This story, in short, is not over.Truth be told, it's difficult to determine what, exactly, Mr. Wolf seems to think is beginning amidst all his confusing personalization of the "eurozone" (ie, "it has a choice," "if the eurozone is willing to live with...", etc.).
For the eurozone, two lessons are clear: first, it has a choice – either it allows sovereign defaults, however messy, or it creates a true fiscal union, with strong discipline and funds sufficient to cushion adjustment in crushed economies – Mr Buiter recommends a European Monetary Fund of €2,000bn; and, second, adjustment in the eurozone is not going to work without offsetting adjustments in core countries. If the eurozone is willing to live with close to stagnant overall demand, it will become an arena for beggar-my-neighbour competitive disinflation, with growing reliance on world markets as a vent for surplus. Few are going to like this outcome.
The crises now unfolding confirm the wisdom of those who saw the euro as a highly risky venture. These shocks are not that surprising. On the contrary, they could have been expected. The fear that yoking together such diverse countries would increase tension, rather than reduce it, also appears vindicated: look at the surge of anti-European sentiment inside Germany. Yet, now that the eurozone has been created, it must work. The attempted rescue of Greece is just the beginning of the story. Much more still needs to be done, in responding to the immediate crisis and in reforming the eurozone itself, in the not too distant future.
Rather than write a lengthy piece trying to wade through the unnecessary complexity in an attempt at understanding what Wolf is talking about and then attempting to offer some comment on it, I'd rather just make the following points:
- There is nothing that will "work" for Greece in terms of any kind of bailout or cost/burden-shifting program designed by third parties.
- Talk of the "eurozone" being both necessarily permanent and necessarily in need of reform seem to be contradictory concepts and ultimately likely signal the impending doom of the arrangement entirely.
First, Greece is not a math problem. Greece is not a physics problem. The Greek economy is suffering from both the entitlement culture and the entitlements themselves of a socialist dependency, or what is known in more polite circles as a "socialist economy." Government expenditure is not productive expenditure, not in the former USSR, not in the current USA and not in Greece. There is no way for Greek politicians, EMU dignitaries or IMF consultants to come in, tweak a few numbers here, throw a few billion Euro there and then, voila! the Greek economy magically springs to life and begins to be able to service the debt anew. There will be pain, there will be hardship, there will be repudiation of the debt now and eventually, there will be repudiation of the entire Greek "economic" system.
The bust can not be avoided, just put off with more stimulus-induced booms. Mises figured out as much. There is no such thing as a free lunch.
Second, the Euro and the eurozone will fail because they must-- the EMU is a contradiction. The EMU, as it stands now, demands that its member governments enact fiscal discipline on themselves while simultaneously (if this current arrangement is actually executed) offering members who violate these rules a free-pass in the form of a dilution of the outstanding Euro-supply handed over as a bailout. That's called moral hazard. The EMU has effectively incentivized violation of its first premise via institution of its second premise. This is what we're witnessing now. Should the member governments seek to "reform" the EMU to resolve this contradiction, the EMU as it stands now will cease to exist.
In other words, for the EMU, it's safe to say that "that's a wrap!"
After that, those crazy euros will be rolling tanks across each others' forests and hillsides in no time, especially with those rascally Germans taking on an "anti-European" populism. Gee, I think I've heard this joke before, something about goose-stepping, kaisers and blitzkrieg.