Monday, December 12, 2011


There is a superb, angry summary of the Erozone summit agreement by Ambrose Evans-Pritchard in the Torygraph of all places.
Europe will now have its austerity union, a revamped Stability Pact. Budgets will be vetted "ex ante". Structural deficits will be capped at 0.5pc of GDP. Sinners will be punished automatically once they break the 3pc limit, and submit to suzerainty. Commissars will tell them how to treat trade unions, what to tax, and what to spend.
It is not remotely a fiscal union. There will be no joint debt issuance, no EU treasury, no shared budgets, and no fiscal transfers to regions in trouble.
 And, making the obvious point that this non-union is the flawed solution to the wrong problem:
This is not at root a debt crisis. By endorsing fiscal fetishism, EU leaders are silently colluding in the Neo-Calvinist illusion that budget excess caused the debacle. They know this to be untrue. Ireland ran surpluses for years, reducing its public debt to 12pc of GDP at one stage (Germany is 82pc). Spain ran a surplus of 2pc of GDP. Italy has long had a primary surplus.
It is a trade and capital flow crisis, a regional variant of the US-China imbalance. The damage was hidden during the boom by cheap German, Dutch, and French capital -- and cheap Asian and Mid-East capital rotated through London banks -- flowing into southern Europe. It was cruelly exposed as soon as creditors shut off credit.
In other words, debts and deficits are the symptoms of a systemic crisis, not its cause.

So what is going on? A rehashing of Herbert Hoover, the rediscovery of the economics of Pierre Laval or a "Medieval leech-cure treatment" that "can only drain the lifeblood from large parts of wasted Euroland"? This will not end well.

Thanks to Alan


Dipper said...

It is a trade and capital flow crisis

yes. As someone who works in the FX business, both the China-USA and Euro-zone had no free-floating currencies, so "speculators" could not adjust the exchange rates to reflect the underlying economics. Countries are stuck at the wrong rate with no means of escape.

If Greece had a free-floating currency it wouldn't be facing the current crisis. It might be facing a different one, with raging inflation and high interest rates, but it wouldn't be facing this one.

Keith said...

Dipper is right. It seems the French and German desire to create a political zone dominated by themselves has no place in it for any policies designed to promote the prosperity of any one living in it.

David Christie said...

'This is not at root a debt crisis...It is a trade and capital flow crisis'

Yet another reason why the so-called 'fiscal union' was doomed right from the start. The agreement will probably break down within the next few months anyway. Or even within a few weeks, if enough of the countries that initially signed up to it decide that they want to get out.

Or, if it does somehow survive over the next few months, the worsening crisis in the European banking system could still destroy the Euro, as Germany is still refusing to let the ECB take decisive action.