“A nation that gives up its sovereign currency by joining the euro gives up the three most effective means of responding to a recession.” – Bill Black

Via Politics.ieBill Black [Associate Professor of Economics and Law at the University of Missouri-Kansas City… white-collar criminologist… former senior financial regulator, and the author of The Best Way to Rob a Bank is to Own One] writes at Naked CapitalismBad Cop; Crazed Cop – the IMF and the ECB:

Crises reveal many deficiencies and one of the most glaring was the European Central Bank (ECB)…
The crisis revealed that the ECB’s narrow mission and function left the EU helpless to deal with a severe economic crisis. The ECB could not save Europe. Only the Fed could, and did…
The central financial crisis caused a series of national crises in the European periphery…
Greece popped a second EU bubble. The second bubble was hyper-inflated by hot air from European politicians (particularly the French and Germans) claiming that the EU and euro were leading the member nations to ever greater political integration and, ultimately, a true “union.” Well, no. Not even close. The EU is moving in the opposite direction. As the Irish columnist David McWilliams aptly observed, it turned out that the Germans didn’t think of the Greeks like the rest of America thought of New Orleans when it was devastated by Hurricane Katrina. They weren’t fellow citizens entitled to draw on the nation’s resources to recover. The French and Germans, the leading proponents of ever greater European unity and solidarity, viewed the crisis as the Greeks’ fault and they believed that the Greeks should pay a stiff price for resolving the self-inflicted crisis…
One of the great paradoxes is that the periphery’s generally left-wing governments adopted so enthusiastically the ECB’s ultra-right wing economic nostrums – austerity is an appropriate response to a great recession. Even neoclassical economists know that the ECB’s policies towards the periphery are insane. The IMF and ECB impose pro-cyclical policies that make recessions worse. Embracing theoclassical economics isn’t simply harmful to the economy, it’s also political suicide. Why left-wing parties embrace the advice of the ultra-right wing economists whose anti-regulatory dogmas helped cause the crisis is one of the great mysteries of life. Their policies are self-destructive to the economy and suicidal politically. Lemmings don’t really follow each other and jump off cliffs – that’s fiction. Left-wing European governments, however, continue to support the ultra-right wing policies that the ECB pushes even when they know those policies will harm the economy and cause the left-wing party to be crushed in the next general election. They watch the ECB’s policies fail and their sister parties lose power and then they step forward to do the same.

Fianna Fail, Ireland’s ruling party during the initial crises is only vaguely left-wing, but it won the prize for the worst response to a banking crisis in modern Europe. It remains so clueless that last I checked its website it still boasted:

The measures we have taken have been commended by international bodies such as the European Central Bank, the European Commission, the IMF and the OECD and the approval of the international markets.

The old, and very true, line is that there is always at least one fool in a poker game and if you cannot identify the fool within five minutes of joining the game it’s because you are the fool. Ireland has played the fool in its response to the banking and sovereign debt crises. Fianna Fail, gratuitously, turned a banking crisis into a budgetary and sovereign debt crisis and a severe recession into a economic trap that threatens to make Ireland a mini-Japan. Fianna Fail – even after it performed disastrously and was crushed in the general election – thinks it’s a good thing that the ECB and the IMF “commended” Fianna Fail’s policies. Fianna Fail would think it was a good thing if its poker rivals “commended” how well it played poker. Unfortunately, the Irish people provided Fianna Fail’s stakes in this real-world poker game with the Irish banks’ creditors, the ECB, and the IMF. Fianna Fail still thinks the ECB is Ireland’s friend. “Naïve” is inadequate as a descriptor.

These three ECB errors combined with the inherent dangers that the euro poses for the periphery. A nation that gives up its sovereign currency by joining the euro gives up the three most effective means of responding to a recession. It cannot devalue its currency to make its exports more competitive. It cannot undertake an expansive monetary policy. It does not have any monetary policy and the EU periphery nations have no meaningful influence on the ECB’s monetary policies. It cannot mount an appropriately expansive fiscal policy because of the restrictions of the EU’s growth and stability pact. The pact is a double oxymoron – preventing effective counter-cyclical fiscal policies harms growth and stability throughout the Eurozone. The additional dangers include the German desire for a very strong euro, which makes it harder for the nations of the periphery to recover through exports. Germany’s ability to export even under a strong euro makes it even harder for the periphery to export. The one area of financial sovereignty that remains for the periphery is debt, and that can easily become a severe threat because, unlike a nation with a sovereign, floating currency, a nation that uses the euro can prove The surging interest expense can cause a feedback into budgetary pressures (brought on by the recession – and aggravated by the ECB austerity) that causes recurrent crises in individual nations and, through contagion, much of the periphery.

Read more.

This entry was posted in Accountability, Bankers' Bailout, Budget, Debt Default/Restructuring, ECB/IMF, Economy, Elections, EU, Euro / Sovereign Money, Geopolitics, Housing Bubble, Solutions and tagged , , , , , , , , , . Bookmark the permalink.

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