The institutional structure puts the Eurozone in a very awkward position.

The higher deficits desired by the economy to restore non govt net financial assets at the same cause a deterioration in the credit worthiness of the member nations running the deficits, which seems to limit the process as these to two forces collide in a counterproductive, unstable and turbulent manner.

The higher member nation deficits also are a force that moves the euro lower which can continue until exports somehow resume via the foreign sector reducing its net financial euro assets as evidenced by a pickup in net euro zone exports. That process can be drawn out and problematic as well in a world where global politics is driven by export desires from all governments.

EU Headlines:

Trichet Expects Investors to ‘Recognize’ Greek Moves

Italian Consumer Prices Rose in March on Energy Costs

Europe Inflation Jumps More Than Economists Forecast

Euro Area Needs to Substantially Improve Governance, EU Says

German Unemployment Unexpectedly Declined in March

German Machine Orders Jumped 26% in February on Foreign Demand

France’s 2009 deficit hits record high 7.5 percent of GDP

5 Responses

  1. To deal with the different export performances of the pigs as compared to the rest, a devaluation or effective devaluation of Pig currencies is needed. This could be done via a 20% or so pay cut for every employee in pig countries (the Irish are trying to do this in their public sector, I think). Alternatively (and I’m scraping the bottom of the barrel for ideas here), how about a big increase in personal taxation designed to fund a big across the board employment subsidy. Does that not amount to the same thing as the above 20% cut?

    Even if it worked, that would be messy; but every solution is messy.

    Having done that, if a euro wide increase in demand is needed, they could do a Mosler trillion euro distribution.

    1. Mr. Musgrave,

      A growing economy requires a growing supply of money. Neither tax increases nor spending cuts accomplish that. Nor will attempts at increased exports, which will fall short.

      The only solution: The EU must act like the U.S. federal government and deficit spend into their member nations’ economies. Else all EU nations soon will be “Greeces.”

      Rodger Malcolm Mitchell

  2. The U.S. went off the gold standard, to give itself the unlimited ability to create money. The individual EU nations do not have this ability. They are on a “euro standard.” In this, they are like our states, counties and cities, which are on a “dollar standard.”

    Political units, that do not have control over their money supply, cannot survive on taxes alone. They must have money coming in from outside. One source is net exports ala Alaska (oil) and Nevada (gambling). The more important source is the federal government.

    For EU member nations to survive, the EU must act like our federal government, and deficit spend. Greece’s suggested cure (raise taxes and/or reduce spending) will only take Greece down the road to bankruptcy.

    The same can be said of our states, counties and cities, which must have outside sources of money, else they will go bankrupt.

  3. Dont expect the EMU apparatus to be abandoned as long as Germany has a say. European countries must proceed to reintroduce their currencies if they want to mantain thei fiscal policy independence. Notice that this can happen only if a crisis emerges that will loosen the ties. As far as the weaker southern economies are conserned it is time to renegotiate and restructure their debt with a haircut if they are going to remain in the EMU. Any bank loses can be covered by the northern states that are currently refusing to bail out their weaker fellow EU members!However, a major problem remains if public policy faces both voluntary (rating agencies, media,conventional economists, conservative politicians) and involuntary (charter) revenue constraints that make expansionary measures unsastainable!

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