Friday, December 9, 2011

Euro Crisis: From Bad To Worse

The euro had already suppressed the national monetary exchange rate policy shock absorbers. Now today’s deal between European governments is intended to suppress the national budgetary policy shock absorber, essentially leaving each member country without any means for dampening asymmetrical shocks, at a time when the ECB is pursuing a non accommodating monetary policy for the whole zone. 

Meanwhile, the disequilibrium real exchange rates between national economies that are at the origin of the problem still prevail and still diverge. Neglecting to address the fundamental problem of exchange rates and removing all the shock absorbers one after the other is a sure recipe for more difficulties to come on the way leading to depression.

The logical conclusion is that the coming eurozone recession will be deepening, aggravating budget deficits, and thus the euro crisis.

Call that progress if you want …

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