Thursday, December 2, 2010

O'Rourke on the Euro

The reaction to the news that Irish taxpayers are to be squeezed while foreign bondholders escape scot-free has been one of outraged disbelief and anger. At the start of last week, it was possible to make the argument that ‘burning the bondholders’ was irresponsible, since it would inevitably lead to contagion, and the spread of the crisis to Iberia. That argument has at this stage lost all validity, since contagion has happened anyway. Besides, the correct response to the possibility of contagion was never to engage in make-believe, but to extend taxpayer protection to other Eurozone members as required. Swapping debt for equity in a coordinated fashion across Europe would show ordinary people that Europe is on their side; but like the PLO of old, the European Union never misses an opportunity to miss an opportunity. It could have provided a means of kick-starting a new post-crisis growth strategy based on investment in the infrastructures we will need in the future; instead it has transformed itself into a mechanism for forcing pro-cyclical adjustment onto countries that are already sinking. It could have led the way in reining in an out-of-control financial sector; instead it now embodies the discredited principle that banks must never, ever, default on their creditors, no matter how insolvent they may be. (h/t Henry Farrell)

And for more gloom, see Ken Rogoff.


FrédéricLN said...

Very, very, very good paper.

But there is a but: You can "swap debt for equity" only if you have a sustainable strategy for the day after. Or your equity is worth nothing.

Finding a sustainable strategy for the 2010's will require time among 450 million people speaking 21 or more different languages, looking at different TV channels, voting at different times.

Here is a true test for Europe as a political being: is it able to experience a large crisis?

So far, no (and I'm waiting since years).

But never say never. Things are-a-changing. Slowly, but that's the European way. Too slow, nevertheless, imho.

The country that's expected to provide ideas for the group is expected to wake up around April, 2012. Let's cross fingers hoping that bankruptcy will wait that long.

FrédéricLN said...

P-S - I tried a translation

American readers who understand French, any improvement will be welcome!