Europe’s under the financial weather, too

The inimitable Ambrose Evans-Pritchard weighs in on the European side of the present global financial crisis. He doesn’t pull his punches, either. Here’s an excerpt.

The German claim that Euroland’s crisis is caused by Club Med profligacy is intellectual chutzpa. None of us should give this self-serving argument any credence.

The problem is deep and structural. These countries were thrown together into monetary union by high-handed politicians before there was any meaningful convergence of productivity, growth patterns, wage bargaining, inflation proclivities, legal systems, or sensitivity to interest rates. The Maastricht rules targeted one variable (debt) but missed all the others.

The damage was compounded by the ECB [European Central Bank]. It ran a loose monetary policy in the early Noughties, breaching its own M3 and inflation targets year after year, in order to help Germany when Germany was in trouble (for cyclical reasons, obviously)

This greatly aggravated the credit bubbles in Ireland and the South. There are no innocents in this story. All countries share blame. Germany is a sinner in all kinds of ways, not least because it seems to think it can lock in a permanent structural trade surplus, and then order others to stop running deficits.

Dr Merkel, you have a PhD in nuclear physics. You must know there cannot be good imbalances (your surplus) and bad imbalances (the Spanish, Italian, French, Portuguese deficits). The maths have to add up within a currency union.

In the old days these intra-EMU imbalances would have corrected naturally. The D-Mark would have risen. The lira and peseta would have crashed. The drachma would have crashed even more. Problem solved.

That corrective mechanism has been jammed by political forces.

We now have a remarkable situation where Merkel is pushing Southern debtors into drastic fiscal tightening without offering any offsetting stimulus in the North. This is so stupid (within a currency union) it leaves you breathless. German policy risks a self-feeding implosion of the whole system, much like the early 1930s Gold Standard – unless the ECB counters this with QE a l’outrance, which is also against German policy.

There’s more at the link. Recommended reading.

As you can see, the USA isn’t alone in its financial problems. Europe’s got a mess of ’em to deal with, too, and China and Japan are fighting their own difficulties. Any one area can bring the others down with it – or lift them up, if things go well.

(I wouldn’t hold my breath that things will go well over the next few years, economically speaking, if I were you . . .)


1 comment

  1. Yeah we'll feel the strain the next few years I'm sure, even here in sweden, where's we're running budget surplus, and have diminishing unemployment right now. Good thing we never joined the monetary union, we've been saved a few times by staying out of it.

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