Pages

 

The Countdown Has Begun for the Eurozone Breakup

0 comments
The ECB decided to raise interest rates today, despite the strain it is going to put on the Eurozone.  Michael T. Darda explains in the WSJ what this could mean for the currency union:
If the ECB starts to tighten policy as expected, it could be a "lights out" situation for the beleaguered European periphery and a potential threat to the euro zone itself.
In more blunt terms, this move may have begun the countdown to the Eurozone breakup.  It is hard to see how else this can turn out.  The Germans--the folks who really call the shots in Europe--are reluctant to see the needed debt restructuring in the periphery and are equally reluctant to provide bailouts large enough to fix the problem. So far the Germans have been kicking the can down the road on these issues. With ECB monetary policy now tightening they will soon run out of road to kick the can down.

Maybe the breakup was inevitable from the start and this is just hastening that outcome.  After all, the Eurozone is not an optimal currency area (OCA).  But if Europeans do want to save their currency union the ECB should be easing monetary policy not tightening it.  Doing so would make it far easier to make the structural adjustments necessary to bring the Eurozone closer to an OCA.  How so?  Here is Darby again:
To understand why, we need to recognize the depth of the hole from which the euro-zone economy is trying to emerge. Nominal GDP, a proxy for nominal income and the tax base, is a staggering 10% below its pre-bubble, post-bust trendline. If anything, this would call for more support, not less, from the ECB... Europe's fiscal bailouts, which began last spring, have transferred resources from stronger countries in the core of Europe to weaker ones in the periphery. They have bought some time, but they are not a substitute for nominal demand in aggregate, which is why debt stresses persist.
Another reason why ECB easing would help is that it would lead to a real appreciation in the Germany and and a real depreciation in the periphery.  This would increase the periphery's external competitiveness relative to the core's and thus allow them to run current account surpluses.  Such surpluses would make it easier for them to manage their debt. But apparently ECB leaders don't see things this way.  And sadly, they probably don't care what some blogger from Texas thinks about their monetary policy.  Maybe, though, they might listen to one of their own:



0 comments:

Post a Comment

  • Greenspan's Cult of Personality... Review topics and articles of economics: Alan Greenspan was a legend in his time and there was no shortage of praise for him back then. For example, who can forget Bob Woodow's 2000 book Maestro: Greenspan's...
  • Yes Tyler, Low Interest Rates Matte... Tyler Cowen is wondering whether the Fed's low interest rates in the early-to-mid 2000s really were that important to the credit and housing boom of the early-to-mid...
  • The Eurozone Crisis: Deja Vu... Review topics and articles of economics: Randal Forsyth sees similarities between the current unfolding of the Eurozone crisis and that of the U.S. financial crisis a few years back:Just as the problem on this...
  • Charles Plosser and the Burden of F... The Economist's Free Exchange blog is shocked to hear this from Federal Reserve Bank of Philadelphia President Charles Plosser:"Since expectations play an important role...
  • Arnold Kling and Expected Inflation... Review topics and articles of economics: What do we know about expected inflation? According to Arnold Kling not much if we look to financial markets:I'm also not convinced that we can read expected inflation...
  • A Paper on Stabilizing Nominal Spen... Given the recent discussion on stabilizing nominal spending as a policy goal I found this article by Evan F. Koenig of the Dallas Fed to be interesting: The article...
  • Why The Low Interest Rates Mattered... Review topics and articles of economics: This is the second of two posts detailing why the Fed's low interest rate policies in the early-to-mid 2000s was one of the more important contributors to the credit and...
  • Why The Low Interest Rates Mattered... This is the first of a two-part follow up to my previous post, where I argued that the Fed's low interest rate policy was a key contributor to the credit and housing...
  • The Stance of Monetary Policy Via t... Review topics and articles of economics: There has been some interesting conversations on the stance of monetary policy in the past few days between Arnold Kling, Scott Sumner, and Josh Hendrickson. Part of...
  • Scott Sumner's New Best Friend:... Joseph Gagnon is calling for $6 trillion more in global monetary easing. This should not be too hard to implement since the Fed is a monetary superpower.Update: The...
 
Review topics and articles of economics © 2011 The Countdown Has Begun for the Eurozone Breakup