Wolfgang Münchau wrote a piece that was carried online yesterday at Der Spiegel. I haven’t seen an English language version so I thought I would say a few words about the piece I saw in German. Münchau says that Standard and Poors was right – not necessarily about the ratings downgrades, but rather that Europe was fixated on the wrong problem, budget deficits. in his view – and mine- this is only going to make things worse. Austerity has already led to a worsening outlook for Europe with even Germany now expecting 0.7% growth for all of 2012.
In Münchau’s view, the reason for the downgrades was that Europe is fighting the wrong battle. S&P even said in their message on the downgrades that an austerity-centered approach would make matters worse. Wolfgang noticed that German Chancellor Merkel and her Finance Minister Schäuble responded to this message by exhorting Europe to push through their austerity packages more quickly. Clearly they don’t get it.
Wolfgang goes on to say that the problem is not in the public sector but in the private sector, where high debt, deleveraging and then recession caused a gaping hole to open up in the public sectors’ balance sheets. Moreover, in what Münchau calls the single currency “strait jacket”, the economies of Euroland have diverged rather than converged and that has meant current account imbalances and private debt accumulation in the periphery.
To me this situation looks pretty hopeless frankly. Policy makers in Europe just don’t get it. The best we are going to get is austerity and partial monetisation by the ECB until the union breaks or sovereign debtors default and banks are recapped. The question is why are they leading us down the abyss. Wolfgang says it’s because the government deficit story is an easier narrative to tell and simpler to attack within the existing institutional limitations of Euroland. That makes some sense politically, but it tells me that this crisis will continue to get worse.
Source: Wir bekämpfen die falsche Krise, Spiegel
This post originally appeared at Credit Writedowns and is posted with permission.
6 Responses to “Münchau: We Are Fighting the Wrong Crisis”
article in english appeared on the FT. It's Merkel who doesn't get it. We need a fiscal union which means a rebalancing on current accounts. She's been talking nonsense to her electorate about eurobonds and is convinced that everybody should export goods (who's going to import then?). She's the wrong person for such an critical time.
The Euro is now for the eurozone what the gold standard had been for the great depression. It is disheartening to see that nothing much has changed. The stakes of what Merkel will discover at the end of the tunnel are overwhelmingly high. Apparently she is determined to endorse the liability.
I think we'll look back in 10 years or so to our vanished wealth and world prestige, and we'll kick ourselves for not having done anything on it. So few realize how pernicious they are and so many are hypnotized by the "easier narrative".
The process of reducing the taxation of the strong EU economies by PIGS countries is positive, but the released financial resources have to be channeled into the investments and consumption in the EU countries with relatively low debt. And i am not speaking about Germany or Holland, but the Eastern European countries, that on one hand all (except of Hungary) have public dept bellow 50%, on the other hand in spite of being part of the European Union, have shamefully low standard of living and big deficit in infrastructure. The governments in these countries are cutting into the investments in sake of keeping balanced budgets. It is time to change this policy and allocate the finances released from the PIGS countries into investments in Eastern European countries. I am pretty sure, it is not only socially correct, but will bring the highest yield on investment compared to any other alternatives.
My guess is that the ECB will pour out any amount of money to buy up all bonds of Euro states, bonds which cannot be sold at a decent rate of interest until all bonds of doubtful value have gone from the hands of private investors into the hands of the ECB aka tax payers and other citizens. Then the first round of Euro crisis is over and the second round can begin with a) inflation and maybe depreciation of the Euro and b) start from square one with a new build up of private and public debt, because nothing substantial will have been done to address the real problem, i.e. the lage differences in competitiveness of the Euro countries.
I translated the Münchau piece yesterday from German into English. You can read it on: econtranslator.blogspot.com.