[np] Euro crisis

[David Morris]

On Wed, Sep 28, 2011 at 4:52 AM, Otto <ottosell at googlemail.com> wrote:
> No, the German public cannot convinced to pay for all those "lazy" people in the south who just sit in the  sun, get salararies for 14 months, retire at 60 (while we work until 67) etc etc.

http://thinkprogress.org/yglesias/2011/09/28/331314/european-debt-crisis-primer/

European Debt Crisis FAQ

Why does Greece need a bailout?

This is pretty simple. The Greek budget is way out of whack and Greece
can’t repay what it owes.

Why don’t the other Euro countries just let Greece default?

The concern is that if one Euro country defaults, this will increase
the perceived riskiness of all European countries. The higher interest
rates will be bad for everyone, but in particular could push countries
like Ireland, Portugal, Spain, and Italy into default.

Well so what?

That many defaults would call other countries (Belgium, even France)
into question. What’s more, the losses to banks would be enormous.
Countries would then either need to choose between witnessing massive
bank failures, or else engaging in bank bailouts much larger than the
cost of just bailing Greece out.

Is this all caused by high taxes and socialism?

No. Sweden’s not on the Euro and they’re fine, notwithstanding high
taxes. Even within the Eurozone, relatively high tax countries such as
Finland and Austria are doing okay on their own terms.

How did the PIGS get into this mess in the first place?

Different reasons. Greece engaged in a lot of budget funny-business.
Spain and Ireland had big property bubbles. I don’t know anything
about Portugal.

More slowly — isn’t this all about irresponsible government spending?

In Greece, that’s a huge part of the story. In Spain and Ireland it’s
really not. Much like the United States, both of those countries had
massive private borrowing during the boom years, much of it to finance
real estate development. Explanations for why exactly this happened in
the USA vary, but it was all one big global phenomenon. Not only did
this directly employ a lot of people, it had the secondary consequence
of pushing wage levels up across the board. Then demand collapsed,
leaving many Irish and Spanish indebted and unemployed while overall
wage levels were fundamentally uncompetitive with Germany. The
collapse in overall economic activity has created plunging revenues
and budget crises.

Why can’t they solve this?

Many reasons, but first and foremost an extremely clunky
decision-making mechanism. Big decisions in Europe need to be made by
unanimous vote of all 27 EU members, even those that aren’t part of
the euro. The constituent countries have different interests, are in
different situations, and also have different governing coalitions. An
idea needs to be acceptable to Spanish socialists and German
conservatives and everyone in between. That’s simply hard to do.

What should be done?

At this point really anything. There are several different options
that could “work.” The Eurozone could break up and banks could eat
default losses. The Eurozone could break up and the stronger countries
could bail out their banks. The Eurozone countries could embrace
fiscal transfers. The European Central Bank could promise massive
monetary stimulus in exchange for continent-wide austerity. The
problem is that all workable options involve allocating losses to
someone or other. Nobody wants the loss allocated to them, and since
the decision-making process is so clunky it’s easy to block
everything. Each time the can gets kicked down the road, it tends to
expose the extent to which the decision-making process won’t lead to a
big bang workable solution and everyone gets more nervous.