Markets are itching again… The Greek indecision over forming the next government is such that the Euro has slid to just under $1.30, and yields on Spanish debt are rising to $6.06… [Ms Lagarde, got yer umbrella handy? – Ed]
Scary stuff… What’s even more scary is that those economists who cast a darkening glance over the fiscal treaty as a means of getting out from under a recession that may already be hardening into a depression are not wrong when they say that more austerity alone will not work… As Michael Taft, one of those on the No side least likely to play politics with the issue, notes:
Most Eurozone countries will have to undergo substantial fiscal consolidation to meet the Treaty’s targets. The German Institute for Macroeconomic and Economic Research estimates that the effect of this will be to drive down Eurozone growth to a mere ½ percent average annual growth up to 2016, depending on the timing of the fiscal consolidation.
It is essential, therefore, that the Government provide its own estimate of (a) the additional fiscal contraction to meet the structural deficit target, (b) the impact this will have on the domestic economy, and (c) the impact on our exports, from sustained fiscal consolidation in the Eurozone.
And Martin Wolf adds that the burden of rising Youth Unemployment will likely continue:
Fiscal tightening does not improve outcomes in shrinking economies. Thus, austerity is merely begetting more austerity. According to the International Monetary Fund, the ratio of gross public debt to gross domestic product will rise, not fall, in every year from 2008 to 2013 in Ireland, Italy, Spain and Portugal. It will briefly fall in Greece, but only because of its debt restructuring.
The most frightening data are for unemployment (see chart). The proportion of young people between the ages of 15 and 25 who are now without a job is 51 per cent in Greece and Spain, 36 per cent in Portugal and Italy and 30 per cent in Ireland. France is in better shape, but even there the picture is dire, with one in five young people out of work.
Is it plausible that people will put up with this indefinitely? No. Far more likely is a repetition of the protest votes we have seen in these elections. Nicolas Sarkozy was the eighth leader of a eurozone member country to have been swept from office in little over a year.
The fiscal compact is a compensation for the fact that too few Eurozone countries (and certainly not the Germans themselves) have been able to keep to the promise of fiscal control when unconstrained by law.
It is a confidence building measure designed to sooth the fixated fiduciary soul of the German parliament (which will have the final say on what does and does not get past).
What, then, might Mr Hollande do? First, he is going to have to forget almost all of his domestic promises, not only because they are not going to help France, but also because German leaders will not take him seriously otherwise.
Then the new president must embark on a serious discussion with the latter on how they expect the eurozone to end its crisis. He should give enthusiastic support to the wise recent remarks by Wolfgang Schäuble calling for higher German wages. He should then point out that there seem to be only five ways this can end.
The first and best would be symmetrical adjustment of the imbalances that built up before the crisis, along with reform in weaker countries.
The second would be a permanent transfer of resources from surplus countries to deficit ones. The third would be a painful shift of the eurozone into external surplus – a Germany writ large, so to speak. The fourth would be semi-permanent depressions in weak countries. The last would be partial or total break-up of the eurozone.
The only sensible choice is the first. But that is not the path the eurozone is now on. Austerity has to be matched to the realistic pace of adjustment and structural reform.
The chances that Mr Hollande can deliver such a changed perspective are small. But the currency union was a French plan. It was François Mitterrand, his Socialist predecessor, who signed the Maastricht treaty.
His task and his goal must be to turn hostility into hope. He may fail. But he alone of European leaders has the desire and the ability to try. [Emphasis added]
So far, so good. Except that the time for any substantial intervention is short and the counsel to abandon all domestic promises may fall on deaf ears… But here’s Stephen Kinsella with the rub from Ireland’s point of view; even if there is a growth pact for the Eurozone, very little of it is likely to fall on Irish soil, north or south.
We are, and will remain, peripheral to the real economic arguments of the Eurozone, no matter how many tricks of the light may persuade it should be otherwise… Austerity is a dish that will almost certainly have to be eaten, whether Ireland votes yes or no…