Tue Feb 12th, 2013 at 04:30:42 AM EST
Earlier this week, I attended a talk by a distinguished gentleman scholar, on the subject of tax fraud and its enablers.
He wanted grad students for research projects in Eastern Europe, so after the talk we chatted a bit about the situation in Greece, which led to an e-mail exchange, in which I was asked whether I was actually serious when I gave 50/50 odds of at least one civil war in Southern Europe before the end of the present depression.
And since I already have the response typed up, I figured I'd repost it here:
Short answer: Yes.
In terms of both the magnitude of the crisis (GDP loss, inequality, unemployment, poverty, your indicator of choice here) and the policy response (rigid adherence to a hard money/balanced budget doctrine) we are in a postmodern reenactment of the 1930s. I don't see why we should expect a built-to-fail policy mix to fail any less catastrophically than it did last time.
Longer answer below the fold.
front-paged by afew
Longer answer: Greece is basically a failed state by now. Going by the Russian experience (ten years of austerity causes approx. 1 percentage point of poverty-related excess mortality), somewhere between 5 and 50 thousand Greeks have died of poverty since the beginning of the depression. Throughout the present depression, Spain has been Greece plus 12-18 months. And throughout the present depression, European policymakers have managed to underperform even my most pessimistic expectations.
On top of this, Spain and Greece are net fuel importers running primary trade deficits, which is known to lead to instability in the event of a sudden loss of access to hard currency credit. Given the contemporary political landscape, I cannot tell a plausible story about how Spain and Greece can avoid either loss of access to hard currency credit or a total breakdown of the legitimacy of their current political system (Greece is already quite far down the latter track). The only event I can imagine being of sufficient magnitude to change the political landscape enough that such a story becomes plausible is an armed conflict on sufficient scale to wake up the creditor countries to the fact that their policies are unsustainable.
Greece and Spain are both saddled with an obviously unsustainable hard currency debt. There are precisely three ways in which that story can end:
1) The country is liquidated (think Russia in the 1990s in the very best case).
Both countries have armed paramilitary forces on both the left and the right (and Spain has the added fun of having armed nationalists in the provinces and a central government that has in the past threatened to use the army to subdue provinces that fail to toe the Madrid line). They will not go quietly into the night.
2) Disorderly default, in which case they will be cut off from hard currency borrowing for a period of approx. 18 months, until the hysterics in the financial markets have calmed down (going by the Russian and Argentine experiences).
Both countries have a trade deficit, and are import dependent on fuel (and in Spain's case food as well - Greece is a net food importer in money terms, but I believe they are a net calorie exporter, and under suddenly imposed autarky that's what counts). Which means that being cut off from hard currency borrowing is pretty much equivalent to being put under a wartime naval blockade.
Switching to what is essentially a wartime economy cannot be done from a cold start, which means that the government will have to make serious preparations for default at least one to two quarters in advance. I do not believe that the current government of either country has done so, because I do not believe that they ever viewed the crisis in terms of national security and territorial integrity. An incoming Syriza or IU government is unlikely to be given six months to prepare before they are forced to choose between disorderly default and an austerity regime which will destroy their electoral legitimacy (and that's assuming they have the plans ready to roll out the moment they enter office - which Syriza has indicated that they have, but I don't think IU does).
In the absence of an orderly transition to a wartime economy, loss of access to food and fuel will effectively liquidate the country per option 1 (think a postmodern reenactment of 1930s Germany).
3) Orderly default, in which the ECB monetizes their (new) government bonds for a period of 18-24 months following a default, until the hysterics in the financial markets have calmed down. This will avoid civil war.
If you can present a politically plausible story that ends with the ECB committing to unrestricted bond monetization, then I would very much like to hear it. Because I can't think of any, and none of my friends can either.