Euro-area thought of the day

This is Joseph.

When even Greg Mankiw has decided that austerity is probably not the best way forward (he suggests that it would be wise to show "mercy"), then you have probably reached the point where the morality narrative has reached its logical limits.  It is also worth noting that the more painful this experience ends up being for Greece, the more likely it is that the Euro group has maximized its size and can only decline from here.

Because who would want to risk ending up like Greece?

Sentence of the day: Greece edition

This is Joseph.

The recent Eurozone stuff requires a bit more blogging than I am prepared for.  But I think that this comment from Ezra Klein puts in perspective just how wrong it all went:

Syriza's strategy, insofar as there was one, uncovered a method of failing that was much more complete and all-encompassing than anyone had thought possible at the start of the process.

The reason that this is bad news is the the European Union has been sold as a partnership.  In a partnership, it is actually bad for one side to lose very, very badly in negotiations.  Not because the person that won will not be objectively better off.  But because a partnership requires mutual benefit, and so a bad deal undermines the strength of the partnership.

Social Justice

Tyler Cowen points out a great interview with the head of a major Slovakian political party on why Slovakia isn't necessarily thrilled about the plans in Europe:

SPIEGEL ONLINE: Nevertheless, banks could run into significant problems should they be forced to write down billions in sovereign bond holdings.

Sulik: So what? They took on too much risk. That one might go broke as a consequence of bad decisions is just part of the market economy. Of course, states have to protect the savings of their populations. But that's much cheaper than bailing banks out. And that, in turn, is much cheaper than bailing entire states out.

SPIEGEL ONLINE: Does one of your reasons for not wanting to help Greece have to do with the fact that Slovakia itself is one of the poorest countries in the EU?

Sulík: A few years back, we survived an economic crisis. With great effort and tough reforms, we put it behind us. Today, Slovakia has the lowest average salaries in the euro zone. How am I supposed to explain to people that they are going to have to pay a higher value-added tax (VAT) so that Greeks can get pensions three times as high as the ones in Slovakia

I think that this is becoming one of the real flashpoints in our economic discourse. I am a huge supporter of pensions. But I can see the potential moral hazard in the Eurozone where making reckless promises can result in being bailed out (and working through your problems can result in being billed for others failure to do so). That sort of "tragedy of the commons" is a much bigger threat to economic stability than I had previously suspected.

We will have some of the same issues between generation here in the United States. There have been proposals to limit Medicare to people who are currently 55 plus. That will mean my generation (which began their careers with a terrible job market) will be playing taxes so that the generation ahead of it (which did comparatively well) can retire at a higher standard of living. These sorts of approaches can be toxic to any social contract.

But I can see Slovakia's position now, even if I am not necessarily in favor of it.

How education reform is becoming like the Eurozone

One of the great lessons that can be (though probably won't be) learned from the current economic crisis is that you shouldn't force yourself into a situation where you have to apply a single solution to a diverse set of problems. Much of Europe's current woes can be traced back to the fact that countries like Greece have to have the same monetary policy as countries like Germany. (Do a search for the Euro on Paul Krugman's blog for a detailed explanation of why this is such a bad idea.)

Schools are also a diverse population where elementary schools have a completely different set of challenges than do the higher grades, and where urban, suburban and rural schools each face radically different problems. Even if the proposed reforms are a good fit for one group of school (and that's far from a safe assumption), they will certainly be a poor, perhaps even disastrous fit for others.