European policymakers have now apparently discovered that they are facing an interlocking problem of public and private debt and that deleveraging is tricky because it requires a distribution of heavy costs. McKinsey has characterized deleveraging episodes following financial crises as fitting four archetypes: austerity, default, inflation, and rapid growth. Since PASOK is unlikely to discover huge oil reserves just outside Athens, deleveraging in Europe will inevitably take place through a mix of the other three options.
The austerity-only approach has been a total failure. Taking a pound of flesh is no way to get someone to slim down, just like a starvation diet makes no sense for someone you want to run faster. The punishment still being meted out to Greece is unconscionable; now even more so given the official admission that the problems in Europe are not limited to the periphery. What is taking place makes a mockery of the lofty words of the preamble of the Treaty on European Union, where it speaks of deepening solidarity between peoples. If Greece were a house, its mortgage would have been foreclosed by now, the residents evicted and its assets stripped. This is no way for our fellow European citizens to be treated.
We are witness in real time to Europe’s leaders failing in historic terms. They bear more resemblance to the grasping incompetents who tried to impose the punitive Versailles Treaty than to the statesmen of the Marshall Plan era of European reconstruction. Surely there are sufficient motives for generosity that do not involve a fear of Stalin.
Who knows what sort of Frankenstein EFSF they will concoct in the absence of an ECB ready to prime the printing presses. It would not require a treaty change for the ECB Governing Council to change its definition of price stability from under 2% to 4% or some other number, but apparently the gang in charge prefers its solutions to be Byzantine. Constitutionalizing a debt brake across Europe must be the most bizarre, talismanic solution of them all; it’s no surprise that Jürgen Stark, the recently departed “chief economist” of the ECB, was one of its outspoken defenders.
Let us suppose that all the governments of Europe indeed ran perpetual primary surpluses. This would be great for debt sustainability. So great that absent crippling rate of debt service (something the debt brake is meant to avoid), growth would over time push the stock of public debt down to zero and mark the end of government bonds in Europe. No debt, no bonds. Alternatively, the continent could keep its bonds but sacrifice the growth. It’s a strange fix to propose at a time when markets crave both growth and safe, high-quality assets and shows just how unhelpful the hardline monetarists are being right now. A modern central bank should be able to help provide both of those goods at the same time; a badly-designed and badly-functioning ECB is facilitating neither.