I have really been enjoying the ongoing internet discussion about “morality” and its role in understanding the Euro crisis (which may or may not be coming to a close with the latest proposals – color me skeptical until the ink is dry). To catch up, check out David Brooks and Matt Yglesias and Tyler Cowen and Ryan Avent and Scott Sumner and Kantoos and there’s no doubt a lot of other good stuff I’ve read that I’ve forgotten about.
Here’s one way to look at the whole situation. An individual may get into debt for many reasons. That individual might have borrowed to finance a new business that went belly-up; that business, in turn, might have failed due to incompetence on the part of the entrepreneur or factors that could not possibly have been foreseen, and everything in-between. The individual in question might have borrowed to buy a bigger house because she was expecting triplets, and felt she needed more space – and then, unexpectedly, lost her job because of a change in management. Or maybe she lost her job because she was pilfering from petty cash. The individual might have had a heart attack or other sudden and serious health condition. And might have declined to purchase adequate disability insurance. Or perhaps he couldn’t afford said insurance. Or perhaps his health problems are due to lifestyle decisions that his doctor had been warning him to correct. That individual might have gone into debt to blow it all in Vegas. Or perhaps he’s got an untreated gambling addiction.
Point being: no matter what the reason, the individual in question is going to go bankrupt if he or she can’t service his or her debts, and the bankruptcy process is not going to be focused on unraveling the thread of personal culpability. There is some degree of mutual interest between lender and debtor in a bankruptcy situation – and the law tries to be cognizant of that (and did a better job of being cognizant of that before the last decade’s bankruptcy “reforms”). But there is not a perfect mutuality of interest. And creditors hold the whip hand whether debtors “deserve” their situation or not.
Between nations, there is no similar law governing relations between debtors and creditors, but there is similarly a degree of mutuality of interest between them and a degree of disjunction of interests. And again, in general the credit has the whip hand, and “desert” plays into the question only inasmuch as it bears on the market estimation of the likelihood of being repaid on time and in a currency that hasn’t been substantially depreciated.
If Italy had control of its own currency, and got into the kind of trouble its in now – slowing global growth making it harder to service its debt – it could resort to devaluation to sustain itself. Which is just what Italy used to do on a regular basis back when it had its own currency, and because Italy had a reputation for doing that, it paid much higher interest rates than countries with better reputations did.
You can get moralistic about it and say that Italy “shouldn’t” have followed such a set of policies, but Italy paid the price for its own choices and I don’t see a need to declare that those choices were wrong.
But once Italy joined the Euro – substantially in order to escape its historic reputation as a serial devaluer – the equation changed. There was now no mechanism for Italy to use on its own to get out of a debt-related mess. Neither was there a mechanism for a higher authority to use, one with rules understood by all parties in advance. The right thing to do would have been to set the rules in advance. But that’s water under the bridge. So what’s going on now is that Europe is trying to establish the rules for dealing with a crisis in the midst of a crisis. Which, needless to say, isn’t easy.
And, politics not being beanbag, all parties are pushing their interests as they understand them. The Germans are more worried about the consequences of writing a blank check than are the Italians because the Germans will be the ones writing the check. It’s very easy to say, as Scott Sumner does, that you shouldn’t use threats of bad policy as leverage to get good policy – you should just do the right thing, because at least then you’ve done the right thing. But what constitutes the “right thing” is a function of time scale – and of how the alternatives are presented. If the choice is to dissolve the Euro or write a blank check, the “right thing” from a German perspective might be to dissolve the Euro. If the choice is dissolve the Euro or submit to permanent austerity, the “right thing” from an Italian perspective might be to dissolve the Euro. Yet both Italy and Germany might prefer a compromise that preserves the Euro to dissolution. To come to a compromise, however, each side needs to believe there are things the other side will not accept. And brinkmanship of the sort we’ve seen over the past few weeks is frequently the way political actors try to assess what those things might be.
I happen to be largely sympathetic to the German perspective on union as such – a perspective the German government held well before the current crisis and under both conservative and social democratic governments. That is to say, I think a “federal Europe” is the only real solution, and the main question is how to get there politically, which amounts to saying how to convince France to go there since France has been a consistent advocate of the “Europe of states” understanding of what the EU is or ought to be, an understanding that, I believe, is fundamentally inconsistent with the idea of a currency union, and proving to be so in the current crisis. But that doesn’t mean I think the Germans are “better” than the French or the Italians, or that the Germans should be “rewarded.” I’m not even sure fiscal union would ultimately be that great for German economic interests – it might, in the long term, be more expensive than just letting the Euro die. All it means is that I think their overall approach is more workable in terms of institutional design.
And the terms of that institutional design matter a great deal more than what the Euro-zone growth rate is next quarter. It would be bizarre for Europe’s leaders, faced with an unequivocal and profound design failure of their existing institutional arrangements, to punt on structural questions and simply have the ECB step in to bail out the periphery. Looser money is exactly what Europe’s central government should be delivering. But Europe doesn’t have a central government. It only has a central bank. The ECB is criticized for behaving as if it were the Bundesbank, making monetary policy based on German conditions alone. I fail to see how the situation is improved if the ECB were to behave as if it were Banca d’Italia. The ECB needs to be the central bank of Europe. To be that, there needs to be a European government. That’s what this crisis is about – not about morals and not about monetary policy, but about institutions.