For some time the rest of the world has been finding it hard to follow the passionate infighting in the US over the federal budget. Only two years after Barrack Obama’s landslide, the United States became, effectively, ungovernable. The current standoff regarding the mystical (to non-Americans) debt ceiling causes a mixture of consternation and incredulity in most people’s minds. And yet, America remains the source of common sense; at least when it comes to… Europe. While European leaders are in complete denial over the systemic aspects of the euro crisis, choosing to focus on Greece as if the problem is one of mere ill discipline, many influential Americans seem to have a much better handle on Europe’s conundrum than we do here in Europe.
This morning’s New York Times editorial is a case in point. In a few, well considered sentences, it captures the heart of the matter:
“Waiting accomplishes nothing. In two months, there is every likelihood that Greece’s debts will be larger, private investors more skittish, and interest rates higher… Greece’s debts will keep rising as interest rates remain very high and its economic growth very slow. Greece now pays more than 20 percent for private lending and more than 5 percent for European bailout money. Its economy has been shrinking for a third straight year.
Lower interest rates and higher growth rates are the key to avoiding default.”
So, what remedies do the NYT suggest? One of the three policies of the Modest Proposal, is the answer:
“One quick way to reduce interest rates would be to issue new European bonds to refinance much of Greece’s existing debt. The European Union, which has a good credit rating, can raise funds at between 3 percent and 4 percent interest.”
And what is stopping Europe from taking this sensible path? As this blog has repeatedly answered: Europe’s political deficit! Or, in the words of the NYT editorial, “Mrs. Merkel, Mr. Sarkozy and other European leaders… are not even talking about this kind of approach. They focus instead on complex and dubious plans to disguise the losses of their banks. They insist against logic and evidence that private lenders will voluntarily participate in refinancing Greek debt. They still pretend that Greece is not slowly moving toward default. Such blinkered views do not help Greece, and will not prevent default or mitigate its consequences.”
Addendum: Jeffrey Sachs’ well intentioned idea
A few days before, Jeffrey Sachs published an article in which he made similar noises. He is clearly following a good instinct but has not thought things through, at least not as clearly and comprehensively as the editors of the NYT seem to have. He seems to be suggesting a Tobin tax by which to subsidise Greek interest rates. This well meaning suggestion is fundamentally flawed for two reasons: First it does not recognise that this is a systemic crisis and that Greece cannot be lent cheaply when Ireland, Portugal, Spain etc. are snowed under mountains of debt. Secondly, he neglects that a Tobin tax will never be enacted in the eurozone while the City and Wall Street are exempt. Still, by the standards of conventional economists, Sachs is ahead of his pack.
PS. If you really want to see up close the poverty of modern conventional economics, listen to this exquisite Radio 4 program (In Our Time, by the infamous Melvyn Bragg) on Malthusianism. Notice that no one on the panel is an economist. An act of negligence on the program’s producers? Of course not. For there is no mainstream economist that could add a penny’s worth to the discussion. Sad but true!