No new hope for Europe – just more active inertia
“These are the terrible choices that a balance-sheet recession leaves any country with. The Euro just makes it worse.”
Although it appeared to reach more far-reaching conclusions, the recent European summit has failed the citizens of the Union and the countries stuck in the Euro. The EU and Euro suffer from Active Inertia, where, in response to a problem, people try harder and harder and simply end up with a more intractable problem. Resources (time, money, effort, political capital) are wasted to work harder on the issue. The problem is, we are tackling the wrong issues.
Once more, (say it with me) the core problem is debt (although there is also an existential crisis of leadership). It is indebtedness and the ways countries got into debt that have sparked the economic crisis that becomes a currency crisis.
Now, the EU strategy is to bring the Eurozone closer together, re-commit to a set of fiscal straightjackets that don’t make any real sense and find a way to get the ECB to save the Euro in much the same way that the USA or UK are attempting to do. That means printing currency, quantitative easing, low interest rates and all the rest.
Effectively it is a two-step strategy once again. Step 1 is to “buy more time by announcing a deal”. Step 2 is to “find a way to do something that actually may fix the problem”.
Folks, it cannot work. From a practical standpoint there is about €1 trillion in debt to be rolled over in the coming quarters. It is going to be tough to get people to buy into that debt. From a procedural perspective it is going to take a long time to get the political authority in place to make such a deal happen. Beneath all of this, I am not sure that the Germans really feel they can sell this to their people – never mind the Danish, Irish, British or Greeks. When you attempt to inflate away debt (through QE/printing) you penalize existing owners of money and assets in that currency by effectively diluting what they own. In this case that hits the Germans hardest, as do most of the other Euro-intact solutions.
People should be aware, however, that even if the ECB unleashes all its weapons, it may still not be able to generate the necessary inflation. It also implies that countries like Ireland will have to slowly and cripplingly deflate their way to real competitiveness.
With all this in mind, it is time to give up on the Euro project as it stands. Even a two-tier Euro would be preferable, although it would leave Ireland lost in a middle ground unless the country could find a way to wipe the banking debt off the books as a condition for its approval.
If Ireland does get a chance to decide on what Finance Minister Noonan today said was a “vote on whether or not to remain in the Euro” then the Irish people need to decide if hanging onto the Titanic in the hope that it can refloat is a winning strategy.
Leaving the Euro will be immensely painful. There will be significant impacts that won’t just be short-term. They will include a loss of competitiveness based on the increased currency risks of dealing with Eurozone. Global companies based in Ireland will certainly be uspset as their local assets – currently valued in € – lose about 50% of that value as the Punt-Nua is introduced. Necessary imports will go through the roof in local price terms (the counter-consequence of competitive export costs).
But that just shows how bad “staying the course” could be. That we would suffer those consequences and still, likely, be better off. Those are the terrible choices that a balance-sheet recession leaves any country with. The Euro just makes it worse.