Looking at the most recent European data you can’t help but wonder whether the Euro crisis is beginning to develop into something more akin to a plain vanilla recession – manufacturing deteriorating and firms responding by cutting jobs, and Spain is further down the path of no return than had been hoped. Worse this is starting to happen in the core – France seems to be increasingly affected, but it seems likely that exports dependant Germany will lose its lustre. The problem is that, as we all know and have discussed before, there are no standard policy levers left to pull – it seems to me that the worries that we had a year or two ago could now materialise in Europe.
It is also the 100th anniversary of the sinking of the Titanic, and yes the movie has been re-released. All this along with the reports that, and TH found himself losing it — thinking about his own version of a Titanic movie. A Monty Python version, where the main characters are the great economists Hayek, Keynes and Fisher, and the crew is the Euro group finance ministers (played by Monty Python, I leave it to you to figure out who is who). The titanic is the Euro area – its unsinkable, so long as the Euro group can just keep going, sticking to the original course.
It looks like a tragedy in three parts, set on a commemorative sailing of a super liner to remember the Titanic. The first part — the response to the US Subprime crisis (hurricane winds soon after ship sails) – two characters Hayek and Keynes debate the policy response. Hayek says do nothing, Keynes says do everything – the crew side with Keynes and increase spending and start quantitative easing to maintain the ship’s speed. The conclusion to the first part, “We are all Keynesian now” sung by John Cleeese dressed in drag as Celine Dione and trumpeted by the chorus (the ship’s captain and crew form the bow) of the ship’s crew.
Second act, concern arises about series of ice bergs that appear on the horizon. Keynes advocates maintaining speed, but changing course, Hayek advocates a slowdown while staying the course – he points out that the ship has no fuel left to change course anyways. Enter Fisher, who points out that icebergs are 6 times larger than they appear on the surface. He mentions something cryptic about “a downward spiral.” Enter Monty Python, playing Euro Group leaders, singing “Always look on the bright side of life.” Announcement from the captain to passengers that the ship was built to sail through ice flows, and the passengers should stand on the deck to observe the spectacular natural event. Part two ends with captain laying off crew as a cost cutting measure. They abandon ship.
Part three: A giant cartoon hand, reaches down beneath the sea and pulls out a plug – Fisher advocates that they can all be saved if they would just believe that there is no problem he asks them to imagine a world where prices are rising and the crew get their jobs back – he suggests that to the captain to tell everyone that the ship has a secret fuel and will use it in a big bazooka to destroy the hand. Alas, the hand is burned, but it is too late the downward spiral has begun. Giant sucking sound. Final credits roll.