Europe (Still) on the Brink

Europe has done a remarkable job of kicking the can down the road so far on the Euro-debt crisis.  But it sure looks like they won't be able to do that much longer.  Things are looking bad... really bad....

Ambrose Evans-Pritchard writes:

[T]he chief reason why Greece cannot meet its deficit targets is because the EU has imposed the most violent fiscal deflation ever inflicted on a modern developed economy - 16pc of GDP of net tightening in three years - without offsetting monetary stimulus, debt relief, or devaluation.

This has sent the economy into a self-feeding downward spiral, crushing tax revenues. The policy is obscurantist, a replay of the Gold Standard in 1931. It has self-evidently failed. As the Greek parliament said, the debt dynamic is "out of control". 

Gavyn Davies:

Last week, several events conspired to make the crisis more alarming. In Greece, the government faced lower GDP growth and higher budget deficits, making the task of hitting deficit targets appear more improbable than ever. Even though the Papandreou government has refused to throw in the towel and intends to close the latest budget gap by raising E2bn from a new property tax, there seems to be no conceivable escape from the familiar downward spiral – more budgetary tightening, low growth, higher budget deficits, higher bond yields.

That leaves Germany with a clear choice, which is either to rescue Greece with a huge fiscal transfer or prepare to deal with the consequences of a Greek default, with a possible departure from the euro. To judge from today’s German newspapers, it is increasingly likely that they will choose to jettison Greece.

Barry Eichengreen:

Europe doesn’t have months, much less years, to resolve its crisis. At this point, it has only days to avert the worst.

Liz Alderman and Nelson Schwartz of the New York Times:

On Sunday, French government officials braced for possible ratings downgrades by Moody’s Investors Service of France’s three largest banks, BNP Paribas, Société Générale and Crédit Agricole, whose shares were among the biggest losers last week. The biggest banks in Europe, especially in France, hold billions of euros’ worth of Greek bonds, and investors fear even a partial default by Greece would sharply diminish the value of those assets, eroding already weak capital positions.

American financial institutions, typically heavy lenders to their French counterparts, have begun to pull back on these loans, but United States banks’ exposure to France remains substantial. 

It looks like we'll have something to talk about in Econ 270 this spring....

Update (9/12): A nice column today from Paul Krugman on the subject.