarter profit of 3 billion pounds.
I don't know many companies that can turn things around that quickly, but
banks regularly do.

This, to my mind, makes it less credible to hold the threat of many banks
defaulting over the heads of the governments, and is another reason why I say
the governments make the call.

------
blumentopf
One point that's not fully explained in this infographic is the borrowing
costs in the Eurozone countries:

Before the Euro introduction, borrowing costs in Germany, both for the private
as well as the government sector, were cheap, whereas in the southern
countries they were high.

With the Euro introduction, borrowing costs were essentially unified, the
interest rate being set by the ECB. So Germany suddenly faced higher borrowing
costs than before and the southern states faced significantly lower borrowing
costs.

That lead to the debt explosion in southern Europe and it put Germany in a
tougher position than before. Germany went through an economic slump between
2000 and 2005 and had to retool its economy to be as competitive as before.
Germany did this with internal devaluation: German wages have now been
stagnating for a decade.

Between 2005 and 2010, the roles have switched and right now Germany's economy
is almost overheating, in part because the interest rate set by the ECB is
super low to make life easier for the struggling southern countries.

That's why Euro critics like Ambrose Evans-Pritchard call the ECB's policy
"one size fits none". However, that's not to say the Euro critics are right.
The hope of Euro optimists is that the Eurozone countries' economies will
eventually converge. Whether or not that will ever happen is still up in the
air. The whole thing is an experiment without precedent.

------
cs702
Missing from this otherwise good infographic: the role played by _private-
sector financial firms_ , which are tightly interlinked with each other in a
massively complex global network no one really understands, even today. The
structure and behavior of private-sector financial firms appear to have been a
major destabilizing force leading to the crisis.

A (relatively tiny) number of reputable economists are starting to look beyond
these current-account imbalances to the disproproportionate growth and
destabilizing role of the financial system -- a welcome development IMO.

Here's a recent example (in lay language):
<http://www.voxeu.org/index.php?q=node/7446>

------
Derbasti
I think the most fascinating point in this is that wages remained constant in
Germany whereas they rose in the countries that are in the worst shape right
now.

Can anyone corroborate this data? Is this actually true? That would be such an
easy explanation…

~~~
dhoe
It's true, but it's debatable how much it explains. Germany looks relatively
good right now, but it's been 20 years of slow growth and lots of pain after
'89. It's funny that just a couple of years ago, say 2003, you'd read about
the booming Greece and "sick man of Europe" Germany.

~~~
arethuza
And Ireland was the Celtic Tiger...

<http://en.wikipedia.org/wiki/Celtic_Tiger>

------
russnewcomer
This is not a fully developed thought, but I think the current Eurozone crisis
shows the difficulty of trying to politically unify culturally diverse people
groups.

I am not an economist or a political theorist, but I think that the Eurozone
crisis proves that in trying to create the EU and gain some of the economic
advantages that the United States has with a single currency (and other
advantages as well, I know I am simplifying), the Eurozone founders didn't
fully take into account the cultural issues that their creation would face.
America, for various and sundry reasons easily traceable through its founding,
is largely culturally monolithic (I realize this is a simplification, yes) and
by and large, Americans in one geographic region of the country (for example,
the Midwest, which didn't fly too high in the recent booms but is also not
facing a bottom dropping out like other regions) do not strenuously question
the need to 'bail out' other areas of the country through large federal
spending. It happens in America, its just largely invisible and rarely widely
debated along geographic lines (farm subsidies, bank bailouts, automaker
bailouts, all can be argued to have a strong geographic context that largely
gets ignored in America politics) because of the strong nationalistic
component in America that the Eurozone lacks.

Smaller versions of this basic problem can be seen, manifested in different
ways, all throughout Asia (Afghanistan, India, India/Pakistan, Laos, China)
and Africa (Sudan/South Sudan, the DRC), and probably though South America
too, but I am far less familiar with SA.

~~~
m0nty
There are indeed cultural issues, but deeper than that is the problem of
trying to impose one economic policy (via one currency) on an area as diverse
as Europe. We are generally quite good at rubbing along with our European
neighbours, but the race to expand the Eurozone at breakneck speed has led to
a large number of economically disparate countries being lumped to together as
(somehow) one entity. Like easy credit, it only holds together while the trend
in the worldwide economy is upward.

------
JamisonM
The summary of the infographic can be made in a single sentence: Paul Krugman
has been right about the causes of the Eurozone crisis.

The "Don't cut spending" solution at the end mentions the real heart of the
problem, "The ECB says its mandate does not allow it [to bail governments
out]." -- All the Eurpoeans need to do is make the ECB a lender of last
resort. In a liquidity trap expanding the monetary base will do very little to
devalue the precious savings the Germans are so worried about, so it won't
even hurt them.

~~~
disgruntledphd2
>All the Eurpoeans need to do is make the ECB a lender of last resort.

The problem with this solution is that it is specifically prohibited by the EU
treaties (Maastricht, I believe). I would guess that this treaty change (which
would require a referendum in Ireland) would be extremely unpopular in Germany
and the Netherlands, the main payers in this situation.

That being said, Eurobonds are not specifically forbidden so I suspect that
the Germans will relent on this after they've extracted their pound of flesh.

~~~
justincormack
Eurobonds are forbidden by the German constitution though. And why exactly is
more borrowing the answer? ECB money would be monetization but eurobonds are
just subsidized borrowing for the PIIGS, which we already had for years with
their low rates. .

~~~
JamisonM
If you read the infographic you will find that borrowing by governments was
not the cause (and even if it were that does not mean it can not be the
answer, that is what widening the monetary base is partially about). Italy and
Greece would be running surpluses if they could borrow at U.S. rates (maybe
Spain and Ireland too, I don't know) - so Eurobonds at the good rates they
would attract can be an important part of the answer.

~~~
justincormack
Borrowing from governments was not the only cause. But more borrowing wont
make it better. Monetization does not create any more debt, while eurobonds
do.

Italy and Greece did borrow at US-like rates for the last ten years. They
can't pay back those debts, and saying that if rates were low they could
afford to increase the debts even more is not that helpful. People have
realized that there needs to be a plan that involves reducing debt levels, as
the ever increasing bank leverage story that funded both the government and
private sector debts is over now, so there are no buyers of new debt, at any
interest rate.

~~~
JamisonM
"More borrowing won't make it better" is grossly oversimplifying. If, for
example, Italy can borrow at US-like rates but not borrow since that would put
them in a surplus position then obviously that would resolve their problem. As
the article explained, Spain _never once_ broke to EU deficit rules until the
crisis pushed their rate up.

If you have bought the idea of "expansionary austerity" then I don't know what
to say - it ain't gonna work and it hasn't worked for anyone so far. The
problem right now is exactly that "people have realized that there needs to be
a plan that involves reducing debt levels" - "people" want to do that now but
now is not the time to do it, it is causing wasteful under-utilization of
capital and causing GDPs to run way under their potential rates of growth.

The assertion that "there are no buyers of new debt, at any interest rate" is
incorrect -- Spain, of all countries, sold more debt than it expected to on
the open market 3 days ago.

My original comment was that Krugman was right about this crisis from day-one
and about the US crisis before that. I am really just repeating things he has
already said many times in many places that no one anywhere seems to be able
to refute with real data.

~~~
justincormack
I haven't bought the idea of expansionary austerity, but I really believe that
the debt levels are far too high, and only managed to get that way because of
a huge bubble, largely in the banking sector. Spain borrowed the other day
because temporary measures to reflate worked briefly. Monetization or default
are the two real options, or a combination.

Spain's problem never was the government, it was private sector housing,
funded from abroad. The solution to that is structural, and also involves
getting the private sector debts written off, which also means the banks are
bust. Bailing these out will add another huge hole on the governments balance
sheet, and make it even harder to fund debt.

------
marquis
In regards to 'wages rose and rose in Spain' and are now not competitive with
Germany: I would have thought that wages in Spain pre-1997 were very low
compared to Germany, so if they rose it was to become comparable. How does
this then make Spain less competitive with Germany? (I may be completely wrong
and am neither an economist nor aware of what the wage gap is/was between
eurozones).

~~~
Maro
The infographic says regarding Spain and Italy: "Their exports are
uncompetitive".

Maybe the thinking is that stuff exported by Spain and Italy is on average
crappier than stuff exported by Germany, so it should cost less to
manufacture, ie. lower wages?

~~~
jc79
I can tell that the minimum wage in Portugal is around 485 Euros (and there is
a very significant portion of the population earning just that), so it's not
fair to say the wages are 'even' with Germany.

It is really a matter of what you invest on and export: and with few
exceptions, the choices made here were not brilliant...

~~~
Maro
Here in Hungary it's around €300.

Btw. there's a Google feature for this:

<http://tinyurl.com/7xlfah2>

------
gregschlom
On a related note, the "Money as Debt" documentary is a fascinating watch to
understand where money comes from.

I just submitted it to HN <http://news.ycombinator.com/item?id=3381634> and
I'd be interested in hearing the opinion and criticism of people with better
knowledge of the monetary system than me.

~~~
webreac
do you have a textual transcription of this video ?

~~~
gregschlom
Here: [http://usuryfree.blogspot.com/2011/01/money-as-debt-ii-
trans...](http://usuryfree.blogspot.com/2011/01/money-as-debt-ii-
transcript.html)

------
ww520
Having the same Euro currency but different economic structure and policy in
different countries doesn't work, especially in Spain/Italy/France's case.
Their labor cost has soared and trade deficit widen against Germany but they
can't cheapen their currency to make them more competitive. They are stuck.

------
jl6
Asking what specifically caused the crisis is like asking which hamburger
caused your obesity. This is a problem that has been building over decades,
and it will take decades to solve.

------
harryf
But where is Greece?

~~~
krogsgard
The infographic stated that Greece is wholly excluded, as they never reported
properly anyway, enabling them to join the union in the first place, and broke
the rules all along. Though I too wish they were included at least for some
perspective.

------
maximusprime
"the idea of a single currency" caused it. A truly terrible idea.

Everything that happened was inevitable.

~~~
jarek
Single currency without a single fiscal policy.

~~~
maximusprime
A single currency across countries with such different economies, histories,
cultures and languages would still result in the same outcome IMHO.

