Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of "13 Bankers."
Most experienced watchers of the euro zone are expecting another serious crisis in early 2011, tied to the rollover funding needs of its weaker governments. With debts coming due from March through May, the crisis seems much more predictable than what happened to Greece or Ireland in 2010.
And the investment bankers who fell over themselves to lend to these countries on the way up now lead the way in talking up the prospects for a serious crisis.
This situation is not more preventable for being predictable, because its resolution will involve politically costly steps "“ which, given how Europe works, can be taken only under duress. Don't smile at the thought and think, "It can't happen here," because this same logic points directly to a deep and morally disturbing crisis in the United States. The euro zone needs to, and eventually will, take three steps:
Step 1: Agree on greater fiscal integration for a core set of countries. This will not be full fiscal union but some greater sharing of responsibilities for each other's debts. There is much room for ambiguity in government accounting and great guile at the top of the European political elite, so do not expect something completely clear to emerge.
But Germany will end up underwriting more liabilities for the European core; its opposition Social Democratic Party and the Greens are pushing Chancellor Angela Merkel in this direction, calling her "un-European."
Step 2: For the core countries, the European Central Bank will receive greater authority to buy up government bonds as needed. Speculators in these securities will be badly burned as necessary. The wild card is whether the Bundesbank president, Axel Weber, will get to take over the central bank in fall 2011 "“ as expected and as apparently required by Ms. Merkel.
Mr. Weber has been vociferously opposed to exactly this bond-buying course of action. So the immovable Mr. Weber will meet the unstoppable logic of economic events. Good luck, Mr. Weber.
Step 3: One or more weaker countries will drop out of the euro zone, probably becoming rather like Montenegro, which uses the euro as its currency but does not have access to the European Central Bank-run credit system. Greece is probably the flashpoint; when it misses a payment on government debt, why should the central bank continue to accept Greek banks’ bonds, backed at that point by a sovereign entity in default?
The maelstrom will probably sweep aside Portugal and perhaps even Ireland; Spain and Italy will be threatened.
It would be easy to set up pre-emptive programs for Portugal and Spain with the International Monetary Fund, but this will not happen. The political stigma attached to borrowing from the I.M.F. is just too great.
The unfortunate truth is that despite its supposed return to pre-eminence and the renewed swagger of its senior officials, the I.M.F. remains weak and of limited value. It is an effective lender to small European countries under intense pressure — Latvia, Iceland, Greece and so on. But the I.M.F. does not have the resources or the legitimacy to save the bigger countries.
At the end of the day, the Europeans will save themselves, with the measures outlined above, only because there will be no other way to avoid wasting 60 years of political unification. But one or more countries will be forced out of full euro-zone membership (although they are likely to keep the euro as the means of exchange). The costs to everyone involved will be large "“ and largely unnecessary.
And when the financial markets are done with Europe, they will come to test the fiscal resolve of the United States. All the indications so far are that our politicians will struggle to get ahead of financial market pressure.
There are plenty of places in Europe where you can find an easy political consensus to cut taxes and increase budget deficits. Sadly, this no longer pacifies markets. The American political elite "“ right and left "“ believes that we are different from the Europeans because we issue the dollar and therefore have some special privileges forever.
But this is not the 1950s. Asia has risen. Europe will sort itself out and become more fiscally Germanic. The Age of American Predominance is over.
Our leading bankers looted the state, plunged the world into deep recession and cost the United States eight million jobs. Now many of them stand by with sharpened knives and enhanced bonuses "“ willing to suggest how the salaries and jobs of others can be further cut. Consider the morality of that.
Will no one think hard about what this means for our budget and our political system until it is too late?
E-mail This Print Share Close Linkedin Digg Facebook Mixx My Space new_york_times:http://economix.blogs.nytimes.com/2010/12/30/fresh-crises-loom-in-europe-and-the-u-s/ Permalink Daily Economist, euro, European Central Bank, fiscal policy, IMF, Simon Johnson Related Posts From Economix How Likely Is Default in Europe? The Next Global Problem: PortugalMaginot Lines and IllusionsIrish Miracle — or Mirage? Answers on Europe’s Debt Crisis, Part 3 Previous Post Who Benefits from Long-Term Unemployment? NYTD.CRNR.userContent.getUserContent(25,'default'); Search This Blog Search Previous Post Who Benefits from Long-Term Unemployment? Follow This Blog Twitter RSS Featured Economix PostsSimon Johnson, the former chief economist at the International Monetary Fund, is the co-author of "13 Bankers."
Most experienced watchers of the euro zone are expecting another serious crisis in early 2011, tied to the rollover funding needs of its weaker governments. With debts coming due from March through May, the crisis seems much more predictable than what happened to Greece or Ireland in 2010.
And the investment bankers who fell over themselves to lend to these countries on the way up now lead the way in talking up the prospects for a serious crisis.
This situation is not more preventable for being predictable, because its resolution will involve politically costly steps "“ which, given how Europe works, can be taken only under duress. Don't smile at the thought and think, "It can't happen here," because this same logic points directly to a deep and morally disturbing crisis in the United States. The euro zone needs to, and eventually will, take three steps:
Step 1: Agree on greater fiscal integration for a core set of countries. This will not be full fiscal union but some greater sharing of responsibilities for each other's debts. There is much room for ambiguity in government accounting and great guile at the top of the European political elite, so do not expect something completely clear to emerge.
But Germany will end up underwriting more liabilities for the European core; its opposition Social Democratic Party and the Greens are pushing Chancellor Angela Merkel in this direction, calling her "un-European."
Step 2: For the core countries, the European Central Bank will receive greater authority to buy up government bonds as needed. Speculators in these securities will be badly burned as necessary. The wild card is whether the Bundesbank president, Axel Weber, will get to take over the central bank in fall 2011 "“ as expected and as apparently required by Ms. Merkel.
Mr. Weber has been vociferously opposed to exactly this bond-buying course of action. So the immovable Mr. Weber will meet the unstoppable logic of economic events. Good luck, Mr. Weber.
Step 3: One or more weaker countries will drop out of the euro zone, probably becoming rather like Montenegro, which uses the euro as its currency but does not have access to the European Central Bank-run credit system. Greece is probably the flashpoint; when it misses a payment on government debt, why should the central bank continue to accept Greek banks’ bonds, backed at that point by a sovereign entity in default?
The maelstrom will probably sweep aside Portugal and perhaps even Ireland; Spain and Italy will be threatened.
It would be easy to set up pre-emptive programs for Portugal and Spain with the International Monetary Fund, but this will not happen. The political stigma attached to borrowing from the I.M.F. is just too great.
The unfortunate truth is that despite its supposed return to pre-eminence and the renewed swagger of its senior officials, the I.M.F. remains weak and of limited value. It is an effective lender to small European countries under intense pressure — Latvia, Iceland, Greece and so on. But the I.M.F. does not have the resources or the legitimacy to save the bigger countries.
At the end of the day, the Europeans will save themselves, with the measures outlined above, only because there will be no other way to avoid wasting 60 years of political unification. But one or more countries will be forced out of full euro-zone membership (although they are likely to keep the euro as the means of exchange). The costs to everyone involved will be large "“ and largely unnecessary.
And when the financial markets are done with Europe, they will come to test the fiscal resolve of the United States. All the indications so far are that our politicians will struggle to get ahead of financial market pressure.
There are plenty of places in Europe where you can find an easy political consensus to cut taxes and increase budget deficits. Sadly, this no longer pacifies markets. The American political elite "“ right and left "“ believes that we are different from the Europeans because we issue the dollar and therefore have some special privileges forever.
But this is not the 1950s. Asia has risen. Europe will sort itself out and become more fiscally Germanic. The Age of American Predominance is over.
Our leading bankers looted the state, plunged the world into deep recession and cost the United States eight million jobs. Now many of them stand by with sharpened knives and enhanced bonuses "“ willing to suggest how the salaries and jobs of others can be further cut. Consider the morality of that.
Will no one think hard about what this means for our budget and our political system until it is too late?
As the Europeans eventually find the political will to tackle their deficits, can the United States do the same, an economist asks.
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The nation’s most pious tend to lead healthier lives, according to the latest findings from the Gallup-Healthways Well-Being Index.
Limiting the compensation of banking executives is not the best way to curb their risk-taking, but it might be the option most readily available, an economist writes.
Should you buy a home or rent one? An updated list of the relationship between home prices and rents in 55 metropolitan areas.
The annual huge swell in retail sales each December brings with it many jobs but also demonstrates the inefficiency of spending as a tool to increase employment, an economist writes.
In a survey, 15 percent of workers who were unemployed in the immediate aftermath of the financial crisis said the economy would “never” begin to recover.
The states can provide a strong defense against growing federal powers, but the federal government is frequently needed to counter malfeasance at local levels, an economist writes.
In putting a spotlight on the Federal Reserve’s pattern of helping corporations and ignoring small businesses and homeowners, Bernie Sanders has reshaped the partisan debate, an economist writes.
Catherine Rampell is the economics editor at nytimes.com.
David Leonhardt writes the Economic Scene column, which appears in The Times on Wednesdays.
Motoko Rich is an economics reporter for The New York Times.
Michael Powell is an economics reporter for The New York Times.
Steven Greenhouse writes about labor and workplace issues for The New York Times.
Liz Alderman writes about European economics, finance and business from Paris.
Sewell Chan writes about economic issues from Washington D.C.
Jack Ewing writes about European economics and business from Frankfurt.
Economists offer readers insights about the dismal science.
Economics doesn't have to be complicated. It is the study of our lives "” our jobs, our homes, our families and the little decisions we face every day. Here at Economix, Catherine Rampell, David Leonhardt and other contributors will analyze the news and use economics as a framework for thinking about the world. We welcome feedback, at economix@nytimes.com.
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Multimedia Breaking Down the BailoutAn accounting of the government’s rescue package.
How the Government Dealt With Past RecessionsThree economists explain what worked and what didn't.
Geography of a RecessionA map of unemployment rates across the United States, now through January.
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Special Features The Debt TrapA series about the surge in consumer debt and the lenders who made it possible.
The ReckoningA series exploring the origins of the financial crisis, from Washington to Wall Street.
Blogroll Blogroll Barking Up the Wrong Tree Brad DeLong Cafe Hayek Calculated Risk Capital Gains and Games Dani Rodrik's Weblog DataPoints: The Dismal Scientist Blog Econbrowser EconLog Economist's View Greg Mankiw Marginal Revolution Nouriel Roubini's Global EconoMonitor Nudge Raghu Rajan Robert Reich Tax.com TaxProf TaxVox The Baseline Scenario The Becker-Posner Blog The Big Picture Will Wilkinson: The Fly Bottle Blogs From Newspapers and Magazines Andrew Sullivan Ezra Klein Felix Salmon Floyd Norris Freakonomics Free exchange (The Economist) James Surowiecki Megan McArdle Money-Supply (Financial Times) Paul Krugman Real Time Economics (WSJ) Wolf Forum (Financial Times) Economic Resources Employment Statistics GeoFRED: Geographic Federal Reserve Data Historical Data on Job Growth and Wages Historical Unemployment Data Inflation Calculator Interactive Housing Calculator International G.D.P. Rankings Latest Job Market Data Local Gas Prices Statistics on Income, Poverty and Health Insurance Coverage in the U.S. U.S. G.D.P. Statistics Tag List DAILY ECONOMIST 527 TAXES 261 UNEMPLOYMENT 255 HEALTH CARE 220 EMPLOYMENT 133 UWE E. REINHARDT 124 EDWARD L. GLAESER 124 STIMULUS 123 HOUSING 121 HEALTH INSURANCE 114 CASEY B. MULLIGAN 109 JOBS 105 JOBS REPORT 104 SIMON JOHNSON 100 WOMEN IN THE WORKFORCE 98 NANCY FOLBRE 91 RECESSION 87 U.S. HEALTH CARE COSTS 84 BUDGET DEFICIT 83 CHINA 82 FEDERAL RESERVE 80 EDUCATION 78 FINANCIAL CRISIS 73 GREAT RECESSION 69 BAILOUT 67 HIGHER EDUCATION 67 BANKS 67 INTERNATIONAL ECONOMICS 66 MAP 65 GROSS DOMESTIC PRODUCT 62 Archive Select Month December 2010 November 2010 October 2010 September 2010 August 2010 July 2010 June 2010 May 2010 April 2010 March 2010 February 2010 January 2010 December 2009 November 2009 October 2009 September 2009 August 2009 July 2009 June 2009 May 2009 April 2009 March 2009 February 2009 January 2009 December 2008 November 2008 October 2008 September 2008 Follow The New York Times »FacebookTwitterYouTubeRSS Home World U.S. N.Y. / Region Business Technology Science Health Sports Opinion Arts Style Travel Jobs Real Estate Autos Back to Top © 2010 The New York Times Company Privacy Your Ad Choices Terms of Service Corrections RSS First Look Help Contact Us Work for Us Advertise Site Map function apture_onload() { apture.addCallback(apture.WINDOW_OPEN, function() { dcsMultiTrack('DCS.dcssip','www.nytimes.com','DCS.dcsuri','/blogs/Apture.html','WT.ti','Apture','WT.z_dcsm','1'); }); } if (typeof NYTD.Blogs.user != 'undefined') { if(NYTD.Blogs.user.isLoggedIn()) { var dcsvid=NYTD.Blogs.user.getId(); var regstatus="registered"; } else { var dcsvid=""; var regstatus="non-registered"; } } var gaJsHost = (("https:" == document.location.protocol) ? "https://ssl." : "http://www."); document.write(unescape("%3Cscript src='" + gaJsHost + "google-analytics.com/ga.js' type='text/javascript'%3E%3C/script%3E")); var pageTracker = _gat._getTracker("UA-4406282-67"); pageTracker._initData(); pageTracker._trackPageview(); document.write('');Apture allows readers to dig deeper into a subject without ever leaving the blog post. When you click on any link marked by the icons , , or , you will be able to view video, reference materials, images and other related media. Please e-mail your feedback and thoughts on this feature to apture@nyt.com.
An accounting of the government’s rescue package.
Three economists explain what worked and what didn't.
A map of unemployment rates across the United States, now through January.
Faces, numbers and stories from behind the downturn.
A series about the surge in consumer debt and the lenders who made it possible.
A series exploring the origins of the financial crisis, from Washington to Wall Street.
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