Europe Rehearses Suicide (Exploring Options Or Actually Slicing Aorta?)

[koganbot]

NY Times: European Central Bank Dashes Hopes for Bolder Action

Some people who believe that they know what they're talking about think that the European leaders really have no clue as to what they're doing. (This post adds nothing to my last post on this issue.)

Comments

[katstevens.livejournal.com]

It was pretty hilarious listening to the Tories on the radio this morning saying "well yes we've fvcked over the rest of the continent's chances for economic stability but the GOOD NEWS is that this means our banks will stay unregulated!" Absolutely fvcking hilarious.

[koganbot]

Krugman says, "we have Cameron acting as a spoiler to protect the wheeler-dealers, poisoning EU politics." I don't know enough about this to know what Krugman means; I assume Britain was right not to go along with the pact, because the pact is terrible; but Cameron's reasons for not going along seem to be equally terrible — i.e., that he doesn't want British financial institutions to be subject to the regulations; whereas he should have said that the prescribed deficit limits on governments were totally insane; but if he'd known to say that, he'd have to have known that his austerity policy isn't much saner, and he doesn't seem to know it. Of course, I don't know it either; I've merely been told it by people I've decided to believe.

[katstevens.livejournal.com]

The problem is that over here, the Tories are hugely anti about the idea of being in any way accommodating to Europe full stop. So the government is trying to spin this as 'RIGHT HO WE SHOWED THEM FURRINERS EH WHAT' whereas everyone else in the business sector is scratching their heads and going 'er um these guys are our main market and if they become instable because we veto all their agreements then we're fvcked too?'

Thankfully it seems that the rest of Europe is ignoring our veto and carrying on without us. Thank fvck for that.

[koganbot]

But — even though this had nothing to do with Cameron's reasoning — this agreement isn't going to make Europe more stable. It has nothing in it forcing the ECB to buy bonds, which is what needs to happen pretty much immediately. And even if the ECB, despite what it's been saying, does decide to finally, unconditionally, back Italian and Spanish bonds, the agreement forces southern Europe to grow through austerity, and sets an insanely low deficit limit for them and for everyone else, with absolutely no mechanism for the south to actually grow. So, if the bond market stabilizes, either through ECB action or through investors deciding that the agreement has made bonds safe again, then the immediate threat has passed but the not-quite-so-immediate problem is exacerbated, since the south can't get out of its hole. Or so say the macroeconomists I've been reading.

An arithmetic problem

[koganbot]

The key Krugman post seems to be this one:

Germany moved from small current account deficits (the current account is a broad version of the trade balance) to massive, and I mean massive, surpluses.

So what the Germans are in effect saying is that everyone should run huge trade surpluses.

May I humbly suggest that this poses an arithmetic problem?

And this isn't trivial — the adding-up constraint, the point that if Southern Europe is going to shrink its trade deficits somebody has to move in the opposite direction, is the core of the problem.

OK, I don't totally have a handle on this: It's Krugman's basic thesis that the Euro problem has nothing to do with fiscal deficits (Greece was the only government really out of line, and its economy is about the size of Miami's). Among other things it's about private investors, many from the North, who assumed that the Eurozone made everything safe, flooding the South willy-nilly with investments. I assume that this has something to do with the current accounts deficits/trade deficits, though I'm quite certain I'm not understanding how one leads to the other (did some of the investment money finance imports?); I looked up "current account" in Wikip, without gaining much insight. Anyway, then the economy went sour, and things were no longer safe. ("Things." Yes, this narrative of mine has ellipses.)

[koganbot]

To fill this in a little: if, say, Greece, Portugal, Spain, Italy, Latvia, and Ireland had their own currencies, those currencies could simply lose value in relation to those of Germany and ilk, those countries' goods would now be cheaper in central Europe, the periphery exports would go up, and the periphery could climb out of its hole without too much economic disruption. But since those countries are in the Euro, this can't happen. So other things must happen to bring the center and the periphery into balance, such as debt being forgiven and/or central Europe accepting reasonable but higher inflation, 4 percent or so. But Germany, especially, is blocking this, and the alternative is deflation in the periphery, which is hard to achieve anyway, and high unemployment in the periphery, with still no way for those countries to get their way out. Maybe the agreement, which I haven't read much about, does allow debt forgiveness, though if investors don't have to take haircuts (the report I read said they wouldn't), I don't know how this happens. (Usual caveats about my not knowing what I'm talking about.)

[koganbot]

Piece by Kevin O'Rourke, if you're interested in reading more:

http://www.project-syndicate.org/commentary/orourke1/English