Perspectives from expert contributors.
Attempts to put together a “rescue package” at the pan-European level repeatedly fall behind events.
And the lack of leadership from Germany and France is palpable – where is the vision or the clarity of thought we would have had from Charles de Gaulle or Konrad Adenauer?
In addition, the pessimists argue, because the troubled countries are locked into the euro, no good options are available. Gentle or even dramatic depreciation of the exchange rate for Greece or Portugal or Italy is not in the cards.
. As a result, it is hard to lower real wages so as to restore competitiveness and boost trade.
This means that the debt burdens for these countries are likely to seem insurmountable for a long time. Hence default and global financial chaos seem likely."
According to the September 2011 edition of the Fiscal Monitor of the International Monetary Fund,
44.4 percent of Italian general government debt is held by nonresidents,
for Greece is 57.4 percent,
while for Portugal it is 60.5 percent.
62.5 percent of French government debt is held by nonresidents.
If Europe has a serious meltdown of sovereign debt values, there is no way
that the problems will be confined just to that continent.
All of this is a serious possibility – and the lack of understanding at top European levels is deeply worrisome. No one has listened to the warnings of the last three years.
Almost all the time since the collapse of Lehman Brothers has been wasted, in the sense that nothing was done to put government finances on a more sustainable footing.
But perhaps the pendulum of sentiment has swung too far, for one simple and perhaps not very comfortable reason.
There is no way to have just a little debt restructuring for Italy.
If Italian debt involves serious credit risk – an end to the view that government debt has “no credit risk” and is a “risk-free asset,” with zero probability of default – then all sovereign debt in Europe will need to be repriced downward.
Will Germany will remain a safe haven?
Even that is far from clear.
gross government debt in Germany will be 82.6 percent of gross domestic product at the end of this year t). Reports of German fiscal prudence have been greatly exaggerated.
German policy makers and the German public will not do well in the event of a major sovereign-credit disaster. Credit would tighten across the board. German exports would plummet.
The famed German social safety net would come under great pressure
.
There is an alternative to a decade of difficult austerity.
The Germans could agree to allow the European Central Bank to provide “liquidity” support across the board to the troubled governments.
Many things are wrong with this policy –
it is exactly the kind of moral hazard-reinforcing measure that brought us to the current overindebted moment.
None of us should be happy that Europe – and the world – has reached this point.
Among others, the bankers who bet big on moral hazard – i.e., massive government-backed bailouts – are about to win again
Perhaps the Europeans will be tougher on executives, boards and shareholders than the Obama administration was in early 2009, but most likely all the truly rich and powerful will do very well.
But if the German choice is global calamity or, effectively, the printing of money, which will they choose?
The European Central Bank has established a great deal of credibility
with regard to keeping inflation at or close to 2 percent.
It could probably offer a great deal of additional support – through creating money –
without immediately causing inflation.
And if the bank is providing a complete backstop to Italian government debt,
the panic phase would be over.
None of this is a lasting solution, of course.
Europe needs a proper fiscal center – much as the United States needed in 1787 and got under Alexander Hamilton’s policies from 1789. When he became Treasury secretary, the United States was in default and the credit system was almost completely broken.
Some centralized tax revenue and control over fiscal deficits are needed.
Silvio Berlusconi stood in the way of all this. Other European leaders would not trust him to tighten Italian fiscal policy. But if he is really gone from power – and we should believe that only when we see it – there is now time and space for Italy to stabilize and, with the right help, find its way back to growth.
Of course, if the European Central Bank provides unconditional financial support to Italian,
or other, politicians who refuse to bring their deficits under control,
we are heading for another Great Inflation"
the full simple simon reveals himself
"Of course, if the European Central Bank provides unconditional financial support to Italian, or other, politicians who refuse to bring their deficits under control, we are heading for another Great Inflation"
the final frontier fiscal deficit driven....secular high inflation....
now we can see why simon johnson got the big jobs he got
and the platform he has now
why
he was chief econ con at what was it ???
the whole earth trans nat
candy cain kool aide acid bank or something ???
wasn't he ???
this guy will carry corporate water babe
like volcker
simon is far from a simple pie man
little guy lover
big bank basher
he's a ridiculous fiscal budget prig
ready to short circuit a nation's
public transfer system at the drop of a credit rating
all his chatter about fiscal space comes down to this:
now the ecb may have to end its bluffing
and stop pretending
the latin loopy states face outer darkness
if they don't cut themselves to fiscal pieces
no
all hell and high water is not justy over the horizon
but as the all clear sounds
sez simon
fuck but
once again
back on the budgetary table
deficits deficits deficits
deficts
yup they'll yawn ever too wide again
all efforst to rebalance trade and payments go bleeewy
and nominal sovereign debt will soar again
now its all too obviously
things can only end this way ??
once the curtain is pulled away
and the plebs can see their national public debt
is in fact back stopped by the limitless ecb euro mine
fiscal binging all around is the implicit order of the day here
as the ever so recently pledged to be dry piig states
revert to budgets on the booze
imagine that ...
of course
here's simon two jumps ahead of krugman
and that i admire
though no stopped clock
just about to be on time
johnson is
something both worse and better
he's a fixated butt plugged observer
that sees the spectre of his fixation everywhere
at all times
fiscal imprudence moral hazard
a punch bowl that is never really removed