Someone in Europe might soon let the cat out of the bag, or maybe they have, but we haven’t heard about it yet over here in the Colonies: the European banking crisis isn’t a banking crisis at all. It’s the moment we have been waiting for ever since the Europeans met at Maastricht and cobbled up the EU.
The EU originated as a financial structure. The initial stages involved elimination of trade barriers and borders — no tariffs, no protectionism, and, theoretically, greater wage equilibrium as workers migrated in one direction toward better-paying jobs, and in the other, toward greater employment opportunity in lower-wage areas. This all seemed to go pretty well, except for the labor migration, which tended unsurprisingly to be pretty much one-way. Workers, for some reason, seemed to prefer working in high-wage economies, and the hoped-for migration of surplus labor to lower-wage, higher-opportunity regions didn’t really pan out. Nor did manufacturing move to cheaper-wage nations, like Greece, Spain, Portugal, et. al., and the low level of their exports failed to improve by any measurable degree.
Still, the weaker economies prospered. That they did so through the issuance of an Alps of debt was largely unremarked, and, when it was “remarked,” the sachems advised us “Don’t look behind the curtain.” And we didn’t, really.
In this process, an oddity called “currency union” was floated and, astonishingly, accepted largely without demur by people (like the Germans) who really should have known better. Those who did know better — like the Brits — were derided as provincial ignoramuses who would suffer for their folly when the mighty euro shouldered the antiquated, inflated and wheezing dollar aside and became the world’s new reserve currency. (Do you think there is one politician in Britain left who would dare advocate giving p the pound sterling right now?)
Okay. It’s now 2007, and the original twelve nations in the EU have expanded to include 27 counties, including Estonia, Finland and Malta (!). No problem. In the United States, it was observed, you have New England Yankees, Texas cowboys, Georgia rednecks, Pennsylvania Quakers, California dreamers and a widely-distributed network of Hispanics, Asians and Republicans. You all get along just fine; why shouldn’t we?
So far, so good. A few countries that are maxing out their credit cards, but there’s growth in their future — right? And everyone else is doing great, unemployment is way down, the euro is at $1.30 and everyone wants in.
Then along came Lehman Brothers, TARP, QE 1 and 2, and — whoops. No one wants to lend Greece any money.
All right. You probably know the rest. Tankers of German, French, British and who-knows-whose cash are dispatched to Greek ports and offloaded, only to vanish into what appears to be a cavern of Stygian dimension. Plummeting Greek bonds are sadly purchased in the tens of billions by unhappy French and German banks, who, strongly “encouraged” by their central banks to support the market for Greek debt, watch with dismal countenance as the plummet morphs into a free fall. They contemplate their ravaged balance sheets with a mixture of outraged stoicism and a funereal sense of the inevitable, hardly reassured by the solemn back-room promises of politicians that the worst is over. They know it isn’t — far from it.
Soon, the banks are even more dismayed to hear certain politicians — in France and Germany — suggesting that there should be an “orderly” Greek default, with the “irresponsible lenders” picking up at least part of the tab. The screams of outrage. The rending of garments. The sackcloth and ashes: “You bastards bludgeoned us into buying this crap by assuring us that you would make it good, and now you want us to take the hit?”
Then the dread word “Eurobond” suddenly kept cropping up, like Banquo’s ghost. What’s a eurobond? A quick definition would be “every French and German taxpayer’s worst nightmare come true.” A eurobond would be a bond issued by a nation — a government bond, with its revenues going only to that nation’s central bank (or excuse for one), but guaranteed by the full faith and credit of the entire eurocurrency union. If the issuing nation defaulted, the rest of the countries would have to make it good. This is like learning that your spendthrift brother-in-law has duplicates of all your credit cards.
Oh, to be sure, there would be lots of rules and regulations about who could issue what and how — just like there are already lots of rules and regulations stating explicitly that the Greeks couldn’t do what they did. And we use the Greeks just as an example — there are a few other members of their club.
Well, this notion of a eurobond is so unpopular with most voters that they assume it’s just a kind of bogeyman the politicians are using to get them to go along with other highly unpalatable solutions, like continuing to funnel these same taxpayers’ money to Greece. But they are wrong to think so. There are many, many members of Europe’s ruling class that would dearly love to see a eurobond.
So, what’s the alternative? Late last week, the orderly default idea popped up again, with sages here and abroad suggesting that Greece’s best remedy now might be to leave the euro and return to the drachma. Two problems with that:
- That’s a default, anyway you slice it, and a default now, after all the attempts at propping things up, would be an admission that everyone involved from the start of the fiasco was a complete chucklehead. Politicians don’t like doing that.
- It would demolish the largest banks in Germany, France, Italy, Spain and a few other spots.
France’s preeminent scold, Christine Lagarde, now head of the IMF, kind of blurted out the realities not long ago when she startled the room at the recent central banker conference in Jackson Hole with the blunt statement that “European banks need immediate recapitalization.” Ms. Lagarde has since tried hard to stuff this cat back into the bag, but the cat isn’t having it. European bank share prices decided to compete in a summer downhill, with Societe General taking the cup so far in a spectacular plunge.
So — what next?
Right now Europe is wobbling on a tightwire between sovereign fiscal independence and a centralized economy. Fiscal independence for individual nations may entail some severe medium term pain. But the alternative now seems to be towards an almost irreversible slide into total economic integration, with all financial authority concentrated in one central bank, with sole authority to issue bonds, dictate monetary policy, and so on. So you see, it isn’t a banking crisis at all. This is a turning point in the evolution of the European Union itself: centralization or independence for nation-states?
Some think that this integration was what many had in mind from the very beginning: a federalized Europe, concentrating political and economic authority in a pan-coalition authority. And others think that some politicians may in fact be gleeful — that the current situation is a great opportunity to effect the long-desired Utopia of a true United States of Europe (and Scandinavia, the Balkans, and, of course, Malta). There has always been a wonderful tendency among the starry-eyed to think that bigger is better, that union is superior to independence, and that harmony among mankind can only be achieved through the establishment of a central, all-powerful paternal state. And certainly integration — and size — have their benefits. We can see this at work in many political unions, and in the world of commerce. But we also see that, after a certain point, the margin of diminishing return rule begins to exert its effect. No one wants just one grocery store chain, or even two.
Back in 1992, when Europe began down a path toward a more open economic landscape, the limits were left undefined, and the idea was to see how things went, and figure it out from there — which was, and is, fine. But consider this:
The past few years have been difficult economic times — among the most difficult since the Depression. The strains on economies have been great, but by and large, in spite of some monumental blundering, the economic fabrics of most western nations have held. This is the first real crisis that European union has faced, and there is some real question about whether European union will survive it. What kinds of stresses lie in the future? What must Europe do now to ensure the security of its citizens? Some clearly believe the solution lies in more centralization, and less independence for nation states. Other, perhaps wiser heads may quietly be thinking that a Greek default might not be the worst of all possible worlds. Not any more.