Check out this raving stock trader on BBC News the other night! As the interviewer says, ‘jaws have collectively dropped’. Either this guy is totally honest and reveals what stock market traders and speculators really do on the financial market; or he’s on cocaine; or it’s a hoax.
Some of the things independent trader Alessio Rastani says include the statement that ‘governments don’t rule the world, Goldman Sachs rules the world’. He’s saying that stock market traders don’t really care about the euro anymore, that the financial crisis is spreading like a ‘cancer’, and that he goes to bed to dream about a new recession. Also he says that people should ‘prepare’ and that the savings of millions of people are gonna vanish into thin air.
Andrew Sullivan contrasts two takes on the future of the euro, the European Monetary Union, and the world financial system: one optimistic, and one very pessimistic. I’d suggest to read them both: each provides a good account of what’s currently at stake. But I don’t know which of them is more realistic. In a few weeks or months we’ll know, I guess.
- Edit: From hilmerv come two more interesting articles. One is of Paul Krugman in the NYT, making (once again) the Keynesian argument that austerity measures and budgets in Europe are worsening the crisis rather than ameliorating it. The other is from the Center for Economic and Policy Research, arguing that China will have to come to the rescue because of the refusal of policy-makers to invest rather than make budget cuts.
- Original post: First the pessimistic one, from The Economist:
TWO significant messages emerged from the weekend’s IMF meetings that are both striking in their own right and which, when set against each other, are deeply disconcerting. On the one hand, journalists seem to be unable to describe the meetings without noting the high level of fear and anxiety among the participants. (The Financial Times‘ Wolfgang Münchau closes his column today by saying, “I have never seen Europe’s policymakers as scared as I saw them in Washington last week.“) Along those lines, leaders came away from the meetings promising bold action by early November, including agreements on steps to recapitalise banks and increase the capacity of the European Financial Stability Facility. The message seems to be that officials have been scared into a recognition of the severity of the world’s problems and are now prepared to act.
Yet the day’s headlines carry another message: the euro zone is riven by conflict and unable to agree on the most basic of rescue measures. Euro-zone governments are still struggling to put in place an agreement reached in July. Some officials insist that Greece’s creditors must take much larger haircuts than those assumed in that deal, while Greek leaders continue to argue that they will not default. Observers are biting their nails over looming parliamentary votes on the plan to increase the EFSF, even as it becomes clear that a rise to €440 billion isn’t sufficient. On the one hand, it’s as clear as ever that the euro zone needs a massive, ambitious policy to avoid a catastrophic financial scenario. And on the other, it seems ever less likely that the euro zone’s leaders can agree on such a policy and muster the domestic political support to ratify and implement it. If Europe simply can’t do what it needs to do, that leaves the euro zone, and the world, facing a very dark economic reality.
This reality could scarcely come at a worse time. Europe is sliding toward recession. America is uncomfortably close to following behind. Even in the absence of a major financial shock, a renewed downturn across major economies would be very painful, given the lack of recovery in many labour markets and the stress contraction places on budgets. Were a double-dip to strike, far fewer economies would have the political will to intervene to support the economy, even among those with the fiscal room to help.
It’s just shocking to think about the dangers that loom and consider the extent to which they’re driven by governmental failures. Despite having been in a state of constant crisis for more than a year, the euro zone is far away from a real solution; the politics may be such that no solution is possible without a dramatic, Lehman-like collapse, at which point it may be too late to save the euro zone. Meanwhile, the European Central Bank blundered into policy tightening, seriously worsening the crisis out of a fear of mild and temporary inflation. Leaders elsewhere have hardly done better. America’s fiscal policymaking has steadily deteriorated, and the Congress needlessly sent confidence tumbling over the summer with a battle over the government’s debt ceiling. At the same time, Ben Bernanke seems to have forgotten everything he once knew about the crises in the 1930s and in Japan in the 1990s. America is sinking back toward recession while the global economy nears a cliff, and the Fed—by its own acknowledgment—has plenty of heavy ammunition sitting untouched on the shelf.
It is a damning performance. If the world economy does indeed face a new crisis and a new contraction in the weeks ahead, rich-world citizens will have every reason to question the institutions of global capitalism. If the liberal order begins to falter, even darker times still may lie ahead.
Gloomy indeed. Here’s the optimistic one, from the Daily Beast:
So the question is, will Europe implode? Contrary to the widespread assumption, I think not.
It isn’t just that Angela Merkel, Germany’s answer to Margaret Thatcher, has drawn what for her is an unequivocal line that Greece will not leave the European Union or the euro zone. It’s that slowly, sloppily, the governments of Europe are awakening to the realization that since they have tethered their collective economic fate to each other, the costs of unraveling are so immense as to be untenable. No government feels comfortable demanding more funds to bail out Greece or shore up banks or create a backstop for the tenuous finances of Italy. But each government understands at some animalistic level that no electorate will celebrate the consequences of doing too little. Even those supposedly dour, disapproving burghers of Düsseldorf who are tired of bailing out what they see as profligate Greeks would blanch at the market consequences of the end of the euro. Germany doesn’t just pay to maintain that union; it benefits mightily as well.
There is no way to prove that the officials of the EU will access their better angels at the last moment (however auspiciously named the German chancellor is). But this crisis is shaping up as the European version of the American debt-ceiling debate: messy, disheartening, but when pushed to stare at the alternatives, deeply clarifying.
Hence the lurch in the past days toward a more explicit, aggressive response, ranging from a more robust stabilization fund, to plans and statements from German Finance Minister Wolfgang Schaeuble to new IMF head Christine Lagarde that suggest at the least a recognition that this won’t magically resolve itself. Yes, the German minister has to speak cautiously, ahead of an important vote on bailout money on Thursday, and yes, Lagarde has been a study in rhetorical excess, but still, no one is in denial and most now recognize what is at stake.
To expect the resolution to be easy is foolish, but to assume that dissolution is the inevitable outcome after generations have fought and striven—that, too, is foolish. The formation of the union was never widely or easily digested, but neither was the carving together of the United States in the early to mid-19th century.
The risk remains that globally, because of Europe, we are on a precipice and will fall. That needs to be factored into any near-term decision about money, business, and economic outlook. But the costs of dissolution are prohibitive, for Europe and for the world. China, Brazil, India, the new creditor nations of the world, have begun the unthinkable conversation about bailing out Europe if Europe will not bail out itself: an unlikely event but indicative of how serious this is. In the end, it is those costs for Germany, for France, and for the entire euro zone that should act as a bulwark against the worst-case scenario.
The economic woes of Greece and the subsequent attempts to address these have revealed, it seems, major fault lines both on the national level in Greece, and on an European Union level. Whereas spending has run amok in the first country, with spending cuts being opposed by a large section of the population that is willing to hit the streets every time some reform is announced, questions of interstate solidarity and the feasibility of having an economic union without a political union with vastly different countries are on the forefront in the second instance.
Now that the mess appears to have cleared a little bit with the $120 billion bailout deal between the EU and the IMF and Greece, one article and one blog commentary seem to capture the whole affair succinctly.
In a televised statement to the nation, Mr. Papandreou urged Greeks to accept “great sacrifices” to avoid “catastrophe.”
He signaled that public-sector employees would see their salaries further reduced, while pensions for retired civil servants would be scaled back. He said members of Parliament would do without their bonuses. He added that in tough negotiations with the International Monetary Fund, the European Union and the European Central Bank, the government had succeeded in avoiding cuts to private-sector salaries.
Mr. Papandreou is the scion of a Socialist dynasty whose father, Andreas Papandreou, helped erect the sprawling Greek welfare state when he was prime minister in the 1980s. The younger Papandreou sought to embolden Greeks to accept what is expected to constitute the greatest overhaul of the state in a generation.
Mr. Papaconstantinou, who was to fly to Brussels for an emergency meeting of euro zone finance ministers, said Greece had agreed to raise its value-added tax to 23 percent from 21 percent, to cut civil servants’ wages and to eliminate public-sector annual bonuses amounting to two months’ pay.
He said special rules allowing for early retirement of civil servants would be tightened. He said the government also intended to increase taxes on fuel, tobacco and alcohol by about 10 percent.
Crucially, Mr. Papaconstantinou did not address the critical issue of whether the government would relax rules on laying off public workers, whose generous salaries and benefits have been a major cause of Greek’s debt problem. Until now, the government has not been able to lay off civil servants, whose employment rights are in effect constitutionally guaranteed.
While the economic lifeline for Greece is expected to reassure jittery markets, doubts remain whether Greece will be able to follow through on what amounts to a cultural revolution in the social contract between state and citizen.
The shakeup of longstanding aspects of Greek life, from endemic tax evasion to overstaffed offices of idle employees, has prompted fears that widespread social unrest could unhinge a Greek recovery.
The government’s proposals for deep spending cuts already have stoked strong resentments in a country where one in three people is employed in a civil service that, until now, has guaranteed jobs for life.
Some analysts feared that the Saturday demonstrations, in which dozens of black-clad anarchists threw Molotov cocktails and stones at the police, might prove to be the beginning of protracted social unrest. Unions are planning mass demonstrations for Wednesday.
Maybe the picture of a striking and protesting happy populace that is unwilling to face the fact that for them, it’s either being bailed out by other tax paying electorates in the European Union, or having their country go down the drain, is not fair, but it seems to be the only picture we have. Come on, Greeks: why should we pay for your Club Med style behaviour? I mean, we will and we have to, but quit striking and rioting at least.
One caveat: I can understand that a population is worried about the IMF taking over. Joseph Stiglitz’ Globalization and Its Discontents(2002), about the havoc wreaked upon several countries when the IMF started prescribing policies is still a must-read.
On the fundamental problem with the EU that now, in hard times, is clear for everybody to see, Matthew Yglesias has the following take (to which a lot of people, I would add, might disagree):
Take a look at this and this from Felix Salmon for a hint of how grim the situation is. Tyler Cowen says “the basic problem . . . is that several European economies have been pretending to be much wealthier than they really are and to make financial plans on that basis.” I think a better way of putting it might be that the entire Eurozone system was structured around the assumption that a whole bunch of countries that mostly aren’t Germany could all viably run a monetary policy designed by and for Germany. The results have been predictably disastrous, and I think worsened by an unwillingness of German policymakers or the German public to recognize their own role in this. If Germany had been subjected to 10 years of Spanish-run monetary policy its economy would have all kinds of “structural” problems too and many decisions would look “irresponsible.”
At any rate, the question now is what kind of way forward exists. It appears that either Europe’s monetary union needs to be undone or else a fiscal union needs to be forged. But neither is possible!