The latest on the Euro deathwatch

Today's NY Times has an article on the latest efforts by the European Union to keep the Euro intact. It has some useful steps in it, but perpetuates a myth that will eventually result in a recurrence of the current crisis. It is quite amazing to me how immune to easily knowable facts these supposedly well informed national leaders can be.

On the good side, they are inching toward a recognition that they need a "lender of last resort" if they are to preserve their financial system from panics that can bring down banking systems like Italy's, which are solvent in the long run, but which can't withstand a run on their assets in the short run. No, they shy away from letting their actual central bank, the ECB, do the job, but they are essentially replicating this function in a huge bailout fund that would be administered separately. This is a step in the right direction but as any gambler knows, sooner or later you get a set of cards (or a series of throws of the dice, or spins of the wheel, or whatever) that result in a loss bigger than whatever fund you have. Only by being quite literally infinite can this function really be accomplished the way it ought to, and that can only happen when the lender of last resort is, as the Federal Reserve is, capable of creating money itself in whatever quantities are needed. Still, it is a step in the right direction. So, this initiative may work for the moment (or it may not), but eventually it will fail because global financial market have more money than whatever amount they are putting into their bailout fund.

The bad side is given away by a quote from the article in the NYT: ".... European leaders will begin to change the fundamental structure of the union, creating a form of centralized oversight of national budgets, with sanctions for the profligate, to reassure investors". Now that might cure the problems of, e.g., Greece, which was indeed profligate, and in fact duplicitous in doctoring their official accounts, but Greece isn't really an existential threat to the Euro because it just isn't big enough, compared to the whole of Europe, to bring it down. (As an aside, I still think Greece will leave the Euro at some point - even a 50% reduction in their debt leaves them with an indefinite recession if they stay in the common currency)

What the leaders can't seem to recognize, as indeed most of the press reports on the problem fail to do as well, is the being profligate was not the root of the problem in Spain, and even Italy really doesn't count, even though one could at least make a case for profligacy there. No, Spain was actually running budget surpluses right up to the beginning of the crisis. If they were obeying all of the rules and curbs on "profligacy" it wouldn't have changed a thing. So what really was the problem with Spain?

It helps a lot if you compare the problem of Spain with the problem we have had with Florida. Just as Florida is our state to escape to for some sun and warmth, and which consequently suffered hugely from the real estate bubble and bust caused by overbuilding condos and vacation homes, so too was Spain the "Florida" of Europe. The Costa del Sol saw a massive real estate bubble fueled by banks willing to lend money to chilly Northern Europeans to build thousands of condos which are now sitting empty. Just like Florida, the bubble eventually burst, but there the stories diverge.

In the USA nobody even imagined cutting Florida off from the rest of us. Their banking system is the same as the banking system the rest of us have and we bailed it out without question. The fact that my little rural areas in the North had no real estate bubble to speak of made no difference - the Federal Reserve, and the Treasury, with the weight of the whole USA behind it, stepped in to prevent a melt down. Sure, Florida has issues, but the unemployed there automatically get unemployment payments and food stamps funded by the rest of us and their workers can fan out across the USA looking for new jobs.

Not so in Spain. Once the bubble burst they were on their own as far as the rest of the EU was concerned. No matter that they "behaved" as they were supposed to right up to the crisis. No matter that the real estate boom was fueled in no small part by some of those very same Germans who now resist doing anything to help them. Once the crisis hit they were required to fund their rescue operations on their own, and that includes not only saving their banks (which they can't do without help) but also the people themselves, who are unemployed at rates only seen in the US during the Great Depression. Right now, Spain has 22% unemployment, and if Europe goes into a recession there will be worse to come. Help for this from the rest of Europe is nowhere to be seen. In fact, the advice they are getting is quite the opposite More austerity! Fiscal discipline!

If THAT is what they really want then they are just debating over the size of the hammer they will use to beat the European economy into a depressionary heap. They need a stimulus, not austerity. Yes, I know those Germans think the "profligate" southern Europeans need to be punished for their transgressions. But Spain's only transgression is that they believed that following the EU guidelines would lead them to a happy outcome. They didn't. Will the rest of Europe figure this out before it all melts down?