A really depressing aspect of watching the Eurozone crisis unfold is that for all the effort they’re putting in, they’re not getting at any solution.
The way European leaders see it, it basically goes like this: Greece borrowed way too much money, and if only it had been responsible it would be fine. Italy might have borrowed too much, but maybe it’s not too late to save it. And so if Greece can get a haircut, and Italy can reform, then everything is fine.
Unfortunately, this isn’t just simplistic, it’s wrong.
Europe doesn’t just have a debt problem, it has — as Nouriel Roubini reiterates out in a new paper — a flow problem. The weaker periphery states run persistent trade deficits with the stronger core countries (Germany, basically). And since the periphery doesn’t have the currency devaluation tool, it plugs the GDP gap (remember, a trade deficit subtracts from GDP) using government spending.
The fact of the matter is that ONLY Germany has seen its trade balance improve since the introduction of the euro. France and Italy have gone from countries running trade surpluses to countries running trade deficits.
And so it is we turn to this chart produced by Reuters’ graphics guru Scotty Barber comparing car registrations in Greece vs. the spread between Greek and German bonds.
Actually, the car sales line is inverse… so that you get the logical conclusion that as interest rates go up, car sales go down.
The simple (and correct) story is that the introducing of the euro made borrowing super-cheap, and that fuelled a car consumption bonanza in Greece. And, well, you probably don’t have to be a rocket scientist to guess which country made all the cars that the Greeks snapped up like crazy (spoiler alert: Germany).
So if Greece is ever going to work, there needs to be a system that resolves this problem, whereby Greece (and the rest of the PIIGS) are basically big credit-fuelled consumers of goods from Germany. One solution, obviously, is fiscal union (having the Germans continually transfer money to the periphery), but the politics of that are going to be really tough. Another solution is for the Greeks to become ultra-productive makers of fine manufactured goods (like the Germans are) but we don’t see that happening soon.
Regardless, merely fixing the current “debt problem” doesn’t get at the underlying problem.