I never held much truck with analysts like George Friedman, who believed that the European Union is doomed. Unfortunately, new facts have caused me to change my mind.
One new fact, actually: the European decision to charge the Irish government a market rate on its “bailout” funds. WTF? Here is where I want to go out and shake a German: the IMF is the good guy in this story! You heard me right. The IMF suggested that Ireland basically default on the debt incurred to rescue the banks. That would be fine. Cut everyone’s debt level, let firms and individuals escape via bankruptcy. That would make it much easier to slash prices and wages without squeezing living standards. “Internal devaluation,” in other words.
But the German government, the same government that (sensibly) wants private-sector haircuts after 2013 nixed the idea because its own banks are too exposed, and Berlin does not want to admit that its banks were as caught up in the foolishness as Irish ones. Instead we get a non-bailout bailout that does nothing to improve the situation and forces the Irish public to transfer 10% of its income to the rest of Europe for the foreseeable future.
Maybe as the possibility of disastrous disorderly defaults looms ever-larger, German politicians will get their act together. A European version of the Brady bond is one possible solution. A raise in the ECB’s inflation target would help. Low-interest E.U. loans are a great idea. And a complete unification of European banking regulation (I suggest they just adopt Canada’s rules and be done with it) is long overdue. Internal devaluations made as easy as possible, reforms in the places that need it (of which Ireland is not one), and the dream of European unity held together.
That looks ever-less likely. Instead we may get collapsing banking systems, chaotic defaults, German taxpayers bailing out German banks at high cost, and a reckless euro-breakup with horrible consequences for the world economy. It would also, as best as I can see, leave a residue of massive anger aimed, rightly or wrongly, at Berlin.
The problem seem to be the German government’s unwillingness to explain that Germans benefit more than anyone from the eurozone. Break it up, and German banks go kaplooie, German exports become uncompetitive, German wages become unsustainable, and the German people get blamed. Instead, though, it seems that the narrative of hard-working Germans selflessly sustaining the rest of Europe is too good to resist. And so, we slouch towards catastrophe. (The optimist in me says that it will turn out much better than the 1930s! The pessimist says, yeah, so did the 1980s in Latin America.)
I hope that I turn out to have been right the first time. Can somebody talk me down?