Home > Uncategorized > The Eurozone Crisis’ End Date Reconsidered

The Eurozone Crisis’ End Date Reconsidered

A friend of mine raised two very relevant points in regard to my belief that this crisis ain’t going to end until 2013. There is a reason he has a much more interesting job than me after all:

  1. I think you assume that the ECB is too hawkish. I can see them getting involved sooner than you think.
  2. There has to be more than just strict conditionality. The Germans really have to get this at some point. Ultimately, there needs to be some reason for the southern countries to actually STAY in the Eurozone. Sure, they’ll say “JA” to everything Berlin throws at them now, because of fear of contagion. But Germany is setting itself up for a bunch of “exits” once the Europeans actually solve this. Without a plan towards growth, which has to come from a commitment by Germany to converge, this can’t last forever

He is probably right to some extent on number 1 as Thursday’s rate cut showed which additionally was immediately followed up by secondary market purchases to the tune of 5bn in one single day. Yet, I wouldn’t overemphasize the ECB’s non-hawkishness either as Draghi’s insistence that the ECB were not to become bank of last resort as well as immediate calls for secondary market purchases to remain temporary (Draghi) and end as soon as possible (Stark who admittedly will be leaving soon) show. The ECB might not be as hawkish as myth has it the Bundesbank used to be, it arguably isn’t dovish (=expansionary) either to seriously bring about an inflationary end to this debt crisis.

Still, there is an extremely interesting paper circulating (check out Olaf Storbeck‘s discussion of it) which posits that:

Looking at the European Central Bank, we show that nationality is indeed relevant for […] decision-making.  […] monetary policy decisions seem to be linked to national representation in the core business areas of the ECB.

Yet, what the paper shies away from naming is which countries are actually overrepresented within the ECB and macro-economic positions thus disproportionately have an impact on the ECB’s monetary guideline decisions. Hope says – for once, I usually abhor this – the Southern Europeans’ nepotism on the EU level has led to a rise in their numbers in the ECB as well leading to higher inflation in the core and less need for painful deflation in the periphery.

On number 2, I also agree with his assessment that there will have to be carrots as well as the stick of conditionality and the loss of sovereignty – hello Greece and welcome to the party Italy. I think this only serves as additional fodder for my argument that we will need a change of government – either through a Grand Coalition at some point next year when the FDP has finally succeeded in committing political suicide or following elections in 2013 – in Germany before an conclusive solution for this crisis can be found. The SPD (and Greens) apart from having positioned themselves as far more integrationist than the current government is also via an international op-ed – Sigmar Gabriel, Ed Miliband and Hakan Juholt – effectively arguing for demand expanding policies.

We need a new deal based on the understanding that lack of demand is undermining the global recovery. In that context, immediate collective austerity simply will not work. […] We also need greater […]  domestic demand in surplus economies.

I still stand by my belief then that a solution to this crisis will require time and a different government constellation in Germany, in other words it is doubtful we will stop to obsessively stare at Slovak, Greek and soon Italian parliamentary turmoil for quite some time to come.

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