I’ve written about Europe a lot over the past couple of years and not out of just a Schadenfreude enjoyment of watching a slow motion disaster far from our shores but because it seems to me that really matters, both in terms of its impact on the global financial marketplace and the probable knock-on effect on domestic U.S. finance markets. It also deserves our attention because it contains lessons for all and sundry policymakers and opinion purveyors about policy choices that simply don’t work.
Of course, the first and most portentous mistake in Europe is don’t ever get into a land war in Southeast Asia, er, I mean never sever control of fiscal and monetary policy; in other words, their big mistake, the Euro-zone currency itself.
Until now, I have shied away from the conclusion that the center could not hold, and held firmly to the notion that somehow Europe would muddle through.
In hindsight, I think this was surrender to the majorityism of received wisdom that somehow the common currency was a permanent feature of European life. All the serious, adult and thoughtful commentators said as much and any contrary view is met with a sigh, a shrug, an eye roll for anyone jejune and melodramatic enough to predict radical change. That sort of thing is the purview of the lunatic fringe (or perhaps Fox News), the not serious; frothing Chicken Littles in pin stripes.
But how does one continue to ignore the troubling reality of a punch drunk polity on the ropes? It’s Economics 101, stupid. A monetary collective of sovereign nations simply cannot long survive when fiscal policy is severed from monetary policy and the government that controls fiscal policy no longer controls the levers of money. In Europe, where nineteen separate, culturally and linguistically distinct and economically and fiscally disparate nation states are held together by a thin veneer of common (and broadly annoying) rules and regulations, it could never have worked.
While it’s hardly a new insight, it is really as simple as this: Europe is not a thing. As Secretary of State Kissinger once said, if I want to talk to Europe, who do I call? Nationalist loyalties remain real and appear to once again be getting stronger. Also, let’s face it, if you’re Greek, you really cannot pull up stakes and find a job in Denmark. You don’t speak the lingo. Employment mobility is a myth. Populations cannot migrate as they do in the US in response to changing regional fortunes. National politicians will not do what’s good for a synthetic trans-European state when depended upon local votes to keep their jobs.
We know, but sometimes forget, the Euro was more than an economic undertaking of a semi-rationalized trade confederacy, but a political edifice, the ultimate response to 40 years of years of brutal warfare across Europe in the 20th century. It was a bet: a bet that baby steps towards economic integration would lead to political conversion which would ultimately lead to a mediation of sovereignty and something akin to the United States of Europe. The magic stardust that made all this seem doable was the simple passage of time. If we can just hold things together long enough, they said, and avoid confronting any of the fatal contradictions in this experiment, we would somehow, someday take that final, fateful step.
Well, it didn’t work. Clock ran out, no miracle at the buzzer. Nationalism, of the old sort, is again disturbing the peace and Brussels sounds horribly out of touch. As I write this, a left wing nutter is in charge of Greece and Grexit is once again front and center. Mademoiselle La Pen is widely thought to be a real competitor for the French presidency if a vote were held today and extreme left and the extreme right are making in-roads across all of the core of Europe, both old and new. A little Hayek anyone?
And now, the ECB toolbox looks mighty empty. QE which may or may not have worked in the United States (economists will argue about that for generations), will certainly not work in Europe where the principal transmission mechanics between the central bank and the real economy is the deeply flawed and politically compromised banking system. Germany extracted a concession from the ECB for its consent to QE, requiring each country to hold the vast majority of its own bonds bought through QE. That is a charade. This rejection of mutualization of the debt essentially ended the common currency experiment. As the continued fiddling at the center is seen as increasingly ineffective and fundamentally irrelevant, most national economics in Europe continue to run downhill with horrible financial entropy, sovereign politics becomes increasingly daunting and the right and the left increasingly intrude into leadership. Is it at all surprising that the new Greek government is a witches’ brew of convenience between the far left and the far right? Elections are coming in many of the major European nations over the next year or so. There is zero chance that the economies of these countries will improve by then. There is a virtual certainty that the fringe will get closer to power.
To be clear, I don’t see any of this happening tomorrow, or indeed anytime soon. But things will not get materially better for Europe so long as the common currency experiment is allowed to continue in this form. It’s just too fragile, it cannot tolerate significant stress, its contradictions are to existential. Once it becomes impossible to believe in the bet that more integration will somehow happen and the EC will morph into a political union, the end is neigh. And that’s where we are. In the near term, there may even be green shoots and positive notes in this otherwise dismal symphony, but at the end of the day, the experiment is done. If not this current Grexit concern (which seems more or less likely on a daily basis), it will be something else; some crisis in Italy, Spain or perhaps France that the edifice simply cannot survive. This means that Europe will continue to be a drag on the international economic market place and, in a derivative way, on the US domestic economy. Periods of international ennui over the ongoing crisis will be convulsed by periodic crisis and each will extract a price from the US economy and world economies. The fatalism around Europe is palpable. While animal spirits appear to be real and thriving here in the US, the only animal spirits I see in Europe these days are, to quote that brilliantly 20thCentury philosophic voice, Monty Python: Run away! Run away! Stand by for a wild ride