The latest meme in the financial press in regards to the eurocrisis is that this time is really different.
If you wish to understand current events in Europe you need to read and understand two books, This Time is Different and Endgame.
In the former, Reinhart and Rogoff analyze 224 debt crisis spanning back to the Enlightenment. Once a country enters crisis mode, it always defaults. There is not one case where the situation reverses itself and the country emerges without either a de jure or de facto default. How and when may change, but the end result is always the same.
In the latter, Maudlin and Tepper delve into the mechanics of debt crisis in general and call today’s eurocrisis right before it started. They predicted Spain’s and the eurozone’s future troubles several years ago.
These facts never will stop a journalist from writing that this time is different. The whole meme is supported by an unearned trust in governments and institutions. The writer’s thinking here is that Europe has the will and the way to solve the eurocrisis based on a temporary abatement caused by Mario Draghi’s promise of unlimited intervention.
The article claims that there has been a change in the German position on bailouts, but this is simply not true. The German position was, is and will remain the same.
Germany will do barely enough to maintain the current status quo through elections so that Merkel retains power. In exchange for this aid, it will insist on concessions from the countries in crisis. This was the plan for the first Greek bailout in 2010, the second in 2012 and the upcoming adjustments to the third bailout.
Germany has also made it clear that Spain and Italy will have to sign on to conditions if they wish to receive aid from an ESM bailout or the ECB through OMT. The only thing that has changed is the perception of Germany’s crisis fighting efforts, not the reality.
The eurocrisis has been ebbing since late July on Draghi’s promises. Because of the temporary improvement in yields, journalists are writing that the worst is over. The author writes
[T]he air of existential crisis has dissipated. Predictions of the euro’s imminent demise proved premature. The common assumption now is that politics is trumping economics.
This is a dangerous mistake. Politics only trumps economics in the short term. In the long term, if something can’t go on, it will stop. While crisis fighting measure have helped to reverse the crisis temporarily, nothing is being done to address the huge internal imbalances within the eurozone created by having a one-size-fits-all currency.
There is a two-speed Europe, a prosperous north where it is easy to obtain financing and a poor south where very little new lending is occurring. As long as these imbalances are not effectively addressed, economic misery will continue in the periphery.
For all the talk of reforms, German workers are the most productive and will continue to be. The only way to address these imbalances is a currency devaluation, which may only be achieved by a breakup. I won’t tell you when this will happen. It could be anytime between tomorrow and several years into the future.
The author believes that what is occurring is a standard debtor-creditor negotiation. This is a mischaracterization of the real dynamics of the eurocrisis. Merkel’s favorite tactic is brinkmanship politics. She simply does nothing until a crisis begins to materialize. Then, her constituents and the debtors allow her to call the shots so that the fear abates. By doing as little as possible in exchange for concessions, she is able to extend the status quo, i.e. kick the can down the road.
By suppressing the crisis for this long, the crash will be much worse when things eventually come to a head. Sadly, this time will not be different at all.