Debtor's Prison

Ross Douthat writes about the troubles of the EU in today's NYT. He call's the suffering South of Europe German's prisoners. I don't want to be caught defending Germany's role in the mess, but that's an exaggeration. What they are is prisoners of their debts and their expectations. My cartoon history of the European debt crisis goes a bit like this: German banks lent a lot of money to a bunch of people who couldn't afford to pay, actually mostly to banks who in turn lent it to those who couldn't afford to pay. If the banks, German and others, were to write off all the bad debt, they would go broke and the continent would be screwed.

The "solution" adopted, having the bad debt of borrowers and banks transferred to countries, combined with crippling austerity for the "borrowing" countries is brutalizing a lot of European countries. The circumstance that nobody wants to face is that the people who lent money don't want to lose it and they don't care how much damage this does to the countries where the money was borrowed.

This is one of the most toxic byproducts of excessive consumer debt. The death grip of the moneyed on thier wallets is strangling everybody else. We know how this ends (see, e.g., Cyprus, Greece, Argentina, etc.) The lenders lose a bunch of their money. The real question is how much damage they do before they figure that out. Douthat:

But you have to wonder whether the center can hold permanently, if unemployment remains so extraordinarily high. How must liberal democracy and mixed-economy capitalism look to young people in the south of Europe right now? How stable is a political and ideological settlement that requires the rising generation to go without jobs, homes and children because the European project supposedly depends on it? And for that matter, how well is the Continent’s difficult integration of Muslim immigrants likely to proceed in a world where neither natives nor immigrants can find work?

Already, the Greek electorate has been flirting with empowering a crypto-communist “coalition of the radical left,” even as a straightforwardly fascist party gains in the polls as well. Hungary’s conservative government has tiptoed toward authoritarianism. Spain has seen huge street protests whose organizers aspire to imitate the Arab Spring. And lately, Sweden, outside the euro zone but not immune to its youth unemployment problems, has been coping with unsettling, highly un-Scandinavian riots in immigrant neighborhoods.

His solution: don't try to fix it up, tear it up.

For now, there simply aren’t enough responsible people ready to unwind what should never have been knitted together in the first place. But with every increase in the unemployment rate, the odds get better that irresponsible and illiberal figures will end up unwinding it instead.

It's fairly likely to come to that, but there is a better way. Ken Rogoff favors explicit write downs of the bad loans - a good idea. Paul Krugman thinks that write down by inflationary expansion in the center would be better, and I tend to agree. German and other workers would at least get a pay raise out of that, and it would stimulate the economies more. Neither is likely to happen, because the wealthy really won't get the point until the peasantry show up at their doors with torches and pitchforks.