Why the #eurocrisis had an unstable ending - and could return. A simple summary for folks who weren’t old enough the first time. (Thread)
The #eurocrisis got real when Italian & Spanish bond markets began unraveling in 2011-12. Capital flight had a self-fulfilling dynamic, like bank runs on countries, and no action by national govts could stop it. /1
Belgian economist @pdegrauwe had warned that such a dynamic was an unforeseen, potentially lethal flaw of the €zone - and that only the ECB had the firepower to break it, by playing bond-buyer of last resort. /2
And so it came to pass. Draghi said he’d do “whatever it takes” and markets believed him, ending the self-fulfilling dynamic and the existential phase of the #eurocrisis. /3
But Draghi only felt able to expand ECB mission in this way once he had a green light from Berlin. (Here’s how he got it despite vigorous Bundesbank opposition: wsj.com/articles/SB100…) /4
To earn German & ECB support, Italy & Spain had to show they were serious about fiscal retrenchment & other overhauls. Merkel - and therefore Draghi - can only justify backstopping governments that play by the rules, incl. on deficits. Otherwise too much moral hazard. /5
(In Greece, Syriza failed to learn this lesson, so it was taught to them again in 2015.) /6
Thus in 2011 Berlusconi had to go as Italian PM, and technocrat successor Monti had to show Italy was taking bitter medicine. Ultimately it was all about persuading Merkel to let Draghi unleash the ECB. /7
Problem: Monti’s austerity measures (mainly tax hikes) deepened Italy’s slump. Italy still hasn’t recovered from its double-dip recession during the crisis. /8
And many Italian voters blame the economic scars since 2011 on austerity, Germany, EU institutions & financial markets. /9
So the argument for fiscal and rhetorical restraint, made by Italy’s deeply unpopular establishment, is more likely to anger than to persuade voters who see it as subservience to Berlin, Brussels, Frankfurt and “lo spread.” /10
Lega & M5S have no serious plan to leave the €. (You can’t. Not without burning your country down.) But they sense they can now slaughter the feeble establishment in snap elections by painting them as stooges of the nasty Germans. /11
When Lega/M5S finally get into govt, I do not know whether they will walk the talk. How radically they will break with European fiscal rules in reality? How much is posturing? /12
How much risk will they take for domestic political gain? Do they fully understand the risks? Or are they self-deluding like Syriza in 2015? /13
But if they govern as they’re currently talking, then they will be acting without an ECB safety net. /14
And if debt investors think the safety net is gone, then the unstable Draghi-Monti-Merkel #eurocrisis settlement of 2012 will be history.
/end of thread & possibly Europe as we know it
/end of thread & possibly Europe as we know it
