Europe, the EU and the euro 2012

Europe will be forged in crises, and will be the sum of the solutions adopted for those crises – Jean Monnet
Background (Foreign Affairs November/December 1997)
EMU and International Conflict
MONNET WAS MISTAKEN
To most Americans, European economic and monetary union seems like an obscure financial undertaking of no relevance to the United States. That perception is far from correct. If EMU does come into existence, as now seems increasingly likely, it will change the political character of Europe in ways that could lead to conflicts in Europe and confrontations with the U.S.
The Guardian’s files on the Eurozone crisis
Reuven Brenner Eurozone Bonds: Learning from Pre-Nuptial Agreements —
The notion of a European ‘tribe’ is not on the horizon. (The American, 8 June 2012)

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The Financial Post reports that leaders of Europe’s centre-right parties have urged Mario Monti to run for prime minister in next year’s Italian election, and that Silvio Berlusconi has promised to withdraw if Mr. Monti agrees.
10 December
Berlusconi’s Return Has Europe Back in Crisis Mode
(Bloomberg/Business Week) Italian stocks and bonds plunged on Dec. 10, and the euro currency neared a two-week low against the dollar, on news that Prime Minister Mario Monti would step aside after his predecessor, Silvio Berlusconi, withdrew support for Monti’s government.
Monti’s decision could lead to elections as early as February, with Berlusconi as a candidate. The vote would likely be preceded by a vigorous campaign by the former prime minister against the austerity and economic-reform measures Monti’s technocratic government has championed. “Italian political stability has been jeopardized once again,” says Giada Giani, an analyst with Citigroup Global Markets in London.
A greater fear is that political turmoil in Italy could open a new front in the battle to contain the euro crisis.
Europe Frets over Italy’s Return to Political Chaos
(Spiegel) Voices across Europe warned on Monday that the euro crisis could return to Italy after the resignation announcement by Prime Minister Mario Monti was followed by news that his predecessor Silvio Berlusconi would attempt a comeback. Italy must stick to its economic reforms, critics say.
Mario Monti’s resignation
(The Economist|Charlemagne) Mr Monti told Giorgio Napolitano, the president, on December 8th that he would step down as soon as the 2013 budget was passed. But it looks as if much else his government had been working on in recent months will now not be approved (or, in the case of measures introduced by decree, confirmed) in parliament. Legislation doomed or in jeopardy includes bills on competition, taxation and the simplification of bureaucracy. Another would have put into effect the new constitutional requirement for a balanced budget. Perhaps most importantly, a package of measures to stimulate economic growth is vulnerable – and particularly so because its ministerial sponsor Corrado Passera, the economic development minister, dared to criticise Silvio Berlusconi’s decision to run for prime minister and has become a hate figure for Mr Berlusconi’s followers.
14 November
Eurozone break-up fears grow as IMF, EU argue
The spat between the IMF and the European Union over how to tackle Greece’s debt has rekindled fears of a eurozone break-u(Emerging Markets) The argument had been brewing for a long time but it came to the public’s attention on Monday when Jean-Claude Juncker, chairman of the Eurogroup of finance ministers in the single currency area, said Greece would have 2 more years to cut its debt levels to 120% of GDP compared with an IMF-agreed target of 2020.
“We clearly have different views,” IMF managing director Christine Lagarde promptly replied during a news conference, insisting that 120% by 2020 was the “appropriate timetable.”
Policy makers in major developing countries have told Emerging Markets that they worry the IMF’s authority would be diluted in the troika, as decisions in the European Union are generally taken after a lot of political negotiation.
9 November
After 3 bumpy years, Europe turns corner on crisis
(AP via Diaal News) — The worst of Europe’s financial crisis appears to be over.
European leaders have taken steps to ease the panic that has plagued the region for three turbulent years. Financial markets are no longer in a state of emergency over Europe’s high government debts and weak banks. And this gives politicians from the 17 countries that use the euro breathing room to fix their remaining problems.
Threats remain in Greece and Spain, and Europe’s economy is forecast to get worse before it gets better. But an imminent breakup of the euro now seems unlikely, analysts say.
“We are probably well beyond the worst,” says Holger Schmieding, chief economist at Berenberg Bank in London. He says occasional flare-ups in financial markets are likely, but “coming waves of turmoil will be less severe.”
Evidence that Europe has turned a corner can be found in countries’ falling borrowing costs, rising stock markets and a slow but steady stabilization of the region’s banking system:
13 October
Euro fears linger as France stands firm
French finance minister Pierre Moscovici dismissed market speculation that his country is the next weak link in the eurozone
(Emerging Markets) Speculation was mounting over the future of the eurozone last night amid calls for Spain to seek a bailout and concern that France will be the next major economy to find itself under stress.
However delegates at the IMF annual meeting sought to strike a more positive note about the future of the eurozone, even as doubts pervaded both the official debates and the informal chatter on the hallways.
Some market participants have suggested that the next target of speculators in the markets could be France
9 October
Eleven EU Countries Agree on Transaction Tax
(Spiegel) Finance ministers from 11 European Union countries agreed at a meeting in Luxembourg on Tuesday to support a tax on financial transactions [Tobin tax], hoping to discourage risky trading while simultaneously raising revenue.
Germany and France, the EU’s two largest economies, have long supported the idea of the tax, while countries like the Netherlands, Sweden and the United Kingdom remained staunchly opposed out of fears the tax could harm the competitiveness of their financial markets.
1 October
Will the ‘Future of Europe’ Group Save the EU?
(University of Ottawa CIPS) “The European Union has reached a decisive juncture. The ongoing sovereign debt crisis and the ever accelerating process of globalization pose an unprecedented dual challenge for Europe. We will have to master it if we want our continent to enjoy a bright future and effectively promote our interests and values in a more polycentric world.”
Thus begins the Final Report issued by the ‘Future of Europe’ Group on September 17. The report is the culmination of months of discussion on the future of Europe between the foreign ministers of Austria, Belgium, Denmark, France, Italy, Germany, Luxembourg, the Netherlands, Poland, Portugal and Spain. It report places a particular emphasis on two issues: overcoming the debt crisis and long-term proposals for reforming the EU.
Getting worse more slowly isn’t good enough
(The Economist) THE crisis in the euro area is beginning to feel like a permanent piece of the world’s economic landscape: a great red spot that just churns and churns and never goes away. It isn’t, though. One day the crisis will be over, either because the euro zone managed to muddle through or because it didn’t, and came apart.
To avoid coming apart, the euro zone needs to accomplish three things. First, it needs a policy mix from the European Central Bank and from its member states sufficient to prevent a market panic leading to a quick end. … The euro area also needs to reestablish strong growth, sufficient to begin meeting fiscal goals. On this score, the euro area has done very poorly. … the third hurdle: Europe must maintain a public commitment to keeping things together.
24 September
(Project Syndicate) Democracy’s Burning Ships
Luigi Zingales offers an intriguing comparison between Hernán Cortés who ordered his troops to burn the ships that had brought them to Mexico in order to motivate them (e.g. – no way back), and the adoption of the euro by southern European economies.
“For southern European countries, joining the euro was – explicitly or implicitly – a way to force their citizens to accept a degree of fiscal discipline that they were incapable of adopting on their own. But was this a democratic decision, or one that an “enlightened” elite forced upon its unwitting citizens?
I fear that the latter is true – hence the growing resentment against the European Union. To add insult to injury, current European leaders do not “own” their past decisions. They do not admit that they or their predecessors are the ones who burned the ships. They blame Europe. The result is that the euro, sold as a way to integrate Europe further, is tearing it apart.”
23 September
Eastern approaches: Ex-communist Europe
Poland and Britain
(The Economist) A YEAR after his headline-grabbing speech in Berlin, in which he called for German leadership of Europe, Poland’s foreign minister Radosław (Radek) Sikorski has launched another bold initiative. In a speech (pdf) near Oxford, he has blasted British Euroscepticism. The intervention follows the publication of a report jointly written with the foreign ministers of Austria, Belgium, Denmark, France, Italy, Germany, Luxembourg, the Netherlands, Portugal and Spain, which demanded “more Europe” as a response to the crisis. Recommendations included European oversight over the national budgets, bank-supervisory powers for the European Central Bank, a European Monetary Fund for bail-outs and more powers for the European Parliament. (It was also published in the New York Times as an op-ed) … He pointed out that half of Britain’s exports go to the EU, that the much-maligned European Convention on Human Rights is nothing to do with the EU (and also a British creation); that the cost to Britain of EU membership is trivial (£15 per person per year by his calculation, against £1,500-£3,500 in benefits from the single market), that the European Commission’s 33,000 staff is tiny by comparison to any national bureaucracy; that EU rules are not “Brussels diktats” but proposed, and agreed, by the member states; that only one-sixteenth of UK primary legislation stems from EU decisions; and, perhaps most importantly, that the EU is a hugely important force in keeping markets open and competitive.
17 September
Draghi Euro Humbles Thought Leaders Seeing End of Union
(Bloomberg) European Central Bank President Mario Draghi, embracing policies dismissed by his predecessor, is forcing euro bears to capitulate.
While former ECB President Jean-Claude Trichet kept the central bank from propping up debt-laden governments by limiting purchases of their securities as the almost three-year crisis deepened, Draghi has done the opposite since he took over in November. His decisions are placing everyone from former International Monetary Fund (MERKX) Chief Economist Kenneth Rogoff to fund manager Axel Merk on the wrong side of the market.
10 September
The Balkans and the EU — Integrated circuit
(The Economist) EUROPEAN integration is still the central strategic goal of all Western Balkan countries. But Europe’s crisis has changed the political landscape. Until its onset several things were clear. For members of the European Union the point of bringing in the former Yugoslavs and Albania was to stabilise the region while for the Balkan countries the idea was to use the process to build modern and functional states. Now all bets are off. No one knows what the future holds because no one knows what the EU will look like in a year’s time let alone ten.
Why ECB Bond-Buying Plans Undermine Democracy
The ECB’s plan to restart its bond-buying program is possibly the most important decision of the euro crisis. But the bank is not subject to control by national parliaments. Europe’s leaders seem to consider saving the euro to be more important than preserving democracy.
Anyone who breaks a law can hardly excuse his actions by claiming that he is acting within the scope of the law. In any case, it won’t help him much — unless his name is Mario Draghi and he is the president of the European Central Bank (ECB).
The ECB is politically independent, but it is not above the law. It is only independent within its mandate, which is clearly defined by the European treaties: The central bank is tasked with safeguarding price stability in the euro zone — no more and no less.
Super Mario Unblocks Europe’s Bond Market
The floodgates are open in Europe’s corporate bond market.
(WSJ)Thanks to the European Central Bank’s new bond-buying plans, a string of European companies, including Spanish and Italian banks and utilities, launched debt sales Monday in one of the busiest days for the market in years. The ECB will be encouraged to see barriers to corporate borrowing coming down. But investors should remember there are still risks ahead.
22 August
Howard Davies: Economics in Denial
(Project Syndicate) In an exasperated outburst, just before he left the presidency of the European Central Bank, Jean-Claude Trichet complained that, “as a policymaker during the crisis, I found the available [economic and financial] models of limited help. In fact, I would go further: in the face of the crisis, we felt abandoned by conventional tools.”
Trichet went on to appeal for inspiration from other disciplines – physics, engineering, psychology, and biology – to help explain the phenomena he had experienced. It was a remarkable cry for help, and a serious indictment of the economics profession, not to mention all those extravagantly rewarded finance professors in business schools from Harvard to Hyderabad.
21 August
Germany Doesn’t Help Europe by Undermining the Euro
Investors are bracing themselves for yet another euro-area moment of truth. How many does that make?
The European Central Bank’s policy-making body meets Sept. 6 amid speculation that it will try to strengthen the euro system by capping borrowing costs for Spain and other distressed governments. Even as rumors, denials and clarifications swarm around that question, Europe’s finance ministries are also deciding whether to give Greece more time to mend its public finances.
These two issues, Greece’s solvency and the integrity of the euro system, are increasingly being muddled together. That’s dangerous. It’s vital to keep them separate. Europe’s prospects would improve at a stroke if one notion could be stamped out — that the European Union will ease Greece and other possible defaulters out of the euro system unless they try harder to balance their books.
16 August
Nouriel Roubini: Will we regret holding the euro zone together?
(Globe & Mail) Of course, a breakup now would be very costly, requiring an international debt conference to restructure the periphery’s debts and the core’s claims. But breaking up earlier could allow the survival of the single market and of the EU. A futile attempt to avoid a breakup for a year or two – after wasting trillions of euros in additional official financing by the core – would mean a disorderly end, including the destruction of the single market, owing to the introduction of protectionist policies on a massive scale. So, if a breakup is unavoidable, delaying it implies much higher costs.
But politics in the euro zone does not permit consideration of an early breakup. Germany and the ECB are relying on large-scale liquidity to buy time to allow the adjustments necessary to restore growth and debt sustainability. And, despite the huge risk implied if a breakup eventually occurs, this remains the strategy to which most of the players in the euro zone are committed. Only time w
Finland prepares for break-up of eurozone
Finland is preparing for the break-up of the eurozone, the country’s foreign minister warned today.
(The Telegraph) The Nordic state is battening down the hatches for a full-blown currency crisis as tensions in the eurozone mount and has said it will not tolerate further bail-out creep or fiscal union by stealth.
“We have to face openly the possibility of a euro-break up,” said Erkki Tuomioja, the country’s veteran foreign minister and a member of the Social Democratic Party, one of six that make up the country’s coalition government.
30 July
Spain’s Economic Arsonists — Political Bankruptcy in Madrid Adds to Woes
(Spiegel) What a week for Spain. The Madrid Stock Exchange crashed, there was bad news of growing mountains of debt from across the country and the risk premiums Spain has to pay to borrow money are rising rapidly, reaching 7.4 percent last Tuesday — a level that already forced three other euro countries to resort to the bailout fund. Last Thursday, European Central Bank (ECB) President Mario Draghi felt compelled to restore calm by promising to do “whatever it takes” to preserve the euro, which apparently means printing as much money as possible. The euro recovered and Spain’s borrowing costs fell slightly, but perhaps it’s only a respite. [In another development, reported by Planet Ark, the King received a slap on the wrist for his ill-advised elephant hunt in April Spain’s WWF dumps King as patron over African hunting trip.]
24 July
‘Our Solidarity Is Limited’
(Spiegel) Finland reached a deal with Greece and Spain to get collateral in exchange for its share in any bailout packages. The deals are controversial, with critics worried that they may herald a quiet Finnish exit from the euro. In a SPIEGEL interview, Finance Minister Jutta Urpilainen, 36, defends the policy, saying her country wants to keep the euro intact.
New debt woes push Spain closer to bailout
(The Independent) Spain took another lurch towards the financial abyss yesterday as fears of a full-scale bailout sent its borrowing costs soaring and shares across the world tumbling.
23 July
Think Again: The Eurocrisis
By David Gordon and Douglas Rediker
(Foreign Policy) Markets are crashing. The euro is hurting. Here’s why the continent’s financial crisis is even messier than it appears, and how the blowback could hit the United States in the face.
… The political and economic costs of a eurozone implosion remain too high and the benefits of maintaining the common currency too real for the countries involved, as self-defeating as they appear at times, to allow a crack up. Europe will likely make steady, halting, and at times apparently counterproductive steps toward a banking union, limited fiscal federalism, and a path to political union. The path from here to there won’t be smooth, just as the past two years haven’t been — but it will likely be enough to keep the currency union.
To be clear: We could very well be heading for a deep crisis, and we might even see the exit of one or more member states, with Greece the most likely. But other peripherals won’t see a Greek exit as a signal to leave themselves; in fact, measures taken as a consequence may well strengthen their own prospects within the currency union. The likelihood of the eurozone imploding and the reintroduction of national currencies across a broad swath of Europe thus remains exceptionally small
Spain slump deepens as bailout fears grow
(Reuters) – Spain’s economy sank deeper into recession in the second quarter, its central bank said on Monday, as investors spooked by a funding crisis in its regions pushed the country ever closer to a full bailout.
Economic output shrank by 0.4 percent in the three months from April to June having slumped by 0.3 percent in the first quarter, the Bank of Spain said in its monthly report.
Economy Minister Luis de Guindos ruled out a full-scale financial rescue on top of the 100 billion euros already earmarked for the country’s banks, but Spain’s sovereign bond yields stayed mired in the danger zone. In contrast to de Guindos, who told lawmakers there was little else Spain could do to ease the tensions after launching a 65-billion-euro austerity package last week, the central bank’s deputy governor said more belt-tightening was needed.
16 July
Exit and Enforcement in the Eurozone
By Sylvester Eijffinger, Professor of Financial Economics and Edin Mujagic, monetary economist, at Tilburg University in the Netherlands.
(Project Syndicate) In 1992, the Maastricht Treaty set rules for European countries’ public finances that would facilitate economic integration. The Stability and Growth Pact (SGP), agreed in 1997, extended these rules to enable the euro’s creation and ensure that the new currency became an established part of the global monetary firmament. But the rulebook was left unfinished, with dire consequences: if the euro survives the current crisis, it is destined to remain unstable, except in periods of exceptionally high economic growth – that is, unless Europe’s leaders finish writing the rules.
2 July
Debt crisis: Finland threat to plans to unleash ESM
Finland, one of the eurozone’s few remaining AAA-rated economies, has pledged to block Brussels’ celebrated plans to allow its new bail-out fund to buy sovereign bonds in the market.
(The Telegraph UK) Under the current rules, Finland is ultimately too small to prevent Brussels from deploying the bail-out funds single-handedly but its opposition is a blow to leaders who are desperate to present a united crisis-fighting front.
Euro defeat for Merkel? Only time will tell
(Reuters) – At first glance, the big winners from Europe’s latest euro-saving summit were the leaders of Italy, Spain and France.
By banding together in a powerful coalition to challenge Germany, the high-stakes meeting seemed to show, Mario Monti, Mariano Rajoy and Francois Hollande were able to wring major crisis-fighting concessions from a suddenly soft Angela Merkel. But if the euro zone is still intact years from now, the marathon session in Brussels may be remembered as much for what the German leader extracted from her combative partners as for the bitter policies she was forced to swallow.
Broke Cyprus hopes to ride euro crisis as EU head
(AFP via France24) NICOSIA — By a cruel twist of fate Cyprus is poised to take the chair as EU president tasked with guiding Europe out of financial chaos just as it becomes the fifth eurozone state to seek a Brussels bailout. Cyprus has the unenviable tag of being the first country to hold the six-month rotating presidency — from July 1 — while negotiating European Union emergency aid.
29 June
EU to prop up troubled banks
(Al Jazeera) After tough all-night bargaining, European leaders appeared to salvage what had seemed to be a summit teetering toward failure by agreeing to funnel money directly to struggling banks, and in the longer term to form a tighter union ; (BBC) ; (Spiegel) How Italy and Spain Defeated Merkel at EU Summit
28 June
Reuven Brenner: The fable of German ants – and Club Med crickets
Knowing European history, and the European tribes’ wishes to avoid major local wars, investors advanced large loans to the “crickety” (Greece, Italy, Spanish) governments on terms similar to those advanced to the governments of the hard working “ants”. Although they knew that the crickets continued singing, and did not work harder, the creditors just expected the government of the ants to bail them out.
EuroFail — How many summits does it take to NOT solve the eurocrisis?
“As a general rule, meetings make individuals perform below their capacity and skill levels,” Reid Hastie, a professor of behavioral science at the University of Chicago’s Booth School of Business, once wrote. “[P]lease, don’t just call a meeting and hope the magic happens. Take charge and take personal responsibility for meeting its objectives, whatever they are.”
It’s advice that European Union leaders would have done well to consider as they kicked off a closely watched two-day summit in Brussels on Thursday, while Italy and Spain watch their cost of borrowing soar. With France and Germany at odds about whether to address the European debt crisis by pooling eurozone debt or better integrating the region financially and politically, German Chancellor Angela Merkel has already tried to tamp down expectations for this week’s summit, which is expected to produce a stimulus package and plans for a banking union.
(The Economist) Cyprus asked for a bail-out, the fifth country in the euro zone to do so. The Cypriot government didn’t say how much it needed and indicated that it wanted the money to recapitalise banks, rather than for a broad restructuring of the economy. The potential size of any European loan could depend on Cyprus’s success in securing a bilateral loan from either China or Russia. See article»
27 June
A German exit from the euro could be relatively easy
By Anatole Kaletsky
(Reuters) Every new veto threat from Angela Merkel increases Germany’s embarrassing isolation, as Joschka Fischer, its former foreign minister, recently warned: “Germany destroyed itself – and the European order – twice in the 20th century. It would be tragic and ironic if a restored Germany … brought about the ruin of the European order a third time.” But if Germany’s role as spoiler is increasingly recognized, why don’t the other countries do what this column suggested last week: Tell Merkel to put up or shut up – either abide by majority decisions or leave the euro?
The standard answer is that Germany is the “paymaster” of Europe; so without Germany the euro zone would be “bankrupt”. Such metaphors are a lazy substitute for clear thinking. To see why, compare the consequences of Germany leaving with the Greek exit, which was described as “manageable” by European officials only a few weeks ago. German departure would be less disruptive than Grexit for three reasons.
25 June
The Disastrous Consequences of a Euro Crash
(Spiegel) Investment experts at Deutsche Bank now feel that a collapse of the common currency is “a very likely scenario.” German companies are preparing themselves for the possibility that their business contacts in Madrid and Barcelona could soon be paying with pesetas again. And in Italy, former Prime Minister Silvio Berlusconi is thinking of running a new election campaign, possibly this year, on a return-to-the-lira platform.
Nothing seems impossible anymore, not even a scenario in which all members of the currency zone dust off their old coins and bills — bidding farewell to the euro, and instead welcoming back the guilder, deutsche mark and drachma.
It would be a dream for nationalist politicians, and a nightmare for the economy. Everything that has grown together in two decades of euro history would have to be painstakingly torn apart. Millions of contracts, business relationships and partnerships would have to be reassessed, while thousands of companies would need protection from bankruptcy. All of Europe would plunge into a deep recession.
20 June
Did the G20 Help the Eurozone?
Interviewee: Jacob Funk Kierkegaard, Senior Fellow, Peterson Institute for International Economics
Interviewer: Christopher Alessi, Associate Staff Writer
(Foreign Affairs) What were the main takeaways of the summit?
The two key takeaways are: first, the additional commitment of funds to the IMF by the large emerging markets, which indicates that they have accepted to continue a longer-term process of IMF quota reform, despite the Obama administration’s inability to get Congressional approval for the 2010 agreement before the October 2012 deadline. Secondly, it is the detailed commitment of the euro area, which “will”–rather than intend, or should–“take all necessary measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks.”
Don’t blame the ‘Euro welfare state’
“Profligacy is not the problem” was the headline on a lengthy examination of Europe’s financial woes published in The Economist. Ask almost any informed observer and you will hear some variation on that statement. The causes of the crisis are complex, and while debt-financed government spending may have contributed around the margins, in a few countries, it is not the full story, nor even the main story.
Europe on the agenda in Los Cabos
(Foreign Policy) Eurozone members of the G20, currently meeting in Los Cabos, Mexico, will pledge today to “take all necessary policy measures” to safeguard the future of the euro and take action to promote growth. A leaked version of the communique discusses “breaking the feedback loop between sovereigns and banks,” but does not commit countries to achieve a banking union, a controversial step supported by some.
18 June
Paul Krugman: US is ‘horrified onlooker’ to euro crisis
Nobel Prize-winning economist Paul Krugman says the US is limited in what it can do to intervene in the eurozone crisis. Speaking to the BBC’s Jane O’Brien, Mr Krugman, a New York Times columnist, described Europe as a great economic power that the US cannot simply order about. Washington is little more than a “horrified onlooker” as events unfold across the Atlantic, he said.
Europe Needs Comprehensive Action to Revive Growth
(IMF) Europe needs to revive economic growth to help break the vicious cycle that keeps many countries stuck in crisis mode—the feedback loop between weak government finances, weak banks, and weak growth that continually undermine each other. Europe also needs to tackle older challenges that hinder growth potential, the IMF said in a new paper.
13 June
12 Signs of the Europocalypse
From the Chinese buying spree to the rise of extremism, here’s what to watch for as the continent teeters on the brink of disaster.
(Foreign Policy) Two short years ago, if anyone had suggested that we would be considering pan-European bank regulation, cross-border deposit guarantees, joint and several Eurobonds, and the very survival of the common currency, they would have been dismissed as nothing short of crazy. But what was unthinkable then appears to be verging on the inevitable now. With last weekend’s announcement of a bailout for Spanish banks and with potentially euro-shaking elections in Greece this weekend, we can now say with certainty that the staid European Union we knew for its first two decades is a thing of the past.
13 June
Disunited nations
(The Economist | Buttonwood) … why can’t the euro-zone be more like the US? As has often been argued, in aggregate the EU has a lower debt-to-GDP ratio than America, a smaller budget deficit and a better current account position. Let us simply move to a fiscal union in which rich countries like Germany subsidise the rest.
The trouble with this proposition is that America has a tax and welfare system that is also national. There may be separate state income, sales and property taxes, but there is one federal income tax rate, one corporate tax rate, one pensions system with the same retirement age, one Medicare, one minimum wage and so on.
If you want a contrast, look at the recent OECD pensions outlook. Everyone knows that the Germans and Greeks have different retirement ages, and the former resent paying money so the latter can retire earlier.
11 June
A Sneak Peek at Tomorrow’s Europe
(Spiegel online)  European leaders have long insisted they will do everything to save the euro. Now, a plan is forming that would dramatically change the architecture of the European Union. Brussels would be granted a significant say in national budgets and debt would be communalized. But the hurdles such a plan might face are high.
… The debt crisis has transformed into a crisis of faith. Few options remain for European Union heads of state and government. Either they will succeed in fixing the birth defects that have plagued the common currency in recent years, or the European Union — the largest economic zone in the world — will sink into the mire of failing banks, bankruptcies and collapse. Such a development would significantly overshadow the chaos that erupted after Lehman Brothers went broke in 2008, predicts The Economist. “Something must happen,” demand British historian Niall Ferguson and the American economist Nouriel Roubini in a dramatic appeal to the German chancellor. [ see: This Time, Europe Really Is on the Brink — A Commentary by Niall Ferguson and Nouriel Roubini]
What is to be done? The currency union has to become a political union. At that point, at least, everyone seems to agree. But what exactly that means is a matter of some dispute between Berlin and Paris, Helsinki and Rome.
10 June
Spain’s banking bailout plays out a running theme of the eurozone crisis
(The Guardian) Spain’s call for assistance echoes a familiar pattern of denial, bond pressure then a crescendo of relief over agreed terms
Eurozone break-up more disastrous than 2008 crisis, warns Kaushik Basu
(Press Trust of India) Chief economic advisor Kaushik Basu has warned that if the Eurozone breaks up, it will be more disastrous than the 2008 global financial crisis triggered by the fall of the Wall Street banks, from which the global economy is yet to recover.
… he warned that the impact on us will be indirect. “Europe being a major driver of growth and if it slows down, even if we don’t get a direct hit, the US is going to get hit immediately; China is going to get hit immediately. So the impact on us will come to us through our trading partners,” he said.
7 June
Merkel says EU ready to act as Spain downgraded
(Reuters) – Chancellor Angela Merkel said Europe was ready to act to ensure stability in the euro zone as Spain’s credit rating was cut by three notches on Thursday amid expectations it may soon seek EU help for banks beset by bad debts.
Eurozone divided as time runs out for Spain
Bailout now ‘inevitable’ despite official denials
(The Independent) The eurozone sovereign debt emergency showed no signs of abating yesterday as the Spanish government desperately haggled over the terms of its expected bailout and the European Central Bank refused to ease monetary policy for the currency bloc, despite signs of stricken European economies sinking still deeper into recession.
1 June
World Bank Blasts Europe’s Euro-Crisis Management
(Spiegel) Is the euro entering the end game? With Spanish banks on the brink and the Greek political situation uncertain, many senior economic leaders say that the time for drastic action is swiftly approaching. On Friday, World Bank head Robert Zoellick argued that it is almost time to “break the glass” on the emergency alarm.
23 May
Euro zone to prepare for Greek exit scenario -sources
(Reuters) – Each euro zone country will have to prepare a contingency plan for the eventuality of Greece leaving the single currency, euro zone sources said on Wednesday.
22 May
Eurozone biggest threat to global outlook, OECD says
(BBC) The economy of the 17 nations that use the euro will shrink 0.1% this year, before rebounding to 0.9% growth next year, the OECD predicts.
18 May
Paul Krugman: Apocalypse Fairly Soon
Suddenly, it has become easy to see how the euro — that grand, flawed experiment in monetary union without political union — could come apart at the seams. We’re not talking about a distant prospect, either. Things could fall apart with stunning speed, in a matter of months, not years. And the costs — both economic and, arguably even more important, political — could be huge.
… Europe’s answer has been austerity: savage spending cuts in an attempt to reassure bond markets. Yet as any sensible economist could have told you (and we did, we did), these cuts deepened the depression in Europe’s troubled economies, which both further undermined investor confidence and led to growing political instability.
13 May
Spain’s ‘indignants’ return to the streets
Thousands stage nationwide anti-government rallies, a year after movement that inspired ‘Occupy’ protests was born.
7 May
The euro crisis — No way out
(The Economist) THE conventional wisdom that emerged immediately after Europe’s weekend elections—that voters may have forced Europe into a new crisis reckoning—seems to have been correct. Greece is struggling to put together a government and whatever government eventually emerges will probably press for a renegotiation of its bail-out deal. Euro-zone officials are saying that this is out of the question. Odds of a Greek departure from the euro zone appear to be rising sharply; Intrade now puts the chance of exit in 2012 at close to 40%, up from 22% a week ago. Markets are shuddering at the possibility; European equities are dropping like stones, yields around the periphery are jumping—Spain’s 10-year yield is back above 6%—and German yields are sinking to record lows. Big trouble is brewing.
6 May
Euro Falls After Hollande Wins French Election
The euro fell to a three-month low after French Socialist Francois Hollande was elected president and as Greek voters flocked to anti-bailout parties, stoking concern austerity efforts in Europe may be derailed.
1 May
(RCI) Canada calls European rescue irresponsible
Canadian Finance Minister Jim Flaherty has criticized an international effort to help bail out Europe. Mr. Flaherty chides Europeans for asking other nations, some with lower standards of living, to help them when they won’t do enough to help themselves. … Canada was one of the few countries in the G20 last month that took a public and vocal stance against the International Monetary Fund’s drive to create a $400 billion fund to backstop eurozone debt.
[Mr. Flaherty] suggests a super-majority in the fund be required to approve major decisions regarding Europe because the continent represents only 34 per cent of the total IMF voting members.
Jim Flaherty: The eurozone should sort out its own mess
The International Monetary Fund is not there to give special treatment to Europe, which is now endangering the world economy.
UN Agency Slams European Austerity Measures
(Spiegel) A new report by the International Labor Organization has strongly criticized euro-crisis austerity measures. They have had “devastating consequences” for the job market, which could be entering a “new and more problematic phase” worldwide, the report warns.
29 April
ILO Urges Worker-Friendly Recovery Policies
(IPS) – Although economic growth has resumed in much of the world since the 2008 financial crisis, the global unemployment situation remains alarming and could worsen, according to the International Labour Organisation (ILO).
European governments, in particular, should adopt more worker- friendly approaches in dealing with fiscal austerity, according to the agency’s “World of Work Report 2012” that was released here and at its headquarters in Geneva Sunday.
Such a change in policy could result in adding around two million jobs in the advanced economies over the next year, as opposed to only about 800,000 if current approaches persist, according to the report.
29 March
A country in denial By ignoring their country’s economic problems, France’s politicians are making it far harder to tackle them
(Economist Leader) … France has not balanced its books since 1974. Public debt stands at 90% of GDP and rising. Public spending, at 56% of GDP, gobbles up a bigger chunk of output than in any other euro-zone country—more even than in Sweden. The banks are undercapitalised. Unemployment is higher than at any time since the late 1990s and has not fallen below 7% in nearly 30 years, creating chronic joblessness in the crime-ridden banlieues that ring France’s big cities. Exports are stagnating while they roar ahead in Germany. France now has the euro zone’s largest current-account deficit in nominal terms. Perhaps France could live on credit before the financial crisis, when borrowing was easy. Not any more. Indeed, a sluggish and unreformed France might even find itself at the centre of the next euro crisis.
26 February
G20 leaders insist no more IMF cash unless eurozone boosts financial firewall
The world’s leading economic powers said they would not stump up more cash to fight Europe’s debt crisis until the eurozone members increase their own contributions, in a move that piles pressure on this week’s Brussels summit.
20 February
Greek indignation threatens to spread
(FT) Even if Athens clears this latest financing hurdle, the damage done by outsiders dictating terms to a sovereign government may be irreversible. And if it is irreversible, it becomes a very bad omen for the EU’s ability to impose tough fiscal medicine from Brussels on other reluctant eurozone governments.
15 February
Eurozone states want Greece out, says Venizelos
(BBC) Unnamed eurozone officials were quoted as suggesting that Greece’s latest assurances still may not be enough, because people no longer trusted the country’s politicians.
Greece has failed to deliver on many of the promises it made to secure an earlier bailout deal, EU officials say.
13 February
Wave of Downgrades — Moody’s Delivers Damning Verdict on Euro Zone
(Spiegel) The ratings agency Moody’s has downgraded six euro-zone members, including Italy, Spain and Portugal, and warned that France, Britain and Austria may lose their triple-A rating. The agency said its decision was based on the “growing risks” caused by Europe’s ongoing debt crisis.
George Soros: ‘Merkel Is Leading Europe in the Wrong Direction’
(Spiegel) … he warns of a vicious circle triggered by Chancellor Angela Merkel’s strict austerity measures and pleads for more money to be pumped into the countries most plagued by the debt crisis. European Doubts Growing over Greece Debt Strategy
10 February
Greeks strike against austerity, EU demands more cuts
(Reuters) – Greek workers went on strike against austerity measures on Friday, docking ships and halting public transport, hours after euro zone finance ministers said Athens needed to make more cuts to convince them to release a financial bailout.
3 February
Eric Reguly: Sarkozy could be next domino to fall
(Globe & Mail) The European debt crisis wrecking ball is not just destroying economies. It is smashing the careers of government leaders everywhere. Since Greece began its plunge into economic Hades almost two-and-a-half years ago, the prime ministers of Britain, Italy, Greece, Spain, Portugal and Ireland have all gone ungently into the night. France’s Nicolas Sarkozy could be next.
30 January
“Austerity vs. Europe” by Javier Solana
(Project Syndicate) Ominously, the same arguments that turned the 1929 financial crisis into the Great Depression are being used today in favor of austerity at all costs. All of Europe must agree on a short-term growth strategy – and implement it quickly.
The world is facing unprecedented challenges. Never before in recent history has a deep recession coincided with seismic geopolitical change. The temptation to favor misguided national priorities could lead to disaster for all.
Only enlightened political leadership can avert this outcome. European leaders must understand that adjustment programs have a social as well as a financial side, and that they will be unsustainable if those affected face the prospect of years of sacrifices with no light at the end of the tunnel.
Austerity at all costs is a flawed strategy, and it will not work. We cannot allow a misconceived notion of “discipline” to cause lasting damage to our economies and inflict a terrible human toll on our societies. All of Europe must agree on a short-term growth strategy – and implement it quickly.
World Economic Forum Davos 2012: Consensus reached on euro zone solution, say sources
(Economic Times) DAVOS: The big question at the annual World Economic Forum meeting in Davos in 2012 was the Euro zone. As the week winds down on snowy ski slopes, the inside track is that some kind of solution – or consensus – has been reached.
According to high level sources, the current thinking among Euro zone leaders is to work out a plan for Greece – and maybe for Portugal – to make a structured exit from the Euro, provided European leaders can ensure that firewalls are big enough not to spread contagion to Ireland and Italy, among others.
Measures like joint Eurobonds, where the entire region guarantees sovereign bonds of everyone, or more firepower to the Euro zone bailout fund – both measures that markets have been calling for – seem “more likely” than they did a week ago.
It is likely that markets may heave a sigh of relief as the message seeps through informal channels coming out of Davos, but none of these measures will become evident until a few months down the line
27 January
Europe’s debt crisis – At bursting point?
(Charlemagne|The Economist) In the words of the World Bank, which published it in a report issued this week (“Golden Growth: Restoring the lustre of the European Economic model”, here), Europe is the world’s “lifestyle superpower”. As opposed to America, which spends almost as much as the rest of the world put together on defence, Europe spends more than the rest of the globe combined on social policies.
In many ways this is an admirable aspect of Europe’s economic model, which combines high living standards with high standards of social welfare. The trouble is, such spending is helping to bankrupt governments—not least because those very same caring policies ensure that Europeans live longer, requiring more expenditure on health care and the payment of pensions for more years.
Anybody who wants to understand the strengths and weaknesses of European economies in this time of crisis would do well to read the report (the overview is here).
25 January
Eurozone debt to dominate Davos talks
(Al Jazeera) World Economic Forum convenes amid fears that Europe’s fiscal crisis could pull entire global economy into recession.
George Soros: New Year, Same Crisis
(Project Syndicate) DAVOS – The measures introduced by the European Central Bank last December, especially the Long Term Refinancing Operation (LTRO), have relieved the liquidity problems of European banks, but have not cured the financing disadvantage of the highly indebted member states. Since high-risk premiums on government bonds endanger the capital adequacy of banks, half a solution is not enough.
19 January
The debtors’ merry-go-round: The Economist graphic overview of comparative debt
Martin Feldstein: The Failure of the Euro
The Little Currency That Couldn’t
(Foreign Affairs | January/February 2012) The euro should now be recognized as an experiment that failed. This failure, which has come after just over a dozen years since the euro was introduced, in 1999, was not an accident or the result of bureaucratic mismanagement but rather the inevitable consequence of imposing a single currency on a very heterogeneous group of countries. The adverse economic consequences of the euro include the sovereign debt crises in several European countries, the fragile condition of major European banks, high levels of unemployment across the eurozone, and the large trade deficits that now plague most eurozone countries.
Eastern Europe Swings Right
(Spiegel) Hungary is almost broke and has lurched to the right so sharply that the EU has launched legal action in defense of democracy. But the problem is far more widespread: Nationalists and populists are gaining ground across Eastern Europe.
A dangerous storm is brewing in the shadow of the euro crisis. The devastating consequences of the 2008 global financial crisis were never fully overcome in Eastern Europe, and more countries in the region are falling into financial and economic imbalance, battling sprawling debt, high budget deficits, recessions and unemployment.
But it’s not just the fragile economies that are at risk. Many central and southern European societies also lack political and social stability. These regions have two decades of uninterrupted reforms and tough austerity policies behind them. Many people there are exhausted, and democracy fatigue, euroskepticism, and aversion towards the once deified West are on the rise.
The Myth of Europe
The euro crisis isn’t really about money. It’s about the fiction that Europeans ever existed at all.
(Foreign Policy) The early 2000s did feel like the European moment. Enlightened policy wonks on both sides of the Atlantic gushed about the glamorous new arrival on the global stage. In this magazine in 2004, Parag Khanna described the “stylish” European Union as a “metrosexual superpower” strutting past the testosterone-fueled, boorish United States on the catwalk of global diplomacy. Later that year, economist Jeremy Rifkin penned a book-length encomium, The European Dream: How Europe’s Vision of the Future Is Quietly Eclipsing the American Dream, which was followed by Washington Post reporter T.R. Reid’s unlikely bestseller, The United States of Europe: The New Superpower and the End of American Supremacy. In 2005, foreign-policy expert Mark Leonard explained Why Europe Will Run the 21st Century.