ECONOMY The eurozone story is changing by the hour. Here's what you need to know to understand developments that will impact the entire global economy and potentially cause major social upheaval.
The eurozone is facing two distinct, but related, problems: Problem #1 is a national solvency issue, which only the European Central Bank (ECB) can solve. Problem #2 is deficient "aggregate demand" (a fancy term for the spending power of consumers), which calls for a stronger fiscal policy response to offset declining investment and purchases in the private sector.
As it stands, the ECB is the only show in town to save the eurozone from a very drawn out and damaging recession. Why is that? Well, because the individual member states in the European Economic and Monetary Union (EMU) cannot spend without taxation revenue or debt-issuance, because they are users of their currency, rather than issuers. This is a key distinction, and one often missed in media coverage. Their position is in sharp contrast to, say, the US, the UK, Canada, and Australia, all of which are issuers of their own currency and therefore not subject to the same kind of solvency risk because they are in control of their own money supply. The only institution in the EMU that can spend without recourse to prior funding is the ECB. That is the consequence of the flawed design of the monetary system that the neo-liberal conservatives in Europe forced upon the member states at the inception of the common currency.
As the issuer of the euro, only the European Central Bank is in the position of backstopping the eurozone nation’s bond markets, which allows these countries to fund themselves without paying the usurious rates of interest now being demanded for countries such as Greece. The problem is that the ECB is only willing to do so for countries willing to submit themselves to harsh austerity measures as a quid pro quo. This strategy might well save the euro, as it will diminish the markets’ concerns about national solvency. But the cost is likely to be yet even more depressed economic activity, higher unemployment, lower tax revenues, higher social welfare expenditures and, consequently, even higher public deficits. And isn’t that precisely what the Germans in particular most fear?
That gives you problem #2. If you have a continent full of consumers who have no money to spend and lack of competitiveness in the “PIIGS” countries (Portugal, Italy, Ireland, Greece, and Spain), then you'll consequently have years of sub-par economic growth. And unless the EMU's architecture moves in a much more pro-growth direction, then the continent will be afflicted with years of high unemployment and mounting social strains. Unfortunately, the EMU is captive to the same kind of thinking as the Germans, who continue to view this crisis as one which has been caused by fiscal profligacy in the periphery countries, rather than seeing it for what it is: a crisis of the euro’s institutional design itself.
For those nations unwilling or unable to subject themselves to the rigors of so-called Teutonic discipline, there might well be an exit from this newly-reconfigured eurozone – in effect creating a two-tier or multi-tier Europe, with a smaller eurozone and a host of competing national currencies for the “outs.” On the one hand, there would be a “hard currency” bloc led by Germany and the so-called “Benelux” countries (Belgium, the Netherlands, Luxembourg), all of which have largely converged with Germany’s economy. Then you'd have a “soft currency bloc," which could devalue its way back to prosperity through exporting cheap goods.
The problems here are that there are no real mechanisms in place to do this in an orderly way, so there would be a risk of a complete breakdown in the existing payments system. Additionally, countries such as France would likely get hurt if they were to join the hard currency bloc. Even though France likes to think of itself as a disciplined Teutonic style country, the reality is that its industrial/manufacturing/social profile is much more like a Mediterranean country such as Italy. Were France to join arms with Germany in a smaller currency bloc, it could face huge competitive threats from Italian industry (which would presumably not be part of this new German economic bloc). It is also questionable whether the French populace as a whole would withstand the kinds of restraints to living standards which the Germans themselves accepted in the wake of their country’s reunification in the 1990s.
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