The Mainstream Media portrays the Eurocrisis as a morality tale. They have adopted the German narrative, which is similar to fable of the ant and the grasshopper. Germany, Austria, Finland and the Netherlands are the ants working hard and saving for the long, cold winter ahead. The periphery is the grasshopper, playing and lounging in the summer and not doing a damn thing to prepare for the winter.
The FANG believes that if the periphery just cut their budgets enough they would return to growth after enduring a rough patch. The facts dispel this view, as the budget cuts have proven to cut economic growth resulting in less tax revenues and large budget deficits. Paradoxically, the more these countries try to save the more they owe.
Each country entered the debt crisis in its own special way. Only Greece conforms to the German narrative, and ironically has received the most aid. Spain and Ireland are enduring the consequences of burst property bubbles and their resultant banking crises. Portugal’s economy experienced the deepest recession in the Eurozone causing its crisis. Cyprus is dealing with a banking crisis caused by its close ties to the Greek economy. Italy, believe it or not, has been practicing austerity for the past 20 years. (See 20 Years of Austerity in Italy | DARECONOMICS.)
Continued austerity is not the answer. A closer European Union could work, but these countries would all have to become joint and severally liable for each others debts. Moreover, the article claims that fiscal transfer payments from rich countries like Germany to poor countries like the PIIGS would be temporary.
This claim does not have a strong factual grounding. The U.S. is also a currency union, the dollar zone. Since the New Deal and the beginnings of a strong central government, the poor states have continued to receive money from the rich states. Membership in these two groups seldom changes. Mississippi has been a net recipient of federal tax dollars forever.
Italy was also a currency union unto itself until it joined the eurozone. Italy did not become a unified country until the 1860’s. An industrialized North was joined with a rural south in the lira zone. To this day, tax money flows from north to south, and this trend shows no signs of abating.
American and Italian currency unions are natural, because they contain peoples with the same language and culture. Will the Germans wish to send hundreds of billions of euros to the periphery every year? We not talking chump change here. Economists agree that annual payments of 5 to 10% of GDP would be necessary.
The FANG have shown no willingness to commit to such large sums. A banking union remains in limbo, because these countries refuse to pay for a joint depository insurance scheme or resolution authority. The FANG wish to enjoy all of the benefits of the common currency while leaving their PIIGS partners the burdens.
Since no one wants to pay, the only recourse for the periphery is to leave the eurozone. National currencies will allow them the flexibility they need to become competitive and retake control of their national budgets.