Friday, February 03, 2012

European crisis and the US

With all the triumphalist symbolism around the Second World War that is common in US culture, and with all the attention the Holocaust receives as a moral cautionary tale, it's striking how little the once-common truism that economic depression create political instability and provide a breeding grounds for anti-democracy mass movements like Mussolini's and Hitler's gets these days.

Because what's going on in Europe, we're seeing a live reminder. Yet the general awareness of it in the US is even worse than "it can't happen here." (It can, of course.) It's also, "It can't happen in Europe", too. Yet Hungary has just morphed its government into an authoritarian form. And the euro crisis has disturbing political dimensions, too.

Ed Harrison of Credit Writedowns gives a good summary of what's going on with the euro crisis, which is part of the larger depression and the serious weakness of large banks in Europe, and also of what it could mean to the US in United States of Europe? What it Will Take to Save the Continent from Economic Collapse Alternet 01/31/2012:

The dilemma Europe now faces is complicated -- not least because the European Union comprises 27 separate sovereign nations and the euro area, where the chief problems lie, is a currency union that has 17 members itself. Beyond that, the euro is flawed both in design and in execution. It hearkens back to the gold standard and its fixed exchange rate system which necessitated a deflationary policy response to the deep downturn of 1929, ending in the Great Depression and World War II. Unless drastic action is taken, we will soon find ourselves in another Great Depression.
He explains in an accessible way the policy tangle currently facing the eurozone and what Angela Merkel's austerity policies are incapable of solving it.

Here's an example of his summary of the crisis:

The bottom line is that Italy, one of Europe's largest economies, faces a dire situation and the solution on offer insures default as a likely outcome without tacit central bank support. That is an outcome which means a run on Italian banks, insolvency in Spain from contagion in Italy, core euro bank insolvency due to exposure to Italian bank and sovereign debt and widespread credit default swap triggers which must be paid by American banks. Conclusion: an Italian default would collapse the entire global financial system in short order. [my emphasis]
He then adds, optimistically, "So, a country as large as Italy will not be allowed to fail. European officials will keep Italy from death's door by hook or by crook because they know how dire an outcome an Italian government default would be."

Given the level of irresponsibility and incompetence we've seen in this crisis the last two years from Britain, France and Germany, I would say he's been very optimistic even on that seemingly obvious assumption.

He does provide a really good description of the concept of "transfer union". It would help our domestic discussions on the economy if that were a generally familiar concept and people had a basic understanding of how that works in the US, which is a "transfer union". Which, as Harrison points out, so are "all national economies."

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