The Euro Again

That global policymakers feel trapped by financial capitalism is evident in the latest round of EU crisis measures. These are the key measures:

  • a closer fiscal accord to save the currency
  • adding 200 billion euros ($268 billion) to their bailout fund
  • tightening rules to curb future debts
  • start a 500 billion-euro rescue fund next year and
  • diluting a demand that bondholders shoulder losses in rescues

Private sector participation in debt restructuring has been diluted so much as to be off the agenda completely. Overall, it is underwhelming.

More austerity – how different that is from the European Growth & Stability Pact or the earlier rounds of austerity – and more money so that indebted governments can bail out their creditors?

Austerity will be credible in the eye of the market if there is economic growth to make the austerity-related goals feasible.

The answer for that – from academics and journalists and others – is to ask ECB to lend to the sovereigns. A wholesale Euro deprecation or debasement is their answer. See thisfrom Wolfgang Muenchau, for example:

To solve the crisis, the eurozone requires, in the long run, a fiscal union with a prospect of a eurozone bond and, in the short run, unlimited sovereign bond market support by the European Central Bank. What we now have is no treaty change, no eurozone bond and no increase either in the rescue fund or in ECB support.

Raghuram Rajan comes up with a better answer than most. But, even he does not have answer for economic growth that would help these countries and their people meet all the demands made of them in terms of higher taxes, cuts in entitlements, etc. I had given my answer here and that is why I am growing tired of analysing the European situation and the solutions, with all their technical obfuscations aimed at desperately hiding debts somewhere.

Most commentators want to solve one problem by creating others – global inflation, social instability in emerging markets, currency wars and capital controls. I think they would prevail, eventually. So, we won’t have a Europe crisis in 2012 but something worse on a global scale.

This post originally appeared at The Gold Standard and is posted with permission.