Secret Origins: Eurozone Debt

Kantoos has an excellent post on Eurozone moralizing that I think I’ll let stand as my last word on the subject before turning attention to the above IMF chart posted by Brad Plumer showing the origins of the debt increases in main Eurozone countries.

Looking at Italy here you can see what makes this so frustrating. It’s honestly the truth that Italy is suffering a national-level bank run. This is not something people are mentally prepared to see happen to a major developed economy, so there seems to be some kind of resistance to stating that it’s what’s happening. But the reason we’re not prepared to see a bank run on a major developed economy is that major developed economies have central banks that act as lenders of last resort. There may or may not be good reasons to have adopted the mentality that the European Central Bank shouldn’t be permitted to act as lender of last resort, but the ECB’s lack of LOLR authority is why Italy is in trouble.

That said, many other things are wrong with Italy as everyone perfectly well knows. Part of the game that’s getting played here seems to be “use the bank run as leverage to force the Italian government to improve its public policy.” To me, getting central bankers more deeply involved in that kind of game is a much more dangerous threat to the long-term stability of monetary policy than is the reverse.

Meanwhile Germany – to an extent that perhaps neither their recent critics nor defenders have been eager to highlight – has done well not just thanks to good underlying qualities but thanks to smart policy choices. Germany went big on financial sector support and fiscal stimulus, and it worked.