For Europe, It Ain’t Over 'til La Gordita Sings

The Future of American Power
April 16 2012 9:33 AM

For Europe, It Ain’t Over 'til La Gordita Sings

The more ensconced in the world of macroeconomics I become, the less pleasure I take in what otherwise would be a columnist’s most cherished goal: saying I told you so. But I will say again what I have been saying for two years now: you cannot run an economy the size of Spain’s on credit card interest rates. Yet that is precisely where Spain finds itself once again.

Michael Moran Michael Moran

Michael Moran is an author and geopolitical analyst.

Today, just three weeks have passed since the EU’s last effort to declare victory over the sovereign debt crisis. On March 26, after much hemming and hawing over the cost to her constituents, German Chancellor Angela Merkel agreed to allow an increase in the EZ bailout fund to roughly $666 billion. This followed a March 13 disbursement of another 130 billion ($169 billion) to bailout the insolvent Greeks.


For some reason, members of the Angela Merkel fan club choose that moment to declare victory on her behalf. Typical was Michael Shulman, a formerly sober critic, all but ran up the white flag earlier this month, declaring that the policy was working, (though adding “One former TIME editor is bombarding me with emails saying that my continued gloom about Europe’s future is more and more misplaced).”

Yet the problem in Europe is blindingly clear to anyone who can add: by the European Commission’s own reckoning, the potential exposure to sovereign defaults by Portugal, Ireland or Spain (not even including the wobbly Italians) would be approximately $1.2 trillion. That’s twice, roughly, what is contained in the EZ’s bailout fund.

Meanwhile, Merkel’s insistence on austerity at all costs has guaranteed that Spain, Greece and Portugal are plummeting back into recession (and the larger Eurozone will follow if this continues too much longer).

The result of this political gamesmanship has once again elevated Europe’s economic dysfunctions from a regional annoyance to a global threat to economic growth. On Monday, Spain found itself paying over 6 percent to borrow money to fund its budget deficit. As global markets reawakened to this fact, debts costs rose across the board – most ominously, pushing the cost of debt for an Italian 10 year bond up near 6 percent, too.

Should this not be halted soon, the world’s 8th largest economy will default, even if EZ leaders decide to call it something else. And if that happens, we’re right back to the Lehman moment, watching as the loss of trust in basic tenets of the global financial system spread Europe’s crisis far and wide.

Spain’s new prime minister, Manuel Rajoy, has worked hard to reign in his government’s deficit – a figure notoriously difficult to control due to the autonomy enjoyed by Spain’s regional governments. Previous Eurozone support for Spain had demanded that the country’s current accounts gap fall to 4.4 percent this year, but after taking office earlier this year, Rajoy found he had been left in worse shape that the previous government had conceded. As a result, Spain will run a 5.8 percent deficit this year instead.

Merkel’s stubborn insistence that growth need not be part of the solution has now run its course. Spain is not Greece – it has a vibrant financial sector and can feasibly become a competitive economy again. But in delivering her particular prescription for saving the euro, Merkel may in fact be destroying it.

Given the depths that the EU’s weaker economies have fallen to, it’s now hard to imagine any of them recovering soon without resorting to a drastic measure: withdrawal from the euro, reintroduction of their own national currencies and devaluing them to bring competitiveness back to their economies.

The austerity crowd – and their right-wing cheering section in the US – will have none of it. Those Mediterranean types just need to work harder. Peter Schiff, the right-wing hedge fund titan, echoes these ideas in America. Late last year, he chided the United States for not being more like Angela, proof that the suicidal strain of economic fundamentalism that drove the global economy to the brink of depression in 2008 is alive and well.

And so the danger that Europe poses to US growth is not just “contagion” in the event of a major default; there’s a psychological deviance afoot, too.


Sports Nut

Grandmaster Clash

One of the most amazing feats in chess history just happened, and no one noticed.

The Extraordinary Amicus Brief That Attempts to Explain the Wu-Tang Clan to the Supreme Court Justices

Amazon Is Officially a Gadget Company. Here Are Its Six New Devices.

The NFL Explains How It Sees “the Role of the Female”

Amazon Is Officially a Gadget Company

Sports Nut

How Much Should You Loathe NFL Commissioner Roger Goodell?

Here are the facts.


How to Order Chinese Food

First, stop thinking of it as “Chinese food.”

Scotland Is Inspiring Secessionists Across America

The Country Where Women Aren’t Allowed to Work Once They’re 36 Weeks’ Pregnant

The XX Factor
Sept. 18 2014 11:40 AM The Country Where Women Aren’t Allowed to Work Once They’re 36 Weeks’ Pregnant
Sept. 17 2014 5:10 PM The Most Awkward Scenario in Which a Man Can Hold a Door for a Woman
  News & Politics
The World
Sept. 18 2014 1:34 PM Americans Fault Obama for Giving Them Exactly the Anti-ISIS Strategy They Want
Business Insider
Sept. 17 2014 1:36 PM Nate Silver Versus Princeton Professor: Who Has the Right Models?
The Eye
Sept. 18 2014 12:47 PM How One of the Most Prolific Known Forgers in Modern History Faked Great Works of Art
  Double X
The XX Factor
Sept. 18 2014 12:03 PM The NFL Opines on “the Role of the Female”
  Slate Plus
Behind the Scenes
Sept. 18 2014 1:23 PM “It’s Not Everyday That You Can Beat the World Champion” An exclusive interview with chess grandmaster Fabiano Caruana.
Brow Beat
Sept. 18 2014 1:15 PM Beyoncé’s 10 Greatest Live Performances
Future Tense
Sept. 18 2014 1:24 PM Can the Celebrities Whose Photos Were Stolen Really Sue Apple? It may be harder to prove “harm” than it seems.
  Health & Science
Bad Astronomy
Sept. 18 2014 7:30 AM Red and Green Ghosts Haunt the Stormy Night
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.