Wednesday, December 07, 2011

Blowing up Europe

Every general knows the term "tactical retreat". It means withdrawing your army because your supply lines are too long, you risk to be cut of from the rest of your troops or another sector of the front needs reinforcement. Such a tactical retreat is exactly what the EU needs at the moment. Unfortunately our eurocrats have gotten used to always wanting more and they simply seem incapable of making a step backwards.

If they had withdrawn a few years ago the euro crisis would have stayed rather small. If they had spent a few billions to grease the transition Greece - whose core problem is a lack of competitiveness - could have left the eurozone without much problems and would by now be refinding its competitiveness. And if they had not forced to accept bad bank loans from speculators in order to avoid trouble with the banks Ireland wouldn't have much problems now. By highlighting that a lack of competitiveness can lead to the exit from the euro they would also have encouraged Spain and Italy to take their problems more seriously.

Now we see instead the eurocrats making another power grab. This time they want automatic fines for countries that have a too large budget deficit. But such a fine would only make the deficit larger. And sometimes budget deficits arrive suddenly like we saw in Spain and Ireland when their real estate bubble burst. The real problem of the eurozone is seldom budget deficits - it is countries that are not competitive and live above their means. Spain and Ireland got into problems thanks to a busting real estate boom, not because they spent too much. But now they have to adjust.

The eurozone has two structural problems and we will need to find an answer to them:
- one is that its economies develop not in sync. The bursting of the real estate bubbles in Spain and Ireland are good examples of that. One could argue that allowing those bubbles to happen was bad economic policy to begin with but as virtually no economists or politicians raised the issue we will have to consider such developments as de facto "natural" developments. It takes painful adjustments for such economies to get back in sync with the rest of the eurozone.
- the other is more structural. I call it the "Southern Italy effect". Since Southern Italy became part of Italy around 1860 it has become poor (much poorer than before) and mafia infested. It have no good theory why that happened, but given the fact that Spain and former Yugoslavia had similar problems between the north and the south there must be some structural cause. I see a great risk that with further integration of the EU the whole of Southern Europe may become caught in such a poverty trap.

It looks like - except for giving in yet again to the power hunger of the eurocrats - the European leaders will today once again attempt to buy time and to evade the structural problems. If they continue that way they might well end up blowing the euro. But maybe that would be the better outcome in the long term. Finding a solution that lets the rot go on just slow enough to be "manageable" might in the long term be yet worse.


Anonymous said...

"Now we see instead the eurocrats making another power grab. This time they want automatic fines for countries that have a too large budget deficit."

There's no good reason for a government to behave in such a grossly irresponsible fashion as to even have a deficit. So what is wrong with preventing it?

Wim Roffel said...

Why is it "grossly irresponsible" for a government to borrow some money to build a much needed road?

Why is irresponsible to borrow money when a government has less income when due to some crisis it has less tax income? It will still have to pay its bills.