The Bloomberg interview with David Blanchflower of Dartmouth College last week captures the essence of the European sovereign debt crisis. The essence of what Dr. Blanchflower says is this: European policymakers are leading from the rear and that has meant an escalating crisis which is now too far gone to be fixable. He calls it “the economics of Dither”.
I think he has it right. The dithering by policymakers has created contagion where they have consistently said they were looking to avoid contagion. Just today, another French bank has come under the microscope because of its poor liquidity situation. This time it is Dexia, a French-Belgian group that was already bailed out in the 2008 panic. European bourses are down in a major way with banks leading the charge. Dexia has traded down by 14% as it has been put on review for downgrade due to its Greek debt exposure.
My comments a year ago on the policy-making approach in Europe still hold:
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.
–A few thoughts about the euro crisis and the psychology of change, June 2010
Blanchflower video below