Backfilling a black-hole

Yanis Varoufakis writing in MRzine claims he has a ‘modest proposal’, it is anything but…

I’ll pull out a few paragraphs but read the rest yourself.

I’m certainly not an advocate of  the responsible federation, he seems to point towards – a system of shared responsibility, risk and benefit for all those that sought to bring the EuroZone about. Though it does seems fairer than what exists.

I doubt EU Finance Ministers have even considered anything close to his proposals..should they?

The EuroZone (EZ) is facing an escalating twin crisis but only acknowledges one of its two manifestations.  On the one hand we have the sovereign debt crisis which permeates the public sector in the majority of its member countries.  On the other hand we have Europe’s private-sector banks, many of which find themselves on the brink.  Over-laden with paper assets (both publically and privately issued) which are worth next to nothing, they constitute black holes into which the European Central Bank (ECB) keeps pumping oceans of liquidity that, naturally, only occasion a tiny trickle of extra loans to business.  Meanwhile, the EZ leadership steadfastly refuses to discuss the private debt crisis, concentrating solely on the need to curtail public debt through a massive austerity drive.  In a never-ending cycle, these fiscal cuts constrain economic activity further and thus pull the rug from under the European bankers’ already weakened legs.  So the crisis is reproducing itself.

What we have now is a textbook case of how not to run a bailout.  Is it any wonder that the banks are not reassured by Europe’s long-term “resolution” of the Greek crisis?  And is it surprising that the markets are ready to speculate on which will be the next domino pieces to fall, once Greece and some banks (that have lent it large sums in the past) have toppled?  This is, in a nutshell, the essence of the euro crisis.  A crisis that is young and that has much energy left in it.  The question that naturally arises in view of the above is: Could Europe have responded differently?

If the euro crisis reveals anything, it is the simple truth (once better understood — see George Krimpas’ excellent article here) that a currency union cannot bank on balanced trade within its regions.  Germany will, come what may, have a trade surplus with Portugal.  So, if the currencies of the two countries are to be locked up indefinitely, keeping the balance sheets balanced requires either a steady transfer of capital from Germany to Portugal or a constant diminution in Portuguese wages.  Though both phenomena are possible, and often observable, life has proved that neither the capital flows nor wage reductions are large enough to avert the ever-growing imbalances between deficit and surplus EZ countries.  In short, either the currency union will break up or a political-cum-institutional solution will be found.  What follows is a modest proposal of what that longer-term institutional solution might entail.  Why modest?  Because it does not call for the obvious solution to the problem: i.e. federation.

The idea that the burdens of the crisis should be shared between capital and labor, between productive and financial sectors, between deficit and surplus regions is anathema to them.  The notion that interest rates paid by the German government will have to rise (even very modestly) so as to maintain a semblance of balance within the EU is abhorrent to the German elites.  For they are quite happy with the current situation where their profit rates are on the rise while the German workers are having to make do with declining real wages.  When confronted with the reality of the imbalances between Germany and Greece or Portugal, their response is to think: “Well, if our German workers, who are considerably more productive, take lying down constant diminutions of their living standards, then the lazy Greek and Portuguese ones should be walloped with huge wage and benefit cuts.  If not, our own workers may object to their lot.”  Indeed, they are convinced of the moral case for such macroeconomic protectionism, unable to recognize that their insistence is incompatible with the maintenance of a common currency which boosts their own surpluses, viz. the maintenance of the deficit EZ countries and the rest of the world.

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