Say that to Germans, however, and what they hear is that they will be required to pay other countries’ debts—and the painful truth is that yes, they will. The only way of reconciling the economic necessities and political requirements is for Europe to grow closer in its fiscal governance, a process that will involve painful losses of sovereignty and years of difficult adjustment in national habits. The Treaty of Rome, which founded the European Economic Community in 1957, plainly states that its goal was the “ever closer union” of European peoples—but nobody actually believed that would mean anything difficult or costly. That “ever closer union” has now become an economic requirement, one that is likely to bring with it many years of political and fiscal discomfort. In the meantime, “the only economically plausible scenario,” Lewis writes, “is that the Germans, with a bit of help from a rapidly shrinking population of solvent European countries, suck it up, work harder, and pay for everyone else.”
This might sound like a harsh truth, but it’s pretty mild by the standards of Boomerang, because Germany’s economy is in better condition than any other place Lewis visits. It will need to be, because the need for the Germans to pay for the Euro’s failings is only going to grow. The measures announced on October 27 all showed movement in the correct direction, but the sums involved were nowhere near big enough and the mechanism to extend the EFSF looked short on detail. When the steps were announced, attention immediately focused on one number: the price which the Italian government must pay when it borrows money. Italy has to roll over €330 billion of debt next year. The cost of that debt is of huge consequence for the Euro, because if it is too high, Italy won’t be able to pay it back, and if Italy can’t pay it back, then the whole Euro project is in big, potentially terminal trouble.
Unfortunately, the new plan got the thumbs-down: markets nudged the yield on Italian debt dangerously close to 6.5 percent, a number generally regarded as unsustainable. So the October 27 deal, generally seen as an attempt to buy time while more comprehensive plans are made, may not even do that. I don’t think Lewis would be surprised at the way this is playing out, and the fact that the full extent of the debt problems are still not being faced. Some of his targets in Boomerang date from the boom years, but many are firmly located in the present. The angriest of these essays is about Greece, which he sees as a country in the grip of “total moral collapse.”
Corruption and tax evasion are endemic, and successive governments have created a state in which citizens see themselves as deserving beneficiaries of state patronage; they expect to live cushioned from economic realities, and to retire at fifty-five for men and fifty for women if they do something “arduous,” a definition that includes “hairdressers, radio announcers, waiters, musicians, and on and on and on.” Lewis finds Greece seething at the moment, full of outrage at the demands for “austerity” imposed on it from outside: “a nation of people looking for anyone to blame but themselves.”
Even if it is technically possible for these people to repay their debts, live within their means, and return to good standing inside the European Union, do they have the inner resources to do it? Or have they so lost their ability to feel connected to anything outside their small worlds that they would rather just shed their obligations? On the face of it, defaulting on their debts and walking away would seem a mad act: all Greek banks would instantly go bankrupt, the country would have no ability to pay for the many necessities it imports (oil, for instance), and the government would be punished for many years in the form of much higher interest rates, if and when it was allowed to borrow again. But the place does not behave as a collective…. It behaves as a collection of atomized particles, each of which has grown accustomed to pursuing its own interest at the expense of the common good. There’s no question that the government is resolved to at least try to re-create Greek civic life. The only question is: Can such a thing, once lost, ever be re-created?
To Lewis, Greece marks a limit case for just how far a developed society can go off the rails. The other case studies, of Iceland, Ireland, and California, involve a great deal of folly, but those societies don’t refuse to admit the realities quite as absolutely. That’s not to say that Lewis is sparing about the behavior he describes, much of it at the top end of my 0–10 scale. Some of it verges on black comedy, especially in Iceland:
Yet another hedge fund manager explained Icelandic banking to me this way: you have a dog, and I have a cat. We agree that each is worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners but Icelandic banks, with a billion dollars in new assets. “They created fake capital by trading assets amongst themselves at inflated values,” says a London hedge fund manager. “This was how the banks and investment companies grew and grew.”
When the value of those assets collapsed, the banks immediately followed, leaving debts equivalent to $330,000 for every Icelander.
The flavor of the mania in Ireland was different again. There, it was a classic property bubble, one that followed a remarkable period of genuine and sustained economic growth. From the late 1980s, Ireland had a number of good years, during which the economy grew rapidly (hitting an annual high of 11.8 percent), prosperity was widely shared, and the country rocketed up to fifth place in the UN’s Human Development Index. This was succeeded by a crazy excess of speculation in land values, beginning in the early years of the new century and ending with the biggest economic contraction seen in any country since the Great Depression.
The widely shared analysis in Ireland is that the disaster was caused by an unholy trinity of bankers, politicians, and house-builders, and involved a great deal of systematic corruption on the part of all three (especially over issues such as rezoning land). Lewis is gentler on the bankers at the heart of the crash than the Irish themselves are: he thinks that the bubble “wasn’t as cynical” as in other countries. The people indulging in the speculation genuinely believed that they were going to get rich. It was a bubble of greed and stupidity and excess, but not one in which the rich systematically stole from the poor. Perhaps the numbers are so bad that no more grimness needs to be troweled on:
A single bank, Anglo Irish, which, two years before, the Irish government claimed was suffering from a “liquidity problem,” confessed to losses of 34 billion euros. To get a sense of how “34 billion euros” sounds to Irish ears, an American thinking in dollars needs to multiply it by roughly one hundred: $3.4 trillion. And that was for a single bank. As the sum total of loans made by Anglo Irish Bank, most of it to property developers, was only 72 billion euros, the bank had lost nearly half of every dollar it invested.
When the Irish banks collapsed, the state stepped in and guaranteed not just the deposits of their customers, but all the banks’ liabilities. Nobody knows quite why they covered the losses of the bondholders who had lent money to these fundamentally broken companies: but they did, and the promise in turn bankrupted Ireland, leading directly to a European Union and International Monetary Fund bailout. The fallout is going to dominate life in Ireland for years.
It’s a sad story; Boomerang is a sad book, as well as a vivid and funny and enlightening one. Lewis ends it with a tentative glimpse of optimism in the formerly bankrupt Californian town of Vallejo, where a new city manager and a new head of the fire department are finally trying to get the municipality functioning again. In a city of 112,000 people, the fire department was cut from 121 to 67; it handles 13,000 calls a year, most of them pointless. The new fire chief, Lewis writes,
sat down and made a list of ways to improve the department…. He began, in short, to rethink firefighting.
When people pile up debts they will find it difficult and perhaps even impossible to repay, they are saying several things at once. They are obviously saying that they want more than they can immediately afford. They are saying, less obviously, that their present wants are so important that, to satisfy them, it is worth some future difficulty. But in making that bargain they are implying that when the future difficulty arrives, they’ll figure it out. They don’t always do that. But you can never rule out the possibility that they will. As idiotic as optimism can sometimes seem, it has a weird habit of paying off.
Outside the pages of Boomerang, there are glimpses of optimism in both Iceland and Ireland—though the countries have taken interestingly opposite routes to their longed-for recoveries. Iceland defaulted and effectively told financial markets where to stick themselves, administering severe “haircuts” to investors in the process, and let its banks collapse rather than pour government money in to prop them up. (Iceland had no choice: the banks were many times bigger than its entire economy.) The currency crashed, thus boosting exports and cutting imports, and now the economy is growing and unemployment is falling.
Ireland did the opposite: it ruinously stood by its bankrupt banks, stayed inside the euro, and took the medicine of austerity packages; it too is now showing signs of tentative return to growth. Both countries should be able to recover, absent a full European meltdown. A crucial component of both countries’ nascent turnaround has been a willingness to look the severity of their predicament straight in the eye, and tell themselves the truth about it.
That doesn’t mean that Boomerang leaves the reader feeling optimistic; an honest book about the current economic condition of the Western world couldn’t do that. One of the lasting feelings I took away from my own experiences of “financial disaster tourism,” as Lewis calls it, was one of sadness. I went to the same countries and met different people who told very similar stories. It is easy to diagnose a basic failure of responsibility as one of the causes of the debt crisis; and there’s no denying that such failures took place on the widest imaginable scale, from individuals up to governments.