Friday 9 December 2011

The Euro - Crisis? What Crisis?

So the big EU summit has come and gone.  The really, really big one we were assured.  Some informed politicians and commentators had even declared in worried tones that we had only 10 days in which to save the Euro, or the EU or both.  Well the 10 days have come and gone and what has happened?  Short answer - not a lot.  Long answer - not a lot.  One is tempted to ask if there really is a Euro crisis after all.
For example take the case of David Cameron, our very own Prime Minister of the UK.  After months lecturing the Eurozone countries on the need for them to get their act together and quickly, what was his big idea at the summit?  Some useful and practical ideas for resolving this crisis which, remember, is so damaging to the future growth prospects for the UK economy?  Hell no, Cameron’s sole contribution to this crisis summit was to insist on cast iron guarantees that the City of London would be forever exempt from any future EU regulation.  Yes, the very same City of London that is home to the banking and financial sector which due to its loose, lax and unregulated practices was the prime cause of the economic and financial woes which threaten all of us.  Clearly David Cameron doesn’t believe there is a Euro crisis.  Otherwise, surely, even he would not risk a collapse of the Euro just to protect rich bankers?
Next up, the rest of the leaders of the EU.  In the face of a threat to the survival of the Euro, what do they do?  Why, let’s negotiate yet another treaty!  One in which everyone solemnly promises that in the future they will behave like good little boys and girls and never, ever borrow lots of money again.  Neverland to the rescue!  And in the meantime?  If this is all it takes to stave off the bond markets then there was never much of a crisis in the first place.
This reading is probably correct in as much as the crisis is not fundamentally about the Euro as a common currency.  It is much more likely to be a banking crisis and a global one at that, in which the US may be more at risk than the EU.  Ann Pettifor has a good summary of this view here.
The summit’s focus on national budgets and deficits is a classic example of our leaders continuing determination to fight the wrong battle.  The most pressing danger facing not just the Eurozone, but the whole of the EU - just look at Germany’s latest export figures - is the real prospect of  deflation and recession.  The weakness of banks is a part of this very real crisis.  And yet the EU has not even begun to work out how to get us out of this mess.  Much easier to draft another treaty.  As usual Paul Krugman has summed up the summit perfectly, if rather pessimistically thus:  “This looks like a disastrous meeting. More austerity, more posing of the crisis, wrongly, as being all about fiscal deficits; no mechanism for ECB funding. Somehow southern Europe is supposed to deflate its way to prosperity, while everyone runs a trade surplus, presumably against that potentially habitable planet we’ve discovered 600 light-years away.
Maybe Draghi’s actions will be very different from his words — but actually, since this is to an important degree about expectations, Europe needs both actions and words.
Oh, and for desertdessert (Oh well — and it’s a floor wax too!) we have Cameron acting as a spoiler to protect the wheeler-dealers, poisoning EU politics.”
How long will we have to wait for an EU summit which tackles the real issues?  The real irony is that it is the failure to come up with positive solutions to avoid deflation and recession that is most likely to bring about the collapse of the Euro - new treaty or not.

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