Wednesday, June 6, 2012

"The Financial Guns of August"

John Quiggin at Foreign Policy has some thoughts concerning Europe's financial crises and the presumptive exit of Greece from the Euro. He writes:
Among the great and tragic questions of modern history, one of the most important is: How did the assassination of an Austrian prince turn into the conflagration of World War I, a disaster that in turn produced Nazism and Soviet communism, and which swept away most of the states that went to war in 1914? The answer, in part, is both simple and shocking. Following the rise of railways and the growth of mass armies, European countries had developed systems of military mobilization that, once set in motion, could not be reversed. As a result, they stumbled into war before they even realized they had passed the point of no return.

* * *

Europe's current economic crisis seems to be headed in the same direction. All of the main parties are set on autopilot, and each seems to expect someone else to fix the problem.

The Greek political system is clearly incapable of implementing further austerity, and yet there is essentially zero support in Greece for an orderly exit from the eurozone, even if such a thing were possible. The only way an exit can occur is if the so-called troika consisting of the European Commission, the International Monetary Fund, and the European Central Bank (ECB) enforces it by provoking a banking crisis in Greece. Such an action would be the economic equivalent of a mobilization order.

Meanwhile, the central European institutions are making noises about preparations for a Greek exit, as if such an outcome will be the automatic result of any Greek refusal to continue the failed policies of austerity. Such saber rattling allows them to avoid thinking about any effective alternative to further growth-killing budget cuts.

The obvious alternative, a shift to fiscal expansion, faces two major obstacles, one of which has been the subject of much comment, while the other has been largely ignored. The clear obstacle is the unwillingness of German voters to pay more taxes that, in their view, will be used for the benefit of profligate Southern Europeans. The reality, that the primary beneficiaries of the bailouts have been German and French banks, is almost never mentioned.

The much bigger problem is that because European governments cannot print their own money, any fiscal expansion must be financed by debt, and any increase in public debt is likely to produce a new crisis. The proposal for a shift to Eurobonds, backed collectively by European governments, would spread the pain but not resolve the problem.

* * *

In retrospect, the ECB's creation looks like a repetition of the systems of military mobilization built up before 1914, or of the doomsday switches built into the MAD system. The ECB's design reflected the policy preoccupations of the 1990s, most notably the belief that low inflation would ensure macroeconomic instability, and fears that a common currency would encourage national profligacy. These preoccupations produced an institution carefully insulated from any kind of democratic control and explicitly precluded from any action that could sustain fiscal stimulus. As long as the ECB remains on its current course, disaster is inevitable.
Just one quibble with his comparison to the beginning to WWI--that war was not the result of autopilot, but was the direct result of Austria-Hungary deciding it wanted to crush Serbia. The assassination provided an excuse to do what Austria-Hungary had been wanting to do all along.

Similarly, history may someday note that the situation here was the direct result of actions taken (or not taken) to try and scare Europeans into accepting more centralized political control. I'm not saying that the Greek crises was created, but that having occurred, it is certainly providing an excuse for taking away more of the sovereign power of the member countries.

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