Moral Mythology and Economic Reality in the Eurozone

What more is there to say?  Europe is on a precipice, political as well as economic.  Eurozone leaders think they have time to slowly habituate their constituencies to incrementally greater commitments, as if we didn’t know from centuries of experience that financial crises descend with terrifying speed in the form of bank runs, panicked asset dumps, and other spasms of runaway positive feedback.  Greece, Portugal, Spain and Italy will not edge gently toward insolvency; one or more of them will undergo a sudden phase change, and the game will be up as soon as it has started.

And incantations of austerity and reform are pointless.  Simple arithmetic demonstrates that the peripheral countries cannot pay their way out of debt through primary fiscal surpluses: at current real interest rates and debt loads it just can’t be done.  Moreover, fiscal tightening throughout the zone can only lead to a severe recession, and as indicators of the slump materialize the panic dynamics will intensify.

Worse, the “reform” imperative—the demand that deficit countries privatize and deregulate—is punitive nonsense.  Politics in the surplus countries seems to demand that there be a story about wayward prodigals to the south who must be stripped of their comforts and put to the yoke.  Put aside this morality tale and there is no economic logic whatsoever.  There is no theoretical or empirical reason to believe that Greece, Italy and the rest are in deficit because they have too much public employment or their workers have too many rights.  (Where there is corruption and clientelism, any sort of employment, public or private, can be uneconomic.)  In fact, those who want to force-feed these reforms, with public displays of abject political submission to them, have never even tried to make this case.  There is no argument to critique, no evidence to rebut.  “Reform” is not a rational economic program for restoring trade balances; it is about exacting a cruel price on entire populations so that bailouts come with a quid pro quo.  Receive a transfer and you must sacrifice.

Of course, the bailout funds go directly to the creditors, mainly private banks, so even this attempt at moral equivalence is beside the point.

Eurozone policy, and most journalistic coverage of it, is in a parallel universe of virtue and vice, benefactors and supplicants, industrious and indolent, modern and honest versus traditional and corrupt.  It satisfies a craving for moral order.  Unfortunately, the real universe is about to crash into it and smash it to pieces.