This article by Niall Ferguson is framed in that particularly annoying way
(how economic armageddon in Europe is bad for Obama!) but the central point is that things are really, really bad in Europe right now:Niall Ferguson on How Europe Could Cost Obama the Election
Indeed, having a monetary union without any of the other institutions of a federal state is proving to be a disastrously unstable combination. The paradox is that monetary union is causing Europe to disintegrate—the opposite of what was intended. According to the IMF, GDP will contract this year by 4.7 percent in Greece, 3.3 percent in Portugal, 1.9 percent in Italy, and 1.8 percent in Spain. The unemployment rate in Spain is 24 percent, in Greece 22 percent, and in Portugal 14 percent. Public debt exceeds 100 percent of GDP in Greece, Ireland, Italy, and Portugal. These countries’ long-term interest rates are four or more times higher than Germany’s.
. . .
Europe’s monetary union has entered a doom loop. Recessions in peripheral Europe are driving down tax revenues and increasing welfare spending. Despite German-imposed austerity programs, deficits keep overshooting the targets. But these governments can no longer borrow at affordable rates. Meanwhile, their banks are hemorrhaging deposits. Up until now, broke banks could prop up broke governments by borrowing from the European Central Bank and using the cash to buy their governments’ bonds. But that game is over. For there is nothing the ECB can do to stop panicky Spaniards swapping “Spanish euros” for “German euros”—in other words, putting their savings into German banks for fear that Spanish accounts will one day be converted back into pesetas.
This is a potentially explosive process. Already the centrifugal forces at work have generated a vast imbalance within the TARGET2 system, which processes payments between the euro-zone member states’ central banks. In effect, the peripheral central banks owe the German Bundesbank €650 billion. This is a figure that grows larger with every passing week.
What makes all of this so terrifying is that it vividly recalls the events of the summer of 1931. It’s often forgotten that the Great Depression, like a soccer match, was a game of two halves. If the first half was dominated by the U.S. stock-market crash, the second was kicked off by a European banking crisis. It began in May 1931, when the biggest bank in Austria, the Creditanstalt, was revealed to be insolvent. The lethal blow was the collapse two months later of the Danat Bank, one of the biggest in Germany.
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So, after more than two years of procrastination—known universally as “kicking the can down the road”—Europe has reached the moment of truth.
It’s binary. Either German Chancellor Angela Merkel has to bow to the logic of her predecessor but one, Helmut Kohl, who always saw monetary union as a route to federalism, or it’s over—and the process of European disintegration is about to spiral out of control. Put another way: if Europe’s leaders try kicking the can one more time, it will turn out to be packed with explosives.
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