Nouriel Roubini explains why the Eurozone is doomed. The only way to ensure that economies on the poor periphery are healthy enough to want to stay in it is to abandon the austerity-only plans being forced down their throats, and allow them to expand. But the big economies in Europe won’t hear of this. The salvation measures would involve
significant easing of monetary policy by the European Central Bank [ECB]; provision of unlimited lender-of-last-resort support to illiquid but potentially solvent economies; a sharp depreciation of the euro, which would turn current-account deficits into surpluses; and fiscal stimulus in the core if the periphery is forced into austerity.
Unfortunately, Germany and the ECB oppose this option, owing to the prospect of a temporary dose of modestly higher inflation in the core relative to the periphery.
The bitter medicine that Germany and the ECB want to impose on the periphery – the second option – is recessionary deflation: fiscal austerity, structural reforms to boost productivity growth and reduce unit labor costs, and real depreciation via price adjustment, as opposed to nominal exchange-rate adjustment.
In other words: politically and socially unacceptable misery around Europe’s rim. There’s one last option for the Eurozone’s rich countries: “bribing the periphery to remain in a low-growth uncompetitive state.”
This would require accepting massive losses on public and private debt, as well as enormous transfer payments that boost the periphery’s income while its output stagnates. Italy has done something similar for decades, with its northern regions subsidizing the poorer Mezzogiorno. But such permanent fiscal transfers are politically impossible in the eurozone, where Germans are Germans and Greeks are Greeks.
In fact, we now see that the whole Eurozone is in something of the same state as the chronically inept and divided Italian state that was cobbled together 150 years ago. It’s called uneven development; rich regions and poor regions have to coexist in uneasy fear and envy, forced into the same currency and polity. In Italy, the misbegotten result has been decades of political deadlock and massive corruption. For Europe, by contrast, the last ten years looked fairly hopeful, buoyed by a strong Euro and the housing bubble. But now the illusions have been stripped away and the reality is on view. Germany wanted the southern European markets, but it’s not willing to keep their economies strong enough to survive.
Roubini expects the zone to start crumbling:
The recent chaos in Greece and Italy may be the first step in this process. … With Italy too big to fail, too big to save, and now at the point of no return, the endgame for the eurozone has begun. Sequential, coercive restructurings of debt will come first, and then exits from the monetary union that will eventually lead to the eurozone’s disintegration.
Everybody says this will make the 2008 implosion of Lehman Brothers look like a hand grenade compared to the Big Bang. Whatever’s coming, it’s unlikely to be fun.