Fixing Europe’s Debt: On Syriza and the French Indemnity of 1871-73

Michael Pettis (previously), concluding an in-depth post that discusses the ongoing European debt crisis, and the traps, pitfalls, and fallacies to be aware of:

In summary, I think there are several points that those of us who want “Europe” to survive should be making.

1. The euro crisis is a crisis of Europe, not of European countries. […] There was plenty of irresponsible behavior in every country, and it is absurd to think […] that there was any chance that these countries would not respond in the way every country in history, including Germany in the 1870s and in the 1920s, had responded under similar conditions.

2. The “losers” in this system have been German and Spanish workers, until now, and German and Spanish middle class savers and taxpayers in the future as European banks are directly or indirectly bailed out. The winners have been banks, owners of assets, and business owners, mainly in Germany, whose profits were much higher during the last decade than they could possibly have been otherwise

3. In fact, the current European crisis is boringly similar to nearly every currency and sovereign debt crisis in modern history, in that it pits the interests of workers and small producers against the interests of bankers. […]

4. Historical precedents suggest two very obvious things. First, as long as Spain suffers from its current debt burden, it does not matter how intelligently and forcefully it implements economic reforms. It will not be able to grow out of its debt burden and must choose between two paths. One path involves many, many more years of economic hell […]. The other path is a swift resolution of the debt as it is restructured and partially forgiven in a disruptive but short process […].

5. Second, it is the responsibility of the leading centrist parties to recognize the options explicitly. If they do not, extremist parties either of the right or the left will take control of the debate, and convert what is a conflict between different economic sectors into a nationalist conflict or a class conflict. If the former win, it will spell the end of the grand European experiment.

Indeed. And it is rather soul-breaking to be observing these events unfold since 2008 without being able to do much or anything about it.

My only quibble with Michael Pettis’ post is that he fails to insist on the fact that this is not merely about public debt. Private debt counts too — in fact massively so. He occasionally writes posts that spell this out, but the little detail tends to get lost in translation when talking heads go back and forth on Europe and its public debt-related problems.

As an aside, the works and insights of Steve Keen on the role that private debt plays in the economy are very interesting, and most assuredly worth an hour of your time reading and watching if you’ve never run into them:

He runs the Debtwatch blog, and offers in-depth Behavioral Finance lectures on YouTube. As an advocate of a modern debt jubilee, he probably watched the recent debt forgiveness in Croatia with some interest.