Euro Explanations

The euro crisis is a tragedy—or a farce? Whatever it is, it’s bit less so today, or one could reason by way of today’s rally in U.S. stocks. But how did we get here? Everyone has an opinion.

“The main cause of the debt crisis is that incomes are not growing fast enough to generate enough free cash flow to pay off the fixed nominal obligations incurred by the insolvent, nearly insolvent, or potentially insolvent Eurozone countries,” argues David Glasner.
It doesn’t help that Germany isn’t quite the rich uncle that some assume. Scott Sumner explains:

Many people seem to be under the illusion that Germany is a rich country. It isn’t. It’s a thrifty country. German per capita income (PPP) is more than 20% below US levels, below the level of Alabama and Arkansas. If you consider those states to be “rich,” then by all means go on calling Germany a rich country. The Germans know they aren’t rich, and they certainly aren’t going to be willing to throw away their hard earned money on another failed EU experiment. That’s not to say the current debt crisis won’t end up costing the German taxpayers. That’s now almost unavoidable, given the inevitable Greek default. But they should not and will not commit to an open-ended fiscal union, i.e. to “taxation without representation.”

The departing European Central Bank economist Juergen Stark is focused on “responsibility,” which leads him to certain conclusions (via Edward Harrison), which implies a particular fate:

There must be a clear separation of functions between central banks and governments. The central bank has to deliver price stability. And it is the responsibility of governments to ensure adequate conditions for the financing of government expenditures. That markets have been more sensitive to the high indebtedness of states for some time and therefore require higher interest rate is not a situation for the central bank to correct… “Money printing” as you call it, is in no way used for the reduction of public debt. We are fulfilling our mandate to ensure price stability now and into the future.

Responsibility and mandate fulfillment, however defined, are moving toward an end game, which may or may not work. The Wall Street Journal reports:

Euro-zone countries are weighing a new plan to accelerate the integration of their fiscal policies, people familiar with the matter said, as Europe’s leaders race to convince investors they can resolve the region’s debt crisis and keep the currency area from fracturing.

Under the proposed plan, national governments would seal bilateral agreements that wouldn’t take as long as a cumbersome change to European Union treaties, according to people familiar with the matter. Some German and French officials fear that an EU treaty change could take far too long. That has prompted the search for a faster option.

The plan, which hasn’t been finalized, would allow the euro zone to announce a speedy change to its governance. European authorities would gain tough new powers to enforce fiscal discipline in the 17 countries that make up the euro zone, the people said. EU treaty changes could then follow at a later stage.

For good or ill, this is how it ends (or revives?). Fiscal integration, or something approximating it, may succeed. But the details will be messy. They already are. A tighter fiscal integration for 17 economies would be an enormous challenge under a multi-year plan. The question is how the crowd reacts over the next several weeks. Even before we begin, we’re “one too many mornings and a thousand miles behind.”