Understanding Europe.

The best – by which I mean both clearest and scariest – piece I’ve read so far is by Niall Ferguson in Newsweek this week. What a careless, calamitous clusterfuck this grandiose unification project was, and how embarrassing that we somehow failed to foresee its inevitable flaws. Talk about creating a monster. Ferguson asks us to imagine a pre-Constitutional America:

Imagine a tiny federal government with almost no revenue. Only the states get to tax and borrow. Now imagine that Nevada has a debt in excess of 150 percent of the state’s gross domestic product. Imagine, too, the beginning of a massive bank run in California. And imagine that unemployment in these states is above 20 percent, with youth unemployment twice as high. Picture riots in Las Vegas and a general strike in Los Angeles…

This is pretty much where Europe finds itself today. Whereas the United States, with its federal system, has—almost without discussion—shared the burden of the financial crisis between the states of the Union, Europe has almost none of the institutions that would make that possible.

Which reminds me of a Krugman post from a fortnight ago:

[Currency areas are] much more likely to be workable if you have fiscal federalism, so that there are large automatic transfers to depressed regions. Now, I often compare Spain with Florida: both had huge housing bubbles followed by busts. Florida, however, has its retirement and much of its health care paid for from Washington. So how big are the transfers?…

Florida received what amounted to an annual transfer from Washington of $31 billion plus, or more than 4 percent of state GDP. That’s a transfer, not a loan. And it’s very big… Aid on that scale is inconceivable in Europe as currently constituted. That’s a big problem.


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