Euro crisis is not over. Just how surprised should you be?24 April, 2012, 13:16. Posted by Zarathustra
Tags: Euro Crisis
Absolutely not surprised. In fact, all those jitters were very predictable.
One should not be surprised that if a sovereign country has to give up its fiscal power to some pompous fools in Brussels, people in that country would be unhappy about that. It is true for Greece, Ireland, Italy, Portugal and Spain, as we have saw strikes and protests countless times in there peripheral countries. Perhaps the only surprising thing now is that Netherlands, which was regarded as a core country, also revolted as the coalition government failed to agree on the deficit-cutting budget, and her PM resigns, pending a general election. But then, perhaps it just isn’t all that surprising, as one really can’t imagine which country would be perfectly happy to give up its fiscal power to some pompous fools in Brussels.
The Eurozone is having a crisis because its structure is fatally flawed, that the monetary union does not have a proper fiscal union behind it, and as events we have seen in the past many months and years, when every country wants to act “in their own interest” in a sense that the stronger countries are unwilling to give up more money and the weaker countries are unwilling or unable to cut deficits, the kind of problem we are seeing in Netherlands is totally within expectation.
Speaking of having the weaker countries to cut deficits and debt, it is also very important to understand that this does not work. If a government (say Greece) was a massive deficit is trying to balance its budget, the government will be making the matter worse, both because government expenditure is part of the GDP, and because of the multiplier effect of government deficits on the economy. A government trying to cut deficits by reducing government expenditures and raising taxes is bound to making the economy contracts, which, paradoxically, have a negative impact on tax collection, making the deficit worse. At the same time, because GDP contracts, the government is making the denominator of the debt-to-GDP ratio decrease, making the situation worse in such a metric. Within the monetary union, the effect of having part of the monetary union (like the PIIGS) going into a recession because of government cuts will eventually have negative impact on the whole of monetary union, as illustrated from this chart from yesterday’s Markit’s Europe PMI flash estimates.
As Paul Donovan of UBS said, Europe could be in a 5-year rolling crisis, or as Wolfgang Münchau said, 9 years of strikes. Here, I also believe that the crisis will continue until either a break-up of the Eurozone, or a fiscal union. The end result is clear, one way or another. It is the path that is not certain.