Tuesday, 13 December 2011

Europe's debacle stems from the euro itself

Ambrose Pritchard Evans writes in the Telegraph: http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100013758/europes-blithering-idiots-and-their-flim-flam-treaty/

Competitiveness mismatch
  • The Eurozone was never an optimal currency area, and is highly unlikely to become one
  • Historically, the dense river network in northwestern Europe afforded the region much lower transportation costs
  • This competitive advantage allowed the accumulation of capital and construction of roads, railways and industry
  • The industrial environment fostered cultural habits of efficiency, innovation and hard work
  • No amount of regulations, treaties, currency unions or monitoring can change this historical development
  • The only trick Southern nations had up their sleeve (currency depreciation) ended with the adoption of the Euro.
  • The result is the trade surplus in the North and huge debts in the South


The Output Gap is a Depression risk
  • Without a debt-liquidation the cost of servicing the debt (private or public) has created an Output Gap reflected in the Unemployment and Excess Capacity figures
  • An oil shock, global slowdown, or simply austerity can widen this Gap into a Depression.
  • The best case scenario under the present course will only result in a prolonged Japan-style slump
  • The worst case will be a deflationary Eurozone depression which can bring down the entire EU and periphery
  • A common market was a great idea. Currency union is a proven disaster. Austerity without debt-liquidation (PSI) will only make things worse.

How can the Eurozone turn this around?
  • The bad debts resulting from the banking bubble must be liquidated & stifling regulations in the Eurozone loosened. This is unappetizing but it is ABSOLUTELY the only way to restart growth.
  • Reinstatement of national currencies will fix the currency misalignment issue depreciation. This will also allow indebted countries to inflate their debts away without a default.
  • A Eurozone split (along North-South lines) can allow indebted countries to inflate and regain competitiveness (France would belong in Club Med, not in the North)

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