Varoufakis on extend-and-pretend solution to euro and refugee problems

Yanis Varoufakis in an 11-minute interview with Bloomberg News on the two mega-problems that endanger the future of the European Union: the flaws of the eurozone currency construction, and the long-term refugee crisis:

https://youtu.be/PJB-iP9EmV4

He talks about how the current extend-and-pretend pseudo-solutions to both are are a deceptive mess. (The more I hear about Angela Merkel's recent deal on refugees with her Interior Minister Horst Seehofer, the more I'm impressed with what vapid political theater it is, a non-solution to a non-problem.) Phony solutions are a staple of normal politics, of course. But the EU program for Greece and the Merkel-Seehofer deal are both classic examples of the genre. The first is far more significant, the second more dramatic in its obvious phoniness.

He deals with the extend-and-pretend "solution" to the Greek debt crisis in Profiles in European Denial Project Syndicate 07/29/2018:

When bankers try to cover up bad loans on their books, they extend new loans to enable their insolvent borrowers to pretend to be servicing the original loan. When the new loan is exhausted, the client is allowed to suspend repayment for a few years, with interest accumulating. This keeps the net present value of their asset (the loan) constant while postponing the day of reckoning (when they have to confess to their regulator that the loan is unrecoverable).

Since 2010, Greece’s creditors have been practicing this extend-and-pretend strategy as though they were training for an Olympic event. Instead of a courageous and therapeutic haircut, or the moderate GDP-indexing solution, the Eurogroup’s recent decision, proclaimed as the “end of the Greek debt crisis” boiled down to the apotheosis of this cynical practice.

Italy and the refugees rescued from the Mediterranean Sea on the Aquarius ship

Italy is still refusing to let the ship Aquarius with refugees rescued from the Mediterranean dock in Italy. (Steve Scherer and Massimiliano Di Giorgio, Italy and France try to patch up migrant row, draw papal rebuke Reuters 06/14/2018)

This is the new Italian face on immigration, and a grim, ugly start for the new left/right coalition government of Five Stars and the League. Interior Minister Matteo Salvini of the League is the public face of the policy. But the new Prime Minister Giuseppe Conte is going along with it. And, as reported by Dominik Straub und Irene Brickner in Nach geschlossenen Grenzen nun auch gesperrte Häfen Standard 13.06.2018, the ban on letting the ship with people in distress rescued from the ocean, a illegal position in international law that is the way it is for good reasons, could not have been implemented without the consent of the Five Stars Transportation Minister.

This is not a question of national security at all. It's a very cynical, bad-faith posture by the Italian government seeking to exploit nationalist hatreds as a basic part of its political project. As Reuters notes, "The [Italian Prime Minister and the French President] confirmed a lunch meeting on Friday to discuss 'new initiatives' on immigration, a day after Italian Interior Minister Matteo Salvini announced an 'axis' with Germany and Austria to fight illegal migration." (my emphasis)

Salvini's talk has to be taken seriously, though like our American xenophobes, we can't assume they have any particular devotion to accuracy in their public claims. Austria does have an anti-immigrant government, a coalition of conservative Christian Democrats and hard-right Putinists, i.e, the Freiheitliche Partei Österreichs (FPÖ), which has a formal "working agreement" with Putin's Russia United party. (Rechtspopulisten und Putin-Partei rücken enger zusammen FAZ 19.12.2016) The FPÖ/Russia United agreement commits them to the "strenthening of friendship and raising the young generation in the spirit of patriotism and joy in labor." Kind of an "Arbeit macht Frei" kind of thing, apparently.

But whatever political "axis" there may be among the Italian League and the Austrian governing parties, both Italy and Austria are EU members and both are still bound by general international law. In Germany, Interior Minister Horst Seehofer, a rightwing leader from Bavaria who is from the CSU, one of the parties in Angela Merkel's national coalition, has been playing footsie lately with Austria's Christian Democratic Chancellor Sebastian "Babyface" Kurz on anti-foreign politics. But, for all of her government's failings on immigration issues - and the general impression in the US that Merkel is very pro-immigration is a mistaken one - she isn't making a "axis" with Italy to drown immigrants in the Mediterranean Sea. The strange courtship between Chancellor Babyface and is actually aimed politically against Merkel.

(Dont' even try to shoehorn the mixing of internal and external policies in the EU into the framwork of the discussion on the Russian meddling in the US elecitons; you'll just give yourself a headache.)

Not to understate what a prick Seehofer is being on the subject. He is claiming that as Interior Minister, he has the authority to turn back refugees at the border, Angela Merkel and international law be damned. (Asylstreit: CSU droht mit Alleingang und Ultimatum ORF 147.06.2018) So far, this looks more like a weird political stunt than an actual move on immigration policy. But I wouldn't want to underestimate the possibility of it turning into something worse.

Immigration and the eurozone are currently the two biggest threats to the future of the EU. Both have been hampered by nationalist posturing by EU countries. Although as the de facto leader of the EU, Germany, and Angela's Merkel's governments in particular, bear the heaviest responsibility for it. I think of the both as chronic crises, both of which hit acute turns in 2015. Both are currently "solved" by classic Merkel extend-and-pretend non-solutions, forcing Greece to become Bangladesh via draconian austerity policies, on the euro front, and by contracting out the solution of the Mediterranean refugee problem to Turkey, Italy, and Greece. Both are highly unstable solutions.

The sad part is that the general shape of realistic solutions are very clear. The eurozone either has to be unwound with a return to national currencies, or change it into an optimal currency area with a common budget, shared public debt obligations, and "transfer union" structures.

With immigration, the broad solution is also clear: stop supporting wars in the Middle East, whether by direct intervention, facilitating American or Russian intervention, or selling arms to belligerent parties; get real about the fact that mass immigration to Europe is for all practical purposes a permanent situation that requires a structured, systematic sharing of burdens, i.e., accepting refugees, including, yes, the richer countries like Germany and Austria; and, systematic development work in North Africa to provide safer conditions and better opportunities there. Did I mention that to stop supporting wars in the Middle East is a critical part of this? Oh, and getting emergency services in shape to handle entirely predictable future surges in immigration.

But the obvious eurozone and refugee solutions aren't being undertaken as they should be, largely because too many political parties and groups and business lobbies like weapons manufacturers in particular find it advantageous to demagogue the issues.

But reality does have a nasty way of catching up with wishful thinking and flat-out denial. Facts do matter, despite being singularly inconvenient for narrow nationalists and xenophobes. Turkey, Italy, or Greece could change the calculation overnight by just sending a bunch of the refugees they are holding to parts northward. That would be irresponsible in itself absent real practical agreements on how to do it. But Hungarian, Austrian, and German politicians would have to respond with more than slogans about "close the borders." Austrian Chancellor Babyface likes to claim credit for "closing the Balkan route," but that's a joke. Angela Merkel's agreement with Turkey is what mitigated the acute phase of the immigration crisis of 2015, not any whizbang diplomacy by Austria.

And there's this fact-based reporting from Straub und Irene Brickner, illustrating how cynical and dishonest it is for the Matteo Salvinis of the world to conjure up phony claims to justify xenophobic cruelty:

Frage: Wie viele Flüchtlinge haben die Mittelmeerstaaten heuer bisher aufgenommen?

Antwort: Italien hat in diesem Jahr bis zum 12. Juni insgesamt 14.441 Bootsflüchtlinge aufgenommen; hinzu kommen die 932 Migranten, die am Mittwoch von der italienischen Küstenwache in Catania an Land gebracht wurden. Insgesamt knapp 80 Prozent weniger als im Vorjahr. Spanien hat im laufenden Jahr bisher 11.308 Flüchtlinge aufgenommen, Griechenland 12.065. Es kann also keine Rede davon sein, dass Italien die ganze Immigration allein schultere. Wahr ist aber, dass die nördlichen Grenzen Italiens – jene nach Frankreich, in die Schweiz, nach Österreich und Slowenien – für Flüchtlinge seit langem faktisch geschlossen sind.

[Question: How many refugees have the Mediterranean states taken on up until now?

Answer: Italy has taken 14,441 boat refugees; that includes 932 migrants who were brought to land by the Italian Coast Guard in Catania on Wednesday. In all, 80% less than in the previous year. In the current year, Spain has accepted 11,308 refugees, Greece 12,1065. So that can be no claim that Italy is shouldering the whole immigration alone. But what is [true], is that the borders north of Italy - that to France, in Switzerland, to Austria and Slovenia - have in fact been closed to refugees for a long time. [my emphasis in italics]

Anti-immigration sentiment in Italy and Austria

The European Union is facing a new round of the Greek debt crisis of 2015, only this time with Italy. Anti-immigrant sentiment is also intensifying, with the new Italian government saying they want to expel hundreds of thousands of refugees. There has not been any new upsurge in refugees like that wave of 2015. But mass migration would be a longterm reality for Europe just from the effects of climate change alone. But military conflicts in the Middle East, fed and sometimes initiated by outside powers, including massive arms sales.The US, Russia, and various European countries are in on this ugly and destructive game.

Angela Merkel became known for her extend-and-pretend solutions on the euro crisis, especially with Greece, where the unsuccessful anti-austerity pushback from Greece in 2015 highlighted. Piling on unpayable debt burdens to the eurozone "periphery" countries was the core of her economic extend-and-pretend approach. In immigration, the main extend-and-pretend solution was an agreement with Turkey to house refugees coming their direction. Ironically, they also rely on Greece for the same thing. And Italy to a smaller but significant degree as well..

Meanwhile, there has been no meaningful progress on practical intra-EU arrangements in meaningfully dealing with refugees on a fair burden-sharing basis. (The xenophobic politicians in Germany and Austria prefer to call them all "migrants," to more easily brand them as moochers coming live high on the hog in good white Christian countries.) Meanwhile, Greece has knuckled under to enduring a permanent depression on the orders of the EU establishment, and of Germany more particularly, and is in chronically desperate states. Italy is also fighting the austerity trap. And name-calling and hostile statements against Turkey are popular favorites for conservative politicians in Germany and Austria. Plus, Germany has known for years that BAMF, its own refugee-resettlement agency, had severe management problems and wasn't prepared for the 2015 upsurge. And still isn't prepared. (How Germany's BAMF refugee agency became a 'political scapegoat' Deutsche Welle 30.05.2018)

So this is an inherently unstable situation. And Greece, Italy, and Turkey can threaten to send large groups on their way north.

In Italy, the new Interior Minister, the national official in charge of law-enforcement - not natural resources like the Interior in the US - is Matteo Salvini, a toxic xenophobe from the far-right League party, which is the junior partner in the new national coalition government. Chico Harlan writes (The torchbearer of Italy’s far right is now in power and wants to make good on anti-migrant promises Washington Post 06/04/20118):

With an Italy-first message, Salvini has rocketed into the center of Europe’s battle over migration. He is recasting the cultural debate about how to treat those fleeing the Middle East and Africa, highlighting examples of migrant criminality and describing the influx as an “invasion.” And now, in his first week in control of Italy’s interior ministry, he has power to do what he has pledged: more tightly close the doors of a country that, several years ago, ranked among the most welcoming in Europe.

Salvini has risen to power on a mix of grass-roots anxiety and his own political acumen. He is the leader of Italy’s far-right League, a once-fringe regional secessionist party that polls now show is on the brink of becoming the country’s most popular party. He styles himself as a friend of Russian President Vladi­mir Putin and a thorn in the side of Brussels bureaucrats. He is an irrepressible social media user. He has a public profile far larger than that of ­Italy’s new prime minister, an academic with little political experience. ...

Among those who crossed the Mediterranean last year, 64 percent landed in Italy. Some 400,000 have applied for asylum here [Italy] over the past four years ...

What makes Salvini stand apart, though, is that he so unsparingly highlights what he sees as the problems with migration. When a Nigerian immigrant was arrested this year in the killing of an 18-year-old, Salvini wrote on Facebook, “What was this maggot still doing in Italy?” Last week, during negotiations to form a government, Salvini posted video footage of what he said was a supposed migrant plucking the feathers of a pigeon. “In broad daylight in the middle of the street,” he wrote. “Go home!!!”

Michael Brooks gives a good summary of the Italian coalition in the first 12 minutes or so of this video, TMBS - 43 - How Not To Do Identity Politics 06/06/2018 (?):

Italy and the ghost of 2015

Frances Coppola in a piece from last Thursday, The Eurocrisis Is Back And It Could Be Uglier Than The Last One Forbes 05/31/2018, comments on the looming clash between the Italian government coalition of Five Stars and the League, on the one hand, and the EU establishment, on the other.

She judges that the coalition's political program amounts to "a toxic mix of right-wing and left-wing handouts, with a hefty dose of xenophobia and Euroscepticism" that represents "a major attack on the Eurozone’s governance model."

The coalition is demanding that the fiscal and monetary rules that hold the euro together be reformed to suit its own agenda. This is not going to go down well in Brussels. Even more importantly, it is not going to go down well in Germany. The new finance minister, Olaf Scholz, is every bit as committed to fiscal discipline and austerity as his formidable predecessor, Wolfgang Schaueble.

They are right to demand an end to Herbert Hoover/Heinrich Brüning austerity policies. But the somewhat vague left policies of Five Star and the nationalist/xenophobia orientation of the League are likely to be an unstable mix. And maybe downright toxic.

And they are likely headed sooner rather than later to a conflict with the EU and Angela Merkel in the lead that will be a lot like the one in Greece in 2015. Like Greece, it has a debt load that it cannot indefinitely support under the current eurozone arrangements. And austerity policies imposed by the Troika have left Italy with a stagnant growth rate for years:

Since 2001, Italy’s GDP growth rate has averaged less than 1% per annum, and it has several times dropped below zero. When GDP growth is very low, debt/GDP does not fall even if the country runs primary surpluses. This is what is happening to Italy. It has a huge historic debt burden that it is unable to reduce, and the Eurozone’s fiscal rules actually make matters worse, since persistent austerity tends to depress GDP growth.

It's going to be a bumpy ride.

Italy, the euro, and the democracy deficit

Former German Finance Minister Wolfgang Schäauble during the 2015 Greek crisis delivered a succinct statement of the conflict between neoliberal Herbert Hoover/Heinrich Brüning economic policy: "Elections cannot be allowed to change economic policy."

His then Greek counterpart Yanis Varoufakis rightly called that attitude "a great gift to those who don't believe in democracy."

"Our #democracy was crushed because the Wolfgang #Schauble line was seen through and completely & utterly adopted, that 'elections cannot be allowed to change economic policy', which is a great gift to those who don't believe in democracy" @yanisvaroufakis https://t.co/DwIFIEdkBD pic.twitter.com/vhJZKjk7aR

— DiEM25 (@DiEM_25) April 5, 2018

Unfortunately, the European establishment is still singing from the same hymnbook:

European Budget Commissioner Günther Oettinger apologized on Tuesday after facing criticism for suggesting that financial markets would show Italians how to vote.

Oettinger told broadcaster Deutsche Welle in an interview conducted in German that the reaction of financial markets would give Italian voters a signal not to vote for populists.

“My concern and expectation is that the coming weeks will show that the development of the markets, government bonds and the economy of Italy will be so far-reaching that this will be a possible signal to voters not to vote for populists on the right or left,” Oettinger said.

“Already the developments of the government bonds, the market value of banks, the general course of the Italian economy is clearly overcast, is negative. This has to do with the possible government formation.” (Emma Anderson, Oettinger apologizes after Italy remarks spark storm Politico EU 05/29/2018; my emphasis)

EU Commission President felt compelled to distance himself (publicly) from that comment, saying, "President Jean-Claude Juncker, saying that “Italy’s fate does not lie in the hands of the financial markets."

But in substance, Italian voters have every reason to believe that it's no more than lip service. The article quoted doesn't mention any criticism of the Italian President's decision that effectively blocked the seating of the duly elected national government and instead proposed to install as President a former IMF official who is (of course!) devoted to austerity economics. Anderson also reports:

Juncker’s own comments before the Italian election seemed to impact financial markets in February when he said that the EU should “brace ourselves for the worst scenario and the worst scenario could be no operational government.”

The Commission president later tried to smooth things over, by saying “whatever the outcome, I am confident that we will have a government that makes sure that Italy remains a central player in Europe and in shaping its future.”

But in case there is any doubt that the Schäuble Principle of Eurozone Government remains in effect, Vítor Constâncio, vice president of the European Central Bank (ECB) explained how things are in an interview with Spiegel Online ('Italy Knows the Rules' 05/29/2018):

SPIEGEL ONLINE: These achievements are now hanging in the balance because one country may no longer want to do its part. Even if their attempt to form a government has failed for now, Italy's two dominant parties are both skeptical of the common currency. They want to push through massive tax cuts and increase spending dramatically, despite that fact that, at 132 percent of gross domestic product, Italy has one of the highest levels of sovereign debt in the world.

Constâncio: It is certainly a challenge, first and foremost for Italy itself. When financial markets attacked Italy in 2012, it demonstrated that perceptions on the financial markets can be volatile and the risk assessment of a given debtor can change abruptly, sometimes with severe consequences - and this even though Italy already had a primary surplus at the time. We will have to see what happens now.

SPIEGEL ONLINE: Risk premiums for Italian government bonds have risen sharply again recently. At what point would the ECB intervene again, as it did in 2012?

Constâncio: I would like to stress that every intervention has to contribute to the fulfilment of our mandate and is also subject to conditionality. The Outright Monetary Transactions program for intervening in national sovereign bond markets of vulnerable countries can only be used if the country in question also agrees to an adjustment program. The rules are very clear on this. Everyone should remember that.

SPIEGEL ONLINE: So if Italy wants to circumvent the EU's fiscal rules, it can't necessarily count on the ECB's help?

Constâncio: I will only say that Italy knows the rules. They should perhaps take another close look at them. [my emphasis in italics]

I guess the latter is a sort of Italian version of the stereotypical American-movie German who says, "Ve haf vays of making zis happen."

This is how the EU's Very Serious People see things.

Wolfgang Münchau in his May 29 Eurointelligence public site writes:

But what we found most remarkable about the quality of the [German press'] discussion [about Italy's increasing resistance to austerity economics] is the opening paragraph of this story by Frankfurter Allgemeine. Apparently, the reason why Emmanuel Macron has been pressing for a deal on a European deposit insurance scheme by June this year is so that Germany rescues French banks from their Italian exposure. With such a framing in the paper of record of the largest member state, abandon all hope ye who enter the eurozone debate.

Italy's political drama and the EU

Italy's left-populist 5Stars Movement (Movimento 5 Stelle) and the right-populist League (Liga), formerly called the Northern League, had agreed on a government. 5Stars got the largest percentage in the March national election with 32%, with the Liga third with 18%.

But the President and head of state of Italy, Sergio Mattarella, a former Christian Democrat and now Independent, refused to accept the proposed Finance Minister.

Alberto Mingardi reports (Italian voters head for euro showdown Politico EU 05/28/2018)

The two parties wanted Paolo Savona, an 82-year-old technocrat who has fantasized in public about a “secret plan to leave the euro,” as the all-powerful economy minister. And they refused to back down when Mattarella pushed back. The Italian president probably feared the effect of Savona’s appointment on a number of treasury auctions this week, and that Italy losing access to the bond markets was a very concrete possibility.

Politico identifies Mingardi as "director general of Istituto Bruno Leoni, Italy’s free-market think tank, and an adjunct scholar at the Cato Institute." So it's safe to assume that he's likely to be very sympathetic to ultra-conservative economic policies that have led so many Italian voters to reject the more mainstream center-left and center-right.

The coalition's Prime Minister candidate, whom Mattarella was willing to accept, refused to accept the job unless Mattarella was willing to accept a Finance Minister that the coalition wanted. The coalition parties are contesting the austerity policy required by the EU leadership, Angela Merkel in particular.

One thing I'm noticing on the reporting about this latest turn is that the distinction between "euorskeptic" and "eurocritical" seems to be getting blurred in the news. A euroskeptic has long been considered to be a person opposed to their country's membership in the EU, while eurocritics were pro-EU but insistent on reforms to reduced the much-discussed "democratic deficit" and the EU's Herbert Hoover/Heinrich Brüning economic policies. Given the current death-lock that neoliberal economic assumptions have on the European establishment, any country that seriously wants to reform the eurozone to make it into an optimal currency zone, which it has never been, will have to be willing to leave the eurozone if their minimal demands aren't met, maybe the distinction between euroskeptic and eurocritical is becoming less relevant.

Now President Mattarella has appointed an interim Prime Minister. "Carlo Cottarelli became known as 'Mr Scissors' for his cuts to public spending in Italy." (Carlo Cottarelli: Italy president names stop-gap PM BBC News 05/28/2018) Cottarelli was a former IMF official, making both the optics even worse. The IMF website notes that "served as Director of the Fiscal Affairs Department from November 2008 to October 22, 2013."

This is another kick in the face to the electorate, for whom the austerity policies are clearly a major problem. And they are right to consider them a problem. As the BBC explains:

After meeting the president, Mr Cottarelli said he would present a programme to parliament, including a budget, to take Italy into new elections "at the beginning of 2019".

If he was unable to pass a programme, which appears likely at this stage, "the government would resign immediately... until elections are held after the month of August", he added.

The BBC's James Reynolds in Rome says early elections are exactly what the two populist parties want, giving them a chance to rally support behind their claim that the Italian and the wider European establishments are getting in the way of the will of the people.

A source from Five Star told Reuters the party could campaign with the League in a fresh vote.

If Parliament refuses to approve the government, which is a real possibility, it will be a Presidentially-imposed technocratic government. And Italian voters will have very good reason to object to that.

To be clear, I have little confidence in the rightwing, xenophobic Liga as a governing party. But Liga leader Matteo Salvini is unfortunately correct in calling Mattarella's course an attack on democracy.

This editorial from The Independent is Italy's political crisis could have devastating effects on the European economy reinforces the stone-conservative narrative on economic policy that currently dominates the EU, Italy's political crisis could have devastating effects on the European economy 05/28/2018:

One of the few things the fractious putative coalition of the League, formerly the near-separatist Northern League, and the Five Star Movement agree on is that Italy should be allowed much more financial freedom, either within the euro or, if needs be, outside it. This is because they need to be able to print huge sums of money on an irresponsible programme, popular or not. The scale of the public spending required to satisfy their populist promises amounts to around 10 per cent of Italian GDP, a figure usually reached only during an extreme economic crisis. They can do that only by a vast increase in borrowing and taking grave risks with the viability of the euro and Italy’s membership of the system.

Ending the Hoover/Brüning is a necessity in order to fix the eurozone. But no one exactly knows what the effect would be of a eurozone member leaving the eurozone. But it will be very disruptive, almost certainly worse for all sides in the short run.

But if staying in the eurozone means that in Italy or other countries means that the bankers, the IMF, EU operatives, and Germany can dismiss the results of legitimate democratic elections and install a Hoover/Brüning "technocrat" instead, then Italy and other countries really are facing a choice between eurozone membership and democracy in their countries.

Wolfgang Münchau for years has been a perceptive critic of the eurozone construction and the EU response to the Greek debt crisis. He mentions again in his current column for the Financial Times his thoughts on what needs to be done with the eurozone (Euro must be made more robust to rival the dollar 05/27/2018):

Before the financial crisis the eurozone ran a small current account surplus. By last year, it reached 3.5 per cent of economic output. The larger the surpluses became, the more dependent the eurozone had become on the rest of the world.

Instead of hyperventilating about Mr Trump, Europeans might want to reflect on what got them into this mess. The EU would be more resilient today if it had not handled the eurozone crisis the way it did, and if its founders had made the euro more robust from the outset. Technically, it would still be possible for the EU to fix the problem, but that would require a degree of political union that goes far beyond even what Emmanuel Macron, the French president, has proposed. It requires at its core a mutualised debt instrument, a euro bond, as a financial instrument to underpin a large sovereign debt market. It would also require a broader mandate for the European Central Bank.

The fate of the euro and the fate of the EU

The euro is plagued by the basic problem that the eurozone does not meet the basic requirements of an "optimal currency area".

Paul Krugman wrote in 2012 (Revenge of the Optimum Currency Area NBER Macroeconomics Annual 2012 Vol. 27) that "right from the beginning" of the euro, economists working with the "theory of optimum currency areas" warned that it "suggested serious concerns about the euro project." He explains:

The disadvantages of a single currency come from loss of flexibility. It’s not just that a currency area is limited to a one-size-fits-all monetary policy; even more important is the loss of a mechanism for adjustment. For it seemed to the creators of optimum currency area (OCA), and continues to seem now, that changes in relative prices and wages are much more easily made via currency depreciation than by renegotiating individual contracts. Iceland achieved a 25 percent fall in wages relative to the European core in one fell swoop, via a fall in the krona. Spain probably needs a comparable adjustment, but that adjustment, if it can happen at all, will require years of grinding wage deflation in the face of high unemployment. [my emphasis]

Recessionary effects hit different regions of a currency zone with disproportionate effects, i.e., "asymmetric shocks." If the currency zone has a common budget, countercyclical measures can be designed that transfer money from the less heavily stricken regions to the ones hardest hit during a recessions. The concept isn't all exotic, though it sometimes sounds so in the economic jargon:

Let’s once again take a not at all hypothetical example: Florida, after the recent housing bust. America may have a small welfare state by European standards, but it is still pretty big, with large spending in particular on Social Security and Medicare — obviously both are a big deal in Florida. These programs are, however, paid for at a national level. What this means is that if Florida suffers an asymmetric adverse shock, it will receive an automatic compensating transfer from the rest of the country: it pays less into the national budget, but this has no impact on the benefits it receives, and may even increase its benefits if they come from programs like unemployment benefits, food stamps, and Medicaid, which expand in the face of economic distress.

This provides not only relief in a humanitarian sense. It also gives harder hit areas additional purchasing power that stimulates the economy in those areas, especially if there is effectively labor mobility. That transfer function makes the dollar currency zone (the US) a "transfer union." The EU is not.

In addition to a transfer union and labor mobility, the ability of the currency zone to borrow money secured by the union as a whole in order to benefit some sections of the currency zone more than others is an important feature to make it workable. In other words, the currency zone needs a lender of last resort. The lack of it in the eurozone was a major factor in the post-2008 euro crisis.

But the EU doesn't have a transfer union, a banking union, a common borrowing capacity (though the ECB has been to partially mitigate that lack), or a common budget. And labor market mobility among EU countries is significantly limited by language as well as different educational systems. Although Krugman notes "lack of labor mobility has not played a major role in euro’s difficulties, at least so far."

(It's worth noting here that a drive through rural states or cities hard hit by de-industrialization will dramatically show that the dollar "transfer union" doesn't entirely eliminate major regional disparities in prosperity.)

Wolfgang Münchau warns in the Financial Times that the unresolved problems of the euro currency zone are more a threat to the survival of the EU than Brexit (Lack of eurozone reform outranks Brexit as the EU’s biggest threat 12/17/2017):

There is a theoretical argument that a fully functioning banking union constitutes a sufficient set of conditions for eurozone stability. It would be a wonderful proposal for a monetary union in a parallel universe. Back on earth, fiscal union is needed precisely because the banking union will always be imperfect.

Therefore, the fundamental problems of the eurozone will remain unaddressed: large and nondecreasing financial imbalances between member states; weak banking systems that are overdependent on EU members; an inbuilt tendency towards pro-cyclical fiscal policies that exacerbate boom and bust; a lack of instruments to deal with asymmetric shocks; and, most important of all, a fundamental lack of trust. The cyclical economic recovery has deflected attention away from these issues, but has not resolved any of them. [my emphasis]

I would add the refugee crisis. It's currently in a less acute phase. But it is both a symptom and the cause of the lack of trust between EU members.

When the "adults in the room" are destructive

"Keep in mind that the ruling class can be self-destructively mad; not just pretending!" (Daniel Ellsberg to Yanis Varoufakis, 2015)

Economist and one-time Greek Finance Minister Yanis Varoufakis has written an account of his experience in 2015 trying desperately but ultimately unsuccessfully to get a debt deal for Greece that wouldn't condemn the country to indefinite economic depression, Adults in the Room: My Battle with the European and American Deep Establishment. It was published in the US Tuesday.

The Ellsberg quote comes in Varoufakis' description of the later stages of negotiations with the EU leaders, of whom Germany's Angela Merkel was easily the most significant.

[Prime Minister] Alexis [Tsipras] looked at me serenely and asked, 'What are the chances that they [the EU institutions and the IMF] will come back to us with something decent, Yani?'

At that critical juncture in our country's history I was obliged to answer with the greatest possible precision. I told him that the probability they would do so was mo per cent if they acted rationally. But, I warned, as Dan Ellsberg, the great American economist and Pentagon strategist turned pacifist whistle-blower, had emailed me a few weeks before, 'Keep in mind that the ruling class can be self-destructively mad; not just pretending!'

'Powerful European leaders have a track record of being bad at serving their interests, of falling prey to irrational urges,' I said. And given that irrationality breeds unpredictability, I estimated that a more sensible probability - that Chancellor Merkel would opt for the mutually assured damage of Grexit rather than a mutually advantageous deal - was around fifty-fifty.' [my emphasis in bold]

Adults in the Room is not only a good read, giving a chronological account of his short but highly eventful tenure as Greek Finance Minister under the Syriza government elected in 2015. Their mandate was to get Greece out from under the ruinous austerity program imposed on them by the "troika" of the IMF, the ECB and the European Commission. In the end, they failed, with Alexis Tsipras' government eventually backing down from risking leaving the euro currency.

Greece is still struggling with the same problems 2 1/2 years later, the austerity program keeping the country in what is in effect a permanent depression. The human cost has been staggering. The pro-EU, anti-austerity group of which Varoufakis is now a part, DiEM25, has recently proposed a New Deal for Greece, which advocates the kind of solutions that he wanted to put into place in 2015. It's opening sentences (bolding in original):

The seven-year economic crisis has kept Greece locked in a state of quadruple insolvency: with a bankrupt state, bankrupt banks, bankrupt businesses, and bankrupt households. Everyone owes to everyone and no one can pay.

Under these circumstances, there can be only one overarching goal: to restructure all public and private debt; a move which requires the restoration of democratic sovereignty.

Those themes run throughout Adults in the Room. Varoufakis does a great job of explaining the interactions between economic policy and the power dynamics within the EU. He cautions against shoeboxing the power rivalries within the EU in opposition between nations. He prefers to see the central conflict in basic left-populist terms as between the oligarchies of the EU nations and the people of the whole EU. At the same time, his account leaves little doubt that the chief enforcer for those EU elites is named Angela Merkel.

Greece did wind up with too much public debt to service, which became a legitimate debt crisis after the 2008 Great Recession began. A major portion of those bonds were held by French and German banks, already hit hard in other ways by the financial crisis, so German officials were particularly opposed to having the debt written down, which would be the normal procedure in such a case. Because the German government would then be faced with recapitalizing the banks, and Merkel didn't want to be seen doing that. The "solution" was a remarkable approach to excessive debt. The troika arranged additional loans to Greece so that they could service the old debt and avoid any French or German bank insolvencies. And forcing Greece to accept radical austerity measures as part of the deal.

Economists and financial journalists - among them Paul Krugman, Joe Stiglitz, Barry Eichengreen, Wolfgang Münchau, Martin Wolf, Varoufakis himself and his successor as Finance Minister Euclid Tsakalotos - predicted in real time that this was a disastrous program that would not solve the debt problem and would hammer the already distressed Greek economy. And events validated their predictions in a gruesomely spectacular way. As the austerity measures made the Greek GDP shrink, the expanded debt forced on them by the troika made the debt a bigger and bigger ratio to the GDP, which meant their debt position deteriorated further, requiring more "bailouts."

I put bailout in quotation marks, because the additional loans forced on Greece were not bailouts. They were additional debt. But politically, Merkel and her Grand Coalition government (CDU/CSU and SPD) decided to present the program as a generous bailout by Germany to Greece. And encouraged nationalist resentment against it. So it became distressingly common for Germans and Austrians to gripe about "lazy" and "corrupt" and "irresponsible" Greeks. This nationalist attitude toward Greece soared during the 2015 negotiations over yet another debt solution that had become urgent.

Varoufakis calls Merkel's strategy "extend-and-pretend," his version of the American "kicking the can down the road." One of the most notable aspects of Varoufakis' account is that the conservative German Finance Minister Wolfgang Schäuble repeatedly admitted to his Greek counterpart that he knew the program on which the EU was insisting would not actually solve the problem it claimed to be solving.

And this is where the Ellsberg quote comes in. Varoufakis also specializes in game theory. And his understanding of the basic negotiating options for Greece meant that if the EU had offered debt relief and a decent recovery program for Greece, then Syriza could accept it and the deal would be done. But if Germany and their allies in the EU insisted on continuing the unrealistic extend-and-pretend austerity program - which is what actually happened - then Greece would have to be prepared to be pushed out of the eurozone in order to be able to force Germany to agree to a solution that kept them within the eurozone without ruinous austerity.

This remains the basic dilemma for the EU and the eurozone. The German political scientist Claus Offe describes it in Europe Entrapped (2016) in terms that are broadly consistent with Varoufakis' description and which obviously draws heavily on the lessons of Greece's doomed 2015 attempt to break out of the debt-and-austerity trap. The German version is titled Europa in der Falle, which the English title also renders well. For the eurozone, no one knows exactly the consequence of a member nation leaving. But it would be a big risk. Because of the very likely possibilities is that the currency zone would quickly disintegrate with one nation after another leaving. The currency breakups after the fall of the Soviet Union and of Yugoslavia don't give anyone looking at this problem warm and fuzzy feelings.

Leaving the eurozone is also presumed to mean that the leaving nation would also have to leave the EU itself, which would create further economic problems. Brexit is providing a real world test of that process, but without the even more consequential implications of having to leave the euro currency zone, since Britain was never a member of it.

Varoufakis and Tsipras assumed on taking office that Germany was likely to insist on their hard line until the very end, which is what occurred. If Greece refused to agree to an unfavorable deal, Germany would then be forced to push Greece out of the eurozone. Schäuble, on Varoufakis' evidence, wanted that to be the outcome. He was willing to take the risk. That's the context in which the Ellsberg quote comes into play. The Greek negotiating strategy was predicated on the idea that Merkel's government would only agree to a realistic program that provided debt restructuring if they thought that Greece was serious about leaving the eurozone rather than accept a continuing of the troika program.

In the end, it was Tsipras who backed down from the risk of Greece leaving the euro. And in a humiliating way. Greece got a terrible deal and the same dilemma persists, unsolved, with 2 1/2 more years of serious economoic damage to the country. And it gives us a good idea of what to look for in future such confrontations. And in the ongoing Brexit negotiations.

One key point that Varoufakis stressed during the process was that Merkel's determination to coerce Greece into capitulation was primarily aimed at deterring other EU countries from going the same route, France in particular. She seems to seriously believe in her austerity policies, because she is especially determined to force them on the eurozone countries.

And Adults in the Room gives a vivid picture of what the much-discussed "democratic deficit" in the EU and especially the eurozone looks like. It's not a pretty picture. In an article (Why we must save the EU Guardian 04/05/2016), Varoufakis relates an emblematic moment in the "democratic deficit":

After I had recited our government’s plea for a substantial renegotiation of the so-called “Greek economic programme”, which had the troika’s fingerprints all over it, Dr Schäuble astounded me with a reply that should send shivers up the spine of every democrat: “Elections cannot be allowed to change an economic programme of a member state!” he said categorically.

During a break from that 10-hour Eurogroup meeting, in which I had struggled to reclaim some economic sovereignty on behalf of my battered parliament and our suffering people, another finance minister attempted to soothe me by saying: “Yanis, you must understand that no country can be sovereign today. Especially not a small and bankrupt one like yours.”

This line of argument is probably the most pernicious fallacy to have afflicted public debate in our modern liberal democracies. Indeed, I would go as far as to suggest that it may be the greatest threat to liberal democracy itself. Its true meaning is that sovereignty is passé unless you are the United States, China or, maybe, Putin’s Russia. In which case you might as well append your country to a transnational alliance of states where your parliament is reduced to a rubber stamp, and all authority is vested in the larger states. [my emphasis]

Spiegel Online is running a piece by Henrik Müller on the increasingly obvious intersecting crises of the European Union in Kontinent der Krisen: Was passiert, wenn Europa scheitert 24.01.2016.

Europa habe sechs bis acht Wochen, um die Flüchtlingskrise in den Griff zu bekommen, mahnt der niederländische Regierungschef Mark Rutte. Und falls das misslingt? Müssten wieder Grenzkontrollen eingeführt werden; das Schengen-Abkommen für grenzenlose Bewegungsfreiheit in Europa sei dann hinfällig.

Jean-Claude Juncker, der Präsident der EU-Kommission, formulierte kürzlich eine Art europäische Dominotheorie: Scheitert Schengen, gibt es keine Freizügigkeit mehr für Arbeitnehmer, der Binnemarkt wäre in Gefahr. Ohne offen Grenzen aber macht der Euro keinen Sinn. So ähnlich sieht das auch Frankreichs Premier Manuel Valls: Er sieht das gesamte europäische Projekt in ernster Gefahr.

Die lange Eurokrise, in der Risse zwischen den Mitgliedstaaten sichtbar wurden, war offenkundig nur das Präludium. Nun werden aus Rissen tiefe Gräben.

[Europe has six to eight weeks to get a handle on the refugee crisis, cautions the Dutch head of government Mark Rutte. And if that doesn't happen? Border controls would have to be opposed again; the Schengen Agreement for borderless freedom of movement in Europe would then be nugatory.

Jean-Claude Juncker, President of the EU Commission, recently formulated a kind of European domino theory: If Schengen fails, there will be no more free movement for employees, the {EU} internal market would be in danger. But without open border, the euro would make no sense. France's Premier Manuel Valls sees is similarly: he sees the whole European project in serious danger.

The long euro crisis, in which the divisions between the member state became visible, was clearly only the prelude. Now the divisions are becoming deep trenches.]

This is probably in part scare talk to try to get EU members to agree to Merkel's demands on accepting refugees.

But it's also a realistic description of the current situation.

The construction of the EU was faulty, and all the participants knew it. The design of the euro even more so, though that probably wasn't as clearly realized by the EU publics. But up until Angela Merkels Chancellorship and the beginning of the euro crisis in 2009, the EU confidently assumed that the desire for political unity would force the member states to fix the design problems in the eurozone and the EU.

Officially - and largely in reality - the measures of economic union were primarily intended to promote political union. The European Coal and Steel Community (ECSC) established in 1952 is a major example of that approach. The ECSC is generally considered to be the first formal agreement that stands as a direct predecessor to today's European Union.

As Yanis Varoufakis et al write in Modern Political Economics (2011):

European leaders, such as Robert Schuman (a leading light in the ECSC's creation), stressed the importance of this coming-together from the (pertinent) perspective of averting another European war and forging a modicum of political union. Creating a shared heavy industry across, primarily, France and Germany would, Schuman believed (quite rightly), both remove the causes of conflict and deprive the two countries of the means by which to persecute it. (p. 312)

But with the onset of the euro crisis and Angela Merkel's successful determination to handle it according to her unrealistic, truly reactionary doctrine of ordoliberalism, the economic unity of the euro became a force that drove the EU nations apart rather than pulling them together.

Europe Day this May 9 may be more an occasion for mourning than for celebration.

Varoufakis on the problems of the EU and the eurozone

Former Greek Finance Minister Yanis Varoufakis recently did an interview with Globo TV in Brazil. And he provides a transcript on his blog (Our movement to democratise Europe & developments in Latin America and China – Interview with Brazil’s GLOBO TV 01/19/2016). It includes various interesting and provocative observations, such as this one on France and Germany:

[French] President [François] Hollande never speaks against [German] Chancellor [Angela] Merkel when she speaks about the Eurozone, even when he disagrees. Remember he was elected in other to counter her perspective of what should happen in the Eurozone. The day he was elected he stopped speaking about it. Now, why is that?

There is a reason. If the Eurozone breaks up, and France and Germany go back to their own currencies, the French franc and the Deutsch mark, what will happen? There will be an exodus of money from France to Germany. Why? Because everybody will anticipate, correctly, that going back to their own currencies means that the Deutsch mark will go up and the French franc will go down.

Yes, but France and Germany are the axis of the EU. So, François Hollande – or whoever happens to be the President, Sarkozy, Hollande, this is not a personal issue – knows that if euro breaks up then France will be destroyed, and there will be a flood of money towards Germany. So he is scared of any disagreement because it may end up destroying his country. ...

Germany doesn’t have this fear, as a euro break up would lead to a flood of money to Frankfurt. Of course, German industry will be injured by the rise of the new German currency but its financial system will not collapse – as France’s would. This asymmetrical fear guarantees that whenever the Chancellor of Germany says something the President of France does not respond. Now, this is an immense power in the hands of the German Chancellor. She knows that if we make our Eurozone absolutely indivisible, impossible to break up – which is what we have to do to fix it – then the office of Chancellor will lose with asymmetric power, because the French president, whoever the French President might be, will no longer fear the break up and will start to speak his mind. So, the immense political power that the German Chancellor has comes from the fact that we are not fixing the euro. So, there is the political incentive for not fixing the euro. [my emphasis]

He also makes an important observation about the intertwining of the euro crisis and the refugee crisis:

If you look at the way Europe has been fragmented in the last 6 years, 7 years, since the 2008 great financial crisis in the United States, Europe and the world; if you look at the way we have failed to deal with that crisis consistently, and during this process of sequential failures, and the denial of the structural aspects of this crisis, our nations in Europe have been pulled apart. Turned against one another.

The events in the Middle East are absolutely independent of the structure of the Eurozone. Even if we had designed the Eurozone well, we would still have had the Americans invading Iraq, creating a rapture between Sunnis and Shiites, the Iranian and Iraqi war before that would have precipitated the whole thing, the collapse of the structural rigidity of Iraq would have spilled over into Syria, independently what Europe did.

But what we did within Europe, our failure to deal with the euro crisis, fragmented us, so when the refugee crisis came, we were not capable of dealing with it in a rational European fashion. We could not deal with a common problem in a systematic, common manner. So, there is a connection. [italics in original]

Merkel, looming German economic crisis and her refugee problems

I just quoted Wolfgang Münchau's weekly German-language column in my previous post. But his weekly English-language column, Gloom gathers over the challenges that Germany faces Financial Times 01/17/2016, covers some of the same ground. Which I'll get to further down.

But what jumps out at me here is that her coalition partners, the ostensibly center-left Social Democrats (SPD), are attacking Angela Merkel's immigration policy from the xenophobic side:

Gerhard Schröder, her Social Democratic predecessor, last week came out against the policy with exactly the same arguments as the right-wingers in Ms Merkel’s own party: Germany cannot absorb such a large number. More than 1m refugees arrived in the country in 2015. It could be twice as many this year and the same again next — more if you include family members who will eventually follow.

It is tempting to think of refugees and migrants as a new source of labour. But in this case this just is not true, at least not for now. The majority of those who arrive in Germany lack the skills needed in the local labour market. They will enter the low wage sector of the economy, and drive down wages, producing another deflationary shock. This is the last thing Germany and the eurozone need right now.

I expect that this policy will change at some point this year. What I do not see, however, is a successful political coup against Ms Merkel from inside her own party. What protects her is the grand coalition with the Christian Social Union and the SPD. There is no majority to the right of her, or to the left for that matter. [my emphasis]

I'm not familiar enough with the demographics of the current immigration to Germany to have a good sense of what if any downward pressure it could put on wages. Based on American experience, I tend to be dubious. But I want to learn more of the details.

But the disgusting thing about the SPD is that while the party embraces Merkel's stone-conservative Herbert Hoover/Heinrich Brüning economic policies. But they attack her from the right on immigration. This is just pitiful.

And it's not just Schröder. Sigmar "Sigi Pop" Gabriel, current German Vice Chancellor and current SPD Party Chair, is joining in, as well. (Reaktion auf Kölner Silvesternacht: Vizekanzler Gabriel fordert schnellere Abschiebungen Spiegel Online 08.01.2016; Karl Doemens, Gabriel greift die Kanzlerin an Frankfurter Rundschau 18.01.2016; Aert van Riel, Eine aussichtslose Mission Neues Deutschland 19.01.2016 )

Merkel has been reckless in her policy on the refugees. But pandering to xenophobia only makes it worse. And Merkel's euro policy has contributed mightily to the current toxic nationalism that is surrounding her refugee policy, in Germany and elsewhere. Which brings us back to Münchau's FT column:

Finally, 2016 promises to be the year of backlash against German dominance of the eurozone. That did not happen during the crisis. The leaders of the countries in the eurozone periphery kept their heads down. Under German pressure, they signed up to treaties and legislation, such as the fiscal compact and the new resolution mechanism for banks, that were clearly not in their long-term interest. ... Even if 2016 does not see another eurozone crisis, it could easily be a year of mutual alienation, which is more dangerous in the long run.

While most of the threats appear to be external, they are caused by domestic policy choices. Germany does not have to rely on a single industry to such an extreme degree. And no country finds itself with an 8 per cent current account surplus by accident. Nor did Ms Merkel need to open up further a border that was already open by making so public a pronouncement. She made a choice. [my emphasis]

You're doing a heckuva job, Angie, a heckuva job!

The "mother of all [economic] crises" under way in the developing world?

Wolfgang Münchau sees current global economic developments as constituting the third phase of the world financial crisis that began in 2008. He sees the third phase as "die Krise der Entwicklungsländer," "the crisis of the developing countries." (Warum Schwellenländer für die Kurskrise sorgen Spiegel Online 15.01.2016)

For him the first phase was the bursting of the mortgage credit bubble in the US. The euro crisis was the second. Presumably, he doesn't see a sharp temporal division between the three. The euro crisis is certainly continuing and has long since become chronic.

He focuses on three of the BRICS. Russia is a petrostate and is being hit hard by the current low oil prices. "Russland ist dank Wladimir Putin eine ökonomische Monokultur," he writes. ("Thanks to Vladimir Putin, Russia is an ecoomic monoculture.") China has been investing a vast amount in construction, creating according to Münchau, "eine der größten Investitionsblasen der Menschheitsgeschichte" ("one of the largest investment bubble in the history of humanity"). In Brazil, he blames the current President Dilma Rousseff for "corruption and miserable economic policy." In the latter case, I suspect he's leaning too heavily on currently conventional wisdom; the decline of oil prices has also hit Brazil hard. Venezuela as well, but Münchau doesn't discuss that.

He sums up the "third phase" this way:

Fast alle Schwellenländer leiden ebenfalls darunter, dass sie sich in den guten Jahren kein robustes Bankensystem aufgebaut und sich auf ausländische Finanzdienstleister verlassen haben. Was wir jetzt erleben, ist die Mutter aller Krisen für diese Länder: Die Rohstoffpreise sind im Keller, die ausländischen Finanziers ziehen ihr Geld ab, die Dollar-Zinsen steigen, die lokalen Investitionsblasen platzen ebenfalls, die ganze Wirtschaft geht den Bach runter.

[Almost all developing countries in any case are suffering from the situation that in the good years they failed to build a robust banking system and left themselves {at the mercy of} foreign financial service providers. What we are now experiencing is the mother of all crises for these countries: raw material princes are in the basement, the foreign financiers are withdrawing their money, the dollar interest rate is rising, the local investment bubbles are bursting in any case, the whole economy is going into the ditch.]

I've learned to be very cautious about broad generalizations from economists or financial writers about "corruption" and bad economic management and the like in developing countries. "Corruption" especially seems to have become a simple term of contempt. From this viewpoint, massive corruption on Wall Street or at Volkswagen aren't signs of chronic corruption in the US of Germany, much less a hindrance to their economic development. But for Greece or Brazil, it expresses a belief in the inferiority of such countries in relation to the US or Germany.

But I also pay attention to Münchau's analyses. And he's hardly alone in noticing the current problems of development in many emerging-market countries. And he does pay attention to how the corruption at Volkwagen can affect Germany's own economic situation at this moment. Germany is currently experiencing such a large surplus in the export economy of which Angela Merkel is so proud that it is particularly susceptible to the growing crisis in the developing world. And since autos constitute a key sector for exports, the costs and brand damage to Volkswagen are likely to damage the German economy any more. As he puts it:

Die Kombination aus einer Exportkrise und einer durch den VW-Skandal verursachten Autokrise hat das Zeug, der deutschen Wirtschaft in einer Weise zuzusetzen, wie es unsere Generation noch nicht erlebt hat.

[The combination of an export crisis and an auto {sector} crisis as a result as a result of the VW scandal has the stuff to press the economy in such a way as our generation has never before experienced.]

Long-festering problems in the EU

The unsolved major problems of the EU and the eurozone continue to snowball in a way that makes the survival of the former and even more so of the latter more problematic all the time. Cooperation within the EU has broken down over the refugee problem and the influx of refugees is providing a newly growing target for far-right parties. Germany has joined its very junior EU/eurozone partner France in participating directly in the Syrian civil war, the prolongation of which will worsen the refugee problem. France may use its war costs to demand loosening of its requirements under the stone-conservative Fiscal (Suicide) Pact of 2012, which could lead to further conflict with Merkel and the stone-conservative Herbert Hoover/Heinrich Brüning economic policies to which she is committed. Not to mention the incredibly complex and risky politics of the Syrian civil war itself.

The devastating extent of the post-2008 depression in the eurozone "peripheral" countries like Greece, Ireland, Italy, Portugal and Spain is largely due to the effects of the Hoover/Brüning policies Merkel imposed on them. Especially Greece. Merkel's insistence on the Hoover/Brüning policies led to various "regime change" operations in pursuit of them, including actual regime changes in Greece in 2011, Italy in 2011, even in Greece of 2015. The Merkel-bot President of Portugal in 2015 tried to block a majority left coalition from taking power after they won a majority in the elections. We'll see what happens in Spain as the new left majority there seeks to form an anti-austerity government. Such high-handed efforts to dominate and impose on other "partners" a highly destructive and massively discredited economic policy has naturally given reason for them to suspect the value of German domination of the EU and the eurozone.

Now Merkel needs other countries in the EU to support her refugee policy, which is a genuinely European problem. In particular, the Germans want Greece to do a better job in retaining refugees from outside the Schengen Area there so they won't come to Germany. But they are getting the best cooperation from their partners! Who could have foreseen such a thing?

All these problems are the culmination so far of Merkel's nationalist approach to EU affairs, by which she insisted on retaining maximum influence and advantage for Germany at the expense of the "partners." And which led to her characteristic approach to EU and eurozone problems, "extend and pretend." Postpone reaching a substantive and permanent solution to the problem, whether it is bank regulation, refugees or the unending euro crisis. Just to mention a few.

The euro crisis is still likely to be the one that provokes formal splits. Wolfgang Münchau continues in his weekly columns to point out the various reasons for his. (Daran wird der Euro zerbrechen Spiegel Online 25.12.2015

But it can't be seen in isolation to the other problems. The crass xenophobia against Greece and other "periphery" countries encouraged and in a real way propagated by the German government, including Merkel's junior coalition partner the SPD, was picked up not just by the Stammtisch (good ole boy opinion) but by both the boulevard and the "quality" press. The Austrian government was as extreme in promoting nationalist hostility as Merkel's has been. But a very similar process took place in Austria.

That nationalist sentiment carried over to the refugee crisis, which in turn reinforced it. It has led to new border controls, which partially removes one of the most concrete benefits most people have seen from the EU. Münchau puts it even more strongly: "The influx of refugees into Germany and the terrorist attacks in France have put a de facto end to Schengen. National border controls have been reinstated in many places." (Fighting Brexit with fear will backfire Financial Times 12/20/2015) Even new walls along national borders, like in the good old days of the Berlin Wall, though so far with less lethal enforcement. And the increased nationalism presents a problem for security cooperation among EU members against terrorism, while terrorist attacks increase xenophobia against immigrants, which in turn strengthen nationalism and xenophobic fear.

You're doing a heckuva job as EU leader, Angie, a heckuva job!!

Jürgen Habermas has been a sympathetic critic of the EU for a long time. In the conventional political vocabulary, "Eurocritic" has referred to supporters of the Union who argued for urgent reforms to integrate the members countries more; "Euroskeptic" has referred to usually nationalist/rightwing opponents of EU membership. After Germany's handling of the Greek negotiations in 2015, it is clear that as long as Merkel remains in powers and/or her austerity doctrine in force, any country seeking to put an end to austerity for themselves will need to be prepared to leave the eurozone if they don't get agreement. Because without a thoroughly credible threat to exit, they have to expect to be crushed like Greece was.

A 2006 article by Habermas, "Die Bewährung Europas" Blätter für deutsche und internationale Politik 12/2006, serves to illustrate the long-standing and chronic nature of the EU's current problems. The euro crisis hadn't yet broken out, and it is not on Habermas' 2006 list. A number of economists had warned that the construction of the eurozone was flawed from the start in a way that made it particularly unsuited to deal with a depression crisis like the one that struck in 2008. But Habermas pointed to real problems that today are intertwining with the euro crisis. In a perceptive observation, he described there nine years ago how neoliberal economic assumptions were already promoting a nationalism among EU nations that has now become toxic to the point of threatening the entire "European project," as it is called:

Die Rückwendung zum Nationalstaat hat in vielen Ländern eine introvertierte Stimmung gefördert: Das Europa-Thema ist entwertet, man beschäftigt sich lieber mit der nationalen Agenda. Bei uns umarmen sich in den Talkshows Großväter und Enkel in der Rührung über den neuen Wohlfühlpatriotismus. Die Gewissheit heiler nationaler Wurzeln soll eine wohlfahrtsstaatlich verweichlichte Bevölkerung für den globalen Wettkampf „zukunftsfähig“ machen. Diese Rhetorik passt zum gegenwärtigen Zustand einer sozialdarwinistisch enthemmten Weltpolitik.

[The return to the national state has promoted an introverted mood in many countries: The theme of Europe is devalued. One prefers to concerns themselves with the national agenda. With us [Germans], grandfathers and grandsons hug each other with emotion over the new feel-good patriotism. The certainly of healthy {heiler} national roots is expected to make an welfare-state-produced effeminate population "ready for the future" of the global competition. This rhetoric belongs to the present situation of an unleashed Social Darwinist world politics.]

Habermas nine years ago pointed to the following visible, major problems in the construction of the European Union:

1. The "democratic deficit," the phrase Habermas uses here. More and more decisions were being take at the EU level that were obligatory on the members without the same kind of meaningful electoral input the citizens have at the national level being in effect at the EU level.
2. The failure to achieve a cohesive foreign policy. Only a united Europe could successfully lead the pressure on the United States for "die Fortentwicklung des klassischen Völkerrechts zu einer politisch verfassten Weltgesellschaft" ("further development of the classical international law to a politically secured world community.")
3. The ongoing "Unterminierung menschenwürdiger sozialer Standards" ("undermining of humane social standards.")
4. The culturally fundamentalist divisions within Europe and within EU members states. This is a reminder that integration of national, ethnic and religious minorities as well as the handling of new immigrants certainly didn't first become evident in 2015: "Es geht darum, die Angehörigen fremder Kulturen und fremder Religionsgemeinschaften gleichzeitig in ihrem Anderssein zu respektieren und in die staatsbürgerliche Solidarität einzubeziehen." ("It has to do with respecting the members of unfamiliar cultures and unfamiliar religious communities in their difference and bring them into the solidarity of citizens.") And he makes the important point that the success of social integration of minorities within member countries also contributes to the success of international integration within the EU.
5. Habermas doesn't make the following a separate point, though in my mind it needs to rank with the others as (5): "Wir sollten George W. Bush nicht auch noch in der Militarisierung des westlichen Geistes folgen." ("We [Europeans] should also not follow George W. Bush in the militarizing of the Western spirit.")

Habermas' comment on the intersection of the second and third problems is revealing:

"Erst eine Europäische Union, die außenpolitisch handlungsfähig würde, könnte auf den Kurs der Weltwirtschaftspolitik Einfluss nehmen. Sie könnte die globale Umweltpolitik vorantreiben und erste Schritte auf dem Wege zu einer Weltinnenpolitik machen. Damit könnte sie anderen Kontinenten für den Zusammenschluss von Nationalstaaten zu supranationalen Mächten ein Beispiel geben. Denn ohne Global Players dieser neuen Art kann ein Gleichgewicht zwischen Subjekten eines gerechteren Weltwirtschaftsregimes nicht entstehen."

Here the failure of the one-time center left parties, the Social Democrats, is a central component of this interweaving of problems. With reference to Germany, Albert Scharenberg wrote in 2007 ("Dem Morgenrot entgegen?" Blätter 5/2007):

Die regierende Sozialdemokratie brachte durch ihre den Sozialstaat deformierenden „Reformen“, insbesondere durch Hartz IV, ihre ureigenste Klientel gegen sich auf – Gewerkschafter und Arbeitslose.

[The ruling Social Democracy through their "reforms" that deformed the welfare state, especially with Hartz IV {that allowed for lower-paid and less secure jobs than before in Germany}, turned their most basic supporters against them - unions and the unemployed.]

This is not just true of the German SPD, but also of the social democrats in France and other countries, including Spain. The latter party, the PSOE, has the chance to form a government in Spain after this month's elections. But their ability to do so and their ability to successful press an anti-austerity program in office has been significantly compromised by their previous embrace of Merkelnomics. (Antoio Avendaño, Un muerto viviente llamado Pedro Sánchez Andaluces.es 27.12.2015)

Spanish election - more problems for Angela Merkel's austerity program

Angela Merkel's neoliberal eurozone saw another crack open today as a result of elections in Spain.

In Sunday's national election, Mariano Rajoy's conservative People's Party (PP) lost the parliamentary majority it has held for four years. They came in first with, according to current projections (La izquierda podrá formar Gobierno Público 21.12.2015) with 122 parliamentary seats, with 176 needed for a majority.

The social democrats (PSOE), which embraced Merkel's austerity policies at the onset of the euro crisis, managed to come in second with 91 seats. That doesn't give the long-dominant two major parties a majority even between the two of them.

The new Podemos party led by Pablo Iglesias came in third with 69 seats, a real surge for the left. The PSOE has made some gestures in the way of criticizing austerity and Merkel's Herbert Hoover/Heinrich Brüning economics. With votes from some of the smaller left parties with seats in Parliament, the PSOE and Podemos could form a left government.

I should note here that when I talk about austerity, there are degrees of it that vary from country to country. It has not been been nearly so severe in Spain as in Greece, for instance. But it's been enormously damaging in Spain nonetheless.

A new rightwing party, Ciudadanos, captured 40 seats and fell short of general expectations.

I guess Angela Merkel is not Person of the Year in Spain.

And probably not in Italy, either: Francesco Guarascio, Italy's Renzi blasts German policies at EU summit Reuters 12/18/2015.

Krugman on the contiuing euro crisis

"The crisis in the euro area — as opposed to the broader global financial crisis — began in late 2009," writes Paul Krugman. "It’s still far from over," although some of the hardest-hit countries' economies are now growing again. (Adjustment in the Euro Area 12/14/2015)

He notes that "Finland — which is suffering from an idiosyncratic shock to its export industries rather than a sudden stop in capital inflows — is doing as badly as much of southern Europe. This is a reminder that the euro system creates huge problems for adjustment everywhere, that this isn’t a one-time problem."

But how would we expect countries to respond to adverse shocks? Contrary to what many people seem to believe, Keynesian-type analysis doesn’t say that countries can never recover without devaluation and/or fiscal stimulus; on the contrary, as I pointed out more than three years ago, it predicts a gradual recovery through internal devaluation — that is, a depressed economy will cause low or negative inflation, gradually improving competitiveness against other members of the currency union, and rising net exports should drive growth as long as they’re not offset by ever-tighter austerity.

And something like that now appears to be happening for Spain, on which Krugman focuses.

He concludes: "What is true is that the single currency isn’t totally unworkable. It’s just extremely costly."

Greece and Germany, Friday the 20th version

C J Polychroniou writes about the eurozone depression in Quantitative easing won't cure Europe's economic woes Aljazeera 03/20/2015:

The euro crisis has had a devastating impact especially on the peripheral eurozone countries (Greece, Portugal, Ireland, Spain, Italy and Cyprus), producing massive unemployment and increasing substantially the debt-to-GDP ratio, mainly thanks to the austerity policies that were implemented in the midst of an economic recession as part of the bailout plans (Italy excluded).

GDP in Spain, Portugal, Ireland, and Italy is on the average 7 percent below the pre-crisis levels; Greece's GDP is nearly 25 percent below its pre-crisis peak. The official unemployment rates in the peripheral countries are stratospherically high, indicating that there is no recovery. In Greece the official unemployment rate is 26 percent while in Spain it is close to 24 percent. In Portugal it is 13.3 percent, in Italy 12.6 percent, and in Ireland (the country with the highest net migration level in Europe) at over 10 percent.

And he recommends basic macroeconomic policies as the immediate treatment: "What Europe's economies need are fiscal policies that can stimulate real growth and generate jobs. Large-scale direct stimulus spending by governments will boost the real economy by increasing aggregate demand and will help to cause wages to rise."

Greek Finance Minister Yanis Varoufakis did a new blog post today Of Greeks and Germans: Re-imagining our shared future 03/20/2015. He gives this helpful historical sketch of the EU/German (so-called) bailout:

I opposed the 2010 and 2012 ‘bailout’ loans from German and other European taxpayers because:

• the new loans represented not a bailout for Greece but a cynical transfer of losses from the books of the private banks to the weak shoulders of the weakest of Greek citizens. (How many of Europe’s taxpayers, who footed these loans, know that more than 90% of the €240 billion borrowed by Greece went to financial institutions, not to the Greek state or its citizens?)
• it was obvious that, at a time Greece could not repay its existing loans, the austerity conditions for giving Greece the new loans would crush Greek nominal incomes, making our debt even less sustainable
• the ‘bailout’ burden would, sooner or later, weigh down German and other European taxpayers once the weaker Greeks buckled under their mountainous debts (as moneyed Greeks had already shifted their deposits to Frankfurt, London etc.)
• misleading peoples and Parliaments by presenting a bank bailout as an act of ‘solidarity to Greece’ would turn Germans against Greeks, Greeks against Germans and, eventually, Europe against itself.

His post also has a couple of nudge-nudge, wink-wink references to the recent days in which a good part of the German quality press made fools of themselves over a clip from a comedy/satire video that was doctored to make it look like he was flipping the bird to Germany. (Which honestly wouldn't have bothered me if he had!) For instance, he writes:

What should we do now, in 2015, that Greece remains in crisis and our people, the Greeks and the Germans, have, regrettably but also predictably, descended into a mutual ‘blame game’?

First, we should work towards ending the toxic ‘blame game’ and the moralising finger-pointing which benefit only the enemies of Europe.

Secondly, we need to focus on our joint interest: On how to grow and to reform Greece rapidly, so that the Greek state can best repay debts it should never have taken on while looking after its citizens as a modern European state ought to do. [my emphasis]

The euro crisis and the FAZ

I'm starting to think that the euro crisis has been to the German press what the run-up to the Iraq War was for the American press. And that's really not a good thing. This is from the oh-so-Respectable Frankfurter Allgemeine Zeitung, aka, the FAZ, Ralph Bollmann und Lisa Nienhaus, Denn sie wissen nicht, was sie tun 8.03.2015:

Außerhalb Griechenlands weiß keiner, wie es im griechischen Haushalt wirklich aussieht. Keine europäische Institution, keine Regierung hat Einblick in den griechischen Haushalt. Das verweigern die Griechen hartnäckig. Einzige Hoffnung für die Europäer ist, dass das Land wenigstens den IWF wieder hereinlässt – womöglich nach der Eurogruppen-Sitzung am morgigen Montag.

[Outside of Greece, no one know what the Greek budget really looks like. No European institution, no government has insight into the Greek budget. The Greeks stubbornly refuse to allow that. The only hope for the Europeans is that the country at least allows the IMF in again - perhaps after the EuroGroup meeting tomorrow on Monday.]

I'm trying to picture the stuffed shirts sitting around in Brussels saying, "Gol-lee, who knows what those Greeks spend their gubment money on? You think they pay soldiers and secretaries or something? Maybe they have a post office, or pay people to build highways and stuff? Who knows?! And who can speak Greek anyway?"

Now, I'm sure there is some cost center in the Greek national government that hasn't undergone an independent audit in the last, say, two days. But since 2010 until January's election, the Greeks haven't even *controlled* their own budget. Angela Merkel and her Finance Minister have been doing via the "Troika" of the EU Commission, the ECB and the IMF.

And yet here's the safely conservative FAZ publishing an obvious whopper like that. Presumably assuming that it will seem like plain good sense to their readers. Scary.

Wolfgang Münchau uses the D-word for the eurozone

"Europe suffers from fatal politics." - Joseph Stiglitz, August 2014

"Die Lektion dieser verspäteten Stresstests lautet: Je länger wir an den Symptomen rumfummeln, anstatt die Ursachen zu bekämpfen, desto länger dauert die europäische Wirtschaftsdepression." [my emphasis]

"The lesson of these delayed stress tests [by the ECB of eurozone banks] reads: The longer with fool around with the symptoms, instead of dealing with the causes, the longer the European economic depression will last." [my emphasis]

- Wolfgang Münchau, Den echten Stress haben nicht die Banken Spiegel Online 27.10.2014

Münchau right points out that whatever good results from the stress tests the ECB just did, however many banks boost their capital reserves, it won't do much to boost the economy.

That's because the eurozone is in a depression, with interest rates at the zero lower bound. They are facing the real threat of deflation, if they aren't there already. Münchau notes that the ECB's stress test

Until economic activity picks up and therefore the demand for credit increases, the banks having money to lend won't do much good for the economy.

ECB provides a sobering but sunny stress test for eurozone banks #ecbstresstest

The ECB seems to be putting an optimistic spin on the results of a "stress test" applied to the state of major banks for the year 2013. The ECB formally assumes oversight for European banks in November. Euronews reports in One in five major European banks fail ECB's first stress test 10/26/2014:

Claire Jones and Alice Ross report for the Financial Times (ECB says banks overvalued assets by €48bn 10/26/2014):

Of the 25 banks that took the biggest hit under the AQR, Italian banks were the clear laggards with eight members, according to calculations by Strategy&, a consultancy. The worst hit was Monte dei Paschi di Siena.

Four Greek banks, three from Austria and two each from Cyprus, Slovenia, and Spain were among the 25 banks who will face the biggest write downs.

German lenders will have to lower the value of their assets by €6.7bn and their French counterparts by €5.6bn.

Overvaluation of assets is a huge problem. "The central bank blamed poor valuation of commercial loans for a chunk of the adjustments."

One of the major factors in the draconian measures that German Chancellor Angela Merkel has insisted upon in the sovereign-debt aspect of the euro crisis has been based on an unwillingness to face the general weakness of the European big banks, including in Germany.

In Austria, the Österreichische Volksbanken AG (ÖVAG) was the only was that was considered to have failed the stress test. Which means that it was likely to go under in a serious three-year economic decline. Two other major Austrian banks, Erste Bank and Raifeissen, were both found to be significantly under-estimating the risk levels on loans in their portfolios, which overvalued their assets. And with a overestimation of assets, capital reserves can be inadequate to the real, risk-adjusted value of the portfolios.

The Euronews report implies that the worry over weak banks would be that in a downturn, they would have inadequate credit to lend to businesses. Which is true as far as it goes.

But that's kind of a tip-of-the-iceberg way of defining the problem. If major banks start failing, national states are responsible for bailing them out. And that requires huge outlays at a time when the economy is declining and government revenues are falling. That means more debt. Including in a country like Greece, which already has an unpayable level of debt, currently at around 175% of GDP.

It's not an abstract possibility. Not only is the eurozone slipping into a new recession within the depression that began in 2008. This scenario is how Ireland became one of the debt crisis basket cases. When Irish banks started failing after 2008, the Irish government borrowed heavily to bail out their banks. A similar scenario occurred in Spain.

Gerald Braunberger notes that in Germany, the ECB tests raised concerns - presumably he means among banks and in government circles - over the oversight role of the ECB. (Der Test allein macht die Branche nicht gesund Frankfurter Allgemeine Zeitung 26.10.2014) Merkel's nationalistic policy includes Germany having a dominant role in eurozone economic policy but without being subjected to the inconveniences of common responsibility and regulation on the part of the larger eurozone, ECB or EU.

Braunberger argues that the ECB designed its stress test to minimize the bad news:

Das Ergebnis ist in etwa so ausgefallen, wie es zu erwarten war. Die EZB konnte angesichts der fragilen Verfassung vieler Banken nicht alle Institute den Test passieren lassen, ohne sich von Beginn an als Bankenaufseher selbst zu diskreditieren. Hätte sie andererseits zu viele Banken scheitern lassen, wäre möglicherweise große Unruhe unter den Kunden entstanden – mit eventuell drastischen Folgen. Solche Bankentests sind keine reine Übung in angewandter Mathematik. Sie besitzen auch eine politische Dimension und dies schmälert natürlich ihre Aussagekraft.

Gleichwohl kann nicht erstaunen, dass die meisten der durchgefallenen Banken im Süden Europas beheimatet sind. Dennoch sollte sich keine Bank ausruhen, nur weil sie den Test bestanden hat. Dies gilt auch für die deutschen Kreditinstitute, die bei genauerem Hinsehen keineswegs alle sehr gut abgeschnitten haben. Die Bundesbank hat in ihrer Kommentierung der Stresstest-Ergebnisse zurecht auf weiterhin vorhandene Schwächen hingewiesen.

[The result is some ways came out as was to be expected. In light of the fragile constitution of many banks, the ECB could not let all the institutions pass the test without discrediting itself from the start as the overseer of banks. On the other had, if it had made too many banks fail, great unease could have arisen among customers - with possibly drastic consequences. Such bank tests are not a pure mathematical exercise. The also have a political dimension and this diminishes their conclusiveness.

At the same time it cannot be surprising that most of the banks that failed are headquartered in the south of Europe. But it shouldn't comfort any bank just because they passed the test. This is also the case for German institutions, which on closer examination by no means all look good. The [German] Bundesbank in its commentary on the stress test results has rightly emphasized broadly present weaknesses.]

Braunberger is suggesting that the ECB's approach in the stress test was something like this:

Laura Noonan and Eva Taylor report for Rueters in ECB fails 25 banks in health check but problems largely solved 10/26/2014 on the ECB test, the headline accentuating the positive. Their report highlights the southern European banks designated by the ECB as particularly problematic:

Painting a brighter picture than had been expected, the ECB found the biggest problems in Italy, Cyprus and Greece but concluded that banks' capital holes had since chiefly been plugged, leaving only a modest 10 billion euros ($12.7 billion) to be raised.

Italy faces the biggest challenge with nine of its banks falling short and two still needing to raise funds.

The test, designed to mark a clean start before the ECB takes on supervision of the banks next month, said Monte dei Paschi (BMPS.MI) had the largest capital hole to fill at 2.1 billion euros. ...

Alongside Italy, regulators said three Greek banks, three Cypriots, two from both Belgium and Slovenia, and one each from France, Germany, Austria, Ireland and Portugal had also missed the grade as of end-2013.

Germany and the eurozone depression

"I woke up this morning/And none of the news was good" - Steve Earle, "Jerusalem"

The business press is paying more attention lately to the euro crisis. A report by Stefan Riecher and Simon Kennedy, The European Central Bank May Have to Defy Germany Bloomberg Businessweek 10/09/2014 provide an interesting example of reporting stuck in a narrow model - though not as narrow as German Chancellor Angela Merkel's "ordoliberalism." They seem to think that only central bank action counts as legitimate public stimulus:

The ECB boss [Mario Draghi] ended Europe’s sovereign debt crisis by promising in 2012 to do “whatever it takes” to save the euro. Investors ask if he’s willing to do the same to save the economy. That leaves Draghi under pressure to introduce a full-bore quantitative easing program, one that would make more money available for cheap lending by having the ECB buy government bonds held by the banks, companies, and others. [my emphasis]

What the ECB ended in the summer of 2012 was an acute phase in the euro debt crisis, not the whole thing. Greece, Portugal, Spain and probably Italy are likely to have to take debt haircuts, in the case of Greece about as certainly as such things can be, with the debt-to-GDP ratio up in the 170%-plus range.

They recognize that an economic solution for the eurozone depression would involve an increase in inflation. Duh! They're on the verge of deflation if not already into it. But Riecher and Kennedy seem to think only the mystical arts of the central bank can bring such needed inflation that would accompany economic growth:

An ECB program of government bond buying, by making even more cheap credit available, would promote spending, which in turn would nudge inflation upward. Because of the lower yields on sovereign debt, ECB bond purchases would encourage a weaker euro as investors seek higher returns elsewhere. A soft euro would make exports more competitive and increase the likelihood of inflation as imported commodities such as oil became pricier. It would also help improve the balance sheets of banks. Draghi may have to act soon: How many more back-to-back recessions can Europe take?

Of course, the main barrier to even that modest kind of effort is Merkel and her Herbert Hoover/Heinrich Brüning economics:

The stumbling block is Germany, which doesn’t want the ECB conducting bailouts in disguise. Buying sovereign bonds — as the U.S. Federal Reserve and a string of other central banks have done — is anathema to the Germans. The ECB, by buying sovereign debt from the member states of the European Monetary Union, would come very close to financing individual governments, something the founding treaty of the EMU bans. And if the ECB did buy that debt, it would also likely lessen the pressure on countries such as Greece and France to put their budgets in order and make their economies more productive. , president of Germany’s Bundesbank, has already spoken out against bond purchases and objected to some of the ECB’s recent stimulus steps. If Germany’s economic weakness worsens, the resistance to the program may diminish. The latest data from Germany show a severe contraction in its manufacturing sector. [my emphasis]

Jens Weidmann was an Angie-bot, but he now may be more hardline than Merkel, though not because Merkel has started acknowledging basic macroeconomics.

This is a Euronews report on Germany pressuring France to tighten austerity, EU finance ministers aim to defuse Paris, Berlin row 10/13/2014:

Interest rates on Greek bonds spiked last week, after the ruling New Democratic Party staged a confidence vote as a political stunt to boost their pitiful standing. Niels Kadritzke refers to polls showing that SYRIZA is showing more support right now than the two government parties combined. SYRIZA party leader Alexis Tsipras has made it clear that as head of government he would push for a relief from the draconian economic policies that Merkel has imposed on Greece via the shamelessly compliant EU.

Elaine Moore et al report for the Financial Times (Market turmoil casts further doubt over Europe revival 10/16/2014):

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For the first time this year, Greece’s benchmark bond yields rose above 9 per cent as mounting political instability raised doubts about Athens’ ability to sustain its heavy debt burden. European countries hit hardest by the eurozone debt crisis also saw their borrowing costs jump at rates not seen for a year. ...

Across wider Europe, global investors moved to reallocate their money away from debt issued by countries at the region’s periphery into German bonds, considered the safest and most liquid debt market.

The move sent the yield on 10-year German Bunds to 0.72 per cent during the day – a historic low. Yields on equivalent Italian, Spanish and Portuguese debt rose by about 30 basis points in the morning before falling back.

But Angie loves her some Hoover/Brüning economics, so she's demanding that the eurozone stay the course, as Old Man Bush and Shrub too liked to say when they were Presidents. Stefal Wagstyl and James Politi report (Financial Times 10/16/2014):

“All member states must accept in full the strengthened rules,” she told the German parliament.

As well as rebuffing French president François Hollande and Italian premier Matteo Renzi, who are demanding that Brussels allow them more budget flexibility, Ms Merkel seemed intent on calming the world’s financial markets, which saw some of their sharpest sell-offs of the week on Thursday, including a steep drop in Greek bonds. ...

Paris and Rome have argued that their embrace of structural reforms, such as a recent Italian move to overhaul a sclerotic labour market, should afford them some relief from the fiscal rules.

As the EU’s biggest economy, Berlin has always had the key say in that debate and has privately been urging the European Commission to take a tough line. Ms Merkel said the financial crisis in Europe was “not permanent” but neither had it been “sustainably overcome”.

Merkel is worried about fighting the bond vigilantes and further slam down the purchasing power of eurozone citizens to coax the Confidence Fairy into her long-delayed arrival.

Fighting the eurozone depression? Not so much.

That report gives the Italian debt-to-GDP ratio as 134%. Possibly sustainable with economic recovery, unsupportable in a continued depression.

Horand Knaup and Christian Reiermann write about pressure on Merkel in Out of Balance? Criticism of Germany Grows as Economy Stalls Spiegel International 10/14/2014:

[Finance Minister Wolfgang Schäuble:] "In Germany, we have shown in recent years that solid finances and better growth are not contradictory -- they are necessary complementary elements," he said on Monday in Luxembourg, where he was for a meeting of euro zone finance ministers. He added that calls for state spending were "old fashioned."

Criticism of Schäuble's position is also mounting in Germany. "The decision to balance the budget is a risky one," says Marcel Fratzscher, the head of the German Institute for Economic Research (DIW) in Berlin. "If the economy continues to weaken, that goal will no longer be sustainable."

If the government were to stick to its guns, he argues, it would have to implement budget cuts that would further hasten the crisis. Instead, he argues, the finance minister should take advantage of the "wiggle room" provided in the balanced budget amendment to Germany's constitution "to increase public investments." Under the law, which was approved by parliament in 2009 and goes into full effect in 2016, the federal government is permitted maximum annual borrowing of 0.35 percent of gross domestic product, the equivalent of about €10 billion next year. "That would send a strong message to the German business community and to Europe that Germany takes its responsibility seriously," Fratzscher says.

But Merkel's government seems set on achieving a balanced budget. Even worse, the current government made the very decisions that are now robbing it of the means it would need to counter a possible economic downturn. [my emphasis]