Austerität vs. Souverainisme

According to Wolfgang Münchau (FT December 4) Angela Merkel and Nicolas Sarkozy are as far apart as they ever were.

Excerpts:

“Contrary to what is being reported, Ms. Merkel is not proposing a fiscal union. She is proposing and austerity club, a stability pact on steroids. The goal is to enforce life-long austerity, with balanced budget rules enshrined in every national constitution. She also proposes automatic sanctions with a judicially administered regime of compliance.”

“Mr. Sarkozy … while rejecting Ms Merkel obsession with austerity, … is not interested in a genuine fiscal union either. He is open to a eurozone bond and to the European Central Bank having the role of lender-of-last resort. I would surmise that this is because  France would stand to benefit from both.”

While European leaders “understand the technical and legal issues well … I doubt they have ever understood the economic and financial dynamics behind the crisis. Their narrative, which reduces the crisis to a failure of fiscal discipline, is probably the reason why all their crisis resolution efforts have failed so far.”

My comment:

The point is well taken. But I suspect that the French and German governments stick to the “failure of fiscal discipline” theory because (a) the fundamental interests of France and Germany are conflicting, and (b) because, contrary to what Münchau believes, a correct diagnosis of the cause of the current euro crisis would point to the fundamental responsibility of the euro system itself: a non OCA (non Optimal currency area) which is also a non “ Optimal State area”, thus precluding any serious move towards a federal state, American way.   

In my view, Ms. Merkel and Mr. Sarkozy are jockeying for position to avoid bearing the responsibility of a euro break up and try to gain some more time to persuade their public opinions that they did try everything to “save” the euro, so that when it finally breaks up none of them will have to take the blame. 

Germany as a Geo-economic Power

In the current crisis, German elites are doggedly pursuing a policy of “civilian power” (Zivilmacht) increasingly perceived in Europe as the continuation of Realpolitk by other means, writes Tony Corn in Small Wars Journal. Are we heading towards a “gentler, kinder German Reich”, but a Reich nevertheless?

“Demographically and economically, Germany is one third larger than either Britain or France. In the past ten years, this predominance has already been reflected in EU institutions, both quantitatively (Germany has the largest representation in the EU parliament) and qualitatively (the European Central Bank is a clone of the Bundesbank). But that’s apparently not good enough for Berlin, who has deliberately let the crisis move from the periphery (Greece and Portugal) to the center (Italy and France) in order to extract the maximum of concessions from the rest of Europe.”

Moreover, “Germany in the past decade has overtaken Britain and France as Europe’s main arms exporter” and is now “responsible for 47 percent of EU exports to China.”

“Germany is not only increasingly defining its national interest in economic terms, but also increasingly using its economic power to impose its own preferences on others in the context of a perceived zero-sum competition within the eurozone, rather than to promote greater cooperation in a perceived win-win situation.”

“German companies lobby the German government to make policy that promotes their interests; they in turn help politicians to maximize growth and in particular employment levels the key measure of success in German politics … Because much of this (German) growth has come from exports to economies such as China and Russia, where the state dominates business, (German) exporters are also conversely dependent on the German government.”

It is a typical mercantilist, Listian (from Friedrich List), policy.

“From 1871 to 1914, it is through civilian means … (mainly the 1879 alliance with Austria-Hungary) that the newly-created German empire proceeded to create in central Europe a greater informal empire known as Mitteleuropa. Even during the Great War, Germany’s main war aim was essentially to create a Europe-wide Customs Union (with a few annexations here and there).  … And from 1940 to 1945, the uncomfortable truth is that Nazi Germany created a “Central European Economic Community” which, in many ways, anticipated the “European Economic Community” created by the treaty of Rome (1957).”

In short, common markets have been consistently used by Germany as an instrument of “soft”, “civil” power and dominance. And on top of the common market, since 1999, the strong euro managed by the ECB in the tradition of the Deutsche Mark has been instrumental in reinforcing the German economy while at the same time strangling the southern European and French ones. A shrewd strategic move. 

The whole post here is serious food for thought.

Evans-Pritchard Is Right: Eurozone Monetary Expansion Is Required

The eurozone badly needs monetary expansion and some inflation, that is, a depreciation of the euro as I advocated in my recent book. It is the first step to get out of the crisis.

Evans-Pritchard writes in The Telegraph:

“A near universal view has emerged that Europe’s crisis can only be solved by governments and fiscal policy, with varying views over the proper dosage of pain.

I beg to differ. This is a monetary crisis, caused by a jejune central bank that aborted a fragile recovery by raising rates earlier this year, allowed the money supply to collapse at vertiginous rates in southern Europe, and caused a completely unnecessary recession – and a deep one judging by the collapse in the PMI new manufacturing orders in November.

Needless to say, drastic fiscal austerity is making matters a lot worse. You cannot push two-thirds of the eurozone into synchronized fiscal and monetary contraction without consequences.

Note that five-years break-even spreads have dropped below zero for Italy, meaning that markets are now pricing in outright deflation. For a country with public debt stock of 120pc of GDP, that is a death sentence.

…

The eurozone economy is in imminent danger of crashing into deflation, bringing down the whole interlocking edifice of sovereign debt and distressed lenders.

…

This crisis can be stopped very easily by monetary policy, working through the old-fashion Fisher-Hawtrey-Friedman method of open-market operations to expand the quantity of money, ideally to keep nominal GDP growth on an even keel.

This does not solve the 30pc intra-EMU currency misalignment between North and South, of course, but it  quite literally “solves” the solvency crisis for Italy and Spain. They would not be insolvent if the ECB had not driven them into depression by letting their money supply implode.

…

The bank can reflate Club Med off the reefs. It chooses not to act for political reasons because this means higher inflation for Germany. That is the dirty secret. Everybody must be crucified to keep German internal inflation under 2pc.”

The whole article here is a must read.

My comment: the lack of decision of the governments in the eurozone is not happenstance: it reflects this basic conflict of national objectives and requirements. It shows very clearly that one size fits none, and that the continental centralization of macroeconomic policy is terribly dangerous.  That is, unworkable.

Crazy Ideas and Vested Interests

Simon Johnson criticizes the notion that the European Central Bank could make a massive loan to the International Monetary Fund, which would then turn around and lend to countries like Italy. “This is a bizarre notion” he writes.

Instead, “the ECB should provide financial support directly to Italy, if that is the goal.

But that goal increasingly seems both to be the only idea of officials and the last failed notion of a fading era. More bailouts and the reinforcement of moral hazard – protecting bankers and other creditors against the downside of their mistakes – is the last thing that the world’s financial system needs.”

The whole post (about Too Big to Fail banks ad how to cope with them) is well worth reading, here.

Euro and the Confidence Fairy

By Paul Krugman. 

Excerpt:

“The idea that austerity measures could trigger stagnation is incorrect,” declared Jean-Claude Trichet, then the president of the European Central Bank. Why? Because “confidence-inspiring policies will foster ad not hamper economic recovery.”

 But the confidence fairy was a no-show …

 Read the post  here.

Various Opinions About the Euro’s Future

"A Freakonomics Quorum",  here.

A mixed bag, of course.

More Plans to Save the Euro

Is the “Great Dither” over? Can political centralization really proceed? here is Edward Harrison’s analysis for Credit Writedowns.

I am still skeptical. It seems more likely that some more time will be bought, and temporary hopes stimulated, until the next “last chance to save the euro”. The reason for being so wary of official discourse? It has been consistently false, and often deliberately so, over the past twenty years ... Remember the claims according to which the strong euro was good for growth and employment, that it would compel national inflation rates to converge, that it would protect national economies from economic and financial crises?