The Iceberg Cometh: An economic and financial crisis will soon be brought about by the collapse of the European Monetary Union. And everyone goes down with the ship!

In the past, I have called the euro zone a "roach motel". But as usual, I've been outdone in the metaphor design department by the Italians: Guilio Tremonti, the Italian Finance Minister, last week compared Germany and its small-minded Chancellor Angela Merkel to a first-class passenger on the Titanic. The underlying message is the same: You can be sailing in coach or you can be in the 1st class compartment. But when the ship hits the iceberg, everybody goes down together -- Germans, Italians, Greeks, Irish and French alike. All euro zone members have an institutional wide problem of not being able to fund deficits, given that the countries of the euro zone have all acceded to impose gold standard conditions on themselves by forfeiting their fiscal freedom.

To repeat: this is not a problem confined to the periphery. The sovereign risk problem applies to the central core countries, such as Germany and France, as it does to the Mediterranean "profligates". Once a run on the currency starts and moves into the banking sector, then none of the governments will be able to do anything other than to oversee financial and economic collapse while the fiddlers in Brussels and Frankfurt try to spin some line about "special circumstances" or something without admitting the whole system they imposed on the area is the cause of this crisis.

In the words of Stephanie Kelton:

The risk for the fiscal authorities of any member country is that the ‘dismal arithmetic' of the budget constraint leaves few palatable alternatives. If the yield on government securities demanded by markets exceeds a country's nominal income growth, then interest expense on the outstanding debt must become a relatively larger burden (Jordan, 1997: 3).

In a country like the United States, this should never cause financial stress; the U.S. government can always meet any dollar-denominated commitment as it comes due. But markets clearly recognize that things work differently in the Eurozone, where governments are no longer able to ‘print money.' As a result, the bonds issued by member governments now resemble those issued by state and local governments in the United States (or bonds issued by provinces in Canada or Australia), where yields often differ by a sizable amount.

The European Monetary Union has hitherto only survived because whenever push comes to shove, the ECB has stepped in as the "missing" fiscal agent and has kept the bond markets at bay. It continues to "write the check" whenever the markets seek to shut down the individual markets on the grounds of looming insolvency.

But Finance Minister Tremonti is right: the underlying logic of the monetary system will continue to ensure these on-going crises will spread across the union. Each successive "resolution" is merely a place-holding operation. The EU bosses are just buying time and kicking the can down the road. Ultimately, to survive the system has to add a unified fiscal authority and abandon the fiscal rules embodied in the Stability and Growth Pact or accept the experiment has failed and dissolve the union. The constant stop-gap measures being introduced on a seemingly ad hoc basis are leading toward a very unpleasant dissolution, the end result for which could be Europe's "Lehman" event. Meanwhile, the iceberg is approaching rapidly.

Europe's brokered marriage is in deep trouble. The partners have not grown together. For a long time, countries such as Greece and Portugal benefited from the illusion of economic convergence through the lower interest rates and stable currency that the euro brought with it. When the European economy was growing, the markets indulged the fantasy that there was little to choose between Greek and German debt. But that has now changed -- and Greece has to pay a significant premium on its borrowing, as does Portugal and now Spain and Italy.

It is also now obvious that countries such as Greece, Spain, Italy, Ireland and Portugal are struggling to compete with the much more productive German economy. In a currency union they cannot devalue their way out of trouble. The only alternative solution on offer is a long and painful period of austerity to reduce their costs through cuts in wages and living standards, the so-called "internal devaluation" -- in reality, a one-off coordinated reduction of wages and prices across the board. It is, as I have argued before, more like an "infernal devaluation." It amounts to a domestic income deflation -- as wages are crushed -- in order to get the prices of tradable goods down enough so the current account balance increases sufficiently enough to carry the next wave of growth.

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This lack of economic convergence has revealed the lack of political convergence around a shared European identity. There is a striking lack of sympathy for the Greeks or Italians from Germany. Berlin continues to fiddle while Rome and Athens burn. The German position seems to be that the weaker European economies are paying the price for not being as hard-working and skilled as Germans -- and must now shape up or ultimately leave the euro.

Any suggestion that German under-consumption and export-addiction might have something to do with the crisis in the euro-area is brushed aside. Some Greek politicians have responded to German pressure with angry references to the Nazis' brutal occupation of their country during the Second World War. So much for European solidarity.

In this context, it is interesting to see that former German Chancellor Helmut Kohl is now apparently speaking out against current Chancellor Merkel, who has proven herself to be a small-minded burger who should not be entrusted with the leadership of a great nation like Germany.

Merkel, of course, claims to be safeguarding the interests of German taxpayers. It is amusing to hear the Germans talk about the "cost" to them of staying in the euro zone as a result of "funding" so-called "profligates" such as Greece or Italy. First of all, the "funding" comes from the ECB which creates new net financial euro denominated assets at will, not the Germans.

In fact, there has been zero cost to the Germans. They've locked their export competitors into the European Monetary Union at hopelessly uncompetitive exchange rates. German taxes haven't gone up, they haven't had their generous social welfare provisions cut (which are much larger than Greece's, contrary to popular perception). At the same time, the periphery countries have had their economies destroyed by enforced austerity, in exchange for which they get ongoing ECB funding which (wait for it) helps them to buy yet more German imports.

So the ECB keeps the game on the road to facilitate the continued expansion of German exports to the rest of Europe (although that strategy is, as Mr Tremonti amongst others, has started to notice, is becoming a touch self-defeating), and the Germans pay nothing for this privilege. No increased taxes, no austerity and no competitive threat to Berlin's export base so long as the PIIGS are locked into the euro straitjacket.

A further sad irony is that if Greece, Spain or the other periphery nations genuinely succeeded in implementing a successful "internal devaluation" a number of German businesses would relocate, or force further downward pressure on German domestic wages.

Guilio Tremonti is right: Germany is in the first class cabin of the Titanic. Another way of looking at it is that figures like Chancellor Merkel are leading the PIIGS to slaughter in the abattoir, not realizing that they are on the same conveyor belt. The tragedy ushered in by the current crisis is entering into its critical phase, and the small mindedness of the policy response could well spell the death of not just a currency but also a vision for a unified Europe. The essential problem is that the EU was founded as a political venture but quickly grew into a (promising) economic venture. The irony is that the lack of a true political union -- which would have permitted a unified fiscal policy -- is precisely what will kill the whole idea.

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

If the fundamental issues of the Greek crisis are addressed, Europe's political project may face the same fate as communism and the US Confederacy.

The collapse of the Soviet empire in 1989 and of the USSR in 1991 have become walled off in Western minds as events from an alien time and place. But they should remind us that the architecture of human governments is not eternal. Communism was once a powerful threat to its capitalist rivals. But when circumstances change, the bright hopes of an age are prone to crash in disillusion.

Europe was a bright political project at the formation of the European Community and again when it expanded at the end of the Cold War. Its purpose was not so much power as peace: truly a noble vision. But that noble project was built on an end-of-history economics, on frozen-in-time free-market notions and on dogmatic monetarism linked to arbitrary criteria for deficits and public debt. In the wake of a global financial meltdown, these no longer serve. Unless they are abandoned soon they will doom Europe as surely as communism doomed the empire of the East.

Europe's structure is also suspended between two stable formations: the federated nation state and the international alliance. This in-between structure is called a confederacy, and it is something that was tried and which failed in North America on two occasions, most recently in 1865. The South lost the US Civil War, in part, because it left too much power in state hands, and so could not in the end raise the funds or the men required to keep its armies in the field. And following defeat, it took almost seventy years -- until Roosevelt's New Deal in 1933 -- before sufficient measures were taken to begin to overcome the dire poverty and economic stagnation of that region. This history too has been walled off in modern minds.

The distinctive combination of millenarian economic ideas and unstable political structure faced a powerful shock from the global meltdown. Faced with vast holdings of toxic US assets, investors sought to cut their losses by selling weak and small sovereigns: Greece, Ireland, Portugal, Spain. Thus yields soared on those debts, while they fell simultaneously on US, German, French and British bonds. There was no sudden discovery that Greece was ill-managed or that Ireland had had an unsustainable construction boom. Those facts were known. The new event was the meltdown, the flight to safety, and the waves of predatory speculation that have followed.

Therefore what happened was a solvency crisis of the banks, as always happens in debt crises. It was true in the 1980s, when the Reagan administration, no less, felt obliged to prepare a secret plan to nationalize all the major New York banks should a single major Latin American debtor declare default. It was true in 2008-09, when preventing the imminent collapse of Bank of America, Citigroup and others trumped all other U.S. policy concerns. It is obvious that the entire recent thrust of European policy has been to find ways to paper over the problems of Europe's banks: with phony stress tests, with new loans, with loud talk, with denunciations of profligacy in Greece or anywhere else -- with anything except an honest examination of what lies at the heart of the problem.

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Today Greece -- under a resolute government and against heavy internal protest -- has met the onerous conditions imposed on it. But for what? For loans that are immediately recycled to the European banks, adding nothing to Greece's prospects except more debt? This will not lower interest rates, restore growth, or bring success to ongoing internal reforms. It is an intolerable situation and it will not continue for long.

Along one road there lies a future of defaults, panic, dissolution of the eurozone, and hyperinflation in the exiting countries, with a collapse of the export markets for those that remain. The final consequence will be large population movements -- as happened from the American South. For if Europe insists on reducing its periphery to poverty, it cannot expect those affected to sit still and accept their fate.

Along the other road lies the assumption of common responsibilities for sustained convergence, based on a new economics of mutual support. Along this path sovereign debts below the Maastricht ceiling will be taken over and converted to European bonds and there will be a public-private investment program to restore growth and employment -- as some of Europe's wisest leaders demanded in a manifesto just a few days ago. There will follow in due course the constitutional reforms needed to adapt Europe and its policies to the conditions of the post-crisis world.

Europe must therefore choose, and soon, as De Gaulle said in 1969, "between progress and upheaval." "Entre le progrès et le bouleversement."

James K. Galbraith holds the Lloyd M. Bentsen Jr. Chair in Government-Business Relations at the Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin. His next book, "Inequality and Instability", is forthcoming from Oxford University Press.

This article originally appeared at the Deutsche Welle website.

Markets are celebrating the triumph of an anti-labor, pro-capital agenda. But is social unrest the consequence?

The Europeans genuinely must genuinely believe that they can get blood out of a stone.  Or perhaps resort to a modern day equivalent of turning lead into gold.  There's no other reason to explain the euphoria now prevalent in the markets, in light of the approval by Greece's lawmakers to pass a key austerity bill, thereby paving the way for the country to get its next bailout loans that will prevent it from defaulting next month.

The €28 billion ($40 billion), five-year package of spending cuts and tax rises was backed by a majority of the 300-member parliament on Wednesday, including Socialist deputy Alexandros Athanassiadis, who had previously vowed to vote against.  The European Union and International Monetary Fund had demanded the austerity measures pass before they approve the release of a €12 billion loan installment from last year's rescue package.

So default is averted for now, which is clearly the main reason behind the global equity rally seen over the past few days.  But will the package work?  Here's a look at the details of the Greek Medium Term Fiscal Bill.

The projections for Real GDP Growth are:

2012: 0.8%

2013: 2.1%

2014: 2.1%

2015: 2.7%

The projections for expenditures (bn euros) are:

2012: 79.491

2013: 83.467

2014: 83.363

2015: 85.39

GDP growth rising in the midst of fiscal austerity?  How is this possible? Everyone knows the current planned financing of Greece is a band aid. With this new financing, Greece's sovereign debt to GDP ratio will rise to almost 170%. It will be more bust than ever. Its real GDP may fall by another 4%. Social tolerance for such austerity -- already strained -- will become less. If that wasn't evident before, it should have been today, given the sight of various reporters in front of the Greek Parliament wearing tear gas masks as they reported on the "success" of the Greek austerity vote.

Can the package passed today deliver increased revenues?  The Greeks apparently think so, if one is to judge by the budget projections.

Actual projections of revenues:

2012: 60.959

2013: 62.454

2014: 63.192

2015: 64.924

Now, to be fair, much of the problem is an antiquated revenue system that supports that state, which results in a budget shortfall consistently about 10% of GDP. Greek economist George Stathakis, for example, has suggested that that the top 20% of the income distribution in Greece pay no taxes at all, which may somewhat of an exaggeration but, if only partially true, suggests that a modicum of tax compliance could perhaps generate an increase in revenues in spite of the austerity measures being introduced.

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Perhaps. But it's hard to see how the EU's attempt to squeeze more blood out of the Greeks will generate increases of revenue of this magnitude. If one examines the Medium-Term Fiscal Strategy submitted to Parliament on June 8th 2011, it appears that the Greek authorities are basically banking on is a big rise in private consumption and investment by 2013 (both of which are negative contributors to GDP today) to reduce their deficit, even as government consumption continues to decline. So they are essentially assuming a "fiscal consolidation boom", even though there has been no historical precedent of the kind to justify this kind of a forecast. The Canadian example does not fit because it was accompanied by a huge depreciation of the Canadian dollar, thereby generating a huge turn in Canada's current account and largely offsetting the impact of the budget cuts. As a member of the euro zone, this option is unavailable to the Greeks.

The short term hope must therefore be ongoing debt restructuring, continued ECB purchases of Greek debt in the secondary market (allowing central banks to buy the debt), guarantees, and lending. The hope is that the financial institutions holding all the periphery government debt can either move it off their balance sheets, or use the American method of "extend and pretend" to avoid recognizing the institutions are fundamentally insolvent.

Short of a fiscal union (which is the ultimate solution to the woes of the euro zone), there are other measures which the Greeks could adopt to make their bonds more attractive to external investors, thereby preventing the markets "shutting the country down" on the grounds that they refuse to extend further credit to a fundamentally insolvent country. Warren Mosler and I have suggested one such alternative: Greece could successfully issue and place new debt at low interest rates. The trick is to insert a provision stating that in the event of default, the bearer on demand can use those defaulted securities to pay Greek government taxes. This makes it immediately obvious to investors that those new securities are 'money good' and will ultimately redeem for face value for as long as the Greek government levies and enforces taxes. This would not only allow Greece to fund itself at low interest rates, but it would also serve as an example for the rest of the euro zone, and thereby ease the funding pressures on the entire region.

This suggestion, of course, does not deal with the problem of aggregate demand. But it provides an attractive instrument for the Greek government (and other periphery states) to secure private funding and possibly at lower rates of interest.  The bigger issue of aggregate demand, however, is still yet to be addressed, and it is hard to envisage a sustainable recovery in Greece, or, indeed, the entire euro zone, without changes to its institutional structures. Of particular concern is the absence of a fiscal authority which would allow the ECB to stick to monetary policy while giving a European Treasury the purse strings to deal with the crisis.

Opposition to a broader fiscal authority, however, is mounting in the core as the crisis has increased hostility among the members. No one wants to cede power to the center. This opposition also reflects the fact that the third convergence -- between elite and public opinion -- has also failed to take place.  But it also reflects a failure to understand the institutional limitations at the heart of the euro zone.  In fact, having lost monetary sovereignty by adopting the euro, core countries such as Germany have more to gain by stabilizing their respective domestic economies by running large deficits during a downturn and boosting consumption, rather than deflating countries like Greece into the ground. That approach is ultimately self-defeating for the prosperous core countries.  As Randy Wray has argued:

If the blood-letting and crushing of wages in the periphery actually does work, the factories will be moved out of Germany seeking lower cost workers. In other words, success in the periphery would shift the burden back to Germany's workers, who would have to accept lower wages to compete. That will be fueled by job losses if Germany cannot find sales outside the EU that will be lost as the periphery nations fall farther into depression. The result will be a nice little rush to the bottom, benefiting Europe's elite.

Implicit in the drive to create a Germanic style "stability culture" is the belief that public debt is invariably an evil, the consequences of which must be stopped at all costs. But as events of the past decade have clearly demonstrated, excessive private sector debt build-up, notably in Asia and the United States, has played a far more destabilizing role in the global economy than fiscal profligacy, which undercuts one of the main rationales for retaining the Stability Pact in its current form.

If we say that the government can run budget surpluses for 15 years, what we are ignoring is that this means the private sector will have to run deficits for 15 years. The private sector, in this case, would be going into debt that totals trillions of dollars in order to allow the government to retire its debt. Does that make sense? Again, it is hard to see why households would be better off if they owed more debt, just so that the government would owe them less. The Eurocrats, led by the ECB, are now using this crisis to ram through their vision of Europe, which is fundamentally anti-labor and pro capital.  That explains why the markets are celebrating today. But it lays the groundwork for more hostility and conflict in the future.

Wasn't this precisely what the European Union was designed to prevent?

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

In a brand-new series, economist Bill Lazonick takes on the structural changes and reforms needed to create good jobs in the U.S. First question: what happened to the jobs we had??

It's now two years since the official end of the Great Recession. Yet the US unemployment rate in May was 9.1 percent, and even college grads are having trouble finding jobs. The US economy is mired in its third, and worst, “jobless recovery” since the early 1990s.

Things look pretty bleak for the foreseeable future. So how did it come to this?

Let's take a look. The scarcity of good jobs, even in an economic recovery, reflects the cumulative impact of three structural changes in the employment practices of US industrial corporations, going back three decades to the early 1980s. These changes are the result of a triple-layered process of 1) rationalization, 2) marketization, and 3) globalization. Together, these trends have taken a permanent bite out of the quantity of well-paid and stable middle-class jobs in the US economy.

From the beginning of the 1980s, the trend of rationalization, which is characterized by plant closings, tended to jettison the jobs of unionized blue-collar workers. And from the beginning of the 1990s, marketization, which brought the end of the one-company-career norm, has placed the job security of middle-aged and older white-collar workers in jeopardy. Finally, from the 2000s, globalization, which drove the offshoring of jobs, left all types of members of the US labor force -- even those with advanced educational credentials and substantial work experience -- vulnerable to displacement.

In each case, the structural change in employment took root in a cyclical downturn: rationalization in the double-dip “blue-collar” recession of 1980-1982; marketization in the “white-collar” recession of 1900-1991; and globalization in the “Internet” recession of 2001. Looking back, we now know that the recoveries that followed the recessions of 1990-1991 and 2001 were “jobless” as marketization and globalization, along with ongoing rationalization, continued after the recoveries. Indeed, in terms of blue-collar employment, the recovery from the recessionary conditions of 1980-1982 was also jobless because of the continuation of plant closings in 1983 and beyond. In 1985, for example, the number of machine operators, inspectors, and assemblers in the US economy was down 22 percent from 1980. For the economy as a whole, however, these blue-collar job losses in the first half of the 1980s were offset by new employment opportunities for white-collar workers created by the microelectronics boom and the rise of what would come to be known as the New Economy.

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Initially, you could justify these structural changes in employment in terms of changes in industrial conditions related to technologies, markets, and competition. The plant closings that came with rationalization were a response to the superior productive capabilities of Japanese competitors in consumer durable and related capital goods industries that employed significant numbers of unionized blue-collar workers. The erosion of the one-company-career norm among white-collar workers that characterized marketization was a response to the dramatic technological shift from proprietary technology systems to open technology systems that was integral to the microelectronics revolution. The offshoring of the jobs of well-educated and highly experienced US members of the labor force that went along with globalization was a response to the emergence of large supplies of highly capable workers in nations such as China and India, many of them with graduate degrees and work experience in the United States.

But once these structural changes in employment had gained legitimacy as responses to new industrial conditions, US corporate executives often pursued them purely for financial gain. Some companies closed manufacturing plants, terminated experienced workers, and offshored production to low-wage areas of the world simply to increase profits, often at the expense of not only the jobs of long-time US employees who had helped to make a company successful but also, going forward, investment in the company’s long-term competitive capabilities. As these changes became embedded in the structure of US employment, business corporations declined to invest in new, higher value-added job creation on a scale that could at least offset the job losses.

At first sight, the Great Recession of 2008-2009 appears to be detached from these changes in employment practices, given its origin in the casino-like activities on financial firms in the subprime mortgage market. Yet the very existence of a large body of subprime borrowers derived in large part from the failure of US industrial corporations since the 1980s to invest in innovation and high-quality job creation while middle-class jobs were permanently lost through rationalization, marketization, and globalization. Through subprime lending, Wall Street sought to exploit the vulnerability of a working-class population to whom industrial corporations no longer delivered middle-class employment opportunities. And, as I will explain in a later post, the current dismal employment situation and outlook reflects the ongoing investment and employment practices of US industrial corporations that, over the past three decades, have become thoroughly financialized.

William Lazonick is director of the UMass Center for Industrial Competitiveness and president of The Academic-Industry Research Network. His book, Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States (Upjohn Institute 2009) was awarded the 2010 Schumpeter Prize.