Death by DavosThis is the way the euro ends: not with the banks but with bunga-bunga.
OK, the euro isn’t doomed — yet. But the Italian election signals that the eurocrats, who never miss an opportunity to miss an opportunity, are getting very close to the edge.
The fundamental fact is that a policy of austerity for all — incredibly harsh austerity in debtor nations, but some austerity in the European core too, and not a hint of expansionary policy anywhere — is a complete failure. None of the nations under Brussels/Berlin-imposed austerity has shown even a hint of economic recovery; unemployment is at society-destroying levels.
This failure came close to destroying the euro twice, in late 2011 and again last summer, as debtor nations threatened to enter a doom loop of plunging bond prices and failing banks. Each time Mario Draghi and the ECB stepped in to contain the damage, first by lending to the banks buying sovereign debt (LTRO) then by announcing a willingness to buy sovereign debt directly (OMT) ; but rather than taking the near-death experience as a warning, Europe’s austerians took the ECB-engineered calming of markets as a sign that austerity was working.
Well, the suffering voters of Europe just told them differently.
How could they not have seen this coming? Well, in Europe even more than in the US the Very Serious People live in a bubble of self-regard at their own seriousness, and imagine that the general public will follow their lead — hey, it’s the only responsible thing to do. Wolfgang Münchau has a great lede in his column today, that gets at the essence:
There was a symbolic moment in the Italian elections when I knew that the game was up for Mario Monti, the defeated prime minister. It was when in the middle of the campaign – in the midst of an anti-establishment insurgence – he took off to Davos to be with his friends from international finance and politics. I know his visit to elite gathering in the Swiss mountains was not an issue in the campaign, but it signalled to me an almost comic lack of political realism.
What Europe’s VSPs fail to get is that the public perception of their right to lead depends on achieving at least some actual results. What they have actually delivered, however, is years of incredible pain accompanied by repeated promises that recovery is just around the corner — and then they wonder that many voters no longer trust their judgment, and turn to someone, anyone, who offers an alternative.
I wish I believed that the Italian election would serve as a wake-up call — a reason to, for example, give the ECB a green light for more expansion, a reason for Germany to do some stimulus and for France to call off its unnecessary belt-tightening. My guess, however, is that we’ll just have more lectures to the Italians and everyone else about how they just aren’t trying hard enough.
And there may be worse figures than Beppe Grillo lurking in Europe’s future.
krugman
