Passion that doesn’t help: These Italians rallying over the weekend don’t help leaders reach a compromise that can limit Europe’s financial woes. (AFP/Getty Images)
It’s been an exiting week for euro-watchers, with the prime ministers of Greece and Italy forced to resign and debate opening wide up as to whether one or more of the “PIIGS” (Portugal, Italy, Ireland, Greece and Spain) will be forced to abandon the euro.
Euroskeptics point to all the internal tensions inherent in jamming a bunch of countries with different languages, cultures and economic institutions into a single currency. More cautious wonks point to the difficulties of leaving: the bank runs as people try to move their euros ahead of the change; the budgetary problems as governments lose their ability to borrow; the sheer logistical difficulty of reversing, overnight, a currency changeover that took years to effect.
In the end, however, this debate may be academic. The people, not the politicians, will ultimately decide. And voters across the euro zone seem to be fed up with the requirements of membership.
Fundamentally, Europe has three choices:
1) The PIIGS can exit the euro, which will constitute a default-by-devaluation on their debt — and trigger financial crises both at home and in other euro members whose banks have loaded up on eurozone sovereign debt over the last decade.
2) The bigger, richer members (read: France and Germany) can give the PIIGS bridge loans while they undertake a brutal austerity program to close their budget deficits as quickly as possible.
3) Those same richer members, and the European Central Bank, can effectively guarantee all the borrowing of the peripheral nations without demanding such deep cuts.
Ask a German about that last possibility, and he’ll tell you that it’s impossible and unfair: Why should they pay to support the bloated public sector of countries where tax evasion is an (Olympic-caliber) national sport?
Ask a Greek about option No. 2, and he’ll tell you it’s impossible and unfair: Why should citizens of an already-struggling country accept massive pay cuts in order to keep German banks solvent?
That would seem to leave exit as the only remaining possibility.
You can argue that they’re cutting off their noses to spite their faces. If the PIIGS choose exit over budget cuts, they’ll touch off a European banking crisis that will cost German depositors (and taxpayers) plenty, probably more than an extremely generous bailout package. Meanwhile, the resulting capital-markets freeze will force many of the PIIGS into even deeper and more immediate austerity measures than the ones now triggering riots in Athens.
Indeed, many people have been making exactly these arguments, for months — to no avail. The demonstrations have continued across the eurozone’s endangered periphery.
The heads of Greece and Rome are now democrats, and not dictators. So are the heads of Germany and France. None of these governments can make a deal of this size unless their population will accept it. And as any parent knows, the most intractable domestic disputes all start with the same cry: “It’s not fair!”
But don’t look too superior, Americans; we’re just as prone to this folly. Look at our own bailouts. Liberals and conservatives are united in condemning the 2008 bank-rescue package: conservatives because the government interfered in the market, and liberals because some of the bailed-out bankers still have lucrative jobs.
This even though almost all the money has been repaid (at a slight profit to the government), and most economists agree that it averted a much worse crisis, something more like the Great Depression’s double-digit GDP contraction and unemployment rates. Maybe true, maybe not, say the critics, so let’s focus on the one thing we do know: It’s not fair that those bankers got all that help from the government.
If events in Europe trigger another financial crisis here (and they well might), will the Federal Reserve and Treasury be able to step in and stop the contagion from spreading too far, as they did in 2008? Or will an outraged American public make sure that they don’t provide any of the guarantees, arranged sales and cash infusions that kept the 2008 crisis from going nuclear?
If we do keep our government from intervening, will the resulting unemployment, bankruptcy and general misery actually fall “fairly” on only those who deserve it?
In a modern, complex economy where all actions can have far-reaching consequences, fault is hard to untangle — and a search for perfect fairness is thus always ultimately quixotic. But Don Quixote was just harmlessly tilting at windmills; we seem determined to tilt the foundations of our own prosperity.
Megan McArdle is a senior editor at The Atlantic.