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The Corner

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About that Eurozone (Where the Crisis is Over)



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Writing in the Daily Telegraph, the always cheerful Ambrose Evans-Pritchard:

Eurozone strategy is in tatters after economic recovery ground to a halt across the region and France demanded a radical shift in policy, warning that austerity overkill is driving Europe into a depression.  Growth slumped to zero in the second quarter, with Germany contracting by 0.2pc and France once again stuck at zero. Italy is already in a triple-dip recession. Yields on 10-year German Bunds fell below 1pc for the first time in history, beneath levels seen during the most extreme episodes of deflation in the 19th century…

The Financial Times:

Spain’s borrowing costs have fallen to levels not seen since the country’s empire stretched across the Americas. The yield on Spain’s benchmark 10-year government bond fell below 2.5 per cent on Monday for the first time in more than two hundred years, according to data from Deutsche Bank.

At least in Spain’s case, the picture may be complicated by deflation  (meaning that real rates are higher than the nominal number would suggest), but even so…

What matters is that the French may have had enough of all this.

Back to Evans-Pritchard:

Michel Sapin, France’s finance minister, sent tremors through European capitals with a defiant warning that his country would no longer try to meet its deficit targets and would not inflict further damage on its economy by tightening into the downturn. “I refuse to raise taxes to close any budget gaps,” he said.  “What is absolutely necessary is to adjust the pace of deficit reduction to the exceptional situation we are in today. Growth is too weak in Europe and inflation is too low. We must therefore stop reinforcing the causes of this depression,” he told RTL television.

“We must face the figures in front of us with realism. The truth is that, contrary to the forecasts of the International Monetary Fund and the [European] Commission, growth has broken down, both in France and in Europe.”

He halved his French growth forecast to 0.5pc this year and to little more than 1pc next year, too weak to stop unemployment hitting fresh highs. The IMF has already warned that there will be no job growth until 2016.  Germany has so far refused to yield any ground on austerity policies but is increasingly vulnerable. Revised data show that the economy has been far weaker than thought over the past two years, falling into a significant double-dip recession last year. Professor Paul De Grauwe, from the London School of Economics, said: “They are victims of their own folly. Germany needs massive investment in its energy sector and it should be doing it now while it can borrow for almost nothing.”

Sapin is, in a way, correct. France’s longer-term budgetary problems are daunting, but taking yet more demand out the economy now is quite likely to make a bad situation worse. If France had its own currency, devaluation could help the necessary adjustment (it could also be abused as a get out of jail free card too) but France no longer has a money to call its own. Instead it’s stuck with the euro, a currency that makes no economic sense and enjoys no political legitimacy.

And yes,  Germany does have room for some fiscal easing at home, although spending yet more money on its ruinously expensive energy policy (it’s a green thing) would not be the way to go. But what Germany does domestically is one thing, agreeing to looser budgetary rules for the euro zone as a whole is quite another. Such a concession is not something that Germany will want to hand to its more indebted ‘partners’ in this wretched currency union. Germans fear, not without reason, that agreeing to any meaningful relaxation of the rules would be a significant step towards a debased currency (something for which Germans have a particular aversion) and, maybe even worse, will eventually set the stage for a series of (explicit or concealed) bailouts for which Germans will, one way or another, end up footing the bill. That’s the bill that Germany’s political class once swore was an impossibility, the bill, Germans were told, that would never ever come their way.

Once again: one size does not fit all.

A partial, and far from straightforward, solution to this mess would be the division of the euro into southern and (yes, this again) northern euros. Writing two days ago, Evans-Pritchard, then giving up his hopes for a ‘Latin revolt’ of the type that some might now believe that  Sapin could lead, went further still, arguing that Italy should go it alone, and return to the lira. In my view he makes a convincing case, but judge for yourself. The most important part of the piece, however,  concerns something other than the mathematics of economic catastrophe (my emphasis added):

…Italy’s economy’s has 67pc “gearing” to the exchange rate due to the kinds of products it makes, compared with 40pc for Germany. The Achilles Heel is the backward half of Italy’s economy, mostly the Mezzogiorno, that competes toe-to-toe with China and the emerging economies of Asia, Turkey and eastern Europe in price-sensitive sectors.

I do not wish to revisit the stale debate over why Italy kept losing labour competitiveness against Germany for a decade and a half, except to say that it proves just how hard it is to bend Europe’s deeply-rooted cultures to the demands of a currency experiment. Economists said EMU nations would converge. Anthropologists and historians said they would do no such thing.

Culture counts for nothing for central planners of the type that created the euro zone, but, in the real world, it counts.

Italian monetary union, supposedly bringing together north and south, has yet to work after more than 150 years: Economically speaking, Naples is not Milan.  How long will it take Naples, let alone, Athens, to ‘converge’ with Berlin?



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