May 24, 2024

High & Low Finance: A Cloud of Ill Will Over the Euro Zone

The real Golden Rule, it has been said, goes like this: He who has the gold, rules.

They are trying that in Europe these days. Germany has the gold and it sees no reason other countries should not do as the Germans say.

The prescription for the so-called peripheral countries of the euro zone is simple: Enact the reforms Germany thinks are needed. Cut spending. Take wage and benefit cuts. Reform your tax system to produce more revenue, which may mean raising tax rates or just forcing people to comply with existing laws. Require people to work longer and retire later. Follow austerity as far as the eye can see.

Do all those things, and the rest of Europe will provide grudging assistance.

To some with the gold, this is simply a morality play. “They had their fun,” a former European central banker told me a few weeks ago, speaking of the peripheral countries. A different official used the same words last week.

In each conversation, I was reminded that the creation of the euro led to interest rates declining sharply in peripheral countries and to economic booms. Those countries lost competitiveness in export markets because they tolerated inflation and did not hold the line on wages. Now, those who partied deserve the pain of hangovers.

It is probable that countries will follow the German prescription. From the perspective of a national government, the alternatives may seem worse.

But democracy can be messy. Will populations go along?

There are a couple of hints that they may not. One comes from Portugal, the other from Iceland, which is not in the euro zone but is in a mess.

In Portugal, the government is seeking a European bailout but seems not to have the authority to agree to one. The opposition has forced elections, which it is widely expected to win, but it won’t say what it will do. In the meantime, the situation is in limbo, which may force Europe to help out before it can get any enforceable promises of reform.

In Iceland, the issue is whether the population should pay for the sins of its banks. The banks had big operations in Britain and the Netherlands, and when they collapsed, the British and Dutch governments made good on the deposits. The government of Iceland promised to pay the money back.

The amount is $5.8 billion, 46 percent of Iceland’s gross domestic product in 2010. A similar bill sent to the United States would call for a payment of $6.8 trillion.

I’m not really clear on why Iceland should be responsible. No doubt its bank regulators performed abysmally. But where were the British and Dutch regulators when the banks were taking in deposits from their citizens?

For reasons good or bad, Iceland’s citizens appear to be reluctant to pick up the bill. Nearly 60 percent of voters turned down the agreement backed by their government, which called for Iceland to pay the money over 30 years beginning in 2016. Britain and the Netherlands now plan to ask something called the European Free Trade Association Surveillance Authority to order Iceland to pay.

Both the Irish and Greek governments embraced the required austerity to get European help, and electorates threw out those deemed responsible for the mess. But there are signs that the new governments are losing support, and there is no indication of early economic recovery. Portugal’s government fell precisely because the opposition would not sign off on the required austerity.

What would be happening without the euro?

Neither the boom nor the bust would have been as great in the peripheral countries. But when the bust did arrive, the currencies of those countries would have plunged in value. That would have made them poorer and unable to afford the imports they once bought. Prices, measured in local currencies, would have risen. In Ireland, where a property boom collapsed, that would have ameliorated the problems faced by homeowners who owe far more than their homes are worth. Exports would have gained competitiveness, stimulating some growth.

But of course there are no separate currencies. There is no provision for allowing a country to leave the euro zone. That idea was not even considered when it turned out that Greece had lied its way into the club. In retrospect, everyone might be better off if it had been kicked out.

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