Europe did not collapse this last week. That was something of a pleasant surprise, since portents of the economic grouping's demise have been accumulating for years now. In lieu of collapse, there were just more troubling signs: the fall of the government in the Netherlands; unemployment approaching 25 percent in Spain and a credit rating downgrade; French elections that featured growing nationalist strength and a likely split with Germany over austerity.
This raises a question. Given all the analyses proclaiming "the end is nigh," when, exactly, might we expect it? Some European friends would argue that this is the point -- we shouldn't expect it. This sort of brinksmanship is the way of Europe. Crises loom, there is wailing and lamentation, a summit is held, someone makes a concession (the Germans a likely candidate) and the crisis is averted. Thus it has been and thus it shall always be, they say. This is largely a matter of faith, but one must admit that it is a reasonable description of the recent European experience.
Here, though, is an alternative interpretation, presented in the form of a parable:
Imagine a friend who earns $3,000 a month, but has an unhealthy tendency to spend $5,000 a month. You observe this and remark to yourself: "This is unsustainable; it's got to stop." You wait for your friend to realize this.
But it turns out your friend has some savings he can use. These savings tide him over for a while, but when he burns through those, you once again figure his time has come. Surely he must now change his behavior.
But your friend finds he can take out a home equity loan. This funds his lifestyle for months more until, at last, those funds are exhausted, too. Time's up, you think.
But your friend announces that he still has plenty of borrowing room on his credit cards. The good life continues (albeit at a rather high interest rate). Sooner or later, of course, he maxes out his cards. This has got to be the end of it, you think. But then your friend mentions that he has heard about this loan shark downtown...
So what's the moral of the story? Is it not to worry -- your friend always finds a way? Or is it that a difficult adjustment can be postponed at ever-increasing cost? And what of the original question -- at what point does "the end" come? Is it when you first recognize that the situation is non-viable? Or is it when the loan shark finally shows up with his truncheon to collect?
This is an imperfect parable for Europe's situation in a number of ways. First, not all troubled European countries got there because of profligate spending. Spain and Ireland, for example, saw good fiscal positions go bad when they had to backstop troubled banks. Nor can one argue that Spain and Greece are continuing to live 'the good life' -- they're suffering real pain. It's just that the major adjustments they have made appear insufficient. And Europe's crisis is multifaceted; in addition to sovereign debt there are faltering banks and uncompetitive economies.
The real problem with the parable is that it tends to suggest that the growing costs are all financial. The more troubling costs may be political. Part of the way Europe has pushed past previous decision points has been to shunt aside democratic input -- as when new governments were installed in Greece and Italy, or when the major Greek political parties had to pre-commit to support an austerity plan, or in the push for a zone-wide austerity pact to be enforced from Brussels. Here the "loan shark with a truncheon" takes the form of more extreme movements in these countries taking up a nationalist cause and winning growing support, as with Marine Le Pen's Front National in France, or the slipping support for New Democracy and Pasok in Greece. Indebted and shamed nations in Europe, pushed around by their neighbors, rallying to a nationalist cry, what could go wrong? Europe does have a history along these lines.
The euro zone has bought itself time and may continue to do so for a while, but the costs seem to be mounting.
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