Europe is trying the same policies that failed in Greece
Economist Tim Duy reflects about the lack of any sense of urgency from Europe to deal with the crisis (ht Economist’s View):
Consider where we are at today. Greece once again is making the headlines, as it is increasingly evident that they have made virtually no progress on the last bailout package, and will therefore need another. This should have come as no surprise; it was increasingly politically impossible to engage in additional austerity with the Greek economy plummeting into the abyss. But bailout fatigue will finally hit this time, as there appears to be no more appetite to limp Greece along. Evan Ambrose-Pritchard argues that Germany is leading the drive to finally force Greece out of the Eurozone. Ambrose rightly places at least some, if not the lion’s share, of the blame for this outcome at the feet of the Troika [ECB, IMF and the European Commission]
The big problem in Europe is that the European Central Bank has refused to make any concessions in terms of allowing higher inflation in Germany to ease the deflation in the periphery (Portugal, Ireland, Italy, Greece and Spain, or the PIIGS), something I addressed in an earlier post. It has also refused to buy these countries’ bonds in a quantitative easing type of program to stimulate the European economy and send a signal that they will support Eurozone countries’ economies even if it raises inflation a bit in Germany, something that is essential for bondholders who are increasingly unwilling to hold Spanish and Italian bonds. Spanish bonds now trade at yields above the 7% threshold that led Portugal, Ireland and Greece to seek a bailout, with Italian bonds only slightly below.
And the prescription from the Troika is the same. As Duy explains:
And make no mistake, European policymakers have learned nothing from the Greek experience. One gets the sense that policymakers think the prescription was correct, but that the patient was simply unwilling to take the medicine. Where Greece failed, Spain will succeed, or at least so it is hoped.
So, as before, the beatings will continue until morale improves and the European crisis is no closer to being solved.
UPDATE: With the latest comments from Mario Draghi, President of the ECB, Tim Duy thinks he has blinked…maybe.