Wednesday, December 14, 2011

Quiggin on the Euro Crisis as Kremlinology

In one respect, the EU agreement was anything but subtle. The fact that the Eurozone countries and those aspiring to join them were prepared to go ahead without the UK (and a few others) suggests that they have something serious in mind. But what – the announcement is pretty much a restatement of the Growth and Stability pact, and under present circumstances, the deficit targets can only be seen as aspirational.

Applying one of the approaches that used to be standard in Kremlinology (not necessarily a reliable one, then or now) I’m going to assume that the EU leaders are acting with some sort of coherent goal in mind and work from there. In particular, I’m going to assume that everyone who matters now recognizes the need for a big monetary expansion and the use of newly created money to resolve, or at least stabilize, the debt crisis.

There are a bunch of obstacles to this:
(i) The desire of the ECB to save face, to avoid admitting its large share of responsibility for the crisis and, if it can, to hold on to its central position and to the inflation targeting system
(ii) The belief of the German public (and some others) that they are being made to bail out a bunch of feckless Southerners, rather than (the reality) saving French and German banks from the consequences of their bad decisions, and preserving the European economy on which the Germans depend as much as anyone else from the disastrous regulatory failures of the Euro-elite, including the ECB, European Commission, financial regulators and so on
(iii) the problems with EU treaty amendments requiring unanimous consent

2 comments:

FrédéricLN said...

Kremlinology is a famous idea, as it's about to analyse a decision system that has very low grip on reality, excepted trough "violent" actions — and decision-makers can't anticipate the future consequences of those actions.

Nevertheless, I wouldn't assume that Mrs Merkel "now recognizes the need for a big monetary expansion and the use of newly created money to resolve, or at least stabilize, the debt crisis".

I'm quite sure that, from Mrs Merkel point of view, 1) the adequate way to stabilize the debt (and thus the debt crisis) is to stabilize the debt; 2) if not, a huge devaluation (it would need to be huge indeed, -50 to -75% at least to make the Greek debt sustainable, -30 to -40% for the French one, despite the new spendings the devaluation would carry with it) would sink the lending banks, not save them.

Up to last month, it seemed that the EU leaders and the common goal to "save the euro" as the currency of 17 Member States. I wonder whether it's still the case; or, I think many are currently reconsidering that, and are taking the only decisions that are independent from the name and nature of the future currencies. And, all of them seem to think that *some kind of* balanced-budget-rule is one of the decisions each European State will have to take whatever the currency.

FrédéricLN said...

Correction!

-> all of them seem to think that *some kind of* balanced-budget-rule is one of the decisions their own State should take whatever the currency.