To:
"eurorealist@yahoogroups.com" <eurorealist@yahoogroups.com>
THERE is no magic Keynesian bullet for the eurozone’s woes.
But the spectacularly muddle-headed argument nowadays that too much austerity
is killing Europe is not surprising. The eurozone’s difficulties stem from
European financial and monetary integration having gotten too far ahead of
actual political, fiscal and banking union. This is not a problem with which
Keynes was familiar.
Any realistic strategy for dealing with the eurozone crisis
must involve huge write-downs of peripheral countries’ debt. These countries’
combined bank and government debt make rapid sustained growth a dream. This is
not the first time I have stressed the need for wholesale debt write-downs. Two
years ago, in a commentary called "The euro’s pig-headed masters", I
wrote that "Europe is in constitutional crisis. No-one seems to have the
power to impose a sensible resolution of its peripheral countries’ debt crisis.
Instead of restructuring the manifestly unsustainable debt burdens of Portugal,
Ireland and Greece, politicians and policy makers are pushing for ever-larger
bail-out packages with ever-less realistic austerity conditions."
In a debt restructuring, the northern eurozone countries
(including France) will see hundreds of billions of euros go up in smoke.
Northern taxpayers will be forced to inject huge amounts of capital into banks,
even if the authorities impose significant losses on banks’ large and wholesale
creditors. These hundreds of billions of euros are already lost and the game of
pretending otherwise cannot continue indefinitely.
A gentler way to achieve some modest reduction in public and
private debt burdens would be to commit to a period of sustained but moderate
inflation. Sustained moderate inflation would help to bring down the real value
of property more quickly and potentially make it easier for German wages to
rise faster than those in peripheral countries.
What else needs to happen? The other steps involve economic
restructuring at national level and political integration of the eurozone. In
another commentary, "A centreless euro cannot hold", I concluded that
"without further profound political and economic integration … the euro
may not make it even to the end of this decade".
Here, all eyes may be on Germany, but it is France that will
play the central role in deciding the euro’s fate. Germany cannot carry the
euro alone indefinitely. France needs to be a second anchor of growth and
stability.
Temporary Keynesian demand measures may help to
sustain short-run internal growth, but they will not solve France’s long-run
competitiveness problems. At the same time, France and Germany must both come
to terms with an approach that leads to far greater political union. Otherwise,
the coming banking union and fiscal transfers will lack the necessary political
legitimacy
http://www.bdlive.co.za/opinion/2013/05/27/no-simple-keynesian-cure-for-the-euros-problems
But the spectacularly muddle-headed argument nowadays that too much austerity
is killing Europe is not surprising. The eurozone’s difficulties stem from
European financial and monetary integration having gotten too far ahead of
actual political, fiscal and banking union. This is not a problem with which
Keynes was familiar.
Any realistic strategy for dealing with the eurozone crisis
must involve huge write-downs of peripheral countries’ debt. These countries’
combined bank and government debt make rapid sustained growth a dream. This is
not the first time I have stressed the need for wholesale debt write-downs. Two
years ago, in a commentary called "The euro’s pig-headed masters", I
wrote that "Europe is in constitutional crisis. No-one seems to have the
power to impose a sensible resolution of its peripheral countries’ debt crisis.
Instead of restructuring the manifestly unsustainable debt burdens of Portugal,
Ireland and Greece, politicians and policy makers are pushing for ever-larger
bail-out packages with ever-less realistic austerity conditions."
In a debt restructuring, the northern eurozone countries
(including France) will see hundreds of billions of euros go up in smoke.
Northern taxpayers will be forced to inject huge amounts of capital into banks,
even if the authorities impose significant losses on banks’ large and wholesale
creditors. These hundreds of billions of euros are already lost and the game of
pretending otherwise cannot continue indefinitely.
A gentler way to achieve some modest reduction in public and
private debt burdens would be to commit to a period of sustained but moderate
inflation. Sustained moderate inflation would help to bring down the real value
of property more quickly and potentially make it easier for German wages to
rise faster than those in peripheral countries.
What else needs to happen? The other steps involve economic
restructuring at national level and political integration of the eurozone. In
another commentary, "A centreless euro cannot hold", I concluded that
"without further profound political and economic integration … the euro
may not make it even to the end of this decade".
Here, all eyes may be on Germany, but it is France that will
play the central role in deciding the euro’s fate. Germany cannot carry the
euro alone indefinitely. France needs to be a second anchor of growth and
stability.
Temporary Keynesian demand measures may help to
sustain short-run internal growth, but they will not solve France’s long-run
competitiveness problems. At the same time, France and Germany must both come
to terms with an approach that leads to far greater political union. Otherwise,
the coming banking union and fiscal transfers will lack the necessary political
legitimacy
http://www.bdlive.co.za/opinion/2013/05/27/no-simple-keynesian-cure-for-the-euros-problems