Rearranging the Deck Chairs in Europe

My new column is up at Forbes, and discusses solutions to the European debt crisis.  The problem is that there are really only three, and all are bad, so most solutions being proposed either attempt to disguise that they are bad or to disguise that they are not really doing anything.  An excerpt:

The default option will almost certainly wipe out a lot of powerful banking and financial interests as well as make it very hard for governments to keep spending money at their historic pace.  This will certainly have a bad effect on the larger economy, but we should be careful accepting forecasts of economic catastrophe as most of these come from these same powerful bankers and politicians.   Every group, down to the local dog catchers, argue that the world will suffer a calamity if their particular profession is harmed.  What we do know is that large banks and financial companies are even more intertwined with the political elite in Europe than they are in the US.   We can be pretty certain that, push come to shove, a solution that saves the banks and allows politicians to keep spending will be preferred.

That is why the Europeans will likely end up printing money to pay off the debt.  They almost certainly would be doing so already,were it not for Germany’s strong memories of its Weimar inflation years, when exactly this kind of money printing to pay down government debt led to hyperinflation and political instability.  But the appeal to politicians of shifting the costs from themselves and banks to the average consumer is simply too great to pass up.  If Germany can be convinced, then the European Central Bank will print Euros.  If Germany cannot be convinced, then countries will leave the Euro and print Lira and Drachma.

  • me

    I reiterate my call for "Warren for President" :)

    Call a shoe a shoe and all that.

  • joshv

    I don't think Germany can be convinced to print money, not without some sort of a general revolt of the populace, and there is the technical problem that it's currently illegal for the ECB to print money. If Germany doesn't go along, I don't see any way out of this but partial default.

    Personally I'd love to see the default option play out and have governments concentrate of keeping people fed and housed during the 1-2 years it will take to realign their economies on a sustainable trajectory. The process would destroy vast swaths of bureaucratic apparatus and their crony capitalist counterparts in the 'private' sector. Welfare programs would return to providing the basics, and perhaps without the money to support extensive regulator regimes, all those bright overeducated, unemployed young Europeans will be able to start new, productive enterprises.

  • NL_

    Of course, another permutation of option #2 is to cut budgetary spending on non-debt items and transfer the savings to pay down debt. Which is the most obvious way out of the crisis. It's not that these countries lack money; they lack the political will to take money away from voting constituents and transfer it to bondholders.

    If Greece were a company then not only would everybody let it go bankrupt, but prosecutors would see to it that plenty of people did prison time for concealing massive amounts of debt from EU regulators. Somehow when a company commits ten-figure fraud it's criminal, but when a country does it it's just policy.

  • Judge Fredd

    Me re: Warren for President.

    Seconded.

  • Matt

    As long as we are discussing wishful thinking options (governments balancing their budgets) add finding an untaped gold deposit somewhere in the EU and using the gold to pay off the debt.

    Note: Even this option carries inflationary risk. The U.S. experienced at least two periods of heavy inflation prior to dropping the gold standard. These periods line up with the major gold rushes in California and Alaska.

    Not even gold is a risk free investment as contrary to popular opinion it has no more inherent value than a FIAT curency. Value in any physical resource comes from one of two things, utility and human desire. While gold has some valuable properties for modern electronics, it's utility is nowhere near justfying the current price of gold. Gold has the high value it currently commands for no reason other than people desire it.

  • Doug

    "Gold has the high value it currently commands for no reason other than people desire it."

    You're ignoring "scarcity," Matt. iPhones, for instance, are of high value, lots of utility, and lots of people want them. They don't, however, make very good stores of value, particularly after they've been held for a year or two and are one or two generations old. Gold still has the same processing power and screen size as it did thousands of years ago.

  • Ted Rado

    One way or the other, I think I will get screwed. First, the Fed sets interest rates very low, wiping out my interest income. Next, they will print money, wiping out my principal. What a bunch of dishonest, irresponsible morons. All this crap to buy themselves political power. They should all go to prison.

  • me

    @Ted. Spot on. Anyone who figures out a way around that trap, please share...

    And, as far as presidential candidates go - what do you think of the current bunch? The only one's I'd like to see (on account of demonstrated evidence of actual smarts) would be Ron Paul or maybe Huntsman. All the others scare the crap out of me.

  • Don

    me: I'd like to see Johnson make it, but he's not even a shadow on the stage at this point. Too bad. He's got the right idea, veto every damned thing that he's sent until the budget balances (even if we have a 100-day-per-year government).

  • Maximum Liberty

    Warren:

    There is one possibility that would work. Germany and some other strong economies could leave the Euro. The remaining Euro states could then inflate the Euro. The problem with the weak states leaving the Euro is that it creates a bank run. Strong states leaving does not.

    Max