Tuesday, June 5, 2012

A Brief History of the Euro …

… as seen by George Soros and reported by Krugman here. Germany was in the doldrums when the euro was created. The euro (and its “German” interest rates that were too low for the southern inflationary economies), in turn generated a false sense of security for investors in southern Europe. That led to vast inflows of capital, debts, bubbles, and to large trade deficits in the south that directly benefited German exporters and led to a German recovery.

Interestingly, “this story bears little resemblance to the morality play of profligacy and its consequences that has dominated European discussion until just about now. If there were villains, they were the architects of the euro, who waved away warnings about the system’s flaws” Krugman writes.

My comment:
Germany, who profited most from these flaws, should refrain from claiming that it is its “virtuous” economic policy that explains its current performance relative to that of southern Europe. It is, indeed, a bit cynical to advise the latter to imitate the “German model” when it was so obviously asymmetrically biased.

Suppressing the intra-european currencies market was the original sin, and no fairy tale of building now a federal fiscal union is going to remedy this fundamentally unbalancing fixed-price device. The only solution is to re-create, in the zone, exchange rates and foreign exchange markets reflecting different national price levels and inflation rates, in order to allow southern European countries to regain competitiveness by restoring realistic exchange rates within Western Europe.     

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