Europe Is Full of Unique, Bad Situations

Ezra Klein interviews Desmond Lachman on Cyprus and the Euro. This, for me, is the money quote:

My view is that things are getting worse. If you just want one metric just look at unemployment. Overall euro-zone unemployment now keeps grinding up, it’s at 9 or 10 percent now. Youth unemployment is in the 20s. Or look at Spain. Spain isn’t a Mickey Mouse economy. They’re at 26 percent unemployment and youth unemployment is 60 percent. This is a social explosion waiting to happen.

And what is the policy recommendation? They need to do more austerity. They need to stay the course. Greece has been in recession for five years, and they still need to tighten their budget. The Cypriot case is their financial sector got out of control. It was 8.5 times the economy. What they managed to do was use Russian deposits to buy Greek bonds. When the Greek bonds got restructured, they suddenly had a big hole in their balance sheet. The Germans, because they have an election coming in September, aren’t prepared to bail out banks in Cyprus because they feel that what they’d be doing is using German taxpayer money to bail out the oligarchs. That makes this a complicated mess.

As I remarked the other day, every time another one of these crises comes up, we're assured that they're unique. But collectively, they're not unique. Much of the eurozone is stuck in a simmering crisis that never seems to really resolve itself. The common currency is creating huge structural problems within the currency union, and so far, the best the government has come up with is a string of just-enough bailouts that keep the place from imploding, but don't resolve any of the underlying problems.

Lachman says that they haven't done any of the things they need to make the currency union work, like gotten their deficits under control or kept huge housing bubbles from inflating. But it's hard to see what the Spanish government could realistically have done to keep people from buying property in Spain.

What they could to is create truly multinational institutions for things like deposit insurance, bond guarantees, and bank regulation, but there's no national will to do this among the solvent countries--and it's hard to blame them. Deposit insurance and the like are a giant statement of faith in your fellow man. And when those men do not share a culture or a set of political and economic institutions, it's hard to generate that sort of faith.

Unfortunately, without those institutions, the whole thing is riotously unstable. How long before the collective uniqueness turns into a systemic failure?

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Megan McArdle

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