I wasn't planning on blogging today, but the Krugman and Roubini articles were too compelling and thought provoking. Europe, like the U.S., has a short-term problem and a long-term problem. In the case of the U.S., the short-term problem is high unemployment and a stalled economy. The long-term problem is fiscal unsustainability (entitlement programs etc.). I'll write more on this on another day.
Europe's short-term problem, simply put, is Greece. Its long-term problem is that the Euro experiment failed to consummate a complete fiscal and monetary marriage between the participating sovereign nations--thereby leading to imbalances with no effective means of remedy--or at least the will to do so. In other words, Spain and Italy are not like Germany (or even France), when it comes to economic and financial practices and issues. The European Central Bank is not therefore in exactly the same position as the U.S. Federal Reserve (in its ability to manage monetary policy for all 50 states).
This leads to the situation where the participating Euro countries have been "shacking up" together without tying the matrimonial knot. In the United States, a very bloody Civil War was fought about 150 years ago that decided forever (among other things) that divorce--err--state secession is not an option (despite whatever Gov. Perry may say)--there is but one central federal government, which has sole control of the printing press and currency (and in effect the economy), for all 50 states. The participating countries in the Euro experiment never went so far, and never achieved full fiscal and monetary integration. Hence the Germans (and French) want Euro monetary policy consistent with what is in the best interests of Germany (and France)--not in the best interests of Greece (or Spain or Italy or Portugal, etc.) or even Europe as a whole.
Want proof? This is what Professor Krugman has to say today:
"I tried to lay this out a while ago. A reasonable estimate would be that Spain and other peripherals need to reduce their price levels relative to Germany by around 20 percent. If Germany had 4 percent inflation, they could do that over 5 years with stable prices in the periphery — which would imply an overall eurozone inflation rate of something like 3 percent.
But if Germany is going to have only 1 percent inflation, we’re talking about massive deflation in the periphery, which is both hard (probably impossible) as a macroeconomic proposition, and would greatly magnify the debt burden. This is a recipe for failure, and collapse.
Another way to say this is that the euro is going to have a chance of working only if the ECB delivers much more expansionary and, yes, inflationary policies than the market now expects. If you don’t think that’s a possibility, say goodbye to the euro project." (emphasis added)
So the euro project may be doomed long-term (without complete integration etc.). What to do about the short-term problem of Greece? Professor Roubini's answer--"Greece Should Default and Abandon the Euro: Greece is insolvent, uncompetitive and stuck in an ever-deepening depression, exacerbated by harsh and excessive fiscal consolidation. It is time for the country to default in an orderly manner on its public debt, exit the eurozone (EZ) and return to the drachma to rapidly restore solvency, competitiveness and growth. . . . .being stuck in a marriage of convenience that is not working any longer is more costly and painful for the couple and their offspring (children/future generations) than an orderly and civilized break-up. Once the pain and costs of the break-up are managed, both sides can look forward to a more friendly relationship and a brighter future." (emphasis added)
http://www.economonitor.com/nouriel/2011/09/22/full-analysis-greece-should-default-and-abandon-the-euro/
OK, so there you have it--goodbye Greece and goodbye Euro.
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