That’s the future awaiting the Eurozone according to Tim Duy. Excerpts:
“in short, I think Europe is rushing full speed to a Japanese outcome, with slow growth coupled with an appreciating currency. And ... that promise of slow growth and a strong currency will be what eventually tears the Eurozone apart.”
“When all is said and done, I am still amazed that the outcome of this summit is being described as a move toward fiscal union. It is not that – it is commitment to unified fiscal austerity, nothing more.
… In other words, the public sector will be engaging in massive procyclical fiscal policy as the recession intensifies. You have to imagine the end result is a substantial deflationary environment.
… that is truly sad given that deficits are not really the problem to begin with.
Why will the Eurozone fail? Because we still see nothing that addresses the internal imbalances between the core (largely Germany), and the periphery. That is a result of failing to commit to a real fiscal union. Such a union would include automatic internal fiscal transfers that are essential to maintaining regional economic stability. For example, economic distress in a US state results in an automatic relative transfer of resources via the decreased tax revenue from and increased transfer payments to that state. Lacking such a mechanism, a slow growth, hard money regime will increasingly ratchet up the levels of economic distress in the periphery. And eventually the costs of staying in the Euro will exceed the costs of exit.”
Precisely, as readers of this blog and of "Euro Error" (L'erreur européenne, 1998) already know quite well. The post is here.