Contagion in the sovereign debt crisis has already spread to Spain and Italy. David Blanchflower believes it may spread yet further to France. On Bloomberg, Blanchflower led off saying this would not be surprising, pointing to the dithering by EU policy makers:
“I’ve sat in this chair over the last, what, year and a half. And we’ve had roughly the same conversations.”
That is it exactly. The dithering, extend and pretend approach doesn’t work. It leads to crisis. A year ago, I voiced a few thoughts about the euro crisis and the psychology of change after the first Greek bailout was underway. And the logic is identical today:
When was the last time an unsustainable economic situation was solved without a crisis? Seriously, that’s a question. I can’t think of one. The way I see it, politicians are always focused on the short-term and that invariably means kicking the gas can down the road until it catches fire and you have to call in the fire department.
But now that it has gone pear-shaped, the EU has repeatedly tried to get through this crisis by making little fixes and tweaks without addressing the fundamental problems of excessive sovereign debt on the one hand and bank undercapitalisation on the other. They have their heads buried in the sand. Instead, politicians have argued that markets are acting like a speculating pack of wolves and creating crisis where none exists. Look at Jeffrey Sachs’ comments in the clip I showed you with Hugh Hendry and Gillian Tett. That’s the kind of rhetoric you see. Well, the wolfpack is at the door and they are going to rip the Euro house to shreds unless the bank capitalisation and national solvency issues are addressed without trying to socialize the losses across the entire euro zone.
Here’s how Pippa Malmgren put it:
- On kicking the can: "If you’re going to make a bet on the European banking system which is purely based on the idea that policy makers will consistently bail them out, then you have to ask questions about the capacity of policy makers to deliver on that promise."
- On markets as a pack of wolves: "That is fine as long as the market doesn’t call their bluff… Do I think the markets are going to call their bluff? The answer is yeah, because that’s what markets do."
- On the psychology of change: "The thing is, in markets and politics, you have to have a crisis to get a solution. That’s the way it works. It always works this way."
Is it any different today in July of 2011 than June of 2010 when she first said this? That’s a question, not a statement. The only difference I see is higher debt yields, more bailout fatigue, and greater potential for a bad outcome.
“Sorry chaps, you’ve made a mess of it. Fix it.” Blanchflower video below
P.S. – The contagion to (France and Germany) is already starting if you look to the CDS market. It has done in the past as well but things always settled down again. You see that in the German and French CDS charts. This time I suspect France will remain slightly coupled.
P.P.S. – Blanchflower: “Thank goodness Britain didn’t join the euro.”