Friday, 9 December 2011

Angela Merkel Kann ich bitte mehr Taschengeld haben?

Like everyone else, I am watching what goes on in Europe this week with great interest. A collapse and the subsequent unraveling of the Euro/EMU, would simply be devastating to the world economy.

First of all whoever decided to give Governments of Ireland, Greece, Italy cheap loans and expected them to exercise prudence didn't do too much homework, and some sort of fiscal oversight would probably have been useful. But even though they were really bad, almost every government in the developed world were also reckless and it's hard to identify a politician, in Europe at least, you could have trusted with the job.

However if I was a conspiracy theorist, then I would also be looking at the potential outcome of this summit with some concern.

A monetary union with a single currency and a single interest rate will inevitably benefit some and disadvantage others. If one country grows by exporting to others, then the money ends up in that country.

Conventionally the less competitive country would allow its currency to devalue (happens automatically in an free floating exchange rate regime) which will then increase their production and decrease their imports. It will make them competitive.

In the absence of this mechanism, there have to be another way to balance the books. If you cant adjust your exchange rate and interest rate alike, you have to adjust everything else, but you show me a politician in the world who will run for office on "lets cut income, lets reduce property prices, lets cut spending on schools, health care and infrastructure development". Even if they could abolish democracy and insert an unelected technocrat like "Super Mario" in Italy,  it is very difficult to sustain in the longer term, and more importantly I believe it will drain the country in a sort of "last man turn off the lights" downwards spiral. It is unclear to me if there is any examples of fiscal prudence and austerity alone will generate growth and restore competitiveness.

But if I was Germany, I would at all cost try to protect the status quo (even if my electorate cant comprehend why I'm doing it). It is a fantastic opportunity for them to transfer fiscal powers to EU and thus sustain the imbalances they are benefitting from, while still protecting them against accumulation of debt in deficit countries. I am actually in favour of some sort of fiscal integration but for the peripheral countries, unless they are happy being turned into great wastelands, it could only only work if accompanied by substantial income transfers, i.e. give them back what they are loosing on the trade, so they can invest in economic development, much like what would be the case in most countries internally. Will they,  when they rush through these changes, remember to implement provisions for large scale fiscal transfer, I think not. Conveniently S&P has put all the Euro countries on "downgrade watch"  and ECB and IMF have declared they are not going to bail out countries, so Germany has an extremely good hand to play. It smells a bit funny though.

Boris Johnson, the Mayer of London, said yesterday that it looked like they were trying to save the cancer and kill the patient. The cancer (in my opinion) is not the Union itself, but more so the selfish interest of some countries, and incompetence of others, that mean vast imbalances in it's implementation. The "peripheral countries" already have the trousers down at their angles and now they are being asked to sign a treaty to keep them there, forever. It might be a good time to brush up on your German.


  1. This is a very interesting and valid post. To say that countries are indebted now is kind of silly because now the big boys have decided to do to G20 countries what they have been doing to developing countries for years - cast doubt on the stability of the country, panic investors, then 'offer' to bail them out with very high interest, non-sustainable loans. Even with a giveaway on par with development aid, typically developing countries pay to the west three times what is given to them by said countries.

    Please PM me and let me know your story or link me to some external About page. All the best!

  2. Thanks for your comment. Although a slightly different issue, I do agree with you that development aid sometimes comes with "special conditions" which makes it quite difficult for those countries to break free from the warm bosom  of their benefactor. It's a bit like payday loans  in the retail banking sector. 

    Regarding the profile page, then I must disappoint. I'm doing some work at the moment for people who like to fly under the radar and, for the time being, it is easier for me to blog semi-anonymously than try to censor what I'm writing. It is however  interesting to note that, like yourself,  I too  have lived in both Copenhagen and Seoul and I look forward to follow your blog.