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Here's how I think about the current debt crisis in the Eurozone. Start with two facts:
  • The Eurozone has, in aggregate, balanced external trade. This means there is no real pressure on the Euro exchange rate from trade flows.
  • The Eurozone has most of its debt, public and private, denominated in Euros. This means large exchange rate swings do not put in danger the solvency of either the public or private sectors of the Eurozone's economy.

That is, from the point of view of monetary policy, the Eurozone is a resounding success.

So, what is the problem? The problem is fiscal and political, not monetary. It is entirely about sharing (or not) the gains from the single currency area and the losses from the deleveraging of the debt bubble.

If the Eurozone member states cannot find in themselves solidarity between (as opposed to within) nation states and cannot find the political will to build a shared fiscal (and industrial!) policy, the Eurozone will implode from within (not due to any external pressure).

The EU having been run by nationalistic politicians with no vision for the last 15 years, I am not optimistic. And we saw how the electorate rewarded the conservatives in the last European (and in the German) elections. You don't get what you don't vote for (in this case, solidarity and forward thinking).

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Mon May 3rd, 2010 at 10:02:03 AM EST
Is it the goal of becoming a reserve currency that shackles the ECB's ability to exert all its potential powers in controlling currency? In other words, why doesn't the ECB operate as a fully functioning reserve bank? If it did, and enhanced that sense of sharing not through direct subsidies from rich nations to the poorer ones but instead through the loosening of monetary policy, this would impact worldwide perception of the euro as a reserve currency.
by Upstate NY on Mon May 3rd, 2010 at 12:18:55 PM EST
[ Parent ]
Is it the goal of becoming a reserve currency that shackles the ECB's ability to exert all its potential powers in controlling currency?
No. It's the ECB's statute.
In other words, why doesn't the ECB operate as a fully functioning reserve bank?
In other words, because it isn't one.
If it did, and enhanced that sense of sharing not through direct subsidies from rich nations to the poorer ones but instead through the loosening of monetary policy, this would impact worldwide perception of the euro as a reserve currency.
If it did it wouldn't be acting like the trick of the plutocrats it is constituted to be.

In this context, maybe a sovereign default by a Euro country would help concentrate the mind of the plutocrats. For the citizens of the defaulting state, the consequences of a default cannot be worse than the neoliberal shock therapy being prescribed for Greece by the IMF, ECB and European Commission.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Mon May 3rd, 2010 at 12:46:28 PM EST
[ Parent ]
Right, I know the ECB doesn't have those capabilities. That's why I referred to it as shackled. I was wondering about the reasoning behind that, and you provided it.
by Upstate NY on Mon May 3rd, 2010 at 01:21:34 PM EST
[ Parent ]
I am not sure what the reasoning was behind it when those rules were written into the treaties. They were probably introduced at the behest of Germany, like the Growth and Stability Pact:
The SGP was initially proposed by German finance minister Theo Waigel in the mid 1990s. Germany had long maintained a low-inflation policy, which had been an important part of the German strong economy's performance since the 1950s; the German government hoped to ensure the continuation of that policy through the SGP which would limit the ability of governments to exert inflationary pressures on the European economy.


The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Mon May 3rd, 2010 at 01:33:33 PM EST
[ Parent ]

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