On Europe: Perhaps This Is the Week that Fewer People Listen to Nonsense
This may well turn out to be the week during which the markets finally break the repeated rally on rhetoric pattern that has previously given the “Euro-crats” more than their fair share of opportunities to delay meaningfully addressing European imbalances.
While over the weekend still more bandages were being prepared to cover festering financial-economic wounds – partial guarantees of short term issuance through the Emergency Financial Stability Fund (EFSF); the final EFSF guidelines that unsurprisingly come up well short of what had been rumored in the market; another market rumor of an International Monetary Fund (IMF) bailout of Italy (using more money than the IMF has available for worldwide operations); and side pacts between Germany and France to foster fiscal union – they amount to more of the same refusal to take on the complex surgery needed to cure the systemic failure.
For the stark reality is that the earnest, although impractical, European experiment with a fiscally-unconsummated union has come up against events – unforeseen and unintended – that require far more than plasters and the Saxon-style dogmatic solutions that, sadly, are as equally impractical as the initial implementation of the European Monetary Union (EMU) itself.
Finger pointing helps even less. Less still, the passing of austere judgment on the hopelessly indebted nations across the southern tier of the Eurozone.
Over the long weekend here in the U.S., with the passing of The New York Times’ Tom Wicker, I happened to re-acquaint myself with Wicker’s legendary reportage of the day President John F. Kennedy was assassinated in Dallas.
Had he lived, President Kennedy would have given a speech that day in which he was slated to say the following about the fiscal austerity advocated by “so-called” conservative voices in the U.S. south. The circumstance and subject matter were certainly different from those of present day, but the words are oddly appropriate – albeit with some interpretive editing, as below:
“There will always be dissident voices heard in the land, expressing opposition without alternatives, finding fault but never favor, perceiving gloom on every side and seeking influence without responsibility….
…But today other voices are heard….voices preaching doctrines wholly unrelated to reality….which apparently assume that words will suffice without weapons, that vituperation is as good as victory….and that peace is a sign of weakness…
…[T]hey see that debt as the greatest single threat to our security. At a time when we are steadily reducing the number of…employees serving every thousand citizens, they fear those supposed hordes of civil servants far more than the actual hordes of opposing armies.
We cannot expect that everyone….will ‘talk sense to the…people.’ But we can hope that fewer people will listen to nonsense.”
While I apologize for the digression, the focus of the core states on fiscal austerity implicitly assumes that talk is more powerful than real economic “weapons” that would enable a viable solution. And that railing against and condemning the “club med countries” for what certainly was a collective action problem involving grievous error on the part of both borrower and lender, is better for the entirety of the Eurozone than making peace and resolving differences in manner mutually acceptable to debtor and creditor sovereigns, if not to that of their respective financial institutions.
So let’s move past the acronymic half-measures and “nonsense” we are met with each week from of stewards of the European crisis, and risk talking sense “to the people” – in Kennedy’s words – as follows:
- As is the case in with the developed (debtor) world versus the emerging (creditor) nations, the peripheral countries of the Eurozone must again become competitive with the core in order to reverse their continuing current account imbalances. This simply cannot be accomplished through austerity/internal devaluation in the periphery – which is impractical from political, social and economic perspective.
- European institutions are severely limited in their capacity to materially bolster overall demand in a manner to improve the needed competitiveness outside of the core. It should be massively clear to all that the European Central Bank (ECB) needs to cut its funds rate should be swiftly cut to the level of the other major central banks and I would go so far as to insist that it is long past time for the ECB to throw in the towel on the monetization of weak sovereign debt (at a haircut, putting a floor at current market values). But these moves, necessary as they are, will devalue (more accurately “tank”) the Euro universally (that is, across the EMU), setting off a degree of universal inflation (particularly in energy and other imports) across the zone.
- Therefore, I am not particularly sanguine that either of these two actions will grow broad money in the peripheral countries, as I continue to believe that the global excess of supply (of labor, productive capacity, and capital) relative to aggregate global demand, is (to say nothing of the debt overhang itself) a crimp on additional investment and therefore any meaningful multiplier that would produce sustainable inflation.
- If sustainable inflation will not occur – much as it has failed to occur here in the U.S. despite extraordinary monetary accommodation/monetization – because wages will not track sufficiently to ensure the sustainability of price increases (other than of commodities and other money substitutes, which merely retards other spending if wages don’t cooperate) then the hoped for general reflation of the target economies, in a manner that lessens the real impact of their extraordinary debt burdens, will not occur.
- As my friend and colleague Sherle Schwenninger of the New America Foundation points out, general monetary reflation aimed at generating inflation also has major constraints, because one can not necessarily engineer relative inflation, higher inflation in the core than in the periphery. But that is what one would need to do in order for competitiveness of the peripheral economies to improve.
- As a result, even for those of us who have become proponents of ECB easing and monetization (being resisted by Germany and many others in the core – save the French in their heart-of-hearts) the best we can hope for is improvement in “universal” Eurozone competitiveness as the result of a fallen Euro. This benefit would be shared (minus the inflationary impact on imports, and tempered as well by global macro imbalances) among zone members relative to the rest of the world, but would not sufficiently reshuffle the relative internal competitiveness within the zone.
Since internal devaluation is an impractical pipe dream (we saw, this past Friday, Greece seek to obtain yet additional principal forgiveness of its debts) it has become much more likely, than generally hoped for of late, that that the only way to true devaluation in the southern tier takes us to the zonal exiting of some of the peripherals and the disclaiming of their Euro-denominated obligations in favor of repaying with a deeply devalued local currency.
Of course I am tossing out as unrealistic the permanent southward life support alternative (in which the core merely subsidizes the “club med” countries ad infinitum), which I can’t see as being politically worth discussing. And I am assuming that a “drachma-tized” Greece, for example, would take advantage of the default on/devaluation of its Euro obligations to attract investment and grow production.
As long as the southern economies remain in the euro-zone, currency devaluation for these economies remains out of the question for obvious reasons. Any devaluation becomes universal (which, it might be added, pushes the cost of adjustment off on the United States and other major economies outside Europe).
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