Naiveté, Euro-style (way off-topic)

Being an American in Europe is a reminder of how unrefined and ignorant Americans can be.  No, we don’t speak three languages fluently, know which clothes to wear to the opera, or know why Belgians like to tweak the French.  We find 100 year old buildings historic (50 year old in Boulder!); Europeans view them as modernization efforts. So probably the biggest insult you could hurl at Europeans is that they are naive.

So GG has been here in Europe, very near Germany (and France, for that matter) and watched as opinions are expressed on the crisis in Greece.  And the conclusion is that there is a lot of naiveté going around, and so it feels like a moment to turn way off-topic.

Consider, for openers, the comment made to an American columnist by a German economist:

As one German economist put it to me, “How do you think the people of Manhattan would like bailing out Texas?”

The retort is, well, never very happy, but stuff like that happens all the time.  Krugman points out a specific example of exactly that. Those of us in the western U.S. are familiar with the rural parts of states getting angry over some laws or regulations passed by urban interests over their objections.  These areas then routinely plot out ways to secede and become new states until somebody finally does the math and recognizes that they can’t afford to be without the urban areas, which are paying more than their share for roads and schools and other services in rural areas. Do the urban areas gleefully look to jettison the rural ones? No. The same thing happens at state levels, where many states get more than they pay to the federal government, yet we don’t drop a few stars from the American flag over it. And you know what?  If you share a common currency, this is almost a necessity.  It is the difference between the American union and the European Union, and that a German economist is oblivious to this is, well, a fine demonstration of naiveté.

Arguably naive is acting as though a morality play is the best guidance for economic policy.  Reading the comments in the German press, there is a lot of anger directed at the Greeks.  They are viewed as the grasshoppers in Aesop’s fable, living a carefree life at others’ expense and unwilling to suffer the consequences. Given this view, there is a lot of anger.  Many Germans feel that no more of their tax dollars should go to Greece.

The problem is that that is not where any bailout money would go: it would go to the banks that made the loans, many of which are, ahem, German. And so it is quite possible to make an alternate morality play. In this play, some sharp operators ply poor and inexperienced people with cheap loans by overvaluing their assets, but when conditions change and hardship grips the people, the lenders demand all their money despite that exceeding the value of the assets.  We saw this in the US with the bundling of subprime loans, and this is essentially the same in Europe, but with Greece and Spain playing the role of Nevada and Arizona.  Both lenders and borrowers take on risks; it seems fair for each to suffer proportionally.  In fact, arguably a lender, with more experience in evaluating risk, should bear a greater and not lesser responsibility.  The free market should reward those who evaluate risks well and penalize those who do not.

So look, the issue is not which morality play is truer, it is that what is needed is a clear-eyed analysis that focuses on the desired outcome and the path to achieve it. The desired outcome is a Greek economy that is self-sufficient and within the Euro zone, one that can pay its debts and be a responsible part of the union.  Such a Greece would be in a position to fix the numerous problems it has (retirement policies well out of the European norm, a kleptocratic streak in government, etc.). The past few years have shown that in a weak economy (Greek prices are actually deflating, meaning that debts are getting proportionally larger), slashing government spending (which the Greeks have done) does not result in increased government income or a reduction in debt/GDP. Arguably all it does is destabilize the country. Empirical science would suggest that the austerity experiment failed and a different path should be found.  The most clear-eyed discussion of the likely path forward GG has seen was in the NY Times recently; basically it says that all such crises end with some of the debt being forgiven. The only major difference is how long it takes to recognize that this has to happen. You might think experienced players at this game would cut to the endgame more quickly.

So naïveté? Having a monetary union without a true economic union? Yes.  Making loans without expecting any risk? Yes. Thinking a morality play is the best basis for economic policy? Yes. Somehow this is all disappointing to a visitor from a country with its own problems with failing to see how the world really works. It is amazing to drive about Europe, crossing boundaries that were fortified for the better part of the last millennium, and not have to pass through customs or change money.  It would be sad for the Europeans not to see what they have made and find a way to preserve it.

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