Euro a mess? Who could have predicted...

Oxford economic historian Kevin O'Rourke dissects the economic mess driven by the Euro, which was clearly a terrible idea from the outset:

The euro area economy is in a terrible mess.

In December 2013 euro area GDP was still 3 percent lower than in the first quarter of 2008, in stark contrast with the United States, where GDP was 6 percent higher. GDP was 8 percent below its precrisis level in Ireland, 9 percent below in Italy, and 12 percent below in Greece. Euro area unemployment exceeds 12 percent—and is about 16 percent in Portugal, 17 percent in Cyprus, and 27 percent in Spain and Greece.

Europeans are so used to these numbers that they no longer find them shocking, which is profoundly disturbing. These are not minor details, blemishing an otherwise impeccable record, but evidence of a dismal policy failure.

The euro is a bad idea, which was pointed out two decades ago when the currency was being devised. The currency area is too large and diverse—and given the need for periodic real exchange rate adjustments, the anti-inflation mandate of the European Central Bank (ECB) is too restrictive. Labor mobility between member countries is too limited to make migration from bust to boom regions a viable adjustment option. And there are virtually no fiscal mechanisms to transfer resources across regions in the event of shocks that hit parts of the currency area harder than others.

Problems foretold

"How Austerity Has Failed"

Martin Wolf @ New York Review of Books focuses on Europe's massive policy failure:

Austerity has failed. It turned a nascent recovery into stagnation. That imposes huge and unnecessary costs, not just in the short run, but also in the long term: the costs of investments unmade, of businesses not started, of skills atrophied, and of hopes destroyed.

What is being done here in the UK and also in much of the eurozone is worse than a crime, it is a blunder. If policymakers listened to the arguments put forward by our opponents, the picture, already dark, would become still darker.

How Austerity Aborted Recovery

Austerity - The beatings continue...

The Economist:

IT IS a car crash of a data release. One simply can't look away. Hard to know precisely which part of the euro area's latest unemployment report is the most grimly compelling. The overall rate, at 12.1%? In the spring of 2010 unemployment rates in America and the euro zone were effectively the same at about 10%. There is now a gap of 4.5 percentage points. Total unemployment? In the first three years of the downturn America did far worse than the euro area, adding some 7.5m workers to the unemployment rolls to Europe's 4.7m. Since then total unemployment in the euro area has risen by another 3.2m while America reduced the ranks of the jobless by 3.5m. The euro area now has some 19.2m unemployed workers.

Individual country numbers inspire their own brand of horror. Greek joblessness topped

27% in January (the most recent month for which data there are available), while Spanish employment has risen to 26.7%. Joblessness in France rose by slightly more in the year to March than it did in Italy. And did you know that Dutch unemployment rose by 1.4 percentage points over the past year? German unemployment, of course, has held steady at 5.4% since last summer.

It is the youth figures that are most remarkable, however: 59.1% of those under 25 are unemployed in Greece, 55.9% in Spain, 38.4% in Italy, 38.3% in Portugal, 26.5% in France—3.6m youths in all.

There is blame to go around for this, but one has to reserve special criticism for the European Central Bank...

The ECB has presided over a wrenching disinflation that has brought inflation well below target, and which is both a consequence of recession and itself an implement of macroeconomic pain. Europe's governments have behaved badly, but American fiscal policy has hardly been better. The ECB faces a more complicated set of political constraints, but it has already proven how adroitly, aggressively, and inventively it can act when necessary.

The ECB meets this week. On Thursday it may announce an interest-rate cut; if it doesn't it is probable that a cut will be made in June. But a rate cut will not be enough, not remotely. As things stand ECB policy is scarcely being transmitted to the periphery, where rates to firms and households are far higher than in Germany. The euro area needs a jolt to expectations, targeted credit easing designed to improve peripheral liquidity, and broad quantitative easing. Mario Draghi has surprised markets before. Hopefully he will do so again. Because at the moment, the ECB is behaving as though the main economic failure in the 1930s was the world's pathetic inability to grit its teeth and endure the costs of tight money.

Interview with Joseph Stiglitz

"Der Spiegel" interviews economist Joseph Stiglitz

SPIEGEL: Professor Stiglitz, how do you expect the next President of the United States to tackle the problem of unequal distribution of wealth?

Stiglitz: First, he has to recognize that there is a problem at all. Watching inequality grow is like watching the grass grow. You don't see it happening day by day, but over a period of time it becomes visible.

SPIEGEL: What is the scale this inequality?

Stiglitz: In the last decades, income and wealth disparity have grown dramatically in this country. Let me give you an example: In 2011, the six heirs to the Walmart empire commanded wealth of almost $70 billion, which is equivalent to the wealth of the entire bottom 30 percent of US society.

SPIEGEL: The US has always thought of itself as a land of opportunity where people can go from rags to riches. What has become of the American dream?

Stiglitz: This belief is still powerful, but the American dream has become a myth. The life chances of a young US citizen are more dependent on the income and education of his parents than in any other advanced industrial country for which there is data. The belief in the American dream is reinforced by anecdotes, by dramatic examples of individuals who have made it from the bottom to the top -- but what matters most are an individual's life chances. The belief in the American dream is not supported by the data.

Europe's Deficit Hawks

Paul Krugman explains how Europe's version of "deficit hawks" operate:

Spain has troubled banks that desperately need more capital, but the Spanish government...faces questions about its own solvency.

So what should European leaders — who have an overwhelming interest in containing the Spanish crisis — do? It seems obvious that European creditor nations need, one way or another, to assume some of the financial risks facing Spanish banks. No, Germany won’t like it — but with the very survival of the euro at stake, a bit of financial risk should be a small consideration. 

But no. Europe’s “solution” was to lend money to the Spanish government, and tell that government to bail out its own banks. It took financial markets no time at all to figure out that this solved nothing, that it just put Spain’s government more deeply in debt. And the European crisis is now deeper than ever.

Let's get this straight.  The leaders counseling austerity and cutting government spending sink Spain's crisis-ridden economy into deeper debt...to bail out the banks.  If ever there was evidence of the fraudulence and class warfare foundations of "austerity economics," this is it. 

The Very Serious, Very Crazy People

Martin Wolf at Financial Times, via The Professor:

Austerians - Brit PM Cameron and German Chancellor Merkel

Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events.

European Austerity - Wrong Diagnosis & Wrong Medicine

Former Treasury Secretary & Harvard-based charmer Larry Summers explains why austerity schemes give him a headache - read his entire piece at the Financial Times HERE:

Unfortunately, Europe has misdiagnosed its problems and set the wrong strategic course. Outside Greece, which represents only 2 per cent of the eurozone, profligacy is not the root cause of problems. Spain and Ireland stood out for their low ratios of debt to gross domestic product five years ago with ratios well below Germany. Italy had a high debt ratio but a very favourable deficit position. Europe’s problem countries are in trouble because the financial crisis under way since 2008 has damaged their financial systems and led to a collapse in growth. High deficits are much more a symptom than a cause of their problems.

Treating symptoms rather than causes is usually a good way to make a patient worse. So it is in Europe. Its financial problems stem from lack of growth...

Europe's Disastrous Austerity Strategy

 Paul Krugman expresses deep, deep misgivings about Europe's chances to avert even worse economic calamity:

Just a few months ago I was feeling some hope about Europe. You may recall that late last fall Europe appeared to be on the verge of financial meltdown; but the European Central Bank, Europe’s counterpart to the Fed, came to the Continent’s rescue. It offered Europe’s banks open-ended credit lines as long as they put up the bonds of European governments as collateral; this directly supported the banks and indirectly supported the governments, and put an end to the panic. 

The question then was whether this brave and effective action would be the start of a broader rethink, whether European leaders would use the breathing space the bank had created to reconsider the policies that brought matters to a head in the first place. 

But they didn’t. Instead, they doubled down on their failed policies and ideas. And it’s getting harder and harder to believe that anything will get them to change course. 

"How Austerity Is Killing Europe

Jeff Madrick at NYRB:

"The European Union has become a vicious circle of burgeoning debt leading to radical austerity measures, which in turn further weaken economic conditions and result in calls for still more damaging cuts in government spending and higher taxes. The European debt crisis began with Greece, and that nation remains the European Union’s most stricken economy. But it has spread inexorably to Ireland, Portugal, Italy, and Spain, and even threatens France and possibly the UK. It need not have done so. Rarely do we get so stark an example of bad—arguably even perverse—economic thinking in action." 

Read the rest of Madrick's excellent piece on the fallacy of austerity economics HERE.

True facts - "A larger welfare state can mean a lower deficit"

Robert Samuelson

Ezra Klein debunks the stunning ignorance of "his colleague" - the modestly endowed Washington Post business writer Robert Samuelson (no relation to noted economist Paul Samuelson) - who true to form spouts the tired and untrue "conventional wisdom" regarding Eurozone troubles being rooted in social spending as % of GDP  and the European model of a robust welfare state:

Speaking of things that the European crisis is not about (debt and deficits), while I was in Germany, my colleague Robert Samuelson wrote that “Europe’s turmoil is more than a currency crisis and was inevitable, in some form, even if the euro had never been created. It’s ultimately a crisis of the welfare state, which has grown too large to be easily supported economically.”

I don’t think that quite works. Take Germany. They have a pretty big welfare state: pensions, health care, paid vacations, unemployment benefits equal to two-thirds of one’s income. Indeed, the Organization for Economic Cooperation and Development keeps track of social spending — unemployment, old-age pensions, health care, etc — as a percentage of GDP. In 2007, Germany spent 25.2 percent of their GDP on such things. Greece spent 21.3 percent on social policies. Yet Greece is in crisis, and Germany is fine.

To bring this across the Atlantic, you could argue that the United States’s debt burden is the product of an insufficiently large welfare state — at least with regard to health care.

"The Wrong Fix" for the Eurozone

Harold Myerson at The American Prospect:

(T)he deal that German Chancellor Angela Merkel and French President Nicolas Sarkozy struck to save the Eurozone will inflict years of austerity on European nations that are already mired in depression. Spain, for instance, has an unemployment rate of about 20 percent and a youth unemployment rate that is approaching a mind-boggling 50 percent. It needs a massive Keynesian jolt to its economy, not budgetary constraints that will condemn it to a decade or quarter-century of penury...

(T)he Merkel-Sarokzy solution was based on a misdiagnosis of Europe’s woes. Some of Europe’s current basket cases were actually running budget surpluses in the years before the Lehman meltdown. Ireland and Spain weren’t overspending at all—but the banks and investors speculating on their housing markets most certainly were. When their banks went under, their economies collapsed, driving their unemployment rates, and their budget deficits, sky-high. If Ireland and Spain could do it over again, they’d have adopted far tighter bank regulations—something that the Merkel-Sarkozy deal doesn’t call for...

The Euro: Can the center hold?

Economist Austin Goolsbee, who recently left the administration to return to teaching at Univ. of Chicago, doesn't believe the Eurozone can hold together...and he explains succinctly why it was a bad idea in the first place. Goolsbee's interview with Ezra Klein is worth a read in it's entirety - a concise picture of some of the central problems in this confusing and complex picture. HERE.

Wonkblog on the Eurocrisis

This doesn't explain the Eurocrisis, but it helps explain areas of potential impact on the US economy - the worst of which, in the apparently still dense jungle of finance, seem still unknown.  Brad Plumer at Wonkblog:

With the crisis in Europe still raging, analysts are frantically trying to game out what a euro zone implosion would mean for the United States. Yesterday, the Federal Reserve Bank of San Francisco put out a research note pegging the odds of a U.S. economic contraction in early 2012 at “greater than 50%,” noting that a European sovereign debt default (Greece, say) would very likely plunge us into recession.

Part of the reason for that is that Europe is one of our major trading partners — accounting for about one-fifth of U.S. exports. Over at Real Time Economics, Josh Mitchell put together a handy chart, using Wells Fargo data, showing which states export the most goods to Europe, and hence would get hit hardest by a Europe slump:


Utah’s gold exports, South Carolina’s auto exports, and West Virginia’s coal exports are potentially at greatest risk. The one sliver of good news is that, as Wells Fargo notes, most states have major trade flows primarily with countries like the United Kingdom, France, the Netherlands and Germany, rather than the most fragile countries like Greece and Italy and Spain. So it’s tough to say, exactly, how a slowdown overseas would play out here.

Meanwhile, the bigger, scarier unknown is whether financial mayhem in Europe could wreak havoc on U.S. banks.

"Euro Zone Death Trip"

"Don't go down those stairs..."

"B" horror movie with subtitles?  No. It's Paul Krugman painting a bleak economic picture: "Europe’s situation is really, really scary: with countries that account for a third of the euro area’s economy now under speculative attack, the single currency’s very existence is being threatened — and a euro collapse could inflict vast damage on the world." 

For a short overview of the crisis brewing in the Euro Zone, check out his complete column in today's NYTs.

"Be afraid - very afraid."

Nouriel "Dr. Doom" Roubini - one of the few economists who foresaw the '08 disaster brewing - adds his frightening outlook HERE: "In my view there is a high likelihood that there is going to be another global financial crisis. My data suggests that most advanced economies are already entering a recession. We’re not any more in an anaemic recovery, we’re not any more at stall speed. We’re at the beginning of a contraction..."  

If you're prepared for a real scare regarding a second global economic crisis triggered by the deep problems in Europe, read the entire Roubini interview.