(Update) The Fire Next Time: The Euro Financial Crisis – The Rise of The Technocrats

Posted by AzBlueMeanie:

In last week's episode of the melodrama Euro Financial Crisis, our heroes Rocky and Bullwinkle were in a cliff hanger in Italy: "Will the fat lady sing in this Italian Opera? Is it curtains for our heroes? Tune in next week…"

In this week's episode of the melodrama Euro Financial Crisis, we learn that just when you think the opera is finally over, there is an intermission and another act. Aaaargh!

This melodrama has entered a new phase: the Rise of the Technocrats. On Thursday, Lucas Papademos, a respected economist and former vice president of the European Central Bank, was named to lead a new Greek unity government that has pledged to abide by the tough terms of a European aid package in the hopes of saving the country from bankruptcy. Economist Lucas Papademos Named Prime Minister of Greece – NYTimes.com:

Mr. Papademos has only a few weeks to persuade Greece’s creditors in the so-called troika — the European Union, the International Monetary Fund and the European Central Bank — to release its next block of aid, $11 billion, before the country runs out of money. Then he must begin fulfilling the painful terms of an even larger loan.

He will have to move swiftly to reassure the European leaders there will be no repeat of the shock they suffered in October, when the former prime minister,George A. Papandreou, after negotiating a new $177 billion loan, decided without warning to submit the bailout package to a referendum. The move infuriated the Europeans, who had concocted the Greek bailout as part of a painstakingly negotiated broader effort to stabilize the euro. It also started the clock on the end of Mr. Papandreou’s tenure.

Mr. Papademos will have to deal with 2011 budget shortfalls and the passage of a 2012 budget that is expected to call for another round of austerity measures in a climate of growing social unrest. He will also have to start what are expected to be difficult negotiations with private sector banks that have agreed, in principle, to write off 50 percent of the face value of their Greek bond holdings as part of the rescue plan.

* * *

Mr. Papademos, seen as an outsider to the old-boy political networks — is a technocrat, perhaps able to take Greece on a new path. But it was not an easy sell. Some analysts here have said that the political parties were reluctant to embrace him because he would be an unknown, and perhaps a rival, at election time.

* * *

Whether he will succeed remains an open question. But some analysts said they considered his appointment to be Greece’s best shot.

Meanwhile, back at the Roman Coliseum, Prime Minister Silvio Berlusconi, Italy's version of Rupert Murdoch — a media tycoon who has thoroughly corrupted media and government — resigned on Saturday, punctuating a tumultuous week and ending an era in Italian politics. Berlusconi Resigns After Italy’s Parliament Approves Austerity Measures – NYTimes.com:

His exit, a sudden fall after months of political stalemate, paves the way for a new government of technocrats led by Mario Monti, a former member of the European Commission. Mr. Monti is likely to be installed in the next few days, following the apparent consent of key blocs of Mr. Berlusconi’s center-right coalition.

* * *

Though it was met by cheering crowds in Rome, the end of Mr. Berlusconi’s 17-year chapter in Italian politics, characterized by his defiance and fortitude, sets off a jarring political transition. “This is the most dramatic moment of our recent history,” Ferruccio de Bortoli, the editor of the Milan daily newspaper Corriere della Sera, said Saturday.

After borrowing rates on Italian bonds soared last week to levels that have required other euro zone countries to seek bailouts, Mr. Berlusconi pledged to step down after the Italian Parliament approved austerity measures sought by the European Union.

The lower house gave their final approval to some of the measures on Saturday afternoon, and two hours later, he officially submitted his resignation to President Giorgio Napolitano.

An impromptu orchestra and choir gathered outside the presidential palace, where Mr. Berlusconi resigned, playing the “Hallelujah” chorus from Handel’s “Messiah” . . . making Mr. Berlusconi the very embodiment of the Italian saying that the tenor is applauded until he is booed off stage.

So does the fat lady sing now? No. It is only intermission, and the next act is to yet to come.

Nobel Prize winning economist Paul Krugman gets kudos for the best line evah:

"This is the way the euro ends — not with a bang but with bunga bunga."

Krugman writes Legends of the Fail – NYTimes.com:

Not long ago, European leaders were insisting that Greece could and should stay on the euro while paying its debts in full. Now, with Italy falling off a cliff, it’s hard to see how the euro can survive at all.

But what’s the meaning of the eurodebacle? As always happens when disaster strikes, there’s a rush by ideologues to claim that the disaster vindicates their views. So it’s time to start debunking.

First things first: The attempt to create a common European currency was one of those ideas that cut across the usual ideological lines. It was cheered on by American right-wingers, who saw it as the next best thing to a revived gold standard, and by Britain’s left, which saw it as a big step toward a social-democratic Europe. But it was opposed by British conservatives, who also saw it as a step toward a social-democratic Europe. And it was questioned by American liberals, who worried — rightly, I’d say (but then I would, wouldn’t I?) — about what would happen if countries couldn’t use monetary and fiscal policy to fight recessions.

So now that the euro project is on the rocks, what lessons should we draw?

I’ve been hearing two claims, both false: that Europe’s woes reflect the failure of welfare states in general, and that Europe’s crisis makes the case for immediate fiscal austerity in the United States.

The assertion that Europe’s crisis proves that the welfare state doesn’t work comes from many Republicans. For example, Mitt Romney has accused President Obama of taking his inspiration from European “socialist democrats” and asserted that “Europe isn’t working in Europe.” The idea, presumably, is that the crisis countries are in trouble because they’re groaning under the burden of high government spending. But the facts say otherwise.

It’s true that all European countries have more generous social benefits — including universal health care — and higher government spending than America does. But the nations now in crisis don’t have bigger welfare states than the nations doing well — if anything, the correlation runs the other way. Sweden, with its famously high benefits, is a star performer, one of the few countries whose G.D.P. is now higher than it was before the crisis. Meanwhile, before the crisis, “social expenditure” — spending on welfare-state programs — was lower, as a percentage of national income, in all of the nations now in trouble than in Germany, let alone Sweden.

Oh, and Canada, which has universal health care and much more generous aid to the poor than the United States, has weathered the crisis better than we have.

The euro crisis, then, says nothing about the sustainability of the welfare state. But does it make the case for belt-tightening in a depressed economy?

You hear that claim all the time. America, we’re told, had better slash spending right away or we’ll end up like Greece or Italy. Again, however, the facts tell a different story.

* * *

What has happened, it turns out, is that by going on the euro, Spain and Italy in effect reduced themselves to the status of third-world countries that have to borrow in someone else’s currency, with all the loss of flexibility that implies. In particular, since euro-area countries can’t print money even in an emergency, they’re subject to funding disruptions in a way that nations that kept their own currencies aren’t — and the result is what you see right now. America, which borrows in dollars, doesn’t have that problem.

The other thing you need to know is that in the face of the current crisis, austerity has been a failure everywhere it has been tried: no country with significant debts has managed to slash its way back into the good graces of the financial markets. For example, Ireland is the good boy of Europe, having responded to its debt problems with savage austerity that has driven its unemployment rate to 14 percent. Yet the interest rate on Irish bonds is still above 8 percent — worse than Italy.

The moral of the story, then, is to beware of ideologues who are trying to hijack the European crisis on behalf of their agendas. If we listen to those ideologues, all we’ll end up doing is making our own problems — which are different from Europe’s, but arguably just as severe — even worse.

Economist James K. Galbraith writes at Salon, The crisis in the eurozone:

Like our own, the European banking crisis is the product of over-lending to weak borrowers, including for housing in Spain, commercial real estate in Ireland and the public sector (partly for infrastructure) in Greece.  The European banks leveraged up to buy toxic American mortgages and when those collapsed they started dumping their weak sovereign bonds to buy strong ones, driving up yields and eventually forcing the whole European periphery into crisis. Greece was merely the first domino in the line.

In all such crises the banks’ first defense is to plead surprise – “no one could have known!” – and to blame their clients for recklessness and cheating.  This is true but it obscures the fact that the bankers pushed the loans very hard while the fees were fat.

* * *

As this process unfolds the Germans reap the rents and lecture their newly indebted customers to cut wages, sell off assets, and give up their pensions, schools, universities, healthcare  – much of which were second-rate to begin with. Recently the lectures have become orders, delivered by the IMF and ECB, demonstrating to Europe’s new debt peons  that they no longer live in democratic states.

The eurozone’s architecture makes things worse in two major ways.  While the EU has long paid some compensation to its poorer regions, these structural funds were never adequate and are now blocked by unmeetable co-pay requirements.  And the zone lacks the inter-regional redistribution channels to households that the U.S. has developed in Social Security, Medicare, Medicaid, federal government payrolls and military contracting among other things. 

* * *

Second, the ECB refuses to solve the crisis at a stroke, which it could do by buying up the weak countries’ bonds and refinancing them. The argument against this is called “moral hazard,” buttressed by old-fashioned inflation fears, but the real issue is that to do so would admit loss of control by creditors over the central bank.  Actions parallel to those taken by the Federal Reserve – nationalizing the entire commercial paper market, for instance – would repel the ECB, even though it does buy up sovereign bonds when it has to.  So instead the zone has gone about creating a gigantic toxic CDO called the European Financial Stability Fund, which may shortly be turned into an even more gigantic toxic CDS (like AIG, they will call it “insurance”).  This may defer panic at most for a little while.

Technical solutions exist.  The most-developed of these is the “Modest Proposal”  of Yanis Varoufakis and Stuart Holland, widely backed by older political leaders in Europe. It would  1) convert the first 60 percent of GDP of every eurozone country’s debt to a common European bond, issued by the ECB; 2) recapitalize and Europeanize the banking system, breaking the hammerlock of national banks on national politicians; and 3) fund a New Deal-like program of investment projects through the European Investment Bank.

Variant proposals include Kunibert Raffer’s call for a sovereign insolvency regime modeled on the U.S. municipal bankruptcy statute, Thomas Palley’s proposal for a new “government banker” and Jan Toporowski’s proposal for a tax on bank balance sheets to retire excess public debt.

These are the best ideas and none of them will happen. . .  Discourse is sealed off from fresh ideas and political survival depends on kicking cans down roads so that the fact that this is a banking crisis does not have to be faced.  The fate of the weak is at best incidental. Thus every meeting of finance ministers and prime ministers yields treacherous half-measures and legal evasions.

* * *

Greece and Ireland are being destroyed. Portugal and Spain are in limbo, and the crisis shifts to Italy – truly too big to fail – which is being put into an IMF-dictated receivership as I write. Meanwhile France struggles to delay the (inevitable) downgrade of its AAA rating by cutting every social and investment program.

If there were an easy exit from the Euro, Greece would be gone already.

* * *

So the cauldrons bubble.  Debtor Europe is sliding toward social breakdown, financial panic and ultimately to emigration, once again, as the way out, for some.  Yet – and here is another difference with the United States – people there have not entirely forgotten how to fight back.  Marches, demonstrations, strikes and general strikes are on the rise.  We are at the point where political structures offer no hope, and the baton stands to pass, quite soon, to the hand of resistance.

Gaius Publius comments at AMERICAblog News: James Galbraith on Europe: The baton is passing "to the hand of resistance":

What Galbraith is saying is that the ECB is creating a situation in Europe where the underlying "bet" is the ability of Greece, Italy, Spain and Portugal (et al) to pay their debts. You can invest in the "rescue" fund, and you can place side bets for or against it. All because the ECB doesn't want to guarantee the underlying debt to begin with.

So watch that fund; it's the key to European hopes, and will be their downfall.

Someone mentioned (I think it was Matt Taibbi) that for a whole lot less than the banker bailout cost, the U.S. could have guaranteed or bought out every shaky mortgage in the country and the crisis would have been over.

Europe is facing the same choice, and has the same determination not to take it.

Galbraith's bottom line: Europe is "at the point where political structures offer no hope, and the baton stands to pass, quite soon, to the hand of resistance."

When resistance is your solution, you've got trouble. Tick, tick, tick.

Can our heroes Rocky and Bullwinkle disarm the bomb in time? Or will they end the next show with a bang? Tune in to find out…"