The Corner

One Size (Still Not Fitting All)

Here’s the Daily Telegraph’s Ambrose Evans-Pritchard with another gloomy round-up:

The structural gap cannot be closed by debt-deflation in the South. It could arguably be mitigated by ECB reflation, yet the central bank has done the opposite, blighting the chances that Spain might just be able to struggle back to viability.  Spain is cutting stoically. The ECB did not have to have make matters worse by tightening monetary policy as well. It chose to do so, knowing that core inflation is tame and that Europe’s banks are about to shrink their balance sheets drastically.

Portugal is already under EU-IMF administration, or “a state of occupation” in the words of Labour leader Carvalho da Silva. The unions have called a general strike this month.

This honourable nation, which pays its debts, has seen its external capital accounts swing from surplus to a deficit of 104pc of GDP under the perverse effects of EMU. The current account deficit is 8pc of GDP. What Portugal needs is a 40pc devaluation against Germany. Instead, premier Pedro Passos Coelho is attempting an “internal devalution”, with swingeing cuts to pay, pensions, welfare, and health. You cannot deflate an economy back to viability where total debt is 350pc of GDP. It is mathematical suicide.

Italy in turn has been told to balance its budget by 2013, even though it has a primary surplus and one of the lower debt levels (public and private) in the OECD club. This risks pushing Italy into a slump that sets off the destructive debt dynamic so widely feared. It misdiagnoses the problem. Italy is in crisis because it cannot compete. It is in the wrong currency.

True enough (as Silvio Berlusconi has, to his credit, long recognized). Evans-Pritchard continues:

The EU refuses to confront the core issue, instead seeking to buy time for the South by conjuring a €1.2 trillion bail-out fund (EFSF) that seeks uber-leverage through “first loss” insurance of bonds.

This concentrates risk for creditors. It further endangers France’s AAA rating, the foundation of the fund. It almost guarantees faster contagion to euroland’s core. Europe has resorted to this twisted device because Germany has vetoed all moves to fiscal union, Eurobonds, debt-pooling, or ECB [European Central Bank] activism. It is a Hail Mary pass, a last gamble when all else fails.

Of all those unlovely alternatives, unleashing the ECB would likely be the quickest, the ‘easiest’ and the most effective (although I doubt if its intervention would have much effect on the underlying structural imbalances), but, given the growing anger of German voters, duped, lied to and robbed  by their political class, not to speak of their folk memories of Weimar, it’s not difficult to see why Merkel is so unwilling to choose any of the alternatives on Evans-Pritchard’s ghastly menu.

Evans-Pritchard resumes:

Chancellor Angela Merkel warns that euro failure threatens a thousand plagues. “No one should think that another half-century of peace and prosperity is assured.”

She has the matter backwards. The euro itself has become an engine of destruction and cross-border rancour. Europe will not be happy again until this misguided experiment is shut down.

But how? Well, British businessman Lord Wolfson is offering a £250,000 prize for anyone who can work out “how to manage the orderly exit of one or more member states from the European Monetary Union.” I’ll stick with the ‘Northern Euro’, but as to how “orderly” that route would really be…

It’s a tricky business unscrambling eggs.


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