Tyler Cowen on the Eurozone

Cowen writes:

WHAT form could a crash take? Imagine a situation where the sounder countries need to put up more money, or the troubled countries need to make bigger financial adjustments, or — most likely — both. Yet power vacuums on each side, or voter rebellions against cross-national agreements, could stop these responses from being applied in a timely way. Political paralysis could then become the harbinger of disaster.

The mess won’t be resolved until the various governments raise their hands and announce transparently just how much of the mess they will pay for — and how. Such announcements will then need to be validated by elections. That means sending a consistent message to other countries and to their own domestic electorates and interest groups. Until then, the game of chicken will continue, and the risks of financial catastrophe will remain high.

Unfortunately, the relevant governments — and their citizens — still don’t seem close to accepting the onerous financial burdens they need to face. And when those burdens are unjust to mostly innocent voters, no matter whose particular story you endorse, acceptance becomes that much tougher.

Still, we shouldn’t forget that a solution exists. In essence, the required debt write-down is a large check lying on the table waiting to be picked up. No one knows how costly it is, but estimates have ranged from the hundreds of billions to the trillions of dollars. It need only be decided how to divide the bill. The reality is this: The longer that the major players wait, the larger that bill will grow. That they’ve yet to split the check is the worst news of all.

Spotting the Eurocession…

From Dr. Ed’s Blog

Europe Should Behave More Like Germany, circa 2000

Matthew O’Brien worries in The Atlantic that Germany is imposing good boom behavior on the rest of Europe during a bust. To illustrate this, he compares current unemployment to proposed austerity.

He observes:

The Germans have latched onto a misdiagnosis of the crisis. They think it’s a morality tale about profligate governments finally having to live within their means.

The Economist‘s Free Exchange blog believed Germany is missing its own advice, albeit from a different era.

So we have a somewhat paradoxical situation here: Ireland and Spain, while living up to the rules of the Stability and Growth Pact, were not fiscally prudent considering the macroeconomics of a currency union, whereas Germany, by violating the deficit limits, did what good economics would prescribe. (Sadly, it seems to have forgotten this lesson.) Two conclusions follow: first, the Stability and Growth Pact was utterly inappropriate for such a monetary union; second, this crisis is also about fiscal policy, even in Spain and Ireland.

A Quick Response to Jake on Democracy in Greece

Jake made a very good argument against populism in his post, and I tend to fall somewhere near his sentiments. I would, however, take his arguments one step further. A Greek referendum on the European bailout is not an example of democracy but of tyranny of the minority.

James Madison in Federalist 10 popularized the concept of tyranny of the majority, though he was not the first to acknowledge this risk of democracy. Tyranny of the minority, as it exists in this case, is evidence of a lack of democracy.

The reason I argue that is that one of the central tenets of democracy is consent of the governed. While there is no doubt that the Greeks are governed by the implications of the Eurozone’s proposal, there is a fair argument to be made that the rest of the Eurozone will be governed by it as well – they will certainly be responsible for making sure it is adequately carried out.

This may be the foreign policy neoliberal in me coming out (though Jake has carried the realist mantle well by examining the issue from a power perspective of sorts), but the fact is Greece is a part of the most closely integrated international governing apparatus in modern history. If democracy is the path they are choosing, they have to be willing to consent to the democratic will of the larger population of which they are a part.

No time for Athenian democracy

Markets around the world tumbled yesterday on the news that Greek Prime Minister George Papandreou would call for a referendum on the rescue agreement struck last week by the leaders of the EU countries. The plan would provide the Greeks with a lifeline to avoid default and remain in the monetary union. European banks would accept a 50% cut in the face value of Greek debt. In exchange, Athens would have to agree to deeper fiscal austerity measures. European leaders who ratified the plan did so at tremendous political costs to themselves — no taxpayer in a solvent European country wants to bail out the Greeks for decades of reckless spending. Now, the Greeks are looking ungrateful to boot.

There’s no doubt that Papandreou, a Socialist elected in 2009, has drawn a lousy hand. He inherited a fiscal catastrophe from his “conservative” predecessor. He has been at the mercy of his creditors, primarily the EU and IMF, whose largesse has thus far kept the Greek budget above water. Their bailouts have come on the condition that he dismantle the welfare state that his party helped create, cutting hundreds of thousands of government jobs, raising taxes, and sending the economy into deep and painful decline. His popularity has followed a similar downward path, and many Greeks have taken to the streets in protest.

Now, the politicians and bankers from Paris, Berlin, and London are demanding another pound of Hellenic flesh. Papandreou’s move, in terms of domestic politics, could be considered savvy, inevitable, or both. He has shouldered the entire political burden of the unpopular-but-necessary austerity measures, while his opposition — the party that is possibly most culpable for the current mess — has sat by and sniped. A successful referendum would provide a public mandate for his policies, thereby solidifying his standing and undercutting that of his opponents. If it were to fail, the opposition would be forced to accept responsibility for the default and its aftermath. But by most accounts, the true impetus for the referendum is that Papandreou has run out of political capital. He simply doesn’t have the ability to push another round of cuts through his razor-thin parliamentary majority. Viewed through the lens of Greek politics, the referendum is an entirely rational decision.

The problem is that these days, the consequences of Greek’s political decisions extend far beyond the water’s edge.

Should the Fed print Euros too?

Tyler Cowen thinks so. His argument is that basically the Fed would be less likely to embrace a pro- or anti-Euro bias and that the Fed has an incentive to do whatever is necessary to stop a crisis from spreading. My only question is why the Fed and not the IMF? The same neoliberal opinions that have me hoping the Euro survives would like to see the IMF get actual power to handle monetary policy in a developed economy. This, of course, has no chance of happening, but it would be interesting and would likely be even less biased than the Fed.