ENDGAME: Europe’s time is up

“If you gaze long into an abyss, the abyss will gaze back into you.” Friedrich Nietzsche’s infamous dictum has never had more purchase than in the current phase of the  eurozone crisis. European leaders have been gazing for more than a year into the abyss of our continent’s triple crisis (banking crisis, debt crisis and investment crisis), unable to lift a finger without causing a political storm in their wretched little national constituencies. Now, after more than a year of gazing, the abyss has had enough: It has begun to gaze back into them. And it does not like what it sees.

For more than a year, Europe’s leaders have been consumed by:

  • denial (“this is a purely Greek crisis that will be contained within the borders of a profligate Greece)
  • anger (Germans loathing the spendthrift Greeks and Greeks despising the authoritarian Germans)
  • a pointless bargaining mood that considered nothing other than the details of non-solutions (like the EFSF/ESM)
  • depression (as the masses and our leaders alike became convinced that all the sacrifices are poured pointlessly into the crisis’ abyss)

What comes (according to those pathetic New Age psycho-bubble manuals weighing down our bookshops’ shelves) after denial, anger, bargaining and depression? Acceptance. But acceptance of what?

Once the abyss ran out of patience, and started gazing into our leaders’ clueless minds, a continuation of the present course can only lead to the inevitable break up of the eurozone. Our they now  willing to accept this?  Several policy makers in Europe and elsewhere are making noises to that effect: “Get rid of Greece”, the proclaim (ignoring the fact that a Greek exit will bring the whole edifice down). “Europe would be just fine is some peripheral countries opted out of the eurozone,” they continue. But does this include Spain? Italy? Belgium? Where does the disintegration end? And if it stops when only the surplus countries are left in the inner circle, how will Germany manage a massively appreciating currency (a sure outcome of ridding itself of the balls-in-chain that are the peripheral countries)? Cognisant of this part of the problem, the proponents of partial disintegration suggest that the rot ought to stop with Greece, Ireland and Portugal.

Alas, the notion that Spain has ‘decoupled’ was shot down yesterday just as surely as the earlier hope that the crisis would not spread to Ireland and Portugal perished in the Fall. The immediate contagion of Italy put paid to the idea that future contagion will be as slow as it was during the crisis’ first year (especially in view of the ECB’s withdrawal from the secondary bond markets). The hope that more loans and more austerity will do the trick that it failed to achieve wherever it was tried (Ireland first, Spain and Portugal later, Greece after the May 2010 ‘bailout’ even later, Italy in the next few weeks etc.) is not even entertained by those who keep mouthing its mantra. The growth slowdown in Europe’s core, combined by a similar slowdown in China, complete a snapshot auguring one outcome and one outcome alone: a German exit from the euro, once the common currency project buckles under the strain of Spain, Italy, France and who knows who else.

It was always going to be thus. Back in May 2010 I argued that the Greek ‘bailout’ will start a series of bailouts that would prove destructive for Europe’s core, possibly more so than for its basket-case periphery. It did not take rocket science to prognosticate this: A common currency area hit by asymmetrical recession, sovereign debt and banking losses (one that does not have the means centrally to attack the aggregate mountain of debt and banking losses) is bound to crash and burn if it makes the mistake of thinking of the problem (A) as one caused by the illiquidity of its member-states and (B) as treatable by spending cuts and nation-specific loans.

Which brings us to the rub of the matter: Our leaders were always going to dither until the ‘last moment’. This they have done. Now that we are experiencing that ‘last moment’, which way will they jump? Will they allow the abyss to consume us all? Or will they take a step back, implementing rational structural reforms at the level of the eurosystem (e.g. our Modest Proposal) that are Europe’s last chance to avert disintegration? So far, our leaders are busy gazing into a stirring abyss which has determined that their time is up.


  • What about the imminent collapse of the US Minibond system in 44 states.A far greater crisis than small Greek etc.Agree on the Modest proposal as part of crisis solution in Euro zone.

    • It should be. But it is not. Why not? Why is the effective bankruptcy of a number of states in the US not stirring up anything like the furore that little, insignificant Greece is managing? Before answering the question, another question: Why is Spain paying 2.3% more interest on its loans than the UK given that it has a lower deficit and a lower debt-to-GDP ratio? The answer to both questions, of course, is: Greece and Spain are, to their detriment, members of a highly problematic currency union. It is not that a currency union cannot work. It is that this particular currency union, the eurosystem, is designed AS IF in order to magnify crises when they happen. The purpose of our Modest Proposal is precisely that: to reform the eurozone, by means of minimalist changes to its institutional settings, in a manner that annuls its shock magnifying properties…

  • True. But someone has to make the cutting move. Could Spain and Italy play the good children and be rewarded still? Could we see another tightening of the screws in Greece, more privatizations (and of what industries?) The situation is excruciating.

    Meanwhile, OECD economists are hoping that profit-led recovery really is more than a game with mirrors. China slows. The situation is actually, more than excruciating, maddening.

  • I think concept needs a bit deeper view.Munibonds supposed to be completely safe issued by local Governments and backed by state authorities.Now the truth or mistaken belief about to join classics as:
    Real Estate only goes up!Buy and Hold never Fails!
    Collapse could mean a 20-40% loss of retirements savings.
    Munibonds allow Cities to grow without raising Taxes!
    Ultimately debts must be repaid.Why not common knowledge?
    Financial companies like AIG have everything to lose so they are quietly dumping these bonds.When Munibonds tumbles down insurance companies will default!Big losers are conservative investors of maybe 40%.
    Here will come a cascade in defaults along with TAXPAYERS
    REVOLT JUST LIKE GREECE!Democracy at work!!
    Active Trader

  • IMO the idea of eurobonds fails the same way the common currency has failed. One size does not fit all, especially not in a region as fragmented as the Europe. Inflation within Europe is not the same. Fiscal discipline, if there ever was any, varies.

    The same interest rates imposed by the ECB will not suit all members. The same interest rates of the eurobonds will not suit all either. Some deserve better rates than the others, based on their situation, and that is simply right.

    The EMU has been a terribly bad idea, only creating problems when it was sold as “creating stability”. What a load of bs that was.

    I’m writing this knowing that unemployment and bad times will result from the crisis, but I see the collapse of the EMU as a very positive development. I hope this sort of crap will not be tried again in my lifetime. And I sincerely hope that the EMU will collapse, even if (personal) unemployment and bad times are a result. Let’s get it over with.

    • Though there is little doubt that EMU was deeply flawed from the outset, there is, I submit, a flaw in your argument. No currency jurisdiction is uniform in terms of its fiscal affairs, investment incidence, competitiveness etc. The USA, Britain, Germany itself each comprises many disparate regions with different growth rates, investment drives, competitiveness etc. The North of England is a very different economy to that of the Greater London Area and California is a different universe when compared to Delaware. Yet in those cases (of monetary union) you do not seem to have a problem with a one-size-fits-all monetary policy (interesst rate etc.) And rightly so. For the reason why monetary union works decently in the case of a national economy (made up by heterogeneous regions) is the existence of a surplus recycling mechanism, which takes the form of either fiscal transfers (e.g. unemployment benefits in Yorkshire are not financed just by the people of Yorkshire) or (and more importantly) the shift of surplus from the surplus regions in the form of productive investments in the deficit regions. This type of surplus recycling mechanism is missing in the eurozone and this lack turns it into a problematic currency union. The answer, therefore, is not to allow the eurozone to collapse (as per your prayers) but to equip it with the missing mechanism. Lastly, let me try to impress upon you the profound difference between (a) wishing that the eurozone was never created, from (b) wishing that it collapses. Due to savage irreversibilities, if the eurozone collapses we shall not be returning to a pre-euro Europe but, rather, to a dystopia.

  • With or without the EU and the euro, Europe would be in crisis. They are really at the outer part of the inner core of the US’s hegemony. The question is, what do their leaders want: a crisis with the euro, or many crises without it.

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