Europe’s Debt Tragicomedy: Horror Show Turns Into Shambolic Farce

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France's President Nicolas Sarkozy and Germany's Chancellor Angela Merkel gesture as they arrive at the G20 venue where world leaders gather in Cannes November 2, 2011. (Photo: Christian Hartmann / Reuters)


There are occasions when even the scariest of  movies will push the atmosphere of dread, danger, and doom a bit too far, and leave the scenario of improbable horror and panic feeling just stupid. That moment has arrived in Nightmare On Euro Street, as people who watched Europe’s escalating crisis through their fingers in terror begin to snort, “Oh come on…!” in disbelief. As my colleague Michael Shuman noted in his recent Curious Capitalist post, Europe’s debt thriller has arrived at what seems to be a climax: Freddy Krueger has Greece trapped in a corner; Jason Vorhees is dragging Spain off by the hair, screaming; and Italy is in the shower, freaking out at the matronly shadow of Norman Bates. The terrible, violent end is clearly upon us—unless a bug-eyed, gore-soaked Angela Merkel suddenly appears looking like Carrie White to smite the doers of evil with the gymnasium ceiling.

But Angie is no Carrie, and since Nicolas Sarkozy doesn’t have the chops of Buffy Summers, we should probably consider the game over, and all lost. Which is exactly why things are now starting to look more stupid than they are scary.

For a horror flick to work, the audience has to be able to believe—even at the darkest moments—that some of the hero-characters may escape the maniacs seeking to hack them to bits (how do you make the sequel otherwise?). But the markets now playing the role of Bruce the shark (no relation) have made it clear they don’t plan to leave enough bodies in the water whole for even a minimalist game of Marco Polo. One by one, each successive euro victim must go down in a spray of blood. Which is why it’s so dumb: when it becomes clear no one has a chance, no one is going make it out, and the story is written to end in utter ruin, the entire venture becomes a total waste without any point.

Why the prediction of inevitable mass slaughter in Europe? Because as time passes, new government responses to the crisis fail, and markets pick up and widen attacks on more indebted euro economies, it becomes increasingly clear the script has already been written—and the demise of countries now fighting for their single currency lives is already sealed. Despite Italy’s economic ills being different than those of other euro zone countries, the market knives have begun hacking at Rome as inevitably as they turned from Greece to Ireland, Portugal, and Spain. France is next: and if anyone in the audience thinks Paris can still pull a Kevin McAllister on the Harry and Marv of prowling markets, they’d better try another movie.

Despite the announcement this week by Sarkozy’s government of debt-fighting austerity measures designed to save $26 billion over the next two years—and $90 billion by 2016—evidence France is on deck for the bludgeoning previous victims received after similarly fighting to forestall attack keeps piling up. Sure, severe political chaos in Italy was cited for the rise Wednesday in yields Rome must pay on new bonds to 7.5%. And despite Berlusconi’s imminent departure and agreement on debt reduction measures, Italy’s rate stayed at a dizzying 6.95% Friday. Yet while focus was riveted on the crisis’ effects in Italy, few people noticed the biggest increase on short-term interest in Europe since mid-week was suffered by France–whose rate jumped from 3.15% to 3.48% Thursday. That set a new record as the largest, costliest spread between the 1.78% rate of German bonds and the level France now pays—an increase that came despite the debt-reduction plan Paris unveiled Monday to show markets it was moving to halt contagion at its borders. Attention was focused on flames in Rome, but in spite of France’s preventive efforts, the debt pyros have set Paris aflame, too.

That lack of reward for French belt-tightening efforts seems unfair, but it’s also characteristic of the script of European doom. Take, for example, Standard & Poors “error” Thursday in sending an alert to investors that it had cut France’s AAA debt rating. A possible downgrade by S&P is currently being studied—making the false announcement of a French downgrade all the more believable to stalking markets. More ironic still, the specter of a negative revision was what prompted Monday’s austerity announcement by Paris to protect its rating. Funny how nothing seems to be working out for anyone in a tough spot these days.

And things aren’t likely to start going Europe’s way soon, either. In announcing lowered EU growth predictions for 2012, European authorities noted their dimming forecasts mean recent debt-cutting measures by euro countries now look insufficient—and that belts should be tightened further. As unhelpful a spanking that was to euro capitals with investors looking on, even that wasn’t as infuriating as former U.K. premier Gordon “the Groom of Gloom” Brown stepping up to predict France will probably be “picked off by the markets in the coming weeks and months”.

Brown’s kvetching is merely one of the spooky sound effects accompanying a film whose final scene seems to require doom for all. S & P’s unthinkable screw up on France’s rating might have been an honest mistake (though if so, can such an outfit really be entrusted making critical decisions about the futures of entire economies?). But does anyone think the market blades will stop flashing if the agency ultimately decides to preserve Paris’ AAA? As has become quite clear, markets are going to do what they’re going to do, and all the rules, thresholds, supposedly vital criteria cited to explain their action won’t stop them from increasing and widening their assault if that’s what they want to do.

Indeed, the decision last August by S&P to cut America’s debt rating resulted in virtually no market grumpiness—since investors figured they had more to lose than gain in dumping on U.S. bonds. Even if S&P stands pat on France’s rating (don’t count on it), markets will ramp up attacks on French debt as they’ve done elsewhere in the euro zone, and for the same reason: they’ve decided there’s lots of money to make in it. That’s the only criteria or justification needed—with most of the traditional economic reasoning cited for market behavior only serving as window dressing. As Paul Krugman notes in his Friday column:

 No country with significant debts has managed to slash its way back into the good graces of the financial markets. For example, Ireland is the good boy of Europe, having responded to its debt problems with savage austerity that has driven its unemployment rate to 14 percent. Yet the interest rate on Irish bonds is still above 8 percent — worse than Italy.

Sense? We don’t need no stinking sense.

Political improvisation in Europe’s debt crisis has been pretty wooden and unconvincing, to be sure. But we shouldn’t forget the drama itself is also looking very staged–if not essentially rigged–to produce a pre-ordained outcome. Just as bad, that script appears to call for a final act that will leave 17 economies, and millions of regular European citizens scattered across the floor in an economic massacre that didn’t have to happen. That’s worse than terrifying—it’s really, really stupid.

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