There are frightening financial rumblings from Europe.
It’s not just about Greece, either, nor even limited to Europe. The last few decades have intertwined the economies of the entire world more tightly than ever.
This seemed like a good idea to most people at the time. I never understood why—but then, as I’ve said many times, economics is not my forte. It has long seemed to me that the more interconnected the elements of a system are, the more any flaw in that system could bring the whole thing down:
We are, of course, deeply intertwined, even without the EU. As the poet John Donne wrote a long time ago, in the early part of the seventeenth century:
No man is an island, entire of itself; every man is a piece of the continent, a part of the main. If a clod be washed away by the sea, Europe is the less, as well as if a promontory were, as well as if a manor of thy friend’s or of thine own were. Any man’s death diminishes me, because I am involved in mankind; and therefore never send to know for whom the bell tolls; it tolls for thee…
Except for a few mountain man survivalists who live in isolation entirely off the grid, those sentiments are more true now than ever before. And the result is that we’re all in trouble, because the Western countries, a huge linchpin of the world’s financial system, have become increasingly addicted to the fiction that there is a free lunch.
Did I say free lunch? Actually, it’s a free lunch plus aperitifs and dinner and then a big whopping dessert—all known as the social welfare state. That state might even be sustainable if it weren’t coupled with a diminishing commitment to actual production or even work, a bad balance of trade, politicians interested in short-term wins for themselves while ignoring long-term risks to their countries, and an ever-increasing sense of entitlement on the part of the citizenry (including immigrants from have-not countries). This trend has spread, of course, to the United States as well.
There is no dearth of articles about the current European crisis, written by people who know far more about economics and finance than I. But there’s “knowing.” and then there’s knowing. I’m afraid that it’s the nature of economics to be clear as mud, and for remedies to be more in the nature of hypotheses and hunches based on pre-existing biases than on any sort of hard science (and I say this in sorrow, because I wish it were otherwise).
Just go to RealClearMarkets and you’ll see today’s crop of pieces on the subject. The bottom line for almost all is a sense of fear and extreme crisis, with confusion about whether a remedy exists—and, if so, what it might be.
Here’s a piece that indicates that some sort of European breakup might be imminent:
“If the euro fails, then Europe fails and the idea of European unity fails,” she said. Too late, I think. The German nation is moving on. I was struck by a piece in the Frankfurter Allgemeine proposing a new “hard currency” made up of Germany, Austria, Benelux, Finland, the Czech Republic, and Poland, but without France. The piece entitled The Alternative says deflation policies may push Greece to the brink of “civil war” and concludes that Europe would better off if it abandoned the attempt to hold together two incompatible halves. “It can be done,” the piece says…No democracy will immolate itself on the altar of monetary union for long.
I’m not so sure about that last sentence, though. Breaking up is hard to do, especially when so many of Europe’s leaders are invested in the PC idea of nationalism=bad and EU=good.
What about tough love? If corporations and banks are too big to fail, aren’t countries? How long can the bailouts go on, and how widespread will they become, before we run out of other people’s money?:
The fatal flaw in the plan is that the European nations bailing out Greece — even Germany, where government debt has risen to about 80 percent of gross domestic product — have similar budget problems and even less political will to take similar medicine.
Their plan appears to rest on the hope that lenders won’t notice. Eventually they will, and when that happens, a worldwide loss of faith in government debt markets is a virtual certainty.
In other words, it is hardly good news for a creditor if a hopelessly bankrupt borrower offers to take on the debts of a hopelessly bankrupt borrower.
During the financial crisis, faith was restored in large financial institutions because toxic assets were essentially exchanged for government bonds. If government bonds become toxic, there will be no effective treatment options remaining. The collapse will have no bottom…
And that collapse could happen at any moment. If lenders decide collectively that the big Western governments have unsustainable debt positions and lack the political will to fix them, the end can come tomorrow.
This is chilling stuff. And despite (or maybe because of?) my rudimentary knowledge of economics, it seems correct to me. Living beyond your means works up to a point, but we’ve gone way beyond that point. The entire world economy was, at least in part, one big bubble, and the bubble may be in the process of bursting.