Europe's Crisis Will Make Markets Unstable for Some Time to Come
Stocks are retreating again today, and Europe -- with an able assist from an unbalanced Korean -- is behind the trouble. It's a timely reminder that we should all be prepared for a year in which Europe stumbles, at best, towards a solution to its crisis.
The European Union has a knack for dreaming up lofty, idealistic projects like the euro. And every time I drive across a national border in Europe and barely notice it, I'm reminded that the EU manages a lot of smaller tasks each day. But the EU is noticeably less good at pulling off the daily tasks that underpin the lofty projects, an unfortunate quality that explains a lot about why Europe can't convince anyone that it has its arms around the current crisis.
Bloomberg compiled the illuminating statistic that countries using the euro failed their fiscal goals 57 percent of the time since the euro was introduced on Jan. 1, 1999. And bear in mind: those were (mostly) the good years! If you're going to face the fiscal music -- deficits at 3 percent of GDP, debt lower than 60 percent -- then an upswing is the time to do it. Now the task is immeasurably more difficult, as the region's economies are growing at a snail's pace.
So Europe's fiscal problems can hardly be blamed on the financial crisis that became and economic crisis. Much more, the failure of pan-European fiscal rules reflect political exhaustion that sets in once European countries manage the first step in one of their big projects. The creation of the euro stirred every inspiration-yearning European heart in the 1990s, and why shouldn't it? Not since Charlemagne ascended to his throne in the year 800 has a common European currency been thinkable. Political momentum was on the side of the euro's creators.
But the foundation of the euro, smart folks knew at the time, would never be anything inspiring. It would be the drudgery of day-to-day politics, and often the politics of doing more with less, or less with less.
Europe's leaders failed that test miserably. Germany and France led the way in breaking the fiscal rules. They redeemed themselves for a time, but not before other countries, like Greece, took inspiration from their rule-breaking. Legal scholars speak of the great value of the "habit of obedience" we have toward the law; Europeans never acquired that habit vis-a-vis the fiscal rules they set for themselves.
Unfortunately, this film is playing again on a shorter loop as Europe tries to deal with the Greek crisis. A few weeks ago, we had the $1 trillion bailout of Greece that stunned markets into submission for a time. Now the drudge work of a more credible European fiscal framework is proving much more difficult. The rest of Europe is all but laughing at the German request to increase the sanctions on deficit sinners -- sanctions that were never used in their current form, despite ample opportunities. The Germans, in turn, are spitting fire at the idea of a common euro-zone bond that would reduce borrowing costs for Greece and its ilk, but raise them for Germany.
James Bullard, the president of the St. Louis Fed, struck a sanguine note in a speech today as to whether the Europe crisis will deliver the feared double-dip recession:
There are several reasons why this new threat to global recovery will probably fall short of becoming a worldwide recessionary shock. Sovereign debt crises have been with us for many, many years. There is nothing intrinsic about such crises that they need to become important shocks to the broader, global macroeconomy ... Let me also stress that the current agreement in Europe does buy substantial time for European governments to enact fiscal retrenchment programs. It will take time for those programs to be enacted and to gain credibility with financial markets.Unfortunately, the current crisis is not a run-of-the-mill sovereign debt crisis but a crisis of European governance, a species of supra-national administration without peer in the world. (The EU is the only non-country listed in the much-consulted CIA Factbook on the world's sovereign nations.) That makes the European crisis much harder than, say, Korea's in the 1990s. The IMF could not dictate a solution here, as it did across Asia, even if it wanted to. For Europe to master this crisis, it will have to take a quantum leap forward in fiscal integration -- a rough-and-tumble, no-fun-at-all political slugfest.
That's not inspiring stuff -- but it's what Europe needs.
Related:
- Forget the Unemployment Rate -- It's the Long-Term Jobless Who Should Worry Us
- Europe's Woes Are Pushing Up the Odds of a Double-Dip Recession in the U.S.
- European Rescue Plan, Part Two: What's Missing
- Europe's Problem Isn't the Welfare State -- It's Political Will
- And Now, a New Financial Crisis -- Made in Greece