-- Posted by Neil H. Buchanan
As we all should have expected, last week's Angela Merkel-led austerity program for Euro Zone countries failed to wow the financial markets. Meanwhile, the IMF this week began pushing still more stringent austerity measures on Greece, even as analysts begin to think about the possible panic that a Greek exit from the Euro could cause. One scenario includes this: "Instead of business as usual on Monday morning, lines of angry Greeks form at the shuttered doors of the country’s banks ... As the country descends into chaos, the military seizes control of the government."
Bizarrely, the prospect of that kind of chaos is now being offered as an excuse for the Merkel treaty, based on the weird argument that more stringent austerity measures will protect them against break-up: "And it was largely this prospect that drove leaders last week to agree to adopt strict fiscal rules that they hope will wrap the 17 European Union nations that use the euro into an even tighter embrace." Apparently, the way to make the Euro Zone stronger is to worsen the symptoms and then punish members for becoming sicker.
The disconnect with reality is astonishing, with European leaders refusing even to discuss contingency plans for the possible break-up of the Euro Zone: "As Mario Draghi, the president of the European Central Bank, put it last week: 'It would be imprudent to create contingency plans when we see no likelihood that they could happen.'" Even giving full credit to the desire not to create a panic with loose words, this is so detached from reality that it could do even greater damage to the euro's credibility. How difficult would it have been to say: "Any good organization has contingency plans in place for all possible outcomes. We do not anticipate having to use any of them, but people can rest assured that we are always prepared to bring stability in even difficult situations." But no, the official line is: "Why think about it?"
Even so, the euro crisis is in temporary (but only temporary) remission. With a bit of perspective on last week's treaty meeting, it is worth considering a few of the side stories and tidbits that have arisen over the last few months. With luck, I might be able to find a common theme. Otherwise, these are simply offered as tasty morsels.
-- The news coverage of the euro crisis is chock full of what Paul Krugman refers to as "zombie" arguments, that is, arguments that keep being killed by facts but that come back to life again and again. (Two consecutive days of Dorf on Law posts discussing zombies? Pure coincidence.) I mentioned in my post earlier this week, for example, that yet another news article used the "spendthrift" trope to describe the crisis countries in the Euro Zone, even though the evidence clearly shows that all but Greece have obediently followed orthodox policies both before and during the crisis. Now, the European zombies are mingling with the U.S. zombies, as another report on the euro crisis asserted that President Obama had engaged in "enormous stimulus spending." I know that this is a talking point on the political right, but can we not hope that news articles will at least stop reviving this dead claim?
-- News coverage described Merkel as being highly distrustful of markets, whereas Obama is viewed as pro-market. What could this mean? Apparently, Merkel's supposedly anti-market sentiments were simply responses to questions about the financial markets' reactions to the euro crisis. Merkel was asked, in other words, whether her policies for Europe should be reconsidered, given that the markets were hammering Spanish and Italian sovereign debt. No, she said, I do not trust the markets. As admirable as it is for leaders not to be driven by bond vigilantes, it would be much better if Merkel did not put her faith in the Confidence Fairy -- especially given that the Confidence Fairy's imaginary powers ultimately derive from financial markets. Meanwhile, Obama's pro-market stance apparently boils down to protecting the interests of Wall Street in any Euro Zone policy changes.
-- And then there is Britain. Prime Minister David Cameron was right for the wrong reasons. He held the UK out of the new treaty, taking a great amount of heat domestically from those who worry that he has further isolated his green and pleasant land from the world. His reasons were quite clear: He did not want to allow any policy changes that would harm The City. In other words, London's Wall Street might not like some of Merkel's "anti-market" policies, so Cameron pulled out.
-- The irony is that Cameron insists on doing what Merkel wants, anyway. Even without being tied to the euro, Cameron's government has engaged in the kind of brutal austerity that would make Merkel smile. Even though all of the evidence from Britain thus far confirms that austerity really is austere (with an outbreak of rioting last summer to show for it), Cameron shows no signs of waking up. If this kind of public break with the Germans and French cannot change Britain's policies, it appears that the only hope for the UK is for the government to fall -- preferably not in the way that the Greek government might fall.
-- Although impolitic, it is impossible not to say this: Nicolas Sarkozy is a jerk. Among all the other evidence to support that conclusion, the newest item is a report that Cameron (in front of reporters) held out his hand to Sarkozy after the acrimonious meetings had ended last week, and Sarkozy brushed past him without a word. Which gives me an opportunity to recommend another film: "The Conquest (La Conquête)," a brilliant fictionalization of Sarkozy's rise to power. It makes, say, Mitt Romney look like a man with no ambition.
Maintaining one's sense of humor is healthy and necessary, but we should not lose sight of the bigger picture: Europe's leaders adopted a disastrous set of policies, and their response to the inevitable failure of those policies is to make them worse. The horrible break-up scenarios might still be avoided, but everything is now pushing even more forcefully in the wrong direction.
Have a nice weekend.