World stocks continue to oscillate with every bond sale and finance minister utterance in the 17 member Eurozone. Yet, the underlying reality is that the situation hasn’t changed at all.
Matthew O’Brien has a nice summary in The Atlantic.
It’s tragicomic. Southern Europe already has an unemployment crisis. Their depression-levels of joblessness are a dagger aimed at the heart of the European project. Absent growth, there’s the danger that southern European politicians will conclude that they can’t get their people to go along with Germany’s agenda of austerity über alles. But this is also political poison for northern Europe. It’s almost impossible to run a balanced budget with unemployment at catastrophic levels — which leaves southern Europe with gaping deficits and no growth. It’s up to countries like Germany, Austria, and the Netherlands to continuously bail out their southern European neighbors. That’s not exactly a popular political platform for Merkel, either.
This makes for some ugly politics. Unfortunately, the euro crisis ultimately demands a political solution. Europe currently lacks the institutions it needs to make the single currency work. There’s no central treasury, or pan-European banking regulator. It’s not worth saving the euro if they don’t eventually create this infrastructure. And that doesn’t seem likely, with Germany’s austerity medicine pushing the two euro blocks further and further apart.
The austerity measures being imposed on peripheral economies are going to cripple them even further with soaring unemployment. It’s an unsustainable solution, and citizens of those countries will act as swiftly as they are able to kick out the offending government.
Under a fixed exchange-rate regime, countries give up monetary independence, but gain more ability to use spending to guide the economy. It seems impossible that citizens would willfully vote in a government that will impose slow economic growth, or in the case of Greece an elongated recession.
Citizens and opposition parties are quickly booting governments that would impose austerity measures. Even in government’s not facing severe austerity political forces are becoming anti-Euro. France is ready to elect a socialist government with spendthrift leanings. In the Netherlands, a row over budget cut backs has led to an election.
The Greek central banker (who is completely impotent with regard to directly controlling the economy) has warned that
What is at stake is the choice between an orderly, albeit painstaking, effort to reconstruct the economy within the euro area, with the support of our partners, or a disorderly economic and social regression, taking the country several decades back, and eventually driving it out of the euro area and the European Union.
After 5 years of recession and a further 5 per cent reduction in GDP expected this year, how much of a threat can this really be? They have already faced a disorderly economic regression fraught with political upheaval and rioting. In fact, 63.2 per cent of Greeks expect government bankruptcy and they now hold virtually no faith in the electoral system. How much worse could a Euro exit be for Greece? Especially given that, other countries within the Eurozone seem unlikely to support austerity budgets.
Why would solvent countries like Germany agree to support failing economies? German citizens don’t want to pay for the bailout of other countries mistakes. Furthermore, even if they did, it would set a poor precedent. It’s a problem of moral hazard: governments with control over their economies will spend in deficit to spur economic growth, if they are aware that they will receive a bailout.
Even if the ECB and IMF continue to step in to support bond markets, it seems likely that European citizens from the periphery to the core are set to vote out any central authority on fiscal economic policy; and therefore, the long-term sustainability of a single European currency.