Why Europe’s crisis can’t be averted
I got a glimpse this morning of what Lance Knobel calls Davos’s “class distinctions, even if you have a white badge” — I was invited to a breakfast meeting under the auspices of something called the Industry Partnership Meeting for Financial Services. Which reminds me of that great line from In the Loop :
What you have to do is you’ve got to look for the ten dullest-named committees happening out of the executive branch. Because Linton is not going to call it “The Big Horrible War Committee”. He’s gonna hide it behind a name like “Diverse Strategy”, something so dull you’re just gonna want to self-harm.
This morning’s breakfast appears nowhere on the official Davos program, but because it was an exclusive by-invitation-only event, it managed to become by far the most high-powered session I’ve yet seen, with a large number of shiny-hologram badges and more big-name economists and central bank governors than you’d think possible. They came because this really was an interactive session, where they can talk in a serious and structured way with each other at a very high level.
This being the WEF, there was lip service paid towards the idea that a group of smart and powerful people, if you get them all in the same room, could come up with ways for the international community to improve the state of the world. But the actual participants didn’t show any sign of believing that: they were insightful with respect to diagnosing the state of the world, tentative in proposing solutions, and downright skeptical when it came to handicapping the likelihood that any of those solutions might actually be implemented.
And indeed there was a strong strain of thought which basically said that we already have the optimal level of international cooperation, and that more would not necessarily be better. Consider the two major currencies of the world: while the euro/dollar exchange rate has certainly been volatile over the course of the crisis years, it hasn’t moved as much in total as it did before the crisis, and there’s no sense at all in which we have had a currency crisis. To a very large degree, this is a function of successful international cooperation: the world’s major central banks all talk to each other regularly, and when they needed to do so they quietly and efficiently opened up unlimited swap facilities with each other. Those swap facilities didn’t cost money, in terms of government budgets, but they were an incredibly effective crisis-fighting tool.
Effectively, the unlimited swap lines have solved most of the global liquidity problems, and have prevented the otherwise very scary prospect that a liquidity run could become a self-fulfilling insolvency process. But that of course doesn’t mean that the world’s economies are all solvent. And so the question then arises: if you want to attack solvency rather than liquidity, is international cooperation (i.e., giving the IMF a massive fiscal bazooka) the best way to do so? And the answer there seems to be no. The biggest solvency problems are the problems within the Eurozone, and it is ultimately Europe’s job to get the necessary cash together if it wants to avert a series of fiscal crises.
Germany and other big northern European countries are running very large trade surpluses: they can remit cash to the periphery if they have the political will to do so. And if they don’t have the political will to do so, there’s no way in which the US, China, and the rest of the world can or should step in to try to save the likes of Greece and Portugal.
This kind of thinking is very much in line with the realism, or fatalism, which I’ve seen a lot of in Davos this year. If you control your own currency — if you’re the US, or China — then ultimately you control your own fate, and you only have yourself to blame if you go belly-up or suffer a major crisis. Certainly the rest of the world won’t come to your rescue. That’s one reason why China has such enormous foreign reserves: it needs them as insurance against a crisis. And it also explains why the yuan is not convertible, and there’s a waiting list of 800 companies who want to go public on Chinese stock exchanges but aren’t being allowed to do so: the Chinese government is keeping tight control of its economy and the way that its companies are financed, because once you lose that control, it’s impossible to regain.
In Europe, of course, the politics of transfer payments are much more fraught — and also much harder to understand. One very senior economist told me as we exited the meeting this morning that he too was decidedly unclear on the details of how TARGET2 works, even though he’s meant to be an expert on such things and he knew that it was crucially important. Similarly, while it’s surely very germane and important that the Bundesbank has more reserves than the ECB, what that means in practice is not at all obvious.
Politically, we still seem to be very far away from a fiscal solution to Europe’s problems, and the baseline scenario has to be that we’re not going to get one — ever. The result is likely to be a series of countries exiting the euro, and/or the “East Germanification” of much of Europe’s periphery: flows of money and human capital away from countries like Greece and Portugal, and towards the more prosperous countries with healthy economies and substantial trade surpluses. Essentially, those countries would become holiday resorts for the north, with all the real economic activity being concentrated in more prosperous nations. If you’re a smart young Spaniard, it’s much more attractive to seek your fortune in the UK than it is to take your chances in a deflating country with a stratospheric youth-unemployment rate.
Certainly there seems to be no belief at all, even among the well-intentioned technocrats at Davos, that coordinated international action will or should solve this particular crisis. And the inevitable conclusion is that the crisis is not going to be averted: it’s only going to get worse. It’s a very scary prospect — but one which it’s very important for global elites to come to terms with. And that’s exactly what they’re doing in Davos this week.