It's euro-doom time once again. A general strike in Greece. Protesters flooding the streets of Madrid. Talk of secession in Catalonia. Financial markets are tanking. So what happened? Wasn't Europe supposed to have fixed itself?
The short answer is that nothing really has happened. Europe's problems were lurking there all along. They just got papered over temporarily.
In late August, European leaders, in conjunction with Mario Draghi of the European Central Bank, announced a grand plan to bring government borrowing costs for countries like Spain and Italy down to manageable levels. That quelled the immediate financial panic. But it didn't solve any of the deeper structural problems within the euro zone.
Consider Greece. The country's prime minister, Antonio Samaras, has been pushing a package of pension cuts and public salary reductions worth $14.6 billion next year in order to satisfy the conditions of its February aid package from the rest of Europe. In a country with 24 percent unemployment, those measures are already inciting protests and labor unrest. And now it turns out, according to reports from Germany, that those austerity measures won't even be enough, because Greece's economy is hurting so badly that its deficit keeps swelling anyway:
Spiegel Online and Suddeutsche Zeitung have updates on the Greek budget gap, which is even bigger than previously assumed – around €30bn. This is the accumulated short-fall the troika is expected to identify in its forthcoming report – the amount Greece has to raise, save, restructure, default on, if it wants to make it through the second loan programme.
Spiegel writes that the troika will say that the recession has totally counteracted the budgetary savings, while the government has failed to introduce structural reforms.
The same goes for Spain, where thousands of protesters have surrounded the parliament building in Madrid, incensed at perpetual budget cuts and tax hikes that never seem to get the country on pace for recovery. Ditto for Portugal, which has been the star poster child for austerity and yet keeps getting choked by poor growth and widening deficits.
Paul Krugman offers up a pithy reminder of the euro zone's core problems today. All the obsession with budget deficits, he writes, is misguided. What countries like Spain, Greece and Italy need to do, at root, is bring their labor costs and prices back down to competitive levels. Typically, countries do that by devaluing their currency. But these countries don't control their own currency, since they're all tethered to the euro, so they have to figure out some strategy.
One possible way to do this would be for the European Central Bank to get aggressive with its monetary policy and ramp up inflation. That would help bring wages and costs in countries like Spain back down to competitive levels. But Germany is resolutely opposed to more inflation. Or the wealthier euro zone countries could subsidize the poorer countries, the way that U.S. cities heavily subsidized poorer agricultural regions during the Great Depression. But the wealthier euro countries aren't thrilled with this.
So, instead, the periphery countries like Greece and Spain are grinding through a slow, painful process of "internal devaluation" — which, in this case, basically means slogging through recession. That makes the deficit situation even worse, which leads to calls for more budget cuts and tax hikes ... and so on. (It doesn't help that there's also a massive run on deposits afflicting banks in countries like Greece and Spain and Italy that is hiking borrowing costs and further restricting growth.)
Back to Krugman: "Which brings us to the question: Can this go on? When do the people of the afflicted economies say that they can bear no more? ... I really do think Draghi has done very well. But he can’t make internal devaluation work on his own, and he can’t save Europe if its leaders continue to think that gratuitous infliction of pain is sound policy."
— Neil Irwin also explains why Europe's still a mess.
— For those who like solutions, ING offers five ways to save the euro.