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 German savings rate and fear of inflation are helping drive the Euro crisis. The nation is playing the role of the Republicans in the United States, even though the Republicans are at least resposible for more than half of the problems here. Each is pushing for tighter money and cuts in government spending, even though there is a problem with demand because of consumer indebtedness. Yes, government deficits are a serious long-term problem, but drastic spending cuts are going to make things worse. I'm not sure what the key solution is in Europe, but here in the states we need to cut war expenditures and raise taxes, especially on the very wealthy. Neither is a significant option in Europe.
The damage was compounded by the ECB. 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.
Thursday, August 18, 2011
Is German Frugality Part Of The Euro Problem?
Yes. Ambrose Evans-Pritchard: