Thursday, April 19, 2012

Macroeconomics for the Eurozone

An excellent discussion of  what Eurozone macroeconomic policy should be, as opposed to what it is, by Simon Wren-Lewis, here. One can hope that the election of François Hollande will move European and especially German thinking on these questions. If Hollande, as promised, calls for renegotiation of the Merkozy agreement, Merkel, whose thinking may be evolving toward recognition of the need for structural rebalancing, could seize the opportunity, and Rajoy and Monti would probably welcome the opportunity. But German opposition to any suggestion that Germany must sacrifice in order to provide life support to the euro remains strong.

Prediction is hard, especially about the future, as Yogi Berra said, but if I had to guess, I would say that it will take a substantial scare to move the Germans away from the status quo. Perhaps the markets will overreact to Hollande's election and provide such a scare. The danger is that fear initiates a self-fulfilling prophecy, resulting in a downward spiral rather than progress toward a sustainable rebalancing. It's a Scylla and Charybdis moment, which may end on the rocks.

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