Saturday, December 10, 2011

Eichengreen Is Right ...

... or at any rate I agree with him:
The collapse of the eurozone would, of course, be an economic and financial calamity. But that is precisely why the European Central Bank will overcome its reluctance and intervene in the Italian and Spanish bond markets, and why the Italian and Spanish governments will, in the end, use that breathing space to complete the reforms that the ECB requires as a quid pro quo.
To be sure, Europe will not be spared the pain of a recession. A botched bank-recapitalization plan and the cloud of uncertainty hanging over the euro mean that recession is already baked in. Moreover, the pro-growth reforms needed in countries like Italy will almost certainly make things worse before they make them better. The initial effect of reducing hiring and firing costs, for example, will be layoffs of redundant workers. But investors look ahead, so reforms that promise an eventual return to growth should reassure them.

Of course, O'Rourke is also right:

As many feared and most expected, the just-concluded European summit left much to be desired. Once again, Europe’s national leaders showed themselves to be in denial about what underlies the eurozone’s economic, banking, and sovereign-debt crises, and thus hopelessly unable to resolve them.
Durchwursteln: it sounds better in German. Europe will muddle through.

1 comment:

Mitch Guthman said...

I am not so sure of that as I once was. The political class in Europe increasingly reminds me of the tale of the sorcerer's apprentice, except that there is nobody who actually know what he is doing to save us.

I do not see how this ends well for anybody except Davos Man. (But maybe that's the point of the exercise).