

Apocalypse Later: The End of Europe Has Been Delayed Indefinitely - llambda
http://www.theatlantic.com/business/archive/2011/09/apocalypse-later-the-end-of-europe-has-been-delayed-indefinitely/245944/

======
lmkg
At some point, it occurred to me that switching everyone over to the same
currency should have been the last thing that Europe does to unify its
economy, rather than one of the first things. It was a big symbolic victory,
but as a practical matter it means the countries in the Eurozone share a
fiscal policy, while still having independent economies. They should have
waited until their economies were already on the same page before conjoining
their currencies, but instead they tried to force a unity that wasn't there
yet. Now Greece is missing one of the big knobs that could have been turned
(by itself or others) to deal with its crisis, namely devaluing its currency.

This article points out something I hadn't seen before, which is one way in
which the unified currency may still end up somehow achieving its goal of
unifying Europe: as the strong, fiscally-responsible states bail out the
weaker ones, they get to dictate policies in those states as conditions of the
bailouts. Politically, the bailed-out states will start aligning more with
European interests compared to purely self-interested ones.

It's not the best way to achieve European unity, but it has some advantages.
On the one hand, it's a little unfair that Germany gets to strong-arm Greece
into doing what it wants, because it's an involuntary loss of sovereignty. On
the other hand, it seems like a decent heuristic that the states with the
strongest economies get more power to make economic decisions. How well that
works out for Greece in the long run depends on the politics and alignment
between what's good for Germany, what's good for Greece, and what's good for
Europe as a whole. I assume the EU will be making sure German bankers don't
simply pillage Greece's economy for decades.

~~~
bd_at_rivenhill
Switching to a common currency had enormous benefits in terms of reducing the
friction associated with trade between nations in the Euro zone. It wasn't a
bad idea to switch early but at least two glaring mistakes were made with the
implementation:

1\. The European establishment decreed that no sovereign in the region would
ever default on its debts and backed that decree up by allowing banks to hold
the debt without allocating capital against it. This was the European
equivalent of US rating agencies rubber-stamping toxic mortgage securities
with a AAA rating.

2\. Member states have been allowed to cheat outrageously on the Masstricht
treaty criteria, even before shenanigans like Greece window-dressing its
numbers by disguising some debt as currency swaps, without much enforcement.

If these errors hadn't been made, they probably wouldn't be in a situation in
which member states were allowed to paper over their problems with cheap
credit while digging the entire continent into a very dangerous hole.

~~~
danmaz74
#1 it linked to #2. The theory was that with Maastricht criteria no member
state should have even come close to default. But this doesn't work if you
aren't able to effectively control the application of those criteria.

By the way, I don't think that a fixed maximum deficit requirement,
independent of the external conditions (eg the 2008 crisis...) is such a good
idea. But at least during normal times it should have been applied.

------
tzs
From the "explain this in a paragraph" paragraph:

    
    
        Athens has run irresponsible deficits for a decade
        on top of an economy operating at a fraction of
        the productivity of Germany and France. If it were
        in control of its own currency, the solution today
        would be simpler. It would print more money to
        depreciate the currency until the value of goods
        fell relative to trading partners, which would
        grow exports. But Greece doesn't control its own
        currency. It's stuck with the euro, which bought
        ten years of low borrowing costs at the price of
        three years (and counting) of difficult, if not
        impossible, adjustments.
    

Interesting. Isn't this situation (not controlling your own currency) the same
thing that happens if a country uses a commodity-based currency where there is
a relatively fixed supply of the commodity? (E.g., gold). In other words, is
what is happening in Greece a refutation to those who say we need to switch in
the US to a gold-based currency?

~~~
redthrowaway
Basic macroeconomics is a refutation of the Gold Standard. The only people
I've ever heard who promote it are those (usually libertarian) who object to
the very existence of the Fed on ideological grounds. I've never heard a
serious, mainstream economist propose it.

Interestingly, it's also a refutation of BitCoins as a currency. They actually
make a very good commodity, but they're useless as a currency. The very
scarcity that gave them perceived value in the beginning has led to the hyper-
deflation that now makes them unsuitable for commerce. If they could be
granularized (so you could pay 150 mBC), then they might be worthwhile. When
the smallest transferable amount is $10, however, they kinda suck.

~~~
Astrohacker
Or maybe governments should just not take on ludicrous amounts of debt.

~~~
RyanMcGreal
Debt isn't good or bad in itself. Whether a given debt is bad depends on some
factors:

* What is the debt as a fraction of GDP?

* What is the interest rate on the debt?

* What is the growth rate of the economy?

* What was the debt incurred to finance?

If a large public debt finances critical public infrastructure that will
promote rapid economic growth and interest rates are reasonably low, the
country will be in a situation where the economy is growing faster than the
debt and the debt-to-GDP ratio is going down. That's a good situation to be
in.

------
mrich
I have been trying to understand why German politicians are willing to throw
so much money at this problem, clearly against the will of the majority of the
electorate. Here is the best theory I can come up with: Germany relies on
exports. They need countries which buy them - having everybody use the same
currency benefits trade. But more importantly, banks of strong countries like
Germany, France are lending money to the fiscally weak countries so that they
can import the goods they produce. This benefits their industries. However,
why would the banks take on credit when they can be quite sure that these
countries will default sooner or later? Well, there has to be some
guarantee/assumption that they will be bailed out by the central
bank/governments. And of course this happened.

So German banks and the export industry, the two entities with the biggest
lobbies, get subsidized with tax money. The weak countries won't ever develop
their industries and become competitive.

What is your view?

~~~
martythemaniak
I believe the mainstream view is that Germany is willing to do this because
having weak countries like Greece and Portugal share the same country weakens
the euro, making Germany's exports better priced.

If Germany was to revert to the Deutsche Mark, or a Euro made up of strong
European economies (for example, Scandinavia, Germany, Low Countries, Austria)
their currency would appreciate and hurt exports and industry.

German politicians simply think the cost of bailing out Greece will be less
than the cost of a strong currency.

~~~
csomar
So this is the only solution to weaken the currency? Why not spend the money
on Germany instead of Greek? (things like Aerospace, Crazy Arts, Free public
goodies...) Won't this make the same effect for the currency?

I don't know economics, I'm really asking.

~~~
mrich
This would only help when it benefits external currencies (e.g. imports).
Otherwise it may help the GDP and economy, but won't lower the value of the
Deutsche Mark.

------
bd_at_rivenhill
_Did Europe just save Greece with this bailout?_

 _Not yet, and probably never._

 _..._

 _If Europe can't save Greece, why is it trying?_

Don't buy this line of reasoning, Greece must be saved or all of Europe is in
a for a very difficult period, economically. If the Greeks are allowed to give
creditors a haircut, the first thing that any sane (if slightly rapacious)
investor/trader (of which there are more than enough) should do is to start
shorting the Italian and Spanish bonds, buying credit default swaps on them,
and shorting the Euro. Once the seal is broken and one sovereign entity is
allowed to default, it becomes obvious that a sustained speculative attack
would drive interest rates high enough to force the larger Southern European
economies into default as well. The whole thing would play out in a fashion
similar to the exit of the British government from the European exchange rate
mechanism in 1992 except that the scale is much larger and the global
financial sector has more numerous and powerful tools at its disposal.

------
roboneal
Europe, like America, is run by politicians with a 2-4 year election cycle
"accountability" making long term multi-generational fiscal obligations (i.e.,
here is a tiny raise now, but we'll promise to give you free healthcare
benefits 20 years from now)

Europe will play the "austerity" game for a bit (cut this & that, raise taxes,
etc), but it will only kill economic growth and make the problem worse.

Inevitably, the "social contract" will be broken. Current working age
generations are not willing to live with both "ruinious taxation" AND
government "austerity" -- just to maintain the status quo of retiree benefits
and government largess.

Old people might vote....but young people fill streets and use firebombs

------
knb
To my understanding, the German version of the law that was passed says:

The guarantees are basically possible, but they are still optional.

Whatever the ESFS contract says, and whatever the EFSF Bureaucrats might
decide: before any real money flows from Germany to Greece, the German
parliament (or a parl. committee) will have to approve this a second time.

------
iwwr
Is this $600bn out of pocket for the German state, or some leveraged fund, or
perhaps a smaller contribution to a bigger fund?

~~~
danmaz74
Usually the share of contributions to the EU by national states are
proportional to GDP. So everybody (who adopted the Euro) is contributing, but
Germany has the biggest proportion. A lot of haggling was needed to convince
Finland to contribute...

~~~
tybris
Though strangely enough, the per-capita contribution of Germany is lower than
that of Ireland.

~~~
Someone
That isn't strange. The GDP per capita of Ireland is higher than that of
Germany
([http://en.wikipedia.org/wiki/Economy_of_the_European_Union#E...](http://en.wikipedia.org/wiki/Economy_of_the_European_Union#Economic_variation))

------
mrich
I would be interested how the bailout is perceived in the US. What is your
understanding of the workings of the eurozone?

~~~
stevenbedrick
I'll give you a hint: 90% of Americans probably couldn't find Greece on a map,
and of the 10% who could, 90% wouldn't know what the word "eurozone" meant.

~~~
vondur
Sad but true.

~~~
learc83
No, just ridiculous hyperbole.

~~~
stevenbedrick
[http://news.nationalgeographic.com/news/2002/11/1120_021120_...](http://news.nationalgeographic.com/news/2002/11/1120_021120_GeoRoperSurvey.html)

Hyperbole, perhaps. Ridiculous, no.

