This is an excellent piece from the Wall Street Journal. Brian Carney interviews Bernard Connolly, the former economist in charge of monetary affairs. In the spirit of the EU, he was was fired for daring to cross the cult of the euro. His crime was speaking the truth that the creation of the euro would eventually cause an economic disaster.
What is left unsaid in this article is that the reason why the mainstream media keeps reporting that the crisis is over is because it has adopted the politicians’ and banks’ perspective on what the crisis is. To these two groups, everything seems great. Sovereign debt rates are low, and stock markets are rising. The politicians can continue borrowing money to preserve the status quo and their jobs. The banks are earning profits as the debt and stocks they hold appreciate. The reason for all of this “good news” is that the ECB has turned on the money machine and promised to really crank it up if it becomes necessary.
Meanwhile, from their perspective, workers are mired in the depths of the crisis. Unemployment has reached disastrous levels and shows no signs of improving:
Excess liquidity is doing nothing to promote economic growth at the level necessary to achieve reductions in unemployment.
Since it is a “news” article, another side to the story must be presented:
Superficially, there is some basis for the official view that the worst of the crisis is over: Interest-rate spreads, current-account deficits and budget deficits are down. Greece’s departure from the single currency no longer seems imminent.
Each of these reasons is flimsy. Interest rate spreads are down because of money printing and the threat of more money printing.
Current account deficits have not declined nearly as much as is necessary to halt the crisis. Furthermore, these deficits have dropped mostly due to the fact that crisis-hit countries can no longer afford imports. Greek citizens are burning wood to keep warm this winter, because fuel oil is just too expensive.
As to budget deficits, they have not declined nearly enough to put an end to the crisis. Spain, Greece and austerity propaganda darling Ireland ran double digit budget deficits for the last fiscal year.
The austerity propaganda spewing forth from Germany and the EU is that the periphery is enduring a “rough patch.” Bailout programs will help these countries get through this time of hardship to the promised land of economic growth on the other side of the crisis.
Connolly debunks the propaganda. His opinion is that the eurocrisis is actually the bursting of the euro bubble. The introduction of the new currency allowed the periphery to enjoy unusually low interest rates. This factor spurred investment booms. Houses were built, and businesses were started. The consequence of the low rates was that they fed overinvestment. There were too much construction and new business formation leading to overcapacity and oversupply in these economies. The result was a bust.
In order to fix the crisis, the ECB is attempting the reflate the bubble, but since there are still too many houses and businesses in the periphery, the extra money is not resulting in economic growth like it did in the past.
The other solution is wage and price adjustments via austerity, but this tactic is failing, too. Budget cuts are insufficient to achieve this goal, so a massive devaluation in the euro is required to pull to do so. However, Germany will not abide the inflation that would be caused by a decrease in the value of the euro.
The only way to put these countries on track is a fiscal transfer from rich to poor. Connolly figures that a yearly amount of 10% of Germany GDP on a permanent basis would be necessary. What the article does not tell us is that the Germans would need to raise taxes over 50% to finance an amount that large.
Since that solution is politically untenable, the periphery will not get the funds they need to maintain their euro memberships.
What we have here is a Sherlock Holmes situation. Allow me the literary license to paraphrase his famous quote:
Remove the impossible. Whatever remains, however improbable, is what will happen.
We have learned that a wage and price adjustment large enough to solve the crisis is impossible. A massive devaluation that will cause inflation is impossible. Fiscal tranfers are impossible. That leaves us with one option: countries exiting the euro and returning to devalued national currencies.
Germany was willing to finance fiscal transfers in the case of Greece and will undoubtedly do the same for Cyprus, but Spain, Italy and France are just too large to save. Taxes would have to rise prohibitively throughout the entire FANG in order to save just one of those countries let alone all three.
The Germans will continue to do just enough to maintain the eurozone. Currently, German businesses are making money hand over fist due in part to a weak euro. Since they are benefiting from the current arrangement, they will continue doing just enough to maintain the status quo. However, as soon as real money is required, they will balk at committing the amounts neccessary. Then, the endgame will begin.