Haven’t commented much on this, but let’s cut to the chase. Greece is going to default. Period. The only question is when. The Europeans can hold it off a year or two if they get their act together. All of the PIGS (Portugal, Italy, Greece, Spain and arguably Ireland) are probably going to default eventually unless the rules by which the Eurozone, which state you can’t run too high deficits, are overturned. All of the countries in the Eurozone, all of them, have been playing shady financial games to hide the real state of their budgets. Every single one.
Oh, and Germany needs to put a cork in it. Trade and balance of payments are ZERO SUM. Every nation cannot run surpluses, it is mathematically impossible. The more countries that do, the less Germany’s surpluses will be. Germany’s surpluses are only possible because other countries run deficits.
When the Greeks get crammed down, hard, either through readjustment packages or because they go off the Euro and default (what I would do, but my by European friends inform me this is unthinkable to all good Eurocrats), when Spain, Ireland, Italy and Portugal get crammed down, that’ll lead to a nice demand collapse, which means less imports and worse balance of payments. Which will make things worse for everyone else—because while balance of payments and trade are zero sum games in the sense that it has to come out to zero, prosperity is not. If overall demand drops or grows very slowly, everyone is hurt. Refusing to deal properly with these problems by putting Europeans and American to work by using deficit financing properly (as opposed to wasting it on tax cuts, bank bail outs and badly designed “stimulus” measures) would help everyone and pay itself back, as long as it was done in a way which also dealt with the oil bottleneck at the same time.
But that ain’t happening. So at best we get a lousy few years economic cycle where over 80% of productivity gains go to corporate profits, wages stagnate and unemployment doesn’t recover anywhere near pre-crisis levels—or we get a second downleg of this financial crisis when China and Europe both crash out. (It ain’t about America, babes.) I’m waiting till the end of the summer to see where I’ll put my money (literally). In the meantime, hold on tight. I’d tell you to pray, but I’m not sure if crashing out or stumbling around with a bloody bandage on the stump is preferable. I suppose the bandage. I doubt even a second crash would be enough to make the powers that be understand they need to make fundamental changes.
Meanwhile, in the US, the strongest part of the recovery comes in medical, insurance, finance and construction. As I said long ago, the fundamental Obama play was to try and reboot the bubbles. Yay.
Celsius 233
Ashes, ashes, we all fall down.
marku
Well, current neoliberal mythology holds that the only valid function of government is to support and inflate the FIRE economy, and through it, funnel stolen wealth to the top 1%.
In the US, the Medical industry gets to tag along b/c it is as a necessary prosthetic to the Insurance industry
Mandos
(On a related note, I finally got wifi at GWU and am liveblogging the fiscal sustainability counter-summit. Just “blogwhoring” here, don’t mind me.)
Ian Welsh
If’n you’re going to blogwhore, include a link. Just sayin’ 🙂
Mandos
Oh. I thought that people would be savvy enough to click my linkname. Anyway, I can be found here as usual for people to harangue. I have the two pre-wifi talk notes to post and then summary and analysis in the next few hours, and I’ll “blogwhore” properly then 🙂
It was an…interesting experience in a number of ways. I wish Mandos-realself had more opportunity to do these kinds of things.
Cumudgeon
How close are we to entering a non-recoverable downward spiral ending in a Somalia-style total collapse?
Since Reagan, every business cycle downturn has left the global main street economy weaker than during the past boom. With every downcycle, increasingly aggressive reforms would have been necessary to improve things for non-elites. With every downcycle, however, elites have been ever more reluctant to do anything but respond to neoliberalism’s failures with even more neoliberalism. With every downcycle, any and all institutions that could push back against the neoliberal cancer have been marginalized or destroyed.
I’m not convinced the spiral can be broken before we have a crash which destroys so much wealth that parts of the developed world fall into some kind of malthusian catastrophe.
marku
Isn’t this problem basically an insoluble side effect of the design of the EU? You are always going to have surplus and deficit countries. The only reason Germany can have a surplus is if someone else takes on a deficit. In the past, a country would recover it’s trade balance through devaluation, making imports more expensive and exports cheaper. The imposition of a common currency makes this now impossible. Now it seems the only path to recovering balance is through wage reductions, which are political dynamite.
It it strange that no one thought of how to handle this in the rush to a single currency.
Ian Welsh
Yes, I think a big part of the problem is the design of the EMU. Stupid.
Mandos
According to the people at the fiscal sustainability anticonference: not stupid. An experiment in Full Neoliberalism.
b.
> An experiment in Full Neoliberalism.
More like the spawn of the overbearing ego of Chancellor Kohl – the same urge to “write history” that led to the hurried German re-unification and the premature recognition of Bosnia paved the way for the monetary union. The neo-liberal benefits are incidental, but appreciated among the retainers of the elites.