Department of "Huh?!" (Sebastian Mallaby Edition)

The European Double-Dip Is in Sight

Ryan Avent:

Europe's economy: Pushed to the breaking point | The Economist: Europe seems to be heading straight for a period of increasing strain. Something must eventually give way.... At the same time workers are struggling, governments are pushing through painful austerity packages. Some of the countries battered by bond markets began cutting in 2010. But as the chart at right indicates, everyone gets into the game in 2011.... The worst of it is that the cuts haven't protected slow-growing, indebted nations from the ravages of the bond traders....

Obviously German and French taxpayers aren't eager to spend more taxpayer cash preserving the currency union. But this attempt to foist more of the cost of adjustment onto the very places suffering the most seems designed specifically to create insoluble tensions with the euro zone. But here's the real kicker: the European Central Bank no longer seems interested in helping smooth things over. As Buttonwood noted yesterday, the ECB is allowing interbank rates wit....

Something clearly has to give. Policy changes are pushing Europe toward a very long period of stagnation if not an outright return to recession. Workers are underemployed and furious. Core and periphery have seriously diverging views on the direction policy should take. And markets continue to pressure indebted nations to make cuts they may not actually be able to make. Either the ECB must seriously soften its stance, or Germany and France must suddenly become much more generous to struggling euro zone economies, or the euro zone will face its toughest months yet. If no exit valve for the building pressure can be found, then pressured economies will begin heading for the exits.