Sunday, October 30, 2011

Is the Euro Steeped in Self-Deception and Suicidal Delusion?

After only one day, the Euro Deal of the recent EU Summit began to wilt under the bright heat of the flood lights of rational scrutiny.  On Day 2, we saw a repetition of how the German Constitution is a fundamental stumbling block to a politically united eurozone fiscal union with additional pleadings which could force Bundestag approval of EFSF bond purchases (not the bond purchase program but the actual individual purchases themselves).

We also saw on Day 2 the Erste Group bank of Austria suddenly writedown its CDS portfolio by 1.49 billion euro creating a a 750 million euro shortfall just two weeks after projecting a profit and reducing its 2010 profit 12%.  It reduced its CDS portfolio to 300 million euro yesterday from 5.2 billion euro as of the end of September.  It also announced it was cancelling its repayment of 1.2 billion euro in State aid, while proclaiming it had no intention of requesting new State aid as it would cover the loss with a 35% (only) return of executive bonuses and the use of retained earnings over the next three quarters.  It should be noted that the Erste Group had substantial exposure to Eastern Europe as do Greek bank Subsidiaries in Eastern Europe.

Worse, not only is Sarkozy seeking China's investment in EFSF bonds or the SPV to be created (Van Rompuy is on record from earlier in the year favoring consideration of Chinese investment), but Klaus Regling, the executive director of the EFSF, was not only already talking with the Chinese but even suggesting that EFSF debt could be issued in Yuan.  It is economically incompetent for a sovereign nation with its own fiat currency to issue debt denominated in a foreign currency.  For a monetary union with no fiscal transfer mechanism to issue debt in a foreign currency (Yuan), when its member nations are under credit attack for debt already denominated in a foreign currency (euro), is beyond incompetent; it is economically suicidal.

The surplus countries of the eurozone have the money to invest in the deficit countries; there is no need for foreign investment in eurozone debt which will cause the euro to be sold and dollars purchased by the eurozone countries which will strengthen the euro and make eurozone exports more expensive.  The surplus eurozone countries, in order to economically correct trade imbalances within the eurozone, should be using the current account surplus funds to invest in the infrastructure and manufacturing of the deficit countries. The Euro Deal of this past week has not increased the equity stake of member nations; it only has the member nations providing insurance guarantees

The one size fits all approach of the eurozone just does not work.  The deficit countries cannot export and privatize their way into surplus under austerity.  The current account surpluses needed to drive down the existing high private sector leverage and public sector deficit in the deficit countries is too massive (even in Ireland) to be obtained from export growth and the privatization of public assets.

Yet, the mantra of convergence, competitiveness and austerity remain as the key mistakes enshrined as European Monetary Union holy grails carry forwarded from the EMU 1991 currency crisis.  Convergence never happened.  Kantoos Economics, a German economics blog, has had two recent posts which exemplify the group think mindset of the European Monetary Union. One was on competitiveness in which a post by Kash Monsori is used in an attempt to show how misunderstood the European concept of "competitiveness" is and that imposed austerity in the deficit countries is not a self fulfilling economic disaster. The second post on Kantoos Economics is on the "necessary" rigidity of currency unions and internal devaluation as the only method of adjustment for trade imbalances with a currency union.  If Kantoos Economics wants to take on a non-European on competitiveness, then Kantoos would be well advised to take on Rebecca Wilder who has shown the "competitiveness" concept as promulgated in the eurozone is a chimera in which all countries must be like Germany in which the concept has become to mean the efficiency of the economy as a whole involving "...strong macro-prudential policy, infrastructure, efficiency and income gains, savings, etc."  In fact, the concept of competitiveness more generally describes and reflects data from a variety of factors such as education, infrastructures, institutions, technological development, health, macroeconomic environment, market efficiency, labor efficiency, and innovation to name a few.  It is always best when theory adapts to the reality of data rather than morph data to fit a phantasmagorical theory.

When one looks at worker statistics, the Greek worker works longer hours for less money than workers in other EU countries.  However, most Greek workers are involved in agriculture and the worker productivity has a smaller euro value.  For productivity to improve, there needs to be technological improvement within Greece.  In fact if you look at the northern and southern eurozone countries, there is no evidence of profligacy and laziness.  What you will see is, the creation of the euro lead t a massive flow of capital from the northern countries to the southern countries, because it was profitable for the northern countries.  Marshall Auerback and Rob Parenteau have provided a concise and strong economic criticism of the Greek myth of profligacy and the ultimate self-destructive nature of austerity not only on the deficit countries but also on the surplus eurozone countries.  They paint a convincing picture of the need for a more coordinated mutually beneficial growth option involving direct investment by the surplus countries in the infrastructure, technological development, and manufacturing of the deficit countries.

The Australian economist, Bill Mitchell, who has been a long time critic of the euro, sees the Euro Deal as one which solves nothing, continues all of the same problems, intensifies the anti-democratic policies of the eurozone, and increases the pressure on the surplus countries to suffer the same fate as the deficit countries.

What does this leave us with?  Desperation, human suffering, failed nations, a breeding ground for authoritarian regimes, economic collapse?  Or does it leave us with an existential epiphany of NO HOPE and the recognition of a common humanity and purpose that digs down and comes up with the political will to get things done for the best interests of the many and a respect for individual freedom which promotes unbiased, empirical analysis of economic data, the needs of aggregate demand, and recognizes the economic growth power of full employment?

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