Tuesday, January 17, 2012

Eurozone About to Unravel

"Is Europe About to Unravel?" asks Tim Duy here.
“Even the illusion of political unity in Europe appears to be dissolving before our eyes.  This, of course, should come as no surprise to anyone watching the European crisis unfold.  The key problem always was the internal imbalances, a problem for which European policymakers have never offered a credible solution.  They simply don't have such a solution in the context of a system of fixed exchange rates.  I believe that currency devaluation is the only option that will change relative competitiveness in any reasonable timeframe and restore internal balance. But that option is unavailable for Euro members. 
Lacking currency devaluation as a tool to resolve imbalances, European policymakers turned to fiscal austerity.  That plan has failed, pushing nation after nation into ever deepening recession.  With Greece going on its fifth year of recession, I imagine by now that Portugal, Spain, and even Italy now see the writing on the wall for themselves.  Sadly, however, the alternative is exiting the Euro, which almost certainly means financial chaos for the Continent as a whole.  
The Eurozone is like a roach motel.  You can get in, but you can't get out.
Still, peripheral nations can only accept so much pain before the costs of being in the Euro outweigh the costs of leaving.  And Italy is now sending Berlin a clear warning that such an endgame is approaching.” 

My comment:
Except for the “you can’t get out” false assertion, Duy’s is an accurate description of the “euro error”. I disagree also on the idea that devaluation is unavailable for Euro members. Depreciation of the euro would be a good first step, even though it does not solve the problem of cross national prices divergence within the zone. But the latter difficulty could indeed be solved more easily by exits from the zone once the value of the euro  vis-à-vis the dollar and other currencies has been seriously curtailed, and only a marginal correction of intra european exchange rates remains to be done.

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