Things have turned dire again in Europe. Hard on the heels of credit downgrades at France and Austria last week, S & P’s just downgraded the credit rating of the Eurozone bailout fund, a news item that carries a whiff of hilarity to it. Euro-TARP needs a bailout!
European financiers are hopeful the new bailout fund, established more recently and said to be more formidable, will surmount its predecessor’s feeblenesss. For that matter, European financiers are also still hopeful that the Germans will relent; that Frankfurt will open the ECB monetary spigots; failing that, they are hopeful that China might possibly be persuaded to swoop in to aid Europe; that the IMF will quietly assume central bank-like powers and make creditors whole; or that some other monetary authority (maybe the Federal Reserve!) will likewise mount its prized steed and ride to rescue of high finance.
These financiers are an excitable lot.
The press reflects the panic. Doomsayers abound. The poor Financial Times is reduced to a desperate prayer than the new Italian technocrat will prevail on German leaders to be less stingy; and the New Statesman to a suggesting that the UK’s government go ahead and “launder a euro bailout through the IMF.”
The Europeans, despite their panic or perhaps because of it, are forging ahead with austerity. Austerity means budget cuts on social spending and tax hikes. Its purpose is to ameliorate the enormous imbalances between output and liabilities that characterize so many Eurozone economies. (Also the US and Japan.) The problem is that austerity inclines to the contractionary: it lowers the denominator in those debt-to-GDP or deficit-to-GDP ratios, thereby weakening the effect of any budgetary reduction in the numerator. In some cases austerity’s consequence is even worse: markedly less revenue along with less output, that is to say, a larger numerator and smaller denominator.
Translating all this into an American context is not easy. Parts of these austerity programs appeal to the budget-cutting passion of Tea Party right-wingers; but tax increases alarm them. American liberals, meanwhile, agitate for the tax hikes with grand self-assurance; and recoil violently from any budget cuts. It is convenient for various factions, right and left, to elide the distinction between fiscal and monetary policy. Better for red-meat oratory to lump the Fed and the Treasury together in denunciation. I wonder how many rank and file Tea Partiers are aware that even so credentialed a capitalist as Milton Friedman would have favored monetary expansion while disdaining any fiscal expansion.
Of course, monetary expansion is not an option available to Eurozone nations. Therein lies a big problem. The Common Currency prevents indebted nations from having recourse to the one tried-and-true method of fighting a debt crisis: currency devaluation.
Germany, in exchange for preserving the capacity of periphery nations to borrow at German rates, in other words in exchange for German taxpayers financing periphery budgets, wants effectual power over periphery budgets. There’s a certain brute logic to it, but it’s serious business. Imagine being in Athens when a functionary from Frankfurt shows up to eliminate your job or trim your pension, in order to protect the investments of Teutonic or Arab or Chinese creditors. But that may well be the price for cheap debt issuance: sovereignty.
Forget the Cross of Gold: this is a Cross of Euros.
Here in America, self-confidence exceeds knowledge by an order or two of magnitude. Everyone thinks he knows better. What has happened in Europe could never happen here. This despite our country’s decision to imitate the European social-democratic model. Italians, too, thought 7% on sovereign bonds was an improbability too remote and awful to contemplate. To read certain Leftists, with their smug presumption that historically low borrowing rates will persist indefinitely, puts one in the mind of no one so much as the huckster banker who sold the Greeks on a big complicated, sight-unseen, currency swap device, back in the mid-2000s, all on the pristine assumption that bond issuance at German rates would endure, forever and amen: “Look, the thing to do is invest in useful capital when it’s cheap; and we’re just the guys to get that deal done for you.”
Meanwhile, to hear the way many critics of the Fed fulminate, one might be forgiven for supposing that all the facts were long been assembled, and all the research long concluded, concerning the crisis of 2007-09; when the toppling truth is that most of the key threads of factual causality will elude our feeble human faculties for decades or more. Economic science is not all that. We barely understand the Great Depression, and it ended 70 years ago. Devotees of a restoration of hard currency seem peculiarly susceptible to this aggressive self-confidence. The bare truth is that divining the consequences of an attempt to convert all dollar (along with euro and yen?) obligations into commodity obligations is beyond any art we here possess. Even the more modest project of re-introducing the old European national currencies would be an extraordinary adventure in international political economy. It’s one I trend to favor, but not without considerable trepidation.