Economy 4.0

Thinking about the eurozone as a bar

David Brancaccio Apr 30, 2012

David Brancaccio: Spain chopped its budgets but now austerity is biting back. There’s word today that Spain’s economy is now going backwards; that it’s contracting at an annual rate 0.5 percent. This isn’t healthy and has contributed to a new sense that Europe has failed to contain its financial crisis caused by countries that wildly spent borrowed money. But some academics are saying that politicians and the news media-are getting it wrong when they call the European mess a “government” or “sovereign debt crisis.”

Let’s go get a drink and explain.

Vivien Schmidt: Think about the eurozone as a bar. With a never-ending happy hour.

Boston University professor Vivien Schmidt. At a conference on Europe the other day, she said maybe the Greeks and the Spanish were on a drunken binge of borrowing.

Schmidt: But who were the bartenders? The French and the German banks! This is, in alcoholic terms, co-dependency. Everyone is responsible.

Because what’s the duty of a good bartender when the customer’s had too much?

John Cariff: Just say, hey buddy, you’ve had enough; not today.

John Cariff manning the bar at O’Neill’s pub near the U.N. in New York. If the customer insists on more drink, you cut ’em off by putting down a glass of water.

Cariff: He’ll eventually get the hint and just walk out. That’s the best way of doing it. That’s how I always do it and it always seems to work.

I then asked Mark Blyth — the Brown University professor of political economy who convened the conference on Europe — about whether the region faces a drinking crisis, a government-or-sovereign debt crisis or really a banking crisis. Blyth points to the mega-size of European banks; he says they have a bigger footprint than banks do in the U.S. In France, the top three banks are two-and-a-half times bigger than the country’s entire economy.

Mark Blyth: If any of those goes down, it blows up France! Deutsche Bank in Germany has an asset footprint that is 80 percent of German GDP. And guess what? It turns out they were buying just as many silly mortgages as everyone else. Oh, and they bought all this debt from places like Greece, so their balance sheet is stuffed full of nonsense!

Brancaccio: I thought our German friends were paragons of prudence.

Blyth: They talk a good game of austerity for everyone else and then practice something quite different themselves. Their banks are stable because basically they have one big bank, Deutsche Bank. But in France, as I said, 260 percent of GDP — that’s too big to bail. So why are we actually worried about the credit ratings of these sovereigns, why are we worried about the debt that they’re carrying?

Well imagine that you can’t bail them and you need to? Oh, and what makes this worse is they are all in the euro, which means they can’t actually print their way out of trouble. Then they’ve “kind’ve” become liabilities! And everyone is blaming the tired parents for the behavior of the teenager. But it’s a private banking problem that we’re really worried about.

Professor Mark Blyth at Brown University’s Watson Institute for International Studies. The conference was called “The Failure of the Euro?”

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