Krugman: 'We're Rapidly Approaching A Moment Of Truth' - NYT

[WillyT]

A Game of Chicken
Paul Krugman - NYT
FEB. 6, 2015

<snip>

On Wednesday, the European Central Bank announced that it would no longer accept Greek government debt as collateral for loans. This move, it turns out, was more symbolic than substantive. Still, the moment of truth is clearly approaching.

And it’s a moment of truth not just for Greece, but for the whole of Europe — and, in particular, for the central bank, which may soon have to decide whom it really works for.

Basically, the current situation may be summarized with the following dialogue:

Germany to Greece: Nice banking system you got there. Be a shame if something were to happen to it.

Greece to Germany: Oh, yeah? Well, we’d hate to see your nice, shiny European Union get all banged up.

Or if you want the stuffier version, Germany is demanding that Greece keep trying to pay its debts in full by imposing incredibly harsh austerity. The implied threat if Greece refuses is that the central bank will cut off the support it gives to Greek banks, which is what Wednesday’s move sounded like but wasn’t. And that would wreak havoc with Greece’s already terrible economy.

Yet pulling the plug on Greece would pose enormous risks, not just to Europe’s economy, but to the whole European project, the 60-year effort to build peace and democracy through shared prosperity. A Greek banking collapse would probably lead Greece to leave the euro and establish its own currency — and if even one country were to abandon the euro, investors would be put on notice that Europe’s grand currency design is reversible.

Beyond that, chaos in Greece could fuel the sinister political forces that have been gaining influence as Europe’s Second Great Depression goes on and on. After a tense meeting with his German counterpart, the new Greek finance minister didn’t hesitate to play the 1930s card. “Nazism,” he declared, “is raising its ugly head in Greece” — a reference to Golden Dawn, the not-so-neo-Nazi party that is now the third largest in the Greek legislature.

What we’re looking at here is, in short, a very dangerous confrontation. This isn’t diplomacy as usual; this is a game of chicken, of two trucks loaded with dynamite barreling toward each other on a narrow mountain road, with neither willing to turn aside. And all of this is taking place within the European Union, which is supposed to be — indeed, has been, until now — an institution that promotes productive cooperation.

How did Europe get to this point? And what’s the end game?

<snip>

More: http://www.nytimes.com/2015/02/06/opinion/a-game-of-chicken.html?hp&action=click&pgtype=Homepage&module=c-column-top-span-region®ion=c-column-top-span-region&WT.nav=c-column-top-span-region&_r=0

[Agnosticsherbet]

1. I thnk Greece will leave the EU. How the EU survives the economic fallout is not to be guessed.

[closeupready]

4. For strategic reasons, the EU can't let that happen. But

from the perspective of the Greeks, it must happen.

[Agnosticsherbet]

5. Ultimately, the EU can not stop them.

All the EU can do is find a way to give the Greeks enough so they won't take their Drachma and go.

Russia's support of Greece makes this more likely.

Sadly, a collapse of the EU would cause economic repercussions to the entire world.

[closeupready]

10. Scotland had a recent secession vote that failed, but as a means of defusing such ideas,

the UK government claimed they wanted to give Scotland more autonomy.

Here, it seems like a secession vote could succeed; in exchange for staying (for more loans, easier terms), the EU will likely attempt to REDUCE Greece's autonomy, primarily I think in terms of tax collection.

[Agnosticsherbet]

49. Scotland's seccession was from England, not the EU.

From a quick look, the EU levies a VAT tax on goods sold within the Union. (Exports are exempt.)

But it is difficult in a short time to find out in a short time, but this is one source for taxes.

From what I could tell, and I may be wrong, they don't levy different taxes on individual nations. But this is a big subject.

[jeff47]

19. Sure they can. They have armies. (nt)

[truebluegreen]

27. Srsly? You think Germany, as leader of the EU and the biggest proponent of austerity,

would get away with that? Or would even try! The optics would suck, and think of the hay Russia could make of it.

[jeff47]

30. Well, we are talking about "ultimately", not "first thing to try". (nt)

[Agnosticsherbet]

45. The EU does not have a military. The inidividual nations do have militaries, but I don't think

they will declare war on Greece to keep it inside what is a voluntary union of nations.

[closeupready]

50. Yes. The entire point of forming the EU was fundamentally about PEACE,

i.e., the states located within continental Europe had spent many centuries killing and fighting, and they claimed they'd had enough, thus the idea for an EU.

If war was declared on a state which sought to secede, then it could conceivably invalidate the moral basis for having an EU to begin with, leading to an end of the EU altogether.

[jeff47]

56. You're forgetting the financial destruction.

There's a whole lot of pain being inflicted on parts of the EU so that Germany can have zero inflation. If Greece is forced to leave the EU over debt, they won't be the last one to leave. That cascade effect could tear the whole thing apart.

In other words, the bankers are already destroying the EU. Don't need the generals to get involved to wreck it.

[jeff47]

55. Probably not, because the money isn't big enough.

At least, not big enough yet. Greece departing the EU could cause a cascade effect in the other "austerity" countries that destroys the EU.

[Adrahil]

40. The problem is...

... that ultimately Greece can't survive without Europe. Russia isn't exactly flush, and they don't do anything out of the goodness of their heart. The new Greek leadership needs to think beyond next year. And so does the EU. Both sides need to come of their current positions some.

[Agnosticsherbet]

48. They survivied before the EU existed. They could find away to suvive without it.

I am not sure that Greece would be better off going it alone.

I suspect they would limp along economically.

This problem happened because even though the individual nations took the Euro currency they never combined their economic systems. There will always be nations that have better economies than others, and that gives the better economies more power in their system.

The real failure was that the EU was incapable of creating a fair system for fixing Greece's economic woes.

If they can not find a way, it might rip the EU apart.

[Adrahil]

57. I basically agree...

I don't mean that Greece, or even Europe need the Euro. In fact, I think the Euro was a bad idea because of the disparate economic conditions and needs of European countries. A monetary policy that is good for Germany, or Denmark, is not likely to meet the needs of Greece, or Spain. And when it comes to setting the monetary policy, who is gonna hold more sway?

But that doesn't mean these economies can exist as islands, either.

[Agnosticsherbet]

58. The Euro was a bad idea because they did not integrate their economic system.

Every country runs its own economy, but share the same economic and monetary system. It worked alright until we the great recession blew apart every economy on earth.

[MrTriumph]

2. It's a speed bump.

The 11 million people in Greece are going to upset the applecart of the other 489 million in the EU?

Maybe Greece is overestimating its importance to the EU.

[riderinthestorm]

3. You can bet Portugal, Spain and Ireland are watching carefully.

This is not simply about Greece. The other countries in severe economic pain will see no benefit to remaining in the EU if the ECB continues down this path of harsh austerity.

And the political implications for Le Pen snd others of her ilk are sobering as well.

Definitely more than a speed bump

[WillyT]

6. Yep... And Speed Bumps Can Be Lethal If One Is Reckless...

Try driving over one at 80 mph...

[Adrahil]

41. Austerity is a terrible idea. These people need to read Keynes. n/t

[tech3149]

7. If the Troika wins it shows Germany actually won WWII

They turned history on it's head and won the war economically on the shoulders of international economic support.
They didn't need to win the war of bullets and bombs but instead to lose it. That provided the financial support to rebuild anew.
The British pissed it away but Germany built the economic powerhouse of the EU. Now they don't want to give the lesser members of the EU the same forgiveness that allowed them to rise from the ashes they created.
Just ask yourself, who holds the debt of Greece and who stands to lose the most if they tell the rest of the world to piss off?

[MrTriumph]

8. The IMF was founded in the US in 1944.

[DonCoquixote]

9. Thr porblem with the EU

Is that Berlin, London and Paris are still fighting over who gets top Billing, and think of everyone else as the chorus dancers or understudies. The rest of Europe realizes why the analogy for everyone else is PIIGS. Portugal, Italy, Ireland, Greece and Spain have seen the EU without her wigs and face paint.

[tech3149]

12. Effin A! You understand the problem!

I don't think the EU was a bad idea but the Euro was a total submission to the banksters.
Like I said in another thread regarding Greece, Germany actually won WWII, it just took a few decades and tons of financial support from the rest of the world.

[Tierra_y_Libertad]

11. ....will have to be fought sooner or later is the people versus the banks.

The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks. Lord Acton

[woo me with science]

14. +10000 The only way to stop a predator

is to stand up to the predator.

[jwirr]

15. And not just in EU.

[Hekate]

13. KnR for Professor Krugman

[Helen Borg]

16. Prediction...

Greece leaves EU and nothing else happens...

[hifiguy]

17. How they got there? Simple.

Austerity. It doesn't work and never has. Keynesianism and/or democratic socialism are the only roads out and the Eurobankers refused to even consider Keynesianism despite mountains of evidence that it works.

I just hope the Greeks land on their feet without too much damage.

[Adrahil]

42. I think I may love you....

... so here's a heart!

You are so right. Keynes knew WTF he was talking about.

[MrMickeysMom]

51. HOW'D they REALLY get there? It's like the sub-prime mortgage crisis of 2007-2008...

This was posted on February 17, 2015 by Charles Hugh Smith from Max Keiser's Financial War Reports. I find it a good analogy…

Sometimes the best way to summarize a complex situation is with an analogy. The Greek debt crisis, for example, is very much like the subprime mortgage crisis of 2007-08.

As you might recall, service workers earning $25,000 annually got $500,000 mortgages to buy McMansions in subprime’s go-go days. The applicant fudged a bit here and there on income and creditworthiness, and lenders reaping huge profits from originating and selling mortgages were delighted to ignore prudent underwriting standards and stamp “low-risk” on the mortgage because it was quickly sold to credulous investors.

The bank made its money in transaction and origination fees, and passed the risk of default on to investors who accepted the fraud that the loan was low-risk.

The loan was fundamentally imprudent and risky because the borrower was not qualified for a loan of such magnitude. But since the risk was distributed to others, the banks ignored the 100% probability of eventual default and skimmed the profits upfront.

Greece was the subprime borrower, and its membership in the euro gave the banks permission to enter the credit rating of Germany on Greece’s loan application. Though anyone with the slightest knowledge of Greece’s economy knew it did not qualify for loans of such magnitude, lenders were happy to offer the loans at interest rates close to those of Greece’s northern neighbors, and then sell them as low-risk sovereign debt investments.

In effect, the banks were free-riding the magical-thinking belief that membership in the euro transformed risky borrowers into creditworthy borrowers.


Read more at http://www.maxkeiser.com/#6ZRdA8mhtzUpmcX5.99

[DetlefK]

52. Don't ridicule yourself.

Was the EU supposed to pump money into a country with rampant tax-evasion, rampant corruption and an overbloated, inefficient bureaucracy driping with cronyism?????????

http://en.wikipedia.org/wiki/Tax_evasion_and_corruption_in_Greece

[nichomachus]

18. The euro was created precisely to bring about the mess we're seeing in Greece, Spain, etc.

The One Percenters thought that the working class was doing too well and the One Percent wasn't able to steal enough money.

With the Euro, it took monetary policy out of the hands of national politicians and made them have to grovel before Germany to get any relief.

The goal of the creators of the Euro was the same as that of the Koch Brothers and the neoliberals of both parties in the US.

--Drive down wages
--Create enormous debt
--Defund public education
--Sell off the public infrastructure
--Reduce taxes on corporations and the wealthy
--Destroy or neuter the unions
--Dismantle social programs

The last chapter in their playbook is "How to Deal with the Civil Unrest that Will Follow."

The only hope for suffering countries is to bolt from the EU and go back to their own currencies.

[TooPragmatic]

20. Getting a bit conspiratorial

Care to show any evidence for the Euro being a plot by bankers and other elites to squash the rest of society?

The Euro was to be part of making a unified Europe who wanted to create one large country. Like during the ancient Rome. But we don't live in Rome anymore and few hundred years of nationalism and the formation of modern nation states made it hard for countries to give up their autonomy and it led to a weak union. Because of those structural flaws, countries not following commonly agreed rules and people not understanding those flaws (plus Greek government and Goldman) the Euro crisis was born.

After all the bailouts and the hair cut, Greece itself could exit the Euro without direct harm to the EU. Other tax payers would pick up the tab, and that would help right wing populists. If EU kicks Greece out of the Euro, this would undermine the EU as a common good and right wing populists would do even better. If EU gives in to Greeces threats, this will open the door for other bailed out countries to demand similar changes to their loans and northern European countries will leave the EU. The only durable solution is for creating a compromise where Greece gets an extension and slightly leaner conditions, but Greece won't be able to institute all of their new social policies and austerity will only be toned down, but it will be better than before. And This compromise could help Europe move to a more constructive discussion about pro growth policies. Rome wasn't build in a day.

[CJCRANE]

23. I think nation states should control their own fiscal, economic and trade policies.

The EU is not capable of becoming a nation state. IMO the individual member countries would be better off taking back some of their sovereignty.

[TooPragmatic]

24. Like they did before WWII?

That was a swell time.

[CJCRANE]

25. There weren't many sovereign nations in those days but plenty of empires.

I'm not an expert but I'm not sure it's an apt comparison.

[TooPragmatic]

35. those empires where nation states

The UK didn't treat Englishmen the same as Indians for example. Sure there was less democracy back then but the people still made a difference. Some countries weren't there before WWI but even so there are other questions.

1. How would this end up for Eastern Europe. Russia has started eyeing on them again. Sure there is Nato. How's about WWIII starting in Eastern Europe?
2. And then there's all the common rivalry. Standards on products wouldn't be the same. What if Portugal decides to start using GMO on its agriculture, but Spain doesn't want any and decides to cut off all Portugese agriculture and requires all products coming from Portugal to be tested? There are million of examples.
3. Trade is more difficult and expensive when currencies have to be changed.
4. Immigration within Europe slows
5. European wars are more likely.

[CJCRANE]

37. The UN was set up to protect the sovereignty of nation states.

As for your pro-EU arguments you make some good points, but nothing you mention is essential. Different countries have different trade policies. There's nothing wrong with that. Should the US have free trade and a currency union with the whole of North and South America? That would make trade easier and also rationalize trade policies. But if the people don't want that then it's a non-starter. As it should be.

[truebluegreen]

29. How about "the pudding." nt

[nichomachus]

38. I love it -- anything someone doesn't like to hear is a "Conspiracy Theory"

But there is evidence.

http://www.gregpalast.com/the-euro-is-a-big-success-no-kidding/

But Mundell, a can-do Canadian-American, intended to do something about it: come up with a weapon that would blow away government rules and labor regulations. (He really hated the union plumbers who charged a bundle to move his throne.)
"It's very hard to fire workers in Europe," he complained. His answer: the euro.

The euro would really do its work when crises hit, Mundell explained. Removing a government's control over currency would prevent nasty little elected officials from using Keynesian monetary and fiscal juice to pull a nation out of recession.

"It puts monetary policy out of the reach of politicians," he said. "[And] without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business.

And pardon me if I put more stock in Greg Palast than in you

[TooPragmatic]

39. Why not just use Alex Jones

Seriously, reading that article was nothing but a waste of time. Mundell's work did contribute on the creation of the Euro. However it wasn't simply created to achieve his political and economic goals.
"I can't have a toilet in my villa! I KNOW! I will create an idea for an European currency that will blow up in their faces, destroy the European economy. And 'i will get my toilet."

It's absurd to claim that the Euro will help get rid of regulations and privatize all parts of European economies. Just look at how regulated European countries are. And to claim that soon all of Europe will go on a path like Greece where privatization is/was on overdrive is also foolish. I don't think that the privatizations that took part in Greece were beneficial in some of the cases and I think there should be some changes made to the current mess that is Greece's debt. But to take away the blame from Greek politicians, corporations and individuals who destroyed the Greece's economy by corruption, tax-avoidance and handing out overly generous benefits. And I understand that no one wants to trust Greek politicians when they ask for more money and to be fully in charge of handling that money.

Palast seems to be making the argument that all privatization is bad and having a system where politicians aren't in charge of the monetary policy themselves is bad. That is a biased political argument and that weakens Palast's authority and he is ultimately as reliable as a pundit like Rush Limbaugh.

And people should stop freaking out over the fact that not every single official is elected by the people. Sure, Mario Monti wasn't elected is part of Italian politics. he was appointed by the Italian president(elected by politicians). Monti was appointed, because the other option would have been new elections and economic instability. Italy was a mess back then and still is, but Monti did cool down Italy's crisis.

It's always easy to get uninformed leftists to get angry when you use Reagan and Tatcher in your article. And of course a quote by Krugman is a must. This article is nothing more but a bunch of half truths and using some peoples ignorance to manipulate them to believe that the euro is a way to a banana republic.

[CJCRANE]

21. I agree.

What's more, it's stupid to have a federation where individual members such as the UK, France and Germany have more political clout on the world stage than the federal government itself.

[SteveG]

54. A similar desire was the cause of the failure of the Articles of Confederation.

The structure of the EU has the same inherent problems that the United States had under the Articles. It's too easy for individual nations to go their own way.

[Adrahil]

43. Good book plot....

... but I honestly don't see how it makes sense.

[Android3.14]

53. Spot on, Nicho

Looks like the squirrels have appeared to distract us from the obvious.

[hfojvt]

22. interesting and scary

I don't know very many of the details, or the back story. I hope the EU does well. I think the world needs more unity.

[Dont call me Shirley]

26. How did Europe get to this point? Goldman Sachs.

[Jefferson23]

28. Recommend...thanks, WillyT. n/t

[WillyT]

31. You Are Quite Welcome !!!

[Jefferson23]

32. You may be interested in Professor Bill Black who has written on the subject in addition to your

Krugman info:

snip*So the normal thing that we do in the commercial world, when we're just dealing with businesses in these circumstances, is we don't try to insist that they repay every bit of their debt, because that'll just force them into a collapse. We create a renegotiated debt that is reduced.

And by the way, this was famously done after World War II for this nation called Germany, and it was done for Poland in 1991, where more than half of the debts were written off, many of them owed to Germany. And then, eventually, 100 percent of the debts were written off for a large number of African nations. And debts were written off in the range of 50 percent to nearly 100 percent for a number of Latin American nations. But in the case of the Greeks, the Germans are now insisting that they pay 100 cents on the dollar when--or euro, in this case--when that is not possible and it will cause a catastrophe.

And the real remarkable thing is, of course, we've seen this pattern before in the 1990s when the Washington Consensus and its insistence on austerity caused the lost decade in Latin America, financial crises in many nations in Latin America, very weak growth, rolling recessions and such. And it led to the election of now over a dozen controlling officials through democratic processes in Latin America who were elected on platforms saying that they were going to oppose austerity. And we've been saying this has got to break out in Europe eventually, and Greece is the first place that has done so. And that's what's really scaring--.

PERIES: That it'll have a ripple effect in Europe, and more and more progressive governments might get elected, as in Spain polls are showing that Podemos is, like SYRIZA, taking a lead in the polls.

BLACK: Yes. And it was only created about a year ago. So that is an astonishing surge in popularity, and the Spanish will be greatly encouraged by what they've seen in Greece. And there's also the possibility in Portugal to get similar results. Italy is more complex, but you're going to see parties that strongly oppose austerity, and you're going to see it in France as well.

Now, Europe's more complicated than Latin America, in that many of the strong opponents to austerity in Europe are actually right-wing parties.

PERIES: Explain that.

BLACK: Well, they don't like, basically, the fact that their governments have been turned over that to the Germans. Of course, what you have to remember is that most of the nations of Europe were occupied by Germany. And they do not have good memories of being occupied by Germany. And now Germany doesn't have to send an army; it just used the bond vigilantes as its shock troops, the Schwerpunkt, to produce a disaster in much of Europe. And now German diktats have ruled most of Europe for roughly five to six years. But that looks like it's going to continue unless there is a break led by folks like Syria that the German hegemony over the European Union seems to be unshakable, absent that kind of resistance.

PERIES: And what do you think of the SYRIZA government's collision course with Europe right now? How do you think it's going to play out?

BLACK: Well, first, nobody knows, and we shouldn't pretend that we know. The Europeans have to find a way to climb down, because what they've established will produce what it has already produced: a disaster that will grow.

So, as I said, there are many, many precedents where European nations, including Germany, have both been the beneficiaries of debt write-downs and people that have made huge debt write-downs. So it's time for them to find a way. Politically, of course, they're saying they're not going to do it, and that's exactly what you would expect going into negotiations. SYRIZA is, I think, doing exactly the right thing. It's being, basically, calm and saying, well, this is what we're going to attempt to achieve. And we'll see whether Europe basically recovers its spine and says to the Germans, no, sorry, you're one nation, you don't get to dictate everything that happens in Europe.

PERIES: Bill, thank you so much for joining us today.

BLACK: Thank you. And /greɪtbluː/.

PERIES: And thank you for joining us on The Real News Network.

His bio:http://en.wikipedia.org/wiki/William_K._Black

[WillyT]

33. Thank You For That... I'm A Big Fan Of Bill Black !!!

[Jefferson23]

34. He is a reliable, powerful force for good analysis..agreed.

Back at ya.

[Pooka Fey]

44. +1

[woo me with science]

36. kick

[marmar]

46. K/R

[MBS]

47. this is a really thoughtful piece.

Lots of points worth heeding.
Thanks for sharing.