Gavyn Davies on the Euromess

Seeing Berlusconi finally on the verge of political oblivion produces mixed feelings, because in fact he has not been defeated by his own mistakes or political weaknesses. Instead, like the fall of Papandreou and Zapatero, it is a result of the fundamentally unsustainable nature of monetary union.

As Gavyn Davies points out in the FT, the German current account surplus more or less exactly corresponds to the current account deficit of Spain, Greece, Italy and Portugal. The stark implication of this is that

Viewed in this light, it is clear that there needs to be a capital account transfer each year amounting to about 5 per cent of German GDP from the core to the periphery. Without that, the euro will break up.

I wonder how many Germans have understood this. In any case, as Davies points out, there is not way this can happen under current arrangements (austerity, deflation and limited ECB intervention). And so the end game continues until the Southerners have had enough and opt for the Argentine route.

Berlusconi, Papandreou and the various corrupt networks they represented should not be exonerated, but ultimately the collapse of this phase of monetary union is not actually their fault. Ireland, with a very difficult social structure, economic regulation and political system (although corrupt enough in its own way) is in a similar mess. More enlightened politicians would probably not have averted disaster. The proof of this is that Spain, the star pupil of economic reform in Southern Europe, is barely better placed than Italy and Greece.

The sad thing is that Northern Europeans may happily blame corruption for the South's plight, but Southern citizens are not in the mood to listen to the sermon. Ironically, the humiliation of the bailout arrangements could end up stirring national pride and generating an alternative (and equally implausible) narrative: blame the Germans.

Berlusconi finally meets his match

Yes, Berlusconi has dealt with pretty much anything that Italian politics has been able to throw at him over the years, but in the end the power of the bond markets is going to get him ("Va via": borsa su. "Resta": crollo I mercati e il destino del premier).

Brings to mind the famous phrase of James Carville, about the bond markets being far more powerful than a president, a pope, or a .400 baseball hitter.

Anyway, I think Silvio may well go tomorrow, if the vote in parliament on the government accounts doesn't produce a majority. If not, with bond yields hitting their Euro-era record today, it can't be much longer.

It's too hot to work

Nice post by Kash Mansori at The Street Light: Where Exactly Are Those Lazy Southern Europeans, Anyway? Mansori points out that there is no evidence of lazy or feckless behaviour being any more prevalent in the South than in the North - working hours, overall employment, social spending and pensions are mostly close to the European average, although welfare coverage is on the whole less generous and working hours longer.

In fact, the prevalence of the grey economy should mean that Southern Europeans are working harder than the data suggests, although this is not an argument likely to impress Northern Europeans.

Of course, Southern Europe has its problems, and its history of corrupt leaders and authoritarianism have left legacies that continue to hold the region back. But the broad picture some Northern Europeans wish to believe in, of lazy Mediterraneans exploiting their virtuous neighbours, is based entirely on ignorance.

Greenspan meets Max Weber

So Alan Greenspan, perhaps the key architect of today's global economy (yes, that is not a compliment), has decided to weigh in on the Eurozone crisis and in particular on the North-South dimension of Europe's problems.

It's hard to know where to start, but here goes. The least interesting part of the nonsense Greenspan talks is that he rehearses the standard story about Mediterranean profligacy, of the Southern periphery living beyond its means as it hurtled to its inevitable reckoning with the harsh reality of the bond markets. This story is still popular, despite being debunked over and over, most recently by Mansori here. It is unpopular, of course, for the reason that it blames the victim, a common response on the part of the supporters of free market capitalism to the crises their prescriptions generate.

What more interesting is the apparently unselfconscious Orientalism of Greenspan's assessment of the Southern countries. Greenspan's analysis of the North-South divide in Europe goes as follows:

There remains the question of whether most, or all, of the south would ever voluntarily adopt northern prudence. The future of the euro beyond a select group of northern countries with a similar culture will depend on the ability of all eurozone nations to follow suit.

What would this 'similar culture', based on 'northern prudence', involve? Well, for a start it presumably doesn't involve the Anglo-Saxon recklessness exhibited by Northern European countries such as Britain, Ireland and Iceland. So we are talking about particular areas of the North whose prudence is expressed in  wage restraint and sound public finances: the countries generally referred to in the comparative political economy literature as 'social democracies'. So Alan comes out as an unexpected fan of large public sectors, high and progressive taxation, and strong trade unions. Who knew?

The counterpart of course is Southern fecklessness. Here we go back to a common refrain of blaming poor economic performance on climate. Greenspan cites approvingly the following words from Kieran Kelly:

if I lived in a country like this [Greece], I would find it hard to stir myself into a Germanic taxpaying life of capital accumulation and arduous labour. The surrounds just aren’t conducive.”

Never mind that the average yearly working hours of a Greek employee are the highest in Europe. It's just so hot, how can they ever do any work? A notion that nobody ever applies to Texas or Florida.

It's barely worth the effort of outlining all the ways in which Greenspan is wrong. But the fact that this kind of sub-racist nonsense can be given space in one of the best newspapers around is a sign of the times. The times are ugly, and what we thought was true wasn't. So why not just blame problems on those suffering them? It's a lot easier than trying to work out what went wrong, and admitting that powerful men like Greenspan didn't have the faintest clue what they were talking about.

The economy is a morality play

Today Krugman ('Notes On The Eurobubble') gives Alan Greenspan another well deserved kicking for blaming the Euro crisis on profligate Southern Europeans getting their just desserts. Krugman points out that huge capital flows from Northern European pushed up demand, output and employment in Spain and other countries, leaving them high and dry when the bubble burst. To blame the Southern Europeans for their plight is therefore misleading moralizing.

Krugman has been berating conservative economists for some time for the tendency to see the economy as a morality play. The trouble is, the political economy is a morality play. Economic behaviour is deeply embedded in social systems within which moral claims, as well as material desires, drive human behaviour. The Eurozone could well collapse entirely because Germans find it so hard to cope with the idea that their supposedly virtuous behaviour will not bring its own reward. Krugman is right in terms of the models, but the very real presence of moral reasoning in the politics of the crisis is precisely why economic modelling alone cannot give us the answers.

Panem et circenses

Italy gets another downgrade, its Finance Minister blames it on his own government not calling early elections and instead hanging lifelessly onto power, yet most attention seems to be focused on Amanda Knox.

What was that about bread and circuses? Italy is currently suffering from a form of paralysis, apparently unaware that it is about to become an over-sized Greece.

Munchau loses it

Wolfgang Munchau, in his article Eurozone fix a con trick for the desperate, describes the latest solution for the Eurozone crisis as "the equivalent of putting explosives into a can, before kicking it down the road". The grounds for this are that the leverage involved in turning the European Financial Stability Facility into something powerful enough to hold back the markets turns it effectively into a CDO.

Munchau used to be a measured, cautious and conservative commentator. The fact that he is using such strong language these days totally freaks me out.