So, the euro crisis is risk on again. And this time it’s centered on Spain — which in a way is a good thing, because now the essential craziness of the orthodox German-inspired diagnosis of the crisis is on full display.
For this is really, really not about fiscal irresponsibility. (Just as a reminder: On the eve of the crisis Spain seemed to be a fiscal paragon.) What happened to Spain was a housing bubble — fueled, to an important degree, by lending from German banks — that burst, taking the economy down with it. Now the country has 23.6 percent unemployment; 50.5 percent among the young.
And the policy response is supposed to be even more austerity, with the European Central Bank, natch, obsessing over inflation — and officials claiming that the incredibly foolish rate hike last year was actually something to be proud of.
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I’m really starting to think that we’re heading for a crack-up of the whole system.
Ken Rogoff’s Bad Parable
Ken Rogoff, an economics professor at Harvard, published a commentary article in the Financial Times on April 23 comparing Europe’s woes to those of a family with a shared checking account, some of whose members start abusing the privilege.
“The real lesson of the euro’s grand experiment is that, given the weak state of global governance, the optimal
single currency area is probably still a country, at least when two or more large countries are involved,” he writes.
It’s a cute story — but it’s almost completely wrong. “Almost” because of yes, Greece. But Ken is basically buying into the German-preferred frame that it’s all about fiscal irresponsibility, which is completely wrong for everyone else — above all for Spain, the heart of the crisis.
For the umpteenth time, the key crisis countries did not have large deficits before the crisis struck.
Taken as a group, the debt/gross domestic product ratios of the G.I.P.S.I.’s (Greece, Ireland, Portugal, Spain and Italy) were falling, not rising.
What brought on the crisis were huge private capital inflows. Don’t think runaway politicians; think German Landesbanken lending money to Spanish cajas, fueling a real-estate bubble.
So what was the big problem with the euro? Not so much that it promoted these flows; it probably did, but the G.I.P.S.I.’s aren’t the first economies bond markets have temporarily loved not wisely but too well. No, the key problem was a lack of a way to adjust when the music stopped.
It’s really frustrating that a completely, demonstrably false narrative about the crisis continues to dominate the discourse, and I’d hoped for better from Ken.