Thursday, July 26, 2012
Europe must face up to ongoing euro crisis
July 26, 2012
Like the bass line in a pop song, the euro zone keeps pumping out bad news, even while the world is distracted by other themes. On a typical day this week — Tuesday, between 8 a.m. and 3 p.m. in Britain — one could learn that Moody’s, the rating agency, had just lowered its outlook on Germany from stable to negative; that there were “alarming signs for Italy in the bond markets”; that Spanish 10-year bond yields had hit a euro-era record high; and that the entire euro zone was suffering from a manufacturing slump. Besides all that, European stock markets had not yet recovered from the previous day’s crash, which had itself been caused by rumors that Spain would soon need a full-scale bailout.
Another day, another set of crisis headlines — but there is a silver lining: Finally, Europeans are being forced to face up to decades’ worth of fundamentally dishonest politics. Since the 1970s, one government after the next has spent, borrowed and then inflated its way out of the subsequent debt. Then they recovered — only to spend, borrow and inflate once again. Not coincidentally, this cycle was most severe in countries with weaker democracies. Spain ceased to be a dictatorship only after Franco’s death in 1975, Greece was ruled by a military junta from 1967 to 1974, and Italy has had more than 60 governments since World War II. Successive leaders in all of those countries have tried to “buy” the electorate with elaborate pensions, state-sector employment and other perks. Banks across the continent and around the world have greedily facilitated them.
Now they can’t. Though no one recognized it at the time, joining the euro was like adopting the gold standard: It meant that individual governments couldn’t inflate their way out of trouble anymore nor pass on to the next generation the bill for today’s expenditures — as they still can in the United States and Britain. All along, it has been a mistake to describe the euro zone’s difficulties as a “currency crisis.” In fact, it’s a political crisis, caused by an addiction to debt, and it requires a political solution. Electorates have learned the truth: They are bankrupt. Whatever decisions the European Union now makes, future recovery depends on how much of the plain facts ordinary people can bear to absorb.