Wonkbook: Muddling along in Europe

at 08:02 AM ET, 02/21/2012

I'm having trouble deciding how to begin this morning's Wonkbook. Option A: The euro zone reached a deal to bailout Greece! Option B: The deal the euro zone reached won't work.


A woman begs as shoppers walk by in central Athens Feb. 21. Greeks resigned themselves on Tuesday to a 130-billion-euro EU/IMF bailout that won their country a last-minute reprieve from bankruptcy at the price of a decade of austerity and humiliating foreign scrutiny of national finances. (YANNIS BEHRAKIS - REUTERS)
Let's begin with Option A. Late last night, the euro zone signed and sealed a $170 billion bailout for Greece. The terms are tough on Greece, who will have to reach incredibly austere targets and put up with monitors in Athens and keep an escrow account filled with three months of debt payments at all times. They're tough on bondholders, who are taking a haircut in excess of 50 percent -- at this point, it's more like they're getting a bit of their head sheared off. They're tough on European lenders and central banks, who will be reducing the interest rate they charge on debt to Greece. The terms are, frankly, tough on everybody. Perhaps too tough.

Which brings us to Option B. The Financial Times reports that on Monday night, analysts from the European Central Bank, the International Monetary Fund, and the European Commission handed euro-zone officials a 12-page, "strictly confidential" memo outlining exactly why the bailout wouldn't work. "The analysis suggests that the medicine being fed to Greece – trying to drive down wages and costs through austerity measures to make the Greek economy more competitive internationally – will lead to higher debt levels in the near term that may never be overcome."

The baseline the euro-zone ministers are using -- Greece's economy shrinks a mere 4 percent this year, is flat next year, and is growing by 3 percent in 2015 -- is so optimistic as to appear absurd. But even under those assumption, the report suggests this bailout won't solve Greece's problems. Turns out the optimistic assumptions are concealing other, even more optimistic assumptions about the debt payments Greece will need to make in order to hit its targets. And if reality doesn't align with the ardent hopes of the optimists? In that case, the memo says, the numbers look really, really bad.

But perhaps that's alright. At the least, perhaps it's more alright than many want to believe. Policy wonks like comprehensive solutions. They look at the problem, look at the solution, and see if the two will fit. If not, they reject the solution as insufficient. And this solution, as most any wonk, myself included, will tell you, is not sufficient.

What policy wonks don't like to do is muddle along. But muddling along is, for the most part, how problems get solved. Particularly in Europe. Europe has been muddling along for years now, and this plan, if all goes well, buys them a few more years of muddling. And perhaps, by then, the global recovery will be stronger than we had thought, or the rest of Europe will be in a stronger position to help push Greece over the finish line. Or perhaps, a few years from now, Europe will just figure out a way to muddle along for a little while more.

What we all keep waiting for in the euro-zone crisis is a solution. Instead, doomsday just keeps getting delayed. Some would say you can't put off a reckoning like this forever. But perhaps you can. Europe, at any rate, is certainly going to try.

Top stories

1) Europe agreed on a new rescue package for Greece, report Matthew Dalton, Stephen Fidler and Costas Paris: "Greece ended months of uncertainty as it secured a new bailout and debt-restructuring agreement during a marathon negotiating session of euro-zone finance ministers, but the deal leaves unanswered questions about whether Greece will be able to meet the terms of the accord. The finance ministers agreed on the long-awaited €130 billion ($171.9 billion) deal after haggling into the early hours of Tuesday morning to settle the final details. Officials said the meeting, which lasted nearly 13 hours, produced a plan that would reduce Greece's debt to just over 120% of gross domestic product by 2020...'The deal is a good result for Greece, for the euro zone and for the markets, we hope,' said Italian Prime Minister Mario Monti after the meeting."

2) But a new report warns that Greece may need further bailouts in the future, reports Peter Spiegel: "A 'strictly confidential' report on Greece’s debt projections prepared for eurozone finance ministers reveals Athens’ rescue programme is way off track and suggests the Greek government may need another bail-out once a second rescue - set to be agreed on Monday night - runs out. The 10-page debt sustainability analysis, distributed to eurozone officials last week but obtained by the Financial Times on Monday night, found that even under the most optimistic scenario, the austerity measures being imposed on Athens risk a recession so deep that Greece will not be able to climb out of the debt hole over the course of a new three-year, €170bn bail-out. It warned that two of the new bail-out’s main principles might be self-defeating. Forcing austerity on Greece could cause debt levels to rise by severely weakening the economy while its €200bn debt restructuring could prevent Greece from ever returning to the financial markets by scaring off future private investors."

More FT analysis of the memo: http://on.ft.com/wCTjfY

@MorningMoneyBen: I look forward to reading/writing about Greek bailout deals well into my late 80's.

3) NEW WORD OF THE DAY -- Lori Montgomery reports that "Taxmageddon" is coming! "With Congress voting last week to extend the payroll tax holiday, 160 million workers will be spared an immediate tax hike. But the move leaves them facing an even bigger hit in January, when the holiday ends and the payroll tax joins a long list of levies already set to sharply and abruptly go up. On Dec. 31, the George W. Bush-era tax cuts are scheduled to expire, raising rates on investment income, estates and gifts, and earnings at all levels. Overnight, the marriage penalty for joint filers will spring back to life, the value of the child credit will drop from $1,000 to $500, and the rate everyone pays on the first $8,700 of wages will jump from 10 percent to 15 percent...The potential shock to the nation’s pocketbook is so enormous, congressional aides have dubbed it 'Taxmageddon.' Some economists say it could push the fragile U.S. economy back into recession, particularly if automatic cuts to federal agencies, also set for January, are permitted to take effect."

4) Worries over Iran are pushing oil prices up, reports Benoit Faucon: "An Iranian threat to pre-empt a European Union embargo pushed oil prices to a nine-month high, prompting the International Energy Agency to warn that the standoff between Iran and the West was bringing the burden of oil prices on the global economy to near levels last seen in 2008. An official with the IEA said, however, that oil markets including those in the EU could cope with any loss of Iranian oil exports...Large producers including Saudi Arabia have already begun to fill the gap, Mr. Houssin said. Current spare capacity available in OPEC, most of it in the Gulf, stands at 2.82 million barrels a day, according to the IEA, making it easy to replace the 2.2 million barrels a day of crude Iran normally exports. Despite the comfortable cushion of available oil, the front-month April Brent contract on London's ICE futures exchange rose to $121.15 a barrel, its highest level since May 2011."

Robert Reich is optimistic: "So many bets are being placed on rising oil prices that the slightest hint the speculators are wrong – almost any sign of expanding supply or declining demand – will set off a sharp drop in oil prices similar to the record one-day fall on May 5 of last year."

@mattyglesias: The question's not whether high gas prices will make Obama "look bad" it's whether they'll do real damage to the overall pace of recovery.

@fivethirtyeight: Gas prices are also a really tricky indicator because they're leading in some ways and countercyclical in others.

5) KUZARBEIT WATCH -- Change is coming for the unemployment-insurance program, report Josh Mitchell and Naftali Bendavid: "The economic package that cleared Congress on Friday includes changes to the nation's unemployment-insurance program aimed at helping more Americans stay in jobs and others go back to work. Those changes, backed by President Barack Obama and some Capitol Hill Republicans, effectively broaden the base of workers who would get help...While supporters said the bill's primary aim was to lift the economy by boosting Americans' take-home pay, several little-noticed provisions will make long-term changes to jobless insurance. The bill will expand a program known as 'work sharing' that uses unemployment-insurance funds to supplement the paychecks of employees whose hours have been reduced as part of a company's cost-cutting. Supporters credit the program, used in Rhode Island and several other states, with encouraging companies to keep workers in part-time jobs rather than resort to layoffs."

@BetseyStevenson: "Right now we have a UI system .. biased toward laying people off rather than cutting hours". Work sharing fixes that.

Top op-eds

1) Europe shows the failure of austerity economics, writes Paul Krugman: "Things didn’t have to be this bad. Greece would have been in deep trouble no matter what policy decisions were taken, and the same is true, to a lesser extent, of other nations around Europe’s periphery. But matters were made far worse than necessary by the way Europe’s leaders, and more broadly its policy elite, substituted moralizing for analysis, fantasies for the lessons of history. Specifically, in early 2010 austerity economics -- the insistence that governments should slash spending even in the face of high unemployment -- became all the rage in European capitals. The doctrine asserted that the direct negative effects of spending cuts on employment would be offset by changes in 'confidence,' that savage spending cuts would lead to a surge in consumer and business spending, while nations failing to make such cuts would see capital flight and soaring interest rates. If this sounds to you like something Herbert Hoover might have said, you’re right: It does and he did."

2) America needs an infrastructure bank, write Felix Rohatyn and Rodney Slater: "America needs to invest in infrastructure. Despite signs of improvement, our economy is still in crisis. We could create millions of jobs by rebuilding our transport and water systems - ending the congestion that stifles our ports, airports, railroads and highways; increasing productivity; and empowering the US to compete with countries that are investing in infrastructure on a massive scale. Infrastructure financing tools are available, providing Washington wants to use them. They could bolster investment by leveraging hundreds of billions of dollars in private and international capital. The potential tools include a national infrastructure bank and other relatively minor legislative changes to encourage private investors off the sidelines. American mutual funds, pension funds and retail investors allocate relatively small portions of their $37,000bn in capital to new infrastructure initiatives."

3) Ruth Bade Ginsburg wants to reopen Citizens United, writes Richard Hasen: "Justice Ruth Bader Ginsburg has written more than 200 opinions on a number of important topics, including major opinions on everything from copyright law to abortion rights to employment discrimination. But in the area of campaign finance, she’s authored only one inconsequential two-paragraph concurring opinion--in one of the Supreme Court’s recent cases striking down parts of the McCain-Feingold law--in which she distanced herself from a more far-reaching dissent of Justice Stevens...Last week, however, Justice Ginsburg issued a short statement that hinted she is ready to speak out more boldly. She, like many Americans, appears concerned with the rise of super PACs and the disturbing role money is playing in the 2012 campaign season since the Supreme Court’s controversial decision in Citizens United v. FEC. Justice Ginsburg likely won’t have the votes to overturn Citizens United, but she soon will be in a position to expose the disingenuousness at the ruling’s core."

@cruickshank: I don't understand the focus on overturning Citizens United. It's not like campaign finance was perfect before it.

4) Job retraining may not work, writes Amy Goldstein: "This latest idea, for a Community College to Career Fund, follows a familiar theme. There was $12 billion for community college training grants (later sliced by Congress to $2 billion) in the president’s economic stimulus plan in the winter of 2009; a White House Community College Summit in the fall of 2010; and just five months ago, $5 billion to renovate community colleges in the administration’s most recent jobs proposal. As the president and his Republican opponents see eye to eye on little else, offering government subsidies to teach unemployed workers to do new jobs stands out as an economic policy on which they agree. GOP presidential candidates Mitt Romney and Newt Gingrich favor retraining efforts...Yet, the widespread confidence that going back to school is a sure path out of unemployment rests on a shaky foundation."

5) American society is becoming increasingly individualistic, writes David Brooks: "If there is one theme that weaves through all the different causes, it is this: The maximization of talent. People want more space to develop their own individual talents. They want more flexibility to explore their own interests and develop their own identities, lifestyles and capacities. They are more impatient with situations that they find stifling...The old settled social structures were stifling to many creative and dynamic people (and in those days discrimination stifled people even more). But people who were depressed, disorganized and disadvantaged were able to lead lives enmeshed in supportive relationships. Today, the fast flexible and diverse networks allow the ambitious and the gifted to surf through amazing possibilities. They are able to construct richer, more varied lives. They are able to enjoy interesting information-age workplaces and then go home and find serenity in a one-bedroom apartment."

Noise-pop interlude: Sleigh Bells plays “Comeback Kid” live on Saturday Night Live.

Got tips, additions, or comments? E-mail me.

Still to come: High-school dropouts are being left behind by the recovery; some hospitals are requiring upfront payment for non-urgent care; the Obama administration plans the next step in its campaign against childhood obesity; the U.S. and Mexico agree to open new areas to drilling; and a dog shows of its tennis ball holding skills.

Economy

The Fed is rewriting sweeping financial regulations behind closed doors, report Victoria McGrane and Jon Hilsenrath: "The Federal Reserve has operated almost entirely behind closed doors as it rewrites the rule book governing the U.S. financial system, a stark contrast with its push for transparency in its interest-rate policies and emergency-lending programs. While many Americans may not realize it, the Fed has taken on a much larger regulatory role than at any time in history. Since the Dodd-Frank financial overhaul became law in July 2010, the Fed has held 47 separate votes on financial regulations, and scores more are coming. In the process it is reshaping the U.S. financial industry by directing banks on how much capital they must hold, what kind of trading they can engage in and what kind of fees they can charge retailers on debit-card transactions. The Fed is making these sweeping changes--the most dramatic since the Great Depression--almost completely without public meetings."

Many manufacturers see a lack of skilled workers, reports Peter Whoriskey: "But as the 2012 presidential candidates roam the state offering ways to 'bring the jobs back,' many manufacturers say that, in fact, the jobs are already here. What’s missing are the skilled workers needed to fill them...Through a combination of overseas competition and productivity gains, the United States has lost nearly 4 million manufacturing jobs in the past 10 years. But many manufacturers say the losses have not yielded a surplus of skilled factory workers. Instead, as automation has transformed factories and altered the skills needed to operate and maintain factory equipment, the laid-off workers, who may be familiar with the old-fashioned presses and lathes, are often unqualified to run the new."

The recovery is leaving high-school dropouts behind, reports Clare Ansberry: "While the U.S. job market is showing signs of improvement, one sizable group of workers has been falling further behind: high-school dropouts. Some 1.8 million more college graduates have found work since January 2010, when the recovery began producing jobs, but about 128,000 high-school dropouts lost work in the same period, according to the Labor Department's Bureau of Labor Statistics. Less than 40% of the 25 million Americans over age 25 who lack a high-school diploma are employed. And those who are working don't earn much. High-school dropouts earn about $23,400 on average, compared with $33,500 for those with a high-school diploma and $54,700 for four-year college grads, the labor bureau says. This gap is expected to widen as jobs demand higher skills and more education. In 2020, there will be nearly six million more high-school dropouts than jobs available to such U.S. workers, according to a 2011 McKinsey Global Institute study."

You know the deficit hawks. Now meet the deficit owls. Dylan Matthews reports: "In contrast to 'deficit hawks' who want spending cuts and revenue increases now in order to temper the deficit, and 'deficit doves' who want to hold off on austerity measures until the economy has recovered, Galbraith is a deficit owl. Owls certainly don’t think we need to balance the budget soon. Indeed, they don’t concede we need to balance it at all...The term isn’t Galbraith’s. It was coined by Stephanie Kelton, a professor at the University of Missouri at Kansas City, who with Galbraith is part of a small group of economists who have concluded that everyone -- members of Congress, think tank denizens, the entire mainstream of the economics profession -- has misunderstood how the government interacts with the economy. If their theory -- dubbed 'Modern Monetary Theory' or MMT -- is right, then everything we thought we knew about the budget, taxes and the Federal Reserve is wrong."

Longform interlude: Jonah Lehrer on the future of memory.

Health Care

More hospitals are charging upfront for non-urgent care, reports Phil Galewitz: "Next time you go to an emergency room, you should be prepared for this: If your problem isn’t urgent, you may have to pay upfront. Last year, about 80,000 emergency-room patients at hospitals owned by HCA, the nation’s largest for-profit hospital chain, left without treatment after being told they would have to first pay $150 because they did not have a true emergency. Led by the Nashville-based HCA, a growing number of hospitals have implemented the pay-first policy in an effort to divert patients with routine illnesses from the ER after they undergo a federally required screening. At least half of all hospitals nationwide now charge upfront ER fees, said Rick Gundling, vice president of the Healthcare Financial Management Association, which represents health-care finance executives."

@mattyglesias: The unique genius of the American health care system is the idea that sick people should engage in complicated billing and paperwork.

Health insurers could take a hit from the birth control mandate, reports Julian Pecquet: "The insurance industry is concerned it will take a hit from the Obama administration’s mandate that they provide birth control in health plans for employees of religious organizations that object to the coverage. Publicly, the health insurance industry has avoided getting involved in the fight. But in private, the industry is dubious of the administration’s argument that the insurance industry wouldn't take a hit because birth control is cheaper than unwanted pregnancies. The trade group America's Health Insurance Plans has limited its comments to saying it worries about the 'precedent' the mandate would set. The concern is that the government could eventually require health plans to cover any number of preventive services - even prescription drugs - without copays or deductibles, under the theory that they save money in the long-term."

States’ contraceptive rules vary widely, report N.C. Aizenman and Lena Sun: "On one hand, as administration officials have repeatedly stressed, 28 states already have laws on their books similar to the rule the administration has imposed...Yet many religiously affiliated employers in the states with coverage mandates have found ways to keep contraception out of their health plans. They can self-insure, putting themselves outside the reach of state regulation. But they can also benefit from exemptions or vague language in their state’s laws, or from indifferent enforcement by authorities. Those avenues would almost certainly be closed by the new federal rule, which, beginning Aug. 1, will require new health plans to not only cover all Food and Drug Administration-approved forms of contraception and sterilization but also to do so without out-of-pocket charges to employees."

Domestic Policy

The Obama administration is planning new rules for school vending machines, reports Ron Nixon: "The government’s attempt to reduce childhood obesity is moving from the school cafeteria to the vending machines. The Obama administration is working on setting nutritional standards for foods that children can buy outside the cafeteria. With students eating 19 percent to 50 percent of their daily food at school, the administration says it wants to ensure that what they eat contributes to good health and smaller waistlines. The proposed rules are expected within the next few weeks. Efforts to restrict the food that schoolchildren eat outside the lunchroom have long been controversial...No details of the proposed guidelines have been released, but health advocates and snack food and soft drink industry representatives predict that the rules will be similar to those for the government’s school lunch program, which reduced amounts of sugar, salt and fat."

Post office closings could boost inequality, report Cezary Podkul and Emily Stephenson: "Some of the nation’s poorest communities, many of them with spotty broadband Internet coverage, stand to suffer most if the struggling agency moves ahead with plans to shutter thousands of post offices this year, a Reuters analysis found. Nearly 80 percent of the 3,830 post offices under consideration are in sparsely populated rural areas where poverty rates are higher than the national average. Moreover, about one-third of the offices slated for closure fall in areas with limited or no wired broadband Internet...The Postal Service is not studying the economic impact on communities where post offices are slated to close, spokesman David Partenheimer said. But in the 3,004 rural areas across 48 states where post offices might close, many residents fear the impact will be pronounced."

America should celebrate its history of ingenuity, writes Steven Pearlstein: "The Mall is, and ought to be, a symbol of national unity and shared experience, a place where we celebrate our collective history, culture and achievements. Ours has always been a country of immigrants from all corners of the world who have contributed to, and drawn inspiration from, the collective national experience. And every year millions of Americans make the pilgrimage to the Mall to celebrate and learn about that experience...As it happens, there is a better, simpler idea for the venerable old Arts and Industries Building, namely to return it to its original purpose as a showcase for American innovation and the latest gee-whiz technology. An informal group comprised of academics, technologists and think-tank executives, calling themselves Makers on the Mall, have come together to push this idea with Congress, the Smithsonian and the Washington tourist industry."

Adorable animals being adorable interlude: A dog holds three tennis balls in its mouth at once.

Energy

The U.S. and Mexico struck a deal to expand oil and gas drilling, report John Broder and Clifford Krauss: "The United States and Mexico on Monday reached agreement on regulating oil and gas development along their maritime border in the Gulf of Mexico, ending years of negotiations and potentially opening more than a million acres to deepwater drilling. The agreement, if ratified by Mexican and American lawmakers, would for the first time provide for joint inspection of the two countries’ rigs in the gulf. Until now, neither was authorized to oversee the environmental and safety practices of the other, even though oil spills do not respect international borders...The Transboundary Agreement, as it is called, will make up to 1.5 million acres of offshore territory claimed by the United States available for leasing as early as June, although the leases will not become active until the pact is ratified."

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.

 
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