The euro crisis comes to a head

By Felix Salmon
September 12, 2011
Spiegel has an excellent, long, and detailed article about the tension at the heart of the euro crisis -- the one between Greece and Germany.

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Spiegel has an excellent, long, and detailed article about the tension at the heart of the euro crisis — the one between Greece and Germany. Europe has thrown $150 billion at Greece to date and has nothing to show for it except for a temporarily averted sovereign default. If that kind of money continues to rain down on Greece, the outcome will be similar — immediate crisis averted, but no real change in terms of the Greek sovereign finances. Austerity, it turns out, is working exactly the way it always does: it’s slowing down the country and making any recovery pretty much impossible.

Up until now, the EU’s attitude to Greece was a bit like Tim Geithner’s attitude to the debt ceiling: Greece will implement the reforms it has promised, it will recover economically, we will give them the liquidity they need from the EFSF, there is no alternative. But now, starkly, two alternatives have emerged blinking into the harsh light of the market. Either Greece defaults and remains in the euro; or it defaults and leaves the euro. This is not an orderly London Club bail-in default with a modest 21% haircut and an exit yield of 9%: rather, it’s a proper we-can’t-pay-our-debts default with significant losses for all banks holding Greek debt — including the ECB.

Meanwhile, with the exit of Jürgen Stark, the ECB itself has clearly reached the limit with respect to how much it can help the eurozone stay intact. Stark’s replacement — almost certainly another German Bundesbank type — may or may not be as hardline as Stark was. But Friday’s news underlines that the ECB is emphatically not going to behave during this crisis as the Fed did during the last one — by subordinating itself to broader necessities, and making its first priority that it do everything in its power to ensure that a coherent and coordinated crisis-response plan is adhered to. To put it another way: Bernanke, ultimately, did what Paulson wanted him to do. It’s not at all clear that Mario Draghi will be able to behave the same way.

So the latest swoon in European and global markets makes sense: we’re at an inflection point, in Europe, and all the signs are pointing to more chaos and uncertainty. The last crisis brought Europe and the world together, at least briefly. This one is tearing Europe apart. The unity that we saw at the G20 summit in London in 2009 is nowhere to be seen, and there’s no indication that it’s going to emerge again, at least not before it’s too late. Most of the time, market reports of “worries over Europe” are code for “global stock markets fell, and we don’t know why.” This time, I think they’re legit.


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Yup, and there’s the Street factor. No-one feels grateful to his saviour. If Germany handed out yet another lifeline, the Greeks would soon be looking to blame Germany for the humiliation.
Germany has paid its WW2 dues, these endlessly exploited, plus its Unification costs, and now “here we go again” (I’m not German btw).
(incidentally, it’s been said that the post-WW2 technology steal – unacknowledged – was worth as much again as Germany paid in cash. Encyclo Britann).

So Greece should leave and all will be well except for some Polies. And maybe Portugal next? It doesn’t matter any more. The damage to the lenders is done.

Posted by eachtohisown | Report as abusive

Crisis, what crisis ? We’re cleaning up the finances, something very rewarding: the U.S. and Japan with their debts level over 100 % and deficits around 10 % might want to try it as well.

Posted by FBreughel1 | Report as abusive

The bailouts have done nothing but prolong the inevitable as well as make it that much more difficult to right the ship. Let it fall so we can rebuild.

Posted by regalbeagle | Report as abusive

eggs-actly! you are right. Let’s drop it all, and focus on the ‘rebuilt’ project with all energy. we can sum it up, draw a line, and learn from our mistakes that each of us made. I am all for rebuilding. And in there is also a lot of opportunity for the middle and the poor-classes.

Forgiveness of course should prevail instead of war or occupation in any kind of form. “forgive you debtors”. And in the future we should not work with debt.

China is seeking a US occupation. This time it is China occupying the US. The US has already given away to China (for free) billions of acres of land as so-called Free-Zones. In these free-zones china is planning on building independent chinese cities. you will need a passport to enter and also to exit. go figure.

Will creditors try to disrupt sovereign land-ownership for collateral trade in exchange of default?

Posted by omniblender | Report as abusive

Thanks for the update Felix

This is very scary to me, if true:

“But Friday’s news underlines that the ECB is emphatically not going to behave during this crisis as the Fed did during the last one — by subordinating itself to broader necessities, and making its first priority that it do everything in its power to ensure that a coherent and coordinated crisis-response plan is adhered to.”

Does this mean that the French/German banks do NOT have access to the “infinite liquidity” of the ECB? If so, it opens up all sorts of questions, none of them good. Do you think the ECB and the various national regulatory authorities would allow for an uncontrolled liquidation of a major SIFI? I understand Christine Lagard (among others) were livid with Paulson for not having a back-up plan for Lehman just in case they couldn’t find a private buyer. Do the current crop of European authorities have a contingency plan if one of their TBTFs go under?

I had a post a few weeks ago warning about “Financial Crisis 2.0″ 1/08/yes-its-financial-crisis-welcome-to .html

Thoughts always appreciated

Posted by EconMaverick | Report as abusive

What will the consequences for the US should the Eurozone collapse? Good for the dollar as the world’s reserve currency (something we’re too stupid to exploit) but what else?

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.”

Posted by frit | Report as abusive

@EconMaverick: No, Trichet already said there will be unlimited funds. Just google. Actually, the ECB is still working with the original bail-out budget. No QE4 here.
But before you worry about the eurozone you better start wondering what happens if 10 % of the U.S. consumption (yes, the 10 % budget deficit) falls away. See how the tiny U.S. 1,7 % growth figure and employment figure looks then (we were promised 4 %, which Reuters seem to have forgotten completely) No multiplier effect applicable this time, we also seem to have forgotten that one works both ways ? How convenient. It’s all windowdressing and working a tiny bit right now, but not for long, not for long at all. The date for the next U.S. debt-limit political bickering is already set. This time, debt will be around 105 % of GDP. Not good.
About the French banks: every bank manager that hasn’t hedged him/herself right now against a partial or whole Greek default SHOULD go bust and MUST go bust because he/she has ignored basic impairment rules. I doubt many of the large banks are that stupid but you never now we might have one CEO that is very anxious to do some jailtime.

Posted by FBreughel1 | Report as abusive


The contrast you draw between the ECB and Fed is fantastic. A key hinderence for the ECB is that unlike the Fed which represented the interests of one nation, the ECB must serve many masters. While Germany and France provide the strength, the weaker southern goverments reap most of the benefits via higher than market wages and spending power.

In the U.S. states are forbidden to post unbalanced budgets. We all know that in times of economic contraction accounting gimicks come out of the woodwork to pull that off… but at least on some level states need to raise revs and cut expenditures to closes shortfalls as they occur. No such system exists in Europe and so there is no way the Greeks can be prodded into volleentarily taxing and cutting enough to eliminate their shortfall.

Southern Europe is like an 18 year old with a credit card. Yes their credit score will be impared if they don’t make good on their debts but ultimatly Mom and Dad (Germany & France) are on the hook because they cosigned on the account by letting the kids share a common currency without any teeth in the deficit rules.

If Europe keeps giving the Greeks money as long as their budget is still in the red they simply perpetuate the status quo.

Posted by y2kurtus | Report as abusive

I wonder what Geithner is discussing with the Eurozone finance ministers.

Perhaps they are discussing the possibility of a consortium of nations and financial entities pooling their assets to create a Brady Bond style rescue?

I hope not. The faults in the underlying systems of Southern Europe should be corrected before throwing any more money at the problem and I don’t see away to do that.

Posted by breezinthru | Report as abusive

It seems to me that Greece is at very long last getting the message: play by the rules or get out of the game. It took a series of hits on the head with the baseball bat, but the message is finally getting through.

As to that 150 billion “thrown” on Greece: the vast majority went to pay bond maturities and interest. The total primary deficit for 2010 and 2011 (proj.) COMBINED comes to approx. $15 billion, one tenth of the sum you mentioned. And 80% of Greek public debt is owned by foreigners, in case you wonder…

Posted by CostasHaramis | Report as abusive

Given that Greece has pretty much not touched the pay and benefits of their public sector workers, and since evidently doing that will result in either a coup or a revolution, they will have to leave. The concerns on unity are valid, but the message is Maastricht was and is a mess, and its internal flaws are going to result in an ongoing failure, but an oh so European one.

The American Civil War resolved the issue of the primacy of the single Federal government, Rick Perry and the nitwits not withstanding. Seems to take fire and steel to create that kind of unity, but then Europe has also tried that approach a couple of times without success. Still, having lived in Britain and Europe (I get confused, are you guys European or not) and listened to any number of lectures on the superiority of your society, I am totally enjoying the nemesis at the end of your hubris.

Posted by ARJTurgot2 | Report as abusive

Greece will bring back the Drachma, possibly expect announcement tomorrow eturn-of-drachma.html

Posted by ken_frost | Report as abusive

When it comes to political hyperbole nobody beats market types. How exactly is Europe “tearing itself apart”? The remarkable thing is how small the political backlash has been from the people who are paying the price of austerity. Yes there have been demonstrations in Athens, Madrid and Milan, but those have been the old guard left and really shown little potential for popular growth. If Greece is torn away from the Eurozone it will be because a bunch of technocrats in suits have decided that is the only option, not because of disorder in the streets.
Even Merkel’s electoral difficulties are not as bad as they appear. The Christian Democrats have lost a few percentage points in most votes and their coalition partners have lost a few points as well. As a result, the Social Democrats and Greens, who are even bigger supporters of Europe than Merkel and Schauble, have been winning.
The politics of Europe now is about how much Germany and the north will pay and how much the rest will reform. While it will be difficult, it will also be horribly tedious and thus much too slow for market types and not dramatic enough for market commentators. It makes a much better story to pretend Europe is once again on the brink of war.

Posted by wpw | Report as abusive

Austerity is like giving a blind man who has just fallen down an open manhole a stick so he doesn’t fall down another one: after he’s fallen he needs a ladder to get out, not a stick. Austerity is the stick – yes, if he’d have had a stick he could have avoided the hole but now he’s down there he needs something different to get him out.

Look at the Great Depression. Banks thought increasing interest rates was the cure, but it should have been the earlier prevention. In reality it only made things worse. When a fallen economy is down, it doesn’t any longer need a white stick or even a safety net, it needs a stimulus. Austerity is like increasing interest rates, it restricts the amount of money in an economy, and that will always delay recovery.

If you want stable growth, austerity should be reserved for the high times, not for the low.

As for ECB v Fed, they have very different remits. The ECB is charged with minimising inflation – that is its Prime Directive. For the Fed, it’s maintaining stable growth. No wonder there are other differences!

Posted by FifthDecade | Report as abusive


Thanks for the comment. I do agree that we are facing a risk of a global double dip. The US consumer is totally over-leveraged with little wage growth prospects, and that is a serious issue

I do have a question though, if the ECB has committed to giving infinite liquidity to the big banks, does that negate the risk of a Lehman Style Liquidity run / funding crisis? What are the terms of the support they are willing to give? I’m guessing it’s nothing like Bagehot’s rule?

Posted by EconMaverick | Report as abusive

Bagehot’s rule falls down at high levels of debt because the ratio of collateral to debt makes the collateral a negligible component.

Interesting to note the Euro now has not just support from the main Euro countries including Germany, but also Switzerland, and now China which is buying Italian debt.

And all as a smokescreen to take the eye off the poor performance of the US Dollar and the self-centred politicians responsible for its downgrade. Oh, and a bit of Nationalism no doubt.

Posted by FifthDecade | Report as abusive

great comments by an intelligent group of posters. thanks!

Posted by boldthinker | Report as abusive