Euro Crisis Update (Lazy Block-Quote Edition) II

...the re-updatening.

Here's that block-quote:

The IMF usually has maximal bargaining power at a country’s moment of crisis – it typically cares far less about whether the country makes it through than the country itself does, and hence can extract harsh conditions in return for aid.2 But – as we have seen with the Greek crisis – EU member states are far less able to simulate indifference when one of their own is in real trouble, both because member states are clubby, involved in iterated bargains etc, and because any real crisis is likely to be highly contagious (especially within the eurozone). In other words, the bargaining power of other EU member states (and of any purported EMF) is quite limited. If Greece really starts going down the tubes, Germany faces the unpalatable choice of either helping out or abandoning the system that it, more than any other member state, created. In short – any EMF, unlike the IMF, needs (a) to concentrate on preventing countries getting into trouble rather than dealing with them when they are already in trouble, and (b) deal with the fact that any country in trouble likely has significant clout in the architecture overseeing it.

From my sense of the EU integration process, and of the rough bargaining strengths of the actors involved, I imagine that any final bargain will emphasize forward-looking measures, which are intended to forestall problems before they arise. Unhappily for Bundesbank disciplinarians, these are likely to rely more on carrots than sticks – it is clear from previous experience with the Growth and Stability Pact that threats of harsh punishment are not sufficient to produce virtue if these threats are not credible. We can expect moderate levels of fiscal transfers (likely ratcheting up over time), aimed at helping ease the pain of adjustment, together with admonishments (and withdrawal of goodies) for those who fail to live up to their promises...So yes – the Greek crisis is plausibly a very significant step indeed in EU integration (whether for good or bad, I am not going to speculate, since even if I am right, it would depend heavily on the detail) (CrookedTimber).

In my first big post on this topic, I speculated that because the current arrangement in Europe is so unsustainable both economically or politically (Greece being the case in point), the system could only fall one of two ways: Europe will unravel or it will converge, but the middle ground can't hold any longer.

But I think I may have been wrong. For reasons relating to policy inertia, confidence in financial markets, politics, and the sheer limits of logistical implimentation, it seems like integration is a bit of a one-way street. It would be very difficult for any one actor in Europe to begin disentangling itself from the rest of the continental system, let alone to disentangle that system itself. At this point, it seems like things can only roll one way.