I was on the Alyona Show panel these past two Mondays talking to Alyona and Reason’s Anthony Randazzo about the debt crises in the US and Europe. As much as we tried to find something we could disagree on, we ended up agreeing a lot in both cases.
As to the root causes of both crises, in the US, it’s largely about private debt. In the euro zone though, it’s really a balance of payments problem. See my recent Macro outline of causes and effects of and predictions for the global financial crisis. I think that does a good job of getting at the broad strokes. For euro-specific thoughts, I have found a post that I wrote just over two years ago on the origins of the euro crisis increasingly useful. This part sticks out for me in the context of a multi-pronged crisis that is flaring not just in Greece, but in Spain and Italy as well:
The Hartz reforms in Germany, the direct result of a botched currency union at re-unification, are specifically designed to keep down wage pressure in Germany. Because of the fixed exchange rate in Euroland, this has made southern Europe uncompetitive. Therefore, despite – or should I say because of – the high Euro this past decade, Germany has run a currency account surplus within the Eurozone, countered by current account deficits in the South. The strength of the Euro – something the Germans have always wanted – has made it impossible for the south to balance the current account without taking on similar structural reforms that suppress wage growth.
…Eurozone monetary policy was made for Germany, inflating bubbles in Ireland and Spain as their economies overheated. To make matters worse, the inappropriate monetary policy made it that much harder to suppress wage growth, making the economies uncompetitive and creating an unsustainable current account balance. Now that things have gone decidedly pear-shaped, the euro has tied the government’s hands on fiscal and monetary policy and the only way forward is a deflationary depression.
What’s happening in Greece is tragic but it won’t rip the euro zone apart. But this is a balance of payments crisis that involves the whole of the euro zone, not just Greece. Every time Europe tries to patch one piece of their broken system, another two break down.
As I said two years ago:
I anticipate that economic nationalism will be a significant factor in the politics of the euro-zone for some time to come. And when the chips are down, the ugly populism of ‘blame the foreigner’ is very seductive. Unless the euro-zone policy makers develop a pro-growth approach, this populism and depression are going to rip the Euro apart.
I know that French President Hollande is pressing on this growth issue now, as are others. But, personally, I have lost hope in Europe’s willingness to fix this and increasingly fear the worst. Let’s see.
Videos below. The first video on the US is from last Monday and the second on Greece and Europe is from last night. I’m slated to be on BNN’s Headline with Howard Green tomorrow at 12:30ET talking about many of the same issues. Tune in.