Europe's Real Problem Is A Loss of International Status

The euro-zone crisis is eroding Europe's geopolitical influence and compromising the European Union's negotiating position in international circles, European Commissioner for Economic and Monetary Affairs Olli Rehn said.

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"In political decision-making involving global economic matters, such as in the G-20 and the IMF, we have constantly been on the receiving end because of the debt crisis," Mr. Rehn told a gathering of Finnish ambassadors in Helsinki on Wednesday. "At this rate, Europe's status in the global economy is weakening ominously."

The European economic crisis is mostly a crisis of confidence, he said, and the region can regain the confidence of the global community by acting as a team. "We can best reinforce confidence by giving the picture of a united European team," Mr. Rehn said. "European decision-making should be a confidence-building team sport, otherwise it will not accomplish anything, nor will it bear fruit."

--WSJ, Aug. 23rd, 2012

So, Europe’s big problem at the moment is that its emissaries are not being treated with adequate respect at international meetings, and representing Europe abroad is becoming a bit embarrassing. The solution: Show more team spirit.

This is what occurs when politicians who do not understand economics confront economic problems. Jimmy Carter blamed his gasoline shortages on motorists driving too much; Gerald Ford fought inflationary monetary policies with a publicity campaign; Richard Nixon dealt with the oil embargo by declaring that his quest for energy independence was the “moral equivalent of war.”

Europe finds itself on the edge of a deflationary catastrophe; might the solution be massive monetary reflation? No, the solution is confidence-building exercises and, of course, “more solidarity”, which will convince foreigners that Europe is on the ball and ready to roll, or something.

So we see before us the utter intellectual bankruptcy of Europe’s leadership. They are rain dancers who believe that, if they dance harder and more sincerely, it will surely rain. They don’t know which economic lever to pull.

Depressions are not caused by poor team spirit or by inadequate “solidarity.” Nor are they caused by economists who are skeptical of European monetary union. I was amused to read a recent article by an Irishman with impeccable European credentials which stated that: “A certain model of financial capitalism perceives the euro as a threat, and its adherents will do everything they can to bring about its demise.” What is this “certain model of finance capitalism,” who are its villainous “adherents,” and what exactly are they doing to bring about the euro’s demise? I have no idea. The best way to bring about the euro’s demise is to tell the Europeans to keep on doing whatever they’ve been doing.

Right now, there are two schools of thought in Europe: the northern school, which preaches fiscal contraction and self-help; and the southern school, which preaches fiscal contraction and debt mutualization. Both schools are completely wrong. The former will quickly lead to breakup, default and chaos, while the latter will shrink the economic base while piling debt upon debt, leading to a Japanese-style fiscal crisis.

The only solution left for the eurozone is to dissolve the debt mountain by inflating the size of the economy. How did Italy manage to stay afloat for the past sixty years? By printing enough lire to make sure that nominal GDP kept up with government debt; it wasn’t rocket science, and it worked.

When one listens for the voice of economic reason in Europe, there is silence. Instead, Europe gets 1% nominal growth and 0% real growth, a recipe for disaster that no amount of team-building exercises can fix.;