Mon Sep 22nd, 2014 at 10:00:34 AM EST
Robin Fransman has a post on Pieria that neatly sums up a lot of what has been said here over the last few years (and that continues to prove depressingly accurate). Citing approvingly Mario Draghi's recent speech at Jackson Hole for its mention of a lack of an EU budget and of a lender of last resort as problems for the euro, he goes on to what Draghi didn't talk about:
Mr Draghi, is it really that difficult to see?
Using the EIP, the Commission can force countries into austerity when deficits and sovereign debts are too high, but can't force them into stimulus or tax cuts when surpluses are high. It can force countries into wage moderation and real wage declines when Unit Labour Costs rise too rapidly, but is powerless when wages rise too slowly. EIP will kick in when a country has a negative international investment position greater than -35%, but a high positive position goes unnoticed. It kicks in when inflation is too high, it does nothing when inflation is too low. Every indicator in the EIP is biased this way. The only indicator that has some balance is the current account indicator: deficit of more than -4% will sound the alarm bells, as will a surplus greater than +6%. But even this is simply another glaring asymmetry.
This is not a system that works towards a benign equilibrium. This is not an Excessive Imbalance Procedure. It's a deflation machine. It works towards an economy with perpetual current account surpluses and suppressed domestic demand, leaving exports as the only possible growth engine, under conditions that put constant upward pressure on the exchange rate of the Euro.
As has been pointed out many times here, all the partners in a single currency can't simultaneously run current account surpluses with each other; and, if Europe's sole vocation is to export, that calls for a big world (or Mars) with a growing appetite for Europe's goods and services. Fransman points out that projecting Eurozone export growth to the rest of the world in line with international trade and economic growth only adds 0.5% to GDP growth. Before one counts the effect of the shortfall in investment due to export gearing via demand depression.
Under an exclusively export oriented policy regime, sectors that service domestic demand have little incentive to invest. Without growth prospects, without rising real wages, companies start maximizing free cash flows and restrict their investments to replacements only. Without rising labour costs, productivity enhancing, labour saving investments become self-defeating. That's 85% of the economy not investing, because their market, domestic demand, does not grow.
We may wonder where, on a global scale, the mercantilist logic leads. If domestic demand in a unit as large as the Eurozone is to be depressed, and investment reduced, the European economy acts less as a locomotive, and the capacity of the rest of the world to soak up European exports will diminish. This has certainly happened within the Eurozone with respect to Germany. Mercantilism is a mug's game.
Franson goes on to speak of morality plays and a new gold standard, language that is familiar to us here:
Mr Draghi, is it really that difficult to see?
The EIP is not sound economic policy but a morality play. Debt and deficits are bad, financial assets and surpluses are good. High wages bad, low wages good. Rising currency good, falling currency bad. It does not recognise that debt and assets, surpluses and deficits are twins, two sides of the same coin. It does not recognise that a surplus or a deficit is not only the result of differing competitiveness, but also the result of differing savings and investment patterns. From an economic perspective all this is utter nonsense. Since economies must find their equilibrium, there is no intrinsically "good" or "bad" price level: nstead, there is an optimal level that can be high or low, rising or falling. Without the Euro, floating currencies would take the largest share in restoring equilibrium, and this would ALWAYS mean both a rise and a fall in relative prices between countries. Within the Eurozone, restoring equilibrium must follow the same path, or it will break up eventually. With high and rising debt levels, being stuck in a deflation machine will kill it, sooner or later. We will then finally have our transfer mechanism in the Eurozone, through defaults and the resulting return to multiple currencies, but it will be very, very painful.
The EIP is the new Gold Standard. It forces member states into rounds of competitive wage declines. It is mercantilism through wage devaluation instead of competitive currency devaluations.
OK, asking Draghi if he can't see all this is somewhat of a framing device for the article. Because whether Draghi sees it or not, he can't or won't say it, and, at the ECB, there's not a lot he can do about it. As for Merkel and Schäuble seeing it, the evidence is that, whatever happens, they will not.
On glides the Titanic.