Thursday, March 22, 2012

Europe's Progress

The Lehmann Letter (SM)

Take a look at today's New York Times article on Europe's progress since the depths of its fiscal and financial crisis:

This letter has commented that Europe's recent concerted action toward Greece had similarities to Europe's actions a century ago toward recalcitrant debtor nations. Back then it was known as gunboat diplomacy. Using the threat of force European nations, on behalf of their bondholders, would seize the customs revenues of debtor nations. Then, over a number of years, they would skim off what was needed to satisfy the claims of these bondholders.

There are no gunboats today, but Europe placed Greece under similar stress. Greec desperately wanted to avoid a calamitous default on its debts because that would have instigated a massive flight of capital out of Greece. In order to obtain relief from its debts and additional funds from Europe to repay those debts, Greece had to agree to provide the European nations with control over much of Greece's finances. Europe now has first call on Greece's tax revenues and can reorder Greek priorities with respect to Greece's budget.

That has given creditors confidence that Greece's restructured debts will be repaid. As a result capital markets are now relieved that Europe will be able to manage the difficult finances of weaker nations such as Spain and Portugal.

It also means that Europe has taken a hard and unsympathetic posture toward nations whose fiscal irresponsibility has compromised their finances. Europe has said that it will force these nations through a contractionary ringer, obliging them to cut government spending as they raise taxes, despite the consequence of rising unemployment and economic misery. Europe has said: Put your fiscal house in order, or else!

As this letter said in an earlier comment, this is reminiscent of "the rules of the game" that prevailed under the gold standard a century ago. Nations were obliged to institute contractionary policies in order to maintain par value for their currencies. Today's nations must practice contractionary policies in order to remain functioning members of the European Union.

Taking the long view, this is all part of Europe's plan to bring its weaker southern and eastern periphery into the mainstream of European life. The European Union was generous in providing funds to these smaller and poorer European nations in order to assist them in building their infrastructure and refashioning their economies. These policies swiftly brought Ireland, Portugal, Spain, Greece, and the former satellites of the Soviet bloc out of severe backwardness. Now Europe is saying to them: We will continue to help you, but you won't get a free ride. Greece is an object lesson and a deterrent. Behave yourselves and you will get the benefit of European civilization. Indulge yourself and you will suffer the consequences.

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© 2012 Michael B. Lehmann

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