The Red Pill

This is your last chance. After this, there is no turning back. You take the blue pill – the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill – you stay in Wonderland and I show you how deep the rabbit-hole goes.

Angela Merkel has a red and a yellow button. One ends the crisis. Which does she push?

Yanis Varoufakis, The Guardian

Monday 6 July 2015 13.11 EDT

The red button

If you press it, chancellor, the euro crisis ends immediately, with a general rise in growth throughout Europe, a sudden collapse of debt for each member state to below its Maastricht limit, no pain for Greek citizens (or for the Italians, Portuguese, etc), no guarantees for the periphery’s debts (states or banks) to be provided by German and Dutch taxpayers, interest rate spreads below 3% throughout the eurozone, a diminution in the eurozone’s internal imbalances, and a wholesale rise in aggregate investment.

The yellow button

If you press it, chancellor, the situation in the eurozone remains more or less as it is for a decade. The euro crisis continues to bubble along, albeit in a controlled fashion. While the probability of a break-up, which will be a calamity for Germany, remains non-trivial, the chances are that, if you push the yellow button, the eurozone will not break up (with a little help from the European Central Bank), German interest rates will remain extremely low, the euro will be nicely depressed (‘nicely’ from the perspective of German exporters), the periphery’s spreads will be sky-high (but not explosive), Italy and Spain will enter deeper into a debt-deflationary spiral that sees to a reduction of their national income by 15% over the next three years, France shall slip steadily into quasi-insolvency, GDP per capita will rise slowly in the surplus countries and fall precipitously in the periphery. As for the first “fallen” nations (Greece, Ireland and Portugal), they shall become little Latvias, or indeed Kosovos: devastated lands (after the loss of between 25% and 40% of national income, a massive exodus of their skilled labour) on which our people will holiday and buy cheap real estate. In aggregate, if you choose the yellow button, chancellor, eurozone unemployment will remain well above UK and US levels, investment will be anaemic, growth negative and poverty on the up and up.

Which button do you think, dear reader, the chancellor would want to push?