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Eurofudge Hits a Wall?

The FT, citing two confidential analyses which were distributed to EU leaders on Friday, warns that the current lull in the storm that’s been roiling the financial markets is only temporary—a reprieve bought at the steep cost of €1 trillion spent to date. The underlying problems are as far as ever from a solution. Portugal and Spain are struggling, and will most likely be where the next stage of the crisis will unfold.

European leaders know this to a certain degree:

“There is no sum with which you can convince financial markets,” [German finance minister] Mr. [Wolfgang] Schäuble said, referring to the size of the eurozone firewall. “You can only be convincing with structural measures.”

Reforms can be painful for the electorate and are often quite politically destabilizing in the short term. And though Spain has just passed its most austere budget since the Franco era, not spending money is not the same thing as making your economy more competitive. The road ahead is very difficult, and there seems to be no sign that Europe is anywhere near finding a way out.

A trillion euros got Europe out of intensive care and into the chronic disease ward, but that is not the same thing as a cure.

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  • Jacksonian Libertarian

    “And though Spain has just passed its most austere budget since the Franco era, not spending money is not the same thing as making your economy more competitive.”

    Wrong, reducing the burden of the Government Monopoly on the economy does make it more competitive, by freeing up capital for improvements in Quality, Service, and Price. None of the world’s Governments are leaving enough Capital (seed corn) in their economies, and because of it the harvest sucks and the peasants are starving. They are a bunch of greedy Robber Barons with no husbandry skills.

  • Anthony

    Viable IMF war chest prior to spring meeting of Group of 20 in hopes of contagion firewall appears to be purpose of European leaders – you’re right WRM indicative of unresolved financial concerns.

  • Marty Keller

    What, EU countries just had a billion euros lying around, doing nothing? Isn’t this bail-out fund fiat money–essentially whipped up out of nowhere, or at least based on incredibly flimsy assets? This just appears to be the latest battle in the futile war against mathematics.

  • juliuscancer

    The voice of reason:
    “And though Spain has just passed its most austere budget since the Franco era, not spending money is not the same thing as making your economy more competitive.”

    That is quite correct. Neither is amassing fiscal surpluses the same thing as making your economy more competitive, or Spain (which like Ireland, was in the black during the pre-financial crisis years) would not be suffering thus.

    For the last several years, there has been a false equivalence being floated in European (and coincidently tea party) circles, that fiscal discipline — meaning policies designed to balance budgets and keep inflation low — is the single most important feature to a healthy economy. And yet years of such fiscal discipline did little to make Spain’s economy resilient or robust enough to withstand the crisis without collapsing on itself.

    This is the problem that has yet to be addressed in Europe. For all the talk about Greece’s sovereign debt, and German demands for austerity and fiscal discipline, precious little time has been seeking a strategy for making Europe competitive. In fact, the strong value of the Euro makes European countries like Spain less competitive than they would be in a vacuum. A weaker currency would lower the cost of doing business in Spain, as well as place Spanish goods at a more competitive price. While such a strategy would not be a cure-all for the competitiveness problem, it would certainly not exacerbate it, and would help keep the Spanish economy from further contraction, shrinking revenue, and its crippling 30% youth unemployment.

    And since that will not happen, it is alarming that there are no serious alternative proposals for making the european economy competitively viable in this globalized world. Gordon Brown has suggested that the most viable path forward is more exports to the rising middle class in Asia (certainly a weaker currency would help catalyze such growth).

    The Mediterranean grew too reliant on real estate, tourism, and agriculture., while the UK was too reliant on the financial industry, and Germany on luxury items and imports. This is not a dynamic system, but rather seems one where comparative advantages have ossified into narrow economies, diminishing returns, and consequently, little resiliency during crisis. In light of the aging demographics, the ‘lost generation’ of un(der)employed youth, where are the growth engines that will drive European prosperity forward? Are there any serious proposals for how to get Europe competitive and on track?

  • Andrew Allison

    It appears to this observer that everybody is tiptoeing around the stark truth that there’s got to be a significant decline in the standard of living in those countries that have, in @1’s felicitous phrase, eaten their seed corn. Even if the current debts were magically expunged, they are still living beyond their means. One way or another, there’s simply no alternative to austerity.

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