Diagnosing the problem - by Richard... Tuesday, January 17, 2012

Diagnosing the problem - by Richard... Tuesday, January 17, 2012

"If you misdiagnose the problem", writes Jeremy Warner, "you are highly likely to prescribe the wrong sort of treatment".

The corollary also applies. In order successfully to solve a problem, you must first diagnose it correctly. Warner has "thought long and hard" about this, about "why Europe should be so bone-headed about the crisis it faces". And he still is nowhere near getting there.

Unsurprisingly, for the chattering classes, he started off on the wrong foot, telling us that "it was tempting to put these failings down to want of intellectual vigour".

Economics, goes the old [lame] joke, is not rocket science; if it was the Germans would be much better at it. "But actually", says Warner, " there are some very fine German economists all of whom fully understand the nature of the problem".

Hence in Warner's book, the problem is worse than that. "What it's really about", he opines, "is refusal to face up to the truth – that monetary union, the imagined crowning glory of the European project, cannot work under the present framework or anywhere close".

"Europe's leaders don't want to hear this", he adds. "They still cling to the belief that monetary union of fiscally sovereign nations can, provided everyone sticks to fiscal disciplines, be made a functioning and transformational engine of growth".

You might have thought he could do better than this. The problem, after all, is very simple. The euro is not an economic but a political project, and the "colleagues" are reacting in a political manner rather than taking the appropriate economic measures.

Their stance is that "the euro must survive", whence they dig their heels in and refuse to budge. They refuse to take the obvious and necessary economic measures because they are at odds with the political objectives.

It really is quite interesting to see how difficult the chatterati find it to come to terms with this very simple point. But the explanation is also quite simple. To do so would require them to come to terms with their own blindness – their own refusal after all these years to realise that the European Union was a political project, and a "trading agreement".

They themselves cling to the belief that the European Union is primarily an economic project, which has somehow gone off the rails, and only needs some economic correctives to bring it back on track. And that "refusal to face up to the truth" is what dooms them. If you start off from the wrong premise, you will always struggle to make a correct diagnosis.

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That precipice again - by Richard...

Rescue work was briefly suspended on the Costa Concordia yesterday after the vessel slipped deeper into the water. Although this was less than four inches, it transpires that the wreck is perched on a rock ledge and, with just a small movement, could plunge to the depths in water over 300 ft deep.

And already, we could not resist the temptation of drawing the parallels, but the similarities are getting to be uncanny.

Even while this testament to "continuing harmony, unity, and peace between European nations" was shifting its ground, rating agency Standard & Poor's cut its credit rating of the European Financial Stability Facility, the euro zone's rescue fund, by one notch to AA+ on Monday, three days after it cut the ratings of France and Austria by the same margin.

In a statement, S&P said the decision was all but inevitable following the cuts to the creditworthiness of France and Austria, which were two of the EFSF's guarantors. "We consider that credit enhancements that would offset what we view as the now-reduced creditworthiness of the EFSF's guarantors and securities backing the EFSF's issues are currently not in place," the agency said.

So there we have it. The euro shifted again yesterday – only a little bit, but it transpires that this wreck of a currency is perched on a rock ledge. Just a small movement could tip it over the precipice and plunge it to the depths. One of those small movements just happened ... the descent is just a matter of time.