Recessions and misunderstandings

Economist
October 4, 2011

One thing that has me very confused about the euro-zone crisis is that, while northern European political leaders and the European Central Bank fervently believe in hard money, balanced budgets, and severe discipline for profligate southern European governments, a substantial portion of the northern European financial industry seems to be in the camp of Martin Wolf and Paul Krugman. I just came from a seminar on the euro-zone crisis by a medium-sized Dutch capital management firm, and they're calling in alarmed tones for an immediate massive enlargement in the European Financial Stability Fund, leveraging of the same a la TARP to give it even more firepower, a centralised European budgetary authority, expansive monetary policy from the ECB to try to raise inflation to 3-4% while holding interest rates near zero, and a savage writedown of debt for Greece (and probably Portugal) to market levels, ie 50-60%. They recognise that in an ideal world, northern Europe should be engaging in fiscal stimulus, but since that's out of the question politically they're not calling for it. A strong majority of the Dutch financial players I talk to are on basically the same page.

I'm confused about this mainly because I can't understand the startling divide between the language one hears from the European financial industry, and the language one hears in European politics. There is virtually no one in the Dutch political scene calling for anything like what the Dutch financial industry wants. I find this bizarre. But perhaps I'm just used to the American political scene, where whatever Wall Street wants gets put in a package, express-mailed to Washington, and is on the floor of Congress the next day.

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