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What really caused the eurozone crisis?

162 pointsby mhwover 13 years ago

15 comments

gizmoover 13 years ago
Pretty good analysis (for an infographic).<p>They correctly show that government debt did not cause the current crisis but total debt did. By stating that the increase in private sector debt caused it they almost (incorrectly) imply that therefore the private sector (and the people) are to blame. Of course it's the responsibility of the government to take corrective measures to ensure long term financial stability. The European governments were completely negligent in that regard. Note also that the financial sector is not mentioned at all in this analysis.<p>The nasty dilemma offered at the end is a false one. First the article observes that government spending was not the cause of the crisis, and then the solution revolves around government spending? The current eurozone debates are about politics: the people in western Europe want to punish the countries they see as irresponsible. That's why we have all the talk about austerity measures. Austerity will only further cripple the economies of the GIPS countries as we've seen during the Great Depression in the 30s. Austerity doesn't work: it leads to criminal levels of capital waste: high unemployment, low standards of living, poor liquidity, and so on.<p>So the question isn't "Should the GIPS countries spend money to prevent a worse recession?" the real question is "How can the GIPS countries get the money to prevent a crushing depression and a lost generation?". There are a number of options: ECB bailout. Eurobonds. Bailout by the richer part of the eurozone. Various forms of quantitative easing. Unfortunately this is difficult as long as the people in Europe are angry at the GIPS countries. No politician is going to support a bailout at the expense of the richer countries if the people want to see blood.
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yummyfajitasover 13 years ago
The drawbacks of the "cut spending" option are predicated on textbook Keynesian analysis. Cut spending, you get an anti-stimulus, and a contraction.<p>But it's important to recognize the assumptions that go into Keynesian analysis, sticky nominal wages in particular. Sticky nominal wages prevent the necessary cuts in real aggregate wages, leading to unemployment (another way of cutting real aggregate wages). Keynesian analysis typically treats sticky nominal wages as given.<p>But is it? In the time of Keynes, government employment was a fairly small sector of the economy. This is no longer true - I've heard estimates that the public sector makes up 20-40% of Greece's economy. Further, even in the private sector (particularly in Europe), a lot of wage stickiness is caused by union contracts, minimum wages, and mandated benefits. Wage stickiness is also created by welfare/unemployment/etc - why get a job paying less than your old job if it only pays marginally more than unemployment?<p>So why not make use of this and impose wage flexibility by fiat? Cut the pay of government workers, force renegotiation of union contracts, reduce benefits and make welfare/unemployment/etc as unpleasant as possible?<p>I truly don't understand why Keynesians don't push for these policies.<p>(Note: I'm aware of the problem of nominal debts, these could be mitigated by making it easier to settle debts. I.e., make foreclosure/debt collection faster and easier.)<p>[edit: just curious, will those who are downmodding explain where my analysis fails?]
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chris_dcostaover 13 years ago
I'm not so sure this tells the whole picture. Countries borrow money from banks and wealthy individuals in the bond market. These same countries (and I class Europe as a pseudo-country) want to bring in legislation to prevent banks from doing what they did to create the first crisis in 2007.<p>But the interest rates are being set by the lenders, and this can be used as a kind of weapon to retaliate in this game.<p>What's happeneing at the moment is that the bond holders are basically trying to force the governments to raise taxes and cut public expenditure for no other reason than so they can get their money back.<p>Governments are caught in this trap because it's rather unfair to punish the people like this.<p>If you take a step back and look at the series of problems since 2007 you'll see that the banks were responsible for selling worthless "structured debt" to each other before realising they couldn't trust each other, then freezing all lending causing liquidity problems, and now using bonds interest rate weapons to effectively prevent governments from legislating against their bad behaviour.<p>It's a game of poker with some very high stakes: the options are a few banks choking or whole countries.<p>I'm not greek but the more I read and look at this the more I think they had the right idea to stand up to the banks. In the end they got half their debt removed, but unless all politicians stand together with the people and call it, this will all end in tears.
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blumentopfover 13 years ago
One point that's not fully explained in this infographic is the borrowing costs in the Eurozone countries:<p>Before the Euro introduction, borrowing costs in Germany, both for the private as well as the government sector, were cheap, whereas in the southern countries they were high.<p>With the Euro introduction, borrowing costs were essentially unified, the interest rate being set by the ECB. So Germany suddenly faced higher borrowing costs than before and the southern states faced significantly lower borrowing costs.<p>That lead to the debt explosion in southern Europe and it put Germany in a tougher position than before. Germany went through an economic slump between 2000 and 2005 and had to retool its economy to be as competitive as before. Germany did this with internal devaluation: German wages have now been stagnating for a decade.<p>Between 2005 and 2010, the roles have switched and right now Germany's economy is almost overheating, in part because the interest rate set by the ECB is super low to make life easier for the struggling southern countries.<p>That's why Euro critics like Ambrose Evans-Pritchard call the ECB's policy "one size fits none". However, that's not to say the Euro critics are right. The hope of Euro optimists is that the Eurozone countries' economies will eventually converge. Whether or not that will ever happen is still up in the air. The whole thing is an experiment without precedent.
cs702over 13 years ago
Missing from this otherwise good infographic: the role played by <i>private-sector financial firms</i>, which are tightly interlinked with each other in a massively complex global network no one really understands, even today. The structure and behavior of private-sector financial firms appear to have been a major destabilizing force leading to the crisis.<p>A (relatively tiny) number of reputable economists are starting to look beyond these current-account imbalances to the disproproportionate growth and destabilizing role of the financial system -- a welcome development IMO.<p>Here's a recent example (in lay language): <a href="http://www.voxeu.org/index.php?q=node/7446" rel="nofollow">http://www.voxeu.org/index.php?q=node/7446</a>
Derbastiover 13 years ago
I think the most fascinating point in this is that wages remained constant in Germany whereas they rose in the countries that are in the worst shape right now.<p>Can anyone corroborate this data? Is this actually true? That would be such an easy explanation…
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russnewcomerover 13 years ago
This is not a fully developed thought, but I think the current Eurozone crisis shows the difficulty of trying to politically unify culturally diverse people groups.<p>I am not an economist or a political theorist, but I think that the Eurozone crisis proves that in trying to create the EU and gain some of the economic advantages that the United States has with a single currency (and other advantages as well, I know I am simplifying), the Eurozone founders didn't fully take into account the cultural issues that their creation would face. America, for various and sundry reasons easily traceable through its founding, is largely culturally monolithic (I realize this is a simplification, yes) and by and large, Americans in one geographic region of the country (for example, the Midwest, which didn't fly too high in the recent booms but is also not facing a bottom dropping out like other regions) do not strenuously question the need to 'bail out' other areas of the country through large federal spending. It happens in America, its just largely invisible and rarely widely debated along geographic lines (farm subsidies, bank bailouts, automaker bailouts, all can be argued to have a strong geographic context that largely gets ignored in America politics) because of the strong nationalistic component in America that the Eurozone lacks.<p>Smaller versions of this basic problem can be seen, manifested in different ways, all throughout Asia (Afghanistan, India, India/Pakistan, Laos, China) and Africa (Sudan/South Sudan, the DRC), and probably though South America too, but I am far less familiar with SA.
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JamisonMover 13 years ago
The summary of the infographic can be made in a single sentence: Paul Krugman has been right about the causes of the Eurozone crisis.<p>The "Don't cut spending" solution at the end mentions the real heart of the problem, "The ECB says its mandate does not allow it [to bail governments out]." -- All the Eurpoeans need to do is make the ECB a lender of last resort. In a liquidity trap expanding the monetary base will do very little to devalue the precious savings the Germans are so worried about, so it won't even hurt them.
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marquisover 13 years ago
In regards to 'wages rose and rose in Spain' and are now not competitive with Germany: I would have thought that wages in Spain pre-1997 were very low compared to Germany, so if they rose it was to become comparable. How does this then make Spain less competitive with Germany? (I may be completely wrong and am neither an economist nor aware of what the wage gap is/was between eurozones).
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gregschlomover 13 years ago
On a related note, the "Money as Debt" documentary is a fascinating watch to understand where money comes from.<p>I just submitted it to HN <a href="http://news.ycombinator.com/item?id=3381634" rel="nofollow">http://news.ycombinator.com/item?id=3381634</a> and I'd be interested in hearing the opinion and criticism of people with better knowledge of the monetary system than me.
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ww520over 13 years ago
Having the same Euro currency but different economic structure and policy in different countries doesn't work, especially in Spain/Italy/France's case. Their labor cost has soared and trade deficit widen against Germany but they can't cheapen their currency to make them more competitive. They are stuck.
jl6over 13 years ago
Asking what specifically caused the crisis is like asking which hamburger caused your obesity. This is a problem that has been building over decades, and it will take decades to solve.
_kover 13 years ago
Countries &#38; institutions that weren't mentioned :<p>Greece 22% of the people in Greece work for the government. That's unsustainable. They paid very little taxes and the government's debt ballooned to a point where the market said enough. Greece asked the EU for a bailout &#38; they got it. There were no real austerity measures. Now they want the debt holders to cut the debt in half.<p>Belgium's problems. Belgium's debt is ballooning out of proportion &#38; bigger than Greece's. Close to 10% of the people work for the government. Savings are high and can be used to revive the economy. Instead, the government asked everyone to buy up their bonds at prices lower than what's available on the market. Crazy &#38; stupid but real. 50% of all goods are export, even though labour costs are twice as high as Spain's. The Netherlands is in a similar situation. How is that possible? They just work harder. I don't know why that isn't mentioned in the article as a possible solution.<p>The Netherlands They were able to handle the world economic slowdown that started in 08. They came prepared, they paid down their debt with every surplus they had. Exports have been holding up quite well, although the slowdown is catching up. Savings are high and that's another bullet you can use to revive the economy. Housing prices are a bit high though. Also, those who work after age 62 can earn a bonus for every year they remain employed.<p>ECB &#38; IMF The ECB says they aren't allowed to buy government debt. That's correct but it's BS as well. They found a way around it. They gave money to the IMF and the IMF gave it to Italy. With Germany &#38; France's permission. Last week the IMF tried to raise money from its members. They failed at it. Both the IMF &#38; the ECB are sitting on gold reserves. Not enough to bail everyone out but perhaps enough for some quantitative easing. Not that I'm in favor of it. Quite the contrary.<p>Inflation When everyone wants a bailout and the ECB blows through all reserves, then they will have no other option than to do what Ben Bernanke is secretly doing in the US. He's buying up all the debt and he's probably doing it by printing more dollars.<p>Don't worry, don't feel sorry, there're other solutions.<p>1) Governments need to be smaller &#38; more efficient.<p>2) Lack of discipline &#38; brass balls In some EU countries you get paid $ 1,000 per month to take time off. You get to ride on the bus for free. You don't have to pay taxes on your house. The list goes on and on. It's a luxury problem. It's easy to stop. It's political suicide but it has to stop.<p>3) Retirement age. The worldwide average is 64 if I'm not mistaken. In Europe it's something like 60 - 62. In Germany it's 65 to 67, so they already shot that bullet. It used to be 50 something in Greece ...<p>I'm all for austerity programs because I want the craziness to stop. I want our politicians to stop getting deeper in debt. Now !
harryfover 13 years ago
But where is Greece?
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maximusprimeover 13 years ago
"the idea of a single currency" caused it. A truly terrible idea.<p>Everything that happened was inevitable.
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