The Boring Euro Crisis18 June, 2012, 11:18. Posted by Zarathustra
Tags: Euro Crisis
Last year, Paul Krugman asked if it is possible to be both terrified and bored by the Euro crisis. Now, almost another year has past, the Euro crisis is not terrified for those who are prepared, but remains sickeningly boring.
We have been reading the same script over and over again since the crisis started: a country was in trouble, but denied need for help; bond yields then surged, fear in the market; then bailout arrived after all negotiations, with the condition of austerity which turned recession into depression, so that the country seemed to need even more help, while another country was dragged into it; at some point the government collapsed, and new guys come in, but nothing is solved anyway. Meanwhile, while the market always seem to think that some sort of Euro-bond would help, Germany expresses opposition at every opportunity. The list of boring things that happened again and again can go on much longer for sure.
The Greek election just now, although very much hyped, has become more of a non-event. Tradition parties still get the most votes that enable them to form a coalition government (whether they are going to do so is another matter of course), while the support for Syriza went from strength to strength. Instead of having a crash in the market, we now have more or less the same crisis that we have been having for years, and it will definitely be dragged on.
We know that the problem of Euro area is that it is a monetary union without fiscal union. We have heard it many times, and it is boring, but that is pretty much the root cause of the crisis. The crisis is not only a debt problem, but also a balance of payment problem, where countries running trade deficits are also running government deficits and sometimes with private sector deficits as well. This is how the accounting of national income works, where trade balance must equal to government surplus and private sector net saving. However, as the crisis started, less money is willing to go into these deficit countries to finance their trade deficits via capital account flow, so to speak, and deposits in these countries are leaving for safety. That makes credit tight, and government under pressure.
To deal with this situation in order for Greece to stay in Euro, the real solution would essentially involve Germany giving money to Greece. In other words, a fiscal union where the Eurozone as a whole behave as if it were a country, where weaker parts of the “country” effectively get subsidies from stronger parts of the country, while this super-state of Euro area will jointly issue bonds. Yes, you have heard that for many times, and we feel bored to tell this once again, but this is the solution. And by the way, this is not going to happen, and without that, the crisis will remain boring and more or less the same.