A very helpful comparison from Kevin Drum:
Remember that Cyprus bailout we told you about Monday? It might not happen after all.
Now that deal's being called into question. Yesterday, some 57 percent of Italians cast a vote against further austerity measures in the nation's parliamentary elections. A good portion of the vote went to former prime minister Silvio Berlusconi, who was promising tax cuts rather than increases, and comedian Beppe Grillo, who was advocating a boost in public spending.
RCP Obama vs. Romney:Obama +2.5%; 7-day change: Obama -1.5%.
But what might that entail? European officials have hinted, rather cryptically, that they’re working on a “master plan” to salvage the euro zone. They won’t, however, divulge much in the way of detail. So here’s a rundown of some of the elements that might be in such a plan:
Let me guess, Spain is in trouble because its government spent way too much and ran up big deficits, right?
Then how did Spain get into its current mess?
The Guardian has a handy primer on the concept. The basic idea is that, right now, lenders and investors are nervous that a bunch of individual countries on the euro — from Spain to Portugal to Greece — might not repay their debts. So the cost of borrowing money for those countries has been spiking at various points. (Spain is the latest casualty.) That, in turn, makes their debt crises even worse, which raises the risk of a horrible death spiral, and so on.
Well, perhaps not. Lately there have been signs that this situation won’t end in total apocalypse, after all. Kate McKenzie points to a new poll suggesting that Greek voters are slowly turning away from Syriza, the leading leftist party that’s threatening to rip up the bailout agreement (and hence risk a Greek exit from the euro). The Greek elections are on June 17. If voters turn away from Syriza and end up reelecting the two parties that support the bailout-for-austerity agreement, then Greece has a somewhat better chance of staying in the euro.
Why, you’d take your euros out of your local Greek bank and put them someplace safe — say, in a German bank. No sense risking the prospect that the Greek government could leave the euro zone and replace all your hard-earned money with some less-valuable drachmas.
What, exactly, are Greek politicians bickering about these days?
Recall Greece’s basic problem: The country racked up many billions of dollars in debt that it can’t repay without help, and the Greek government doesn’t have enough cash to cover all of its own obligations. In February, the European Central Bank, the European Commission, and the IMF (known as the “troika”) agreed to renegotiate Greece’s debts with lenders and give Greece a €130 billion ($170 billion) bailout. In return, Greece agreed to shrink its deficits with a series of spending cuts and tax hikes.
But muddling through doesn’t seem to be working. Voters are now revolting against austerity, especially as the euro zone slides into yet another recession. Countries like Spain are finding that austerity is hurting growth and making deficits harder, not easier, to control. The bailout fund isn’t big enough to prop up countries like Italy and Spain if they run into serious trouble borrowing money. And many poorer euro zone countries are finding it difficult to grow and reduce their trade imbalances so long as they’re yoked to a single currency and a central bank that can’t cater to everyone’s needs.
The current front-runner in the French race, Francois Hollande of the Socialist party, has vowed to renegotiate the treaties that bind the euro zone together, arguing that the current focus on austerity is counterproductive. His main opponent, incumbent president Nicolas Sarkozy, argues that Hollande is threatening to undermine the entire euro zone project. The first round of the French election is Sunday, April 22, and the top two candidates will compete in a run-off on May 6. Some observers fear that if Hollande wins, investors in Europe will get spooked, which could, in turn, ripple out to our economy, and even to our election.
Not very well, reports Der Spiegel. Germany has enacted fewer than half of the spending cuts proposed by Angela Merkel’s coalition government: “Calculations made by the influential Cologne Institute for Economic Research indicate that only €4.7 billion ($6.16 billion) of the €11.2 billion in austerity measures stipulated by the savings package actually took shape in 2011. The government is also falling behind on its targets for this year. Of the originally planned €19.1 billion in savings, less than half has been implemented.”
Planet Money’s Jacob Goldstein has a nice, simplified explanation. Over the past few weeks, Greece has been working to restructure its debt — the people holding Greek bonds will get repaid far less than they were originally owed. And there was a lingering question about whether the people who’d bought insurance on these bonds (in the event of a Greek default) would get their insurance money. Today, the committee that decides these things pronounced that, yes, they will.
Kevin Featherstone, professor of contemporary Greek studies at the London School of Economics:
Zero Hedge says it is:
Yesterday, Italian 10-year bond yields quivered above 7 percent yet again. Many analysts have deemed this level intolerable: basically, the amount that Italy has to pay to borrow money has risen so high that the cost of servicing the country’s debt threatens to increase far more quickly than its GDP. That, in turn, means Italy’s debt load would eventually spiral out of control. Bad news.
Here’s how onlookers thought this week’s European summit might play out: The euro zone nations would tentatively agree to a new fiscal measures to rein in their debts. And then the European Central Bank would step in with its gigantic firehose and put out the market conflagrations that are threatening countries like Spain and Italy. ECB President Mario Draghi hinted as much last week when he said that “other elements might follow” the new government reforms. As Martin Wolf notes, the markets seemed to interpret that as a sign that the central bank would intervene to cap borrowing costs for troubled euro nations.
First, a recap of what happened today: As the Financial Times describes, France and Germany reached a tentative agreement to impose mandatory limits on the budget deficits of European Union countries, a process that would require more centralized oversight. A “golden rule” would limit deficits of euro nations to no higher than 3 percent. Of course, the E.U. already had a rule like that, and countries violated it all the time. This time around, though, truant nations would face automatic sanctions — unless a qualified majority of governments voted to overturn the fine. This treaty change still has to be agreed by, at the very least, all 17 euro-zone members.
Tyler Cowen has a thoughtful post at Marginal Revolution trying to see things from the German perspective. Among other points, he notes that Germany has some experience in standing firm in the face of expert carping after the fall of the Berlin Wall. “We” — meaning the Germans — “did a deal with East Germany, and the terms of that deal violated a lot of precepts of economic theory,” Cowen writes. “It even included an overvalued currency for the poorer region and a long period of adjustment. Yet we insisted up front that all dealings be done on the terms of the more successful region and culture, with very little compromise. This transition, for all of its short-term flaws, will go down in the history books as a great long-run success.”
So here’s a question: Why don’t countries like Spain or Italy or France try to do what the Obama administration has proposed in the United States? Enact some stimulus this year, while the economy’s weak, and then cut future spending. Avert a recession now, austerity later. This is what the IMF has recommended, after all. Why wouldn’t that placate the bond markets? One problem, says Joe Gagnon of the Peterson Institute for International Economics, is that the structure of European political institutions make these sort of timed cuts a lot more difficult.
And maybe Merkel is just bluffing. But plenty of observers seem freaked out enough to start asking the question no one wants to ask: What would a breakup of the euro zone actually look like? The FT’s Gavyn Davies runs through some likely scenarios. Maybe a few periphery countries like Greece and Ireland decide to exit the euro zone, default on their debts, and revert back to their old, devalued currencies in order to start afresh. Or, alternatively, maybe financially stable countries like Germany and the Netherlands decide to leave the euro, bid their troubled neighbors adieu, and form their own, smaller currency zone.
That means Italy needs either to grow its way out of debt (hard to do right now) or run up even bigger surpluses, either by cutting spending or raising taxes. And that sort of grueling austerity could hurt Italy’s economy even further, worsening the problem. A more appealing possibility is for Italy to crack down on rampant tax cheating in the country. My Washington Post colleague Anthony Faiola has a great exploration of Italy’s untaxed “shadow economy” today, with this striking stat:
Der Speigel summarizes: “At an auction on Wednesday of the country’s 10-year bonds, one-third went unsold. ... The federal government had initially intended to sell bond issues worth some €6 billion (around $8 billion), but managed to garner just €3.89 billion.” Or, if you prefer your bond-market summaries pithy and apocalyptic, here’s Marc Ostwald, a strategist at Monument Securities in London: “It is a complete and utter disaster.”
That’s partly why some economists have argued that if all of the euro zone countries simply banded together and issued one common euro bond, they could placate nervous investors and put a stop to the ongoing market convulsions that are threatening to rip apart the euro right now. In essence, wealthy, stable countries that currently enjoy low borrowing costs, like Germany, would be subsidizing countries like Greece and Italy by helping to back their debt. (As Wolfgang Münchau has observed, this isn’t all that different from having the European Central Bank aggressively buy up the bonds of various E.U. countries to keep their borrowing costs down, but the ECB seems to be shying away from the latter option.)
And yet… European officials keep insisting that the ECB isn’t legally allowed to play savior. On Tuesday, the head of Germany’s Bundesbank called it a violation of European law. The Wall Street Journal argued Wednesday that the European Union’s founding treaty would need to be revamped before the ECB could act as a lender of last resort to countries like Italy. So is this true? Could Europe really melt down because of a few legal niceties?
One big reason for pessimism is that Italy faces some serious structural problems that won’t go away with a new leader, however wonky and competent he might be. Gavyn Davies’ has a nice breakdown of Italy’s debt challenges over at the Financial Times. To prevent an implosion, Italy first needs some deep-pocketed entity to backstop its debt, placate the markets, and give Italy time and space to carry out longer reforms. Yet the deepest-pocketed entity around, the European Central Bank, seems unwilling to play this role.
Recall the reasons why markets are freaking right now. Members of the euro zone all issue debt in a currency they don’t control — i.e., the euro. So countries like Italy can’t always guarantee to bondholders that they’ll have enough money to pay up when the bills come due. At the moment, investors are fretting that they won’t get repaid and are demanding ever-higher interest rates to lend Italy money. That, in turn, makes Italy’s debt problems more unmanageable and causes markets to freak out further. Repeat until doomsday.
It’s not an easy problem, after all. Italy’s public debt currently amounts to some 1.9 trillion euros — far too large for the country to be bailed out by the European Financial Stability Facility or by the IMF. At best, some economists say, those institutions might be able to keep Italy afloat for a few months. (The European Central Bank could also step up its purchases of Italian debt.) But no one knows how long that relief would last. Italy has more than 150 billion euros worth of debt coming due between February and April. Even if it can survive its short-term woes, it’s unclear whether the country can sort itself out before then.
Actually, yes. Tito Boeri, an economist at the University of Bocconi in Milan, devised a clever way of showing just how much Berlusconi’s antics are weighing Italy down. Boeri compared the borrowing costs of both Spain and Italy — two countries in similar predicaments since Europe’s debt crisis began — by looking at their bond spreads vis-à-vis German bonds. Boeri found that Italy’s position relative to Spain has noticeably worsened every time new Berlusconi-related scandals have emerged. What’s more, Berlusconi’s announcement of a new budget package on Aug. 8 had no effect on Italy’s standing — suggesting that the prime minister no longer has any credibility with the markets.
prime minister George Papandreou. After all, he was the guy who threw the entire European bailout deal into disarray by calling for a referendum. And later today, he faces a no-confidence vote in the Greek parliament.
flux. But for the time being, the most likely path forward looks like it won’t involve a Greek referendum on the European bailout package. Instead, Greek Prime Minister George Papandreou is said to be working on a coalition government that could accept the bailout, no popular vote required.
Sarah Kliff: What’s the feeling on the ground in Athens right now?
uncertainty. Yesterday, Greek Prime Minister George Papandreou called for a referendum on the bailout deal crafted by European leaders. That deal would have absolved Greece of much of its private debt, but also would impose unpopular austerity measures on the nation. Markets, which jumped last week at news of a deal, declined again. Much still remains in flux, so here are five things to watch as events unfold across the Atlantic this morning:
In May of 2010, I spoke with Desmond Lachman, a resident fellow at the American Enterprise Institute, about the growing crisis in Greece. Lachmann, a former managing director and chief emerging market economic strategist at Salomon Smith Barney and deputy director in the International Monetary Fund’s Policy Development and Review Department, was not optimistic. I called him back today to see how he was feeling now. His answers weren’t comforting. A lightly edited transcript of our conversation follows.
EK: And if some of these dominoes fall, how bad are things likely to get?
BP: So what are the big hurdles standing in the way of resolving the crisis?