United "Snakes" of Europe
June 20, 2012
– Comments (13)
Board: Macro Economics
Author: Goofyhoofy
Sometimes, when dealing with unfamiliar territory, I find it helpful to put it in a frame of reference that I understand. Let me try with this.
The European Union is just like the United States, except without the "United." Sure, they share a currency, but not much else. In the US, we had a financial crisis, and Nevada (among others) got hammered because of rampant overbuilding. Their unemployment skyrocketed, builders went belly up faster than you can say "Blackjack!", and the social safety net costs accelerated dramatically.
In the United States, most of those sudden, unanticipated costs are paid by Federal dollars. If they were not, Nevada alone would scramble to find enough money to hold an unemployment fund together, pay the increased costs of Medicaid, food stamps, or whatever other expenses accrue during such a situation. On top of that, individual States have a "no deficit" law, so Nevada would have to cut back on lots of other things (which employ people) just to pay for those. That puts more people out of work, which adds to... well, lather, rinse, repeat.
In Europe there is no "federal government" to pick up the tab, short term or long. When Greece goes down, it's like Nevada going down, except there's nobody to help pick up the slack, except for the good graces of Germany (this time) if they feel like it. In America, the people of New York help pay the transition costs for Nevada, and there's no "if they feel like it", it's just what happens. Some of the Federal money is borrowed - or just printed - but it still flows to Nevada, which is spared from having to lay off even more people and adding further to their social misery. (There are proposals here, now, to disengage these programs from the Federal government and turn them back to the states, which would make us more like Europe in our ability to balance the pain and pleasure, which is to say 'balkanize' everyone.)
So, that's a long way of saying, "What would happen if Nevada went bankrupt?" and there was no Federal money to be (easily) had? (Actually it's not a fair comparison, because Nevada is #32 in the US, while Greece is #12 in the EU.)
Obviously, the larger the state, the worse the impact. In the EU there are only about 6 states which matter: Germany, France, UK, Italy, Spain, Netherlands. By the time you get to Greece, you're looking at a GDP 1/10th the size of Germany. In the US, the equivalent equation is California = Alabama x 10. Everything below Alabama (#25) just doesn't matter. Sorry Rhode Island, you're cute, but irrelevant.
So honestly, Greece doesn't matter. (Oh sure it does, headlines will ensue, pundits will pundit, banks will fail, drachmas will depreciate) but when the curtain falls, nothing much else will happen, DING DING DING, except for "confidence", and that's the unpredictable. If one of the Big Six goes down: different scenario. It would be like California or New York or Texas going upside down. Luckily we have a Federal Government which could actually do something, that is, if the political will hadn't been totally crushed under some moralizing clap trap about how we ought to let the Texans go sorting through dumpsters to teach them a lesson.
Europe doesn't have that. Europe isn't going to have that, because creating a Federal Union requires vastly more than "currency", and that's all the EU has at the moment.
If there is a lesson here, it is that each EU state will have to stand or fall on its own; there is no big Daddy around the corner, and Germany will soon enough tire of the chore of bailing everyone out, particularly after a decade or two of supporting East Germany, which found itself in a peculiarly similar supplicant state when the wall came down. Germany already had bailout fatigue, and that was for the people of their own historic homeland. How much can the people of Greece expect from them? No much, I'd say. Spain? Sorry Charlie.
Germany is, for the moment, an export powerhouse, but it is logically impossible for the rest of the EU to copy that model. Not everybody can have an export surplus, especially not at the same time. Not everybody can have a budget surplus, and anyway Spain and Ireland both had surpluses when the boom fell, and look how that turned out. Who can right these economies, bound as they are by a common currency but not a political union?
With individual states one might depreciate the currency and gain competitiveness. Bound to a current they don't control? No can do. Inflation is a subtle form of depreciation, but they can't even do that because of the common currency. So who or what is the answer?
The US can't help; China is turning inward, Japan is tapped out, and there's nobody else. Domino theory, unless the EU and the Central Bank there change philosophy dramatically and start printing money and yes, devaluing the Euro and guaranteeing bonds so the dominoes have a chance to stand for a while and regain popular support. Some devaluation (or inflation) would allow some of these states to gain against the US or China or whoever and help a bit, but the Bundesbank is dead set against it. (Yes, inflation is unpleasant. "Cut your wages" is even more so, and more likely to be accompanied by riots and unrest.)
So it appears to me to be, as the saying goes toes up, one at a time, until there are only a precious few remaining, and the rest of us collapse from sympathetic exhaustion.
Will it affect the rest of the world? Sure. Are there safe havens? Probably, but we'll only know after the fact. Can you do anything about it? Enjoy yourself, stay liquid, move quickly, have friends over for a beer while you can still afford a beer ;)
The United States of Europe. It seemed like such a good idea, they just got too far ahead of themselves too fast.
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