The Eurozone looks like it's about to unravel. Greece announced that it's holding a referendum about the austerity/bailout package offered to it by the EU and the IMF, and it's pretty likely that such a referendum would reject it. It's quite likely that it won't even be needed, as the mere announcement has gotten stuff moving so quickly that by the time there is such a referendum, it'll be too late.
The EU leadership has completely failed to address the crisis. I'm really disappointed in it. There's a simple, basic refusal to face reality. The reality is this:
GREECE IS BROKE.
This has been entirely obvious for at least a year now. Instead of accepting this and dealing with it, the approach has been to go "BLAA BLAA BLAA I'M NOT LISTENING I'M NOT LISTENING" and pretend that it's a liquidity problem, and that "confidence" and "voluntary debt forgiveness" that just might, if we're lucky, get the Greek debt/GDP ratio to about 120% instead of 140% in another decade or so, will magically sort things out.
It doesn't really matter how Greece got there. That's the reality, and it needs to be dealth with. Dealing with insolvent debtors is pretty simple. They default, and then the creditors and the debtor come to some kind of arrangement about who recovers what of the debts, if anything. The rest are written off as losses, and then life goes on, with everybody the sorrier but, it is to be hoped, the wiser. It wouldn't be the first time, and certainly not the last.
Another complicating factor with Greece is that the Euro functions much as the gold standard did in the 1930's depression: it makes it impossible to devalue, which means the only way the economy can adjust is through a fall in wages, which only happens through massive and very persistent unemployment. Years of pain, in other words.
Germany has been the big problem here. It wants something that's mathematically impossible—to simultaneously maintain its massive trade surplus with Southern Europe, and to stop lending Southern Europe more money. A trade surplus means that goods go in, money comes out. If money comes out, money has to go in. If Southern Europe can't in turn export to someone else to get money to come in—which it can't as long as it has a currency that's massively overvalued for their economies—that money has to be borrowed. It doesn't matter how much Angela Merkel hectors Greece about "living up to its commitments." It can't do that. It's broke, and nobody's lending it any more money.
Oh, and, austerity doesn't produce growth. Never. Structural reforms might make an economy more competitive in the long run, and Greece absolutely needs to do something about its utterly rotten system of governance, but that won't help with the immediate crisis. That can only happen once the dust settles, and will be needed to stop this from happening again. But not now.
I was wrong about the Euro. I believed it could work as a way to get the diverse European economies to converge, and the difficulties inherent in such a diverse currency zone could be worked through by political action. That was clearly not the case. Turns out that Paul Krugman does understand economics better than me. Imagine that.
Right now the best solution for everybody is to bite the bullet and get this over with. Greece should leave the Euro and default, and the let the drachma drop as far it has to. If—as seems very likely—the crisis will spread to Italy next, Italy should do the same. As should any other countries to which it spreads. This could include France. If that happens, what's left doesn't have much to do with the Euro as it used to be, and the European Union itself would be in grave jeopardy.
That would be a shame. Europe used to be the most war-ridden continent in the past thousand years at least, and the EU has brought it a period of peace, stability, and prosperity that it has never experienced. I believe that the EU could be a huge stabilizing influence simply by virtue of existing and functioning; an empire with voluntary membership and no emperor. I would hate to go back to a system of jingoistic nation-states beggaring each other.
This crisis is a pretty good acid test of the whole European idea. If Europe can't manage to resolve this, it doesn't deserve to survive.
I'm pretty bummed about this. But bravo, Greece, about that referendum thing. It's about time someone faced up to the reality, and if Merkel and Sarkozy aren't able to do it, it's gotta be you.
So please, let's get this over with. Then we'll pick up the pieces.