Free Markets, Free People
“Kicking the can” in a cul de sac
Or maybe a better analogy is Nero and Rome. Politicians and hard decisions just don’t seem to mix very well do they? It is much better to be Santa Clause than the Grinch. Especially if you want politics to be your career.
Maybe that’s the problem. If you remember correctly, at least in the US, politics was supposed to be a part-time job. But here as in Europe, it has developed into a full-time job that requires excessive pandering to special interest groups using taxpayer money and borrowing as the means.
And here we are.
In Europe, it has, as predicted for decades, finally reached a tipping point. And the political elite? They really have no idea how to handle the problem (and the same sort of problem is becoming evident here). So they resort to the usual reaction of politicians caught in an uncomfortable situation. Defer a decision:
Under pressure to deliver shock treatment to the ailing euro, European finance ministers failed to come up with a plan for European countries to spend within their means. Such a plan is needed before Europe’s central bank and the International Monetary Fund consider stepping in to stem an escalating threat to the global economy.
The ministers delayed action on major financial issues – such as the concept of a closer fiscal union that would guarantee more budgetary discipline – until their bosses meet next week in Brussels.
If their finance ministers can’t put together a plan of action, what in the world are the ministers going to do next week? Megan McArdle notices the can kicking as well and also recognizes that they’re doing that in a cul de sac:
Keeping the euro together requires much more than fiscal integration–all fiscal integration does is turn the peripheral countries into something like those Algerian ghettos ringing Paris. Actually correcting these imbalances is going to require a lot of people in the periphery to get up and move. That’s a really tall order. Despite the fabled European multi-lingualism, in my experience, the majority of workers speak English about like I spoke high-school French and college Spanish; well enough to go on vacation, but not well enough to enjoy living in another country. I’m told that this is about standard. And that’s just one of the many barriers to movement between countries.
It’s not just the Germans who have to ask themselves whether the PIIGS won’t eventually say "Enough!" and renege. The bond buyers have to ask the same thing. At this point, it’s not entirely clear to me that any solution is credible enough to kick the can more than a very short distance down the road.
McArdle’s question in the title of the piece is “How can Europe possibly save itself?” You could read the question two ways. The first is wondering out loud what Europe could do to fix the problem and solve the dilemma they’re in. The second is rhetorical and reflecting a belief that it can’t.
Given this latest deferral, I’m beginning to see the question as rhetorical and the result as catastrophic. If you want to see a real “Domino Effect”, let Europe collapse.
Oh, and by the way, they just downgraded the third quarter GDP estimate from 3.1% to 2.3%.
And that sound you hear? The can clinking along as politicians the world over do what they do best.
MICHAEL ADDS: You could actually read the question a third way: Who will step in to save Europe from itself? Why, none other than good ole Uncle Sam (aka we the taxpayers):
The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points. In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary. Further details on the revised arrangements will be available shortly.
U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.
This is essentially a back-door bailout of the Euro. The Fed fixes the interest rate for these loans (the currency swaps) at today’s rate, sends a bunch of US dollars to European central banks (and elsewhere), which then loan out those dollars to European banks facing a “liquidity crisis” — i.e. running out of money and holding diminishing assets (one of which may have almost crashed last night). Nominally, the European central banks are on the hook for any losses suffered, but we all know how that works.
You can read more about how these swaps work here.