Haircutting the Eurozone

Barry Eichengreen has another good column on the Eurozone debt situation making the point that for countries such as Spain, Portugal, Greece, and Ireland to successfully implement a strategy of “internal devaluation” (i.e., wage and price cuts) they almost certainly need to restructure their external debts. That means coordinated action, and it means some kind of backstopping function from the government of Germany, the ECB, etc:

Now we get to the hard part. All of this requires leadership. German leaders must acknowledge that their country’s banks are dangerously exposed to the debts of the eurozone periphery. They must convince their constituents that using public money to provide sweeteners for debt restructuring and to recapitalize the banks is essential to the internal devaluation strategy that they insist their neighbors follow.

In short, Europe’s leaders — and German leaders above all — must make the case that the alternative is too dire to contemplate. Because it is.

Something that really comes through spending time in Germany and talking to members of the German press (and just scanning their papers) is that mass consciousness of “European” issues is just very low across the board here. I’ve asked a bunch of people if they think people understand the circular flow of debts and how it is that much of this money is owed back to German institutions, and nobody seems to think the answer is yes. If you look at the serious newspapers like FAZ and the Suddeutscher Zeitung, none of the featured articles on their websites this morning related to these European questions. So while leadership is certainly needed, it also doesn’t seem incredibly likely. I think European elites thought they were doing something very clever in the 1990s when they sort of built up EU institutions by stealth. Part of what’s happening now, though, is that the continent is paying the price for having built a set of political institutions that’s totally at odds with public awareness.