Legends of the Fail
By PAUL KRUGMAN
Published: November 10, 2011

http://www.nytimes.com/2011/11/11/op...e-fail.html?hp

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

First, if you look around the world you see that the big determining factor for interest rates isn’t the level of government debt but whether a government borrows in its own currency. Japan is much more deeply in debt than Italy, but the interest rate on long-term Japanese bonds is only about 1 percent to Italy’s 7 percent. Britain’s fiscal prospects look worse than Spain’s, but Britain can borrow at just a bit over 2 percent, while Spain is paying almost 6 percent.

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.

__________________
Unless otherwise specified, I am posting as a regular poster. When I will act as a mod, I'll make sure you're in no doubt.

Christ I'd like to punch Krugman in the face. It's nothing to do with his politics, just his self-important, indefinitely-prolonged-anal-stage tone of voice.

__________________
Standard disclaimer: the disgusting statements contained in this post are the views of the poster, and unless specified do not represent the views of the moderators or the site's owners.

Hmmmm, I am biased, obviously. But which passages or turn of sentence in this article do you object to?

__________________
Unless otherwise specified, I am posting as a regular poster. When I will act as a mod, I'll make sure you're in no doubt.

That's a large part of the problem. He's not like Mark Steyn or Robert Fisk where you can basically go through sentence by sentence, mocking each one mercilessly, it's far more subtle than that. To me he always comes across sounding like the bastard child of Stewie from Family Guy and a talk radio host. I've never seen a piece where he doesn't call everyone who disagrees with him, however slightly, an ideologue. Most of the time he also addresses them as if they were drooling morons. Also, the tendancy to think that incessantly predicting disaster makes you more intelligent than the herd.

So, yeah. Basically that.

__________________
Standard disclaimer: the disgusting statements contained in this post are the views of the poster, and unless specified do not represent the views of the moderators or the site's owners.

^

TL-DR; Nobody likes a smarty-pants

__________________
Righteousness will always be the trap at the gates of hell

Originally Posted by AnonymousIdiotSavant

Nobody likes a smarty-pants

That's why I never seriously considered going into politics. I'd fail on that account.

__________________
Unless otherwise specified, I am posting as a regular poster. When I will act as a mod, I'll make sure you're in no doubt.

The Eurozone Turns Down Chinese Money And Quid Pro Quo

By Wolf Richter www.testosteronepit.com
For months, rumors China would use its $3.2 trillion in foreign exchange reserves to bail out the Eurozone with the stroke of a plastic pen goosed financial markets. But China has a list of demands, a veritable quid pro quo. And today the European panhandling delegation in Beijing, instead of demurely accepting those demands or offering compromises, turned them down. "A slap in the face," according to Reuters.

And the Eurozone goes back to square one. It needs money to increase the firepower of its bailout fund, the EFSF, to €1 trillion. In 2012, a tsunami of debt matures. Alone the four largest countries in the Eurozone need to roll over nearly €1 trillion in debt: Italy €307 billion (19.3% of GDP); Germany €273 billion (10.6% of GDP), France €240 billion (12% of GDP), and Spain €132 billion (12.2% of GDP). Then there’s the tidal wave of new debt that will be issued to fund current deficits and bank bailouts. And the standard fallback solution of having the central bank start up the printing press and buy up sovereign bonds is complicated because the ECB is barred by treaty from doing so—though it’s already doing so.

There were even speculations that Germany was planning to form a mini-Eurozone with a few select members that would follow the same fiscal policies—so powerful had the speculations become that Chancellor Angela Merkel had to step forward and deny them with great emphasis.

Europe’s desperation meets Chinese eagerness. The European Union is China’s largest export market. The 27 countries with a population of over 500 million bought €282 billion in Chinese merchandise in 2010, up 18.9% from 2009. China's export machine depends on a stable Europe to thrive. And financially, China is already stuck. A quarter of its foreign exchange reserves are in euro-denominated investments. If the euro were to take a hit, China would be one of the big losers.

China has already reached into its deep pockets. It invested €10 billion in the Greek shipping industry. While many merchant ships fly the Greek flag, China is a growing force in shipbuilding, and it wants to lock in its customers. In non-Eurozone Hungary, which is struggling with its own debt crisis, telecom equipment maker Huawei is building a logistics center for the European market. And China Railway Construction Corp has agreed to modernize Hungary’s rail network. China has even bought some of the bonds issued by the EFSF, according to its CEO, Klaus Regling.

But China doesn’t want to be the dumb money. October 30, Zhu Guangyao, Vice Finance Minister, suggested that China would wait and see how the technical details of the fund’s proposed special investment vehicles would work out. This followed a warning by the government-owned news agency, Xinhua: China would be willing to invest in Europe on a win-win basis; the Europeans should not expect a Good Samaritan but be prepared to make concessions.

Which China has floated for months:
- EU support in obtaining market-economy status at the World Trade Organization.
- Removal of the arms embargo that the EU imposed after the 1989 Tiananmen Square massacre.
- Better guarantees for its investments.
- Greater influence at the International Monetary Fund, specifically through inclusion of the yuan in the IMF’s currency basket that underlies the Special Drawing Rights (SDR).

Alas, making concessions to China is the one thing that Germany and some other less desperate European countries aren’t prepared to do. Not yet.
"We're making a huge mistake if we stabilize the euro by permitting influence from an external government," said Hans-Peter Keitel, President of the Federation of German Industry (Handelsblatt). Germany, which has already surrendered its spot as the world’s number one exporter, is in no mood to cede more ground to China. And it’s fiercely resisting the temptation to offer political concessions in exchange for money. He added, “For example, we can't offer China compromises concerning intellectual property just to save the EFSF."

Resistance also came from other directions, as Germans shudder at the idea of becoming too dependent on money from the communist regime.
"It’s worrisome if a country that isn't a democracy obtains influence over EU members,” warned Peter Bofinger, a German economist and member of the German Council of Economic Experts. And Amnesty International fears that human rights will be moved to the back burner. Which, of course, they will be.

And so the delegation had gone to China empty handed. China’s demand for greater influence at the IMF and accelerated inclusion of the yuan in the SDR, which the Chinese apparently had seen as a feasible compromise, hit a wall of resistance (Reuters).

Clearly, the debt crisis isn’t deep enough yet for concessions. However, a vertigo-inducing spike in French yields or a 2,000 point drop in the DAX might change that, now that governments decide every issue with one eye on the ticker. Then Germans will be confronted with the choice of yielding to Chinese money, allowing the ECB to print unlimited amounts of money (and devalue the Euro), or invent another option, such as the mini-Eurozone that Merkel so vigorously denied or the revival of the deutschmark.

Export powerhouse Germany finds itself at war—with itself.... Germany at Its Rubicon.

Wolf Richter www.testosteronepit.com

__________________
"Patriotism means being loyal to your country all the time and to its government when it deserves it."-- Mark Twain

"Inter arma silent Musae"--when the weapons speak, the muses fall silent.

An't nanum hearm deth, doth hwaet ye willath.

It is forbidden to kill; therefore all murderers are punished
unless they kill in large numbers and to the sound of trumpets. -Voltaire

Economic Left/Right: -3.88
Authoritarian/Libertarian: -4.36

Quote:

"We're making a huge mistake if we stabilize the euro by permitting influence from an external government," said Hans-Peter Keitel,

They don't like it up 'em.