How Greece and Italy Can Avoid a Deep Recession
You say Papandreou
I say Papademos
Let’s call the whole thing off!
How many dear readers have any idea what that little ditty is about? You have to be a certain age to remember… You have to recall Louis Armstrong…
But heck, who cares about song lyrics?
Europe is falling apart. “Italy’s days in the eurozone may be numbered,” writes Nouriel Roubini in The Financial Times.
“France plots eurozone breakaway group,” adds The Daily Telegraph.
And here’s Ambrose Evans-Pritchard, at the Telegraph: “Europe’s debt crisis is threatening to push large parts of the world into recession.”
The Wall Street Journal elaborates:
BRUSSELS — The European Union slashed its growth forecast for the coming year and said it can’t exclude the possibility of a “deep and prolonged recession.”
The European Commission, the EU’s executive arm, said Thursday in its semiannual forecast that the 27-nation bloc’s economy is struggling amid weak confidence, financial turmoil, government austerity packages and slowdowns in Europe’s main trading partners.
The EU’s gross domestic product, adjusted for inflation, is expected to grow just 0.6% in 2012, the commission said, sharply down from its forecast only six months ago of 1.9%.
The commission’s forecast for the 17-nation euro zone is 0.5% growth in 2012, also short of the May outlook for 1.8% growth.
Since May, the euro-zone sovereign-debt crisis has intensified, undermining investment and consumer confidence, the commission said. Austerity packages have suppressed growth across the bloc. Domestic private-sector demand, which economists had hoped would drive recovery, has failed to pick up the slack.
“The probability of a more protracted period of stagnation is high,” said Marco Buti, head of the commission’s economics division. “Given the unusually high uncertainty around key policy decisions, a deep and prolonged recession complemented by continued market turmoil cannot be excluded.”
Despite the wave of austerity sweeping Europe, public debt as a percentage of GDP is expected to peak in 2013 at 90.9% of GDP. Greek debt is expected to soar to 198% of GDP next year. Six months ago, forecasters had predicted Greek debt at 166% of GDP.
Many Europeans are ready to call the whole thing off. Many would rather leave the EU than face a “deep and prolonged’ recession. They know that inflation would cure a lot of their troubles. They could quickly reduce the real price of their own labor, for example, rendering their economies more competitive again. They could reduce employment. They could go back to the good ol’ days. Back to the days when they could listen to Louis Armstrong on the radio…while drinking coffee in a local bar…and ripping off the tourists with their funny money.
How can they bring those good ol’ days back? Say goodbye to the EU…shuck the euro…return to the lira or the drachma…and inflate the hell out of it. Will they do it? Who knows? But while the forces of the last 300 years pushed people together. Now, they pull them apart. World trade slows. Doors are closed. Long-festering wounds and resentments burst out into the open. Old scores, like unpaid bills, wait to be settled…
Meanwhile, a slump in Europe probably means a slump in the US too. Statistically, and historically, that’s what happens. But at least we don’t have the euro! And there’s no danger of Mississippi or Montana going its own way…yet. Abraham Lincoln solved that problem!
“You want independence? You want to go your own way?” he said, or words to that effect. “It’ll be over my dead body.”
Lincoln was dead soon after. But by then, the freedom proclaimed by Jefferson and Hancock were dead issues too. No more right to self-determination. No more sovereign states. Instead, we’ve got the Californians and the New Yorkers in the same union, whether we like it or not.
We’ve also got the dollar. It is managed by Americans, not Germans. Its managers fear depression, not hyperinflation. They don’t mind a little money-printing if it is for a good cause.
The crisis faced by the Italians and the Greeks seems far away. After all, these sunny places always had shady finances. The cause of their problems now is too much debt. And on that point, you may be surprised to find out that there is not much difference between Greeks, Italians and Americans. We all have around 3 times as much debt as GDP to support it. The Greeks a little less. The Italians a little more. We are all the same…all living under the same Vesuvius of debt…and all screwed in the same way.
Right now, it’s the Greeks and the Italians who are having trouble financing their debts and deficits. Eventually, Americans will have the same problem.
Perhaps sooner, rather than later.