Thursday, October 16, 2008


Will the EU turn to Keynesian stimulus to stave off depression? Two articles appeared this morning, highly contrasting in tone, suggesting a divergence of views. Die Zeit portrays Sarkozy as in favor of an energetic next step, with Merkel still holding back, albeit now praising the rescue package about which she was formerly reticent. The picture is again one of Sarko leading, prodding, full of vigor and eager to do something, while Merkel remains cautious. Meanwhile, Le Monde says that the Eurogroup has "rejected" a stimulus plan but cites only the opinion of Jean-Claude Juncker, who appears not to have noticed that the Stability and Growth Pact is now a dead letter. His position--"Where will the money come from?"--harks back to the earlier clash between him and Sarkozy over the French budget deficit. Sarkozy, who always chafed against the limits imposed by the SGP, now plainly regards the emergency as having rendered them obsolete.

Indeed, Sarkozy recognizes what Merkel seems to have shut her eyes to: Europe, having offered massive guarantees to both depositors and lenders--guarantees that will remain credible only as long as they are not sorely tested--must now ensure that borrowers do not fail, that investor confidence does not crumble, that what Keynes termed "animal spirits" do not flag. Of the more than one trillion euros pledged thus far, only a small fraction involves up-front expenditure: the equity infusion to banks. The rest is in the nature of insurance, a sort of gigantic credit default swap, which, like too many other CDSs, cannot possibly be paid in case of systemic failure. Thus governments have now committed themselves, pace Merkel and Juncker, to making sure that systemic failure does not occur. The question is what form the stimulus will take, not whether it will occur, and it would be good if Europe could achieve coordination on that point as rapidly as it came to agreement on the insurance policy that made such coordination as inevitable as it is essential.

1 comment:

Anonymous said...

^^ nice blog!! ^@^

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