European Mess

On the basis of the previous post, I felt it is necessary to draw the big European picture too.

For the lazy folks not to dig the bits themselves, Gary North offers a fairly comprehensive overview of current state of affairs. Well, be critical, don't take everything straight from lips.

The Baseline Scenario paints the basics. European leaders have made their choice over weekend. However, economists like Edward Hugh goes radical, and Wolfgang Munchau at Financial Times draws the same line. Here I quote Munchau at FT, for the quick sense:

What are the policy options? Naturally, the EU could provide financial help – through the International Monetary Fund – but it is not clear that this would stop a contagious balance-of-payments crisis in the region. If exchange rates were to drop further, household defaults could rise dramatically. Would we bail out those households as well?

In my view, the smartest answer to the prospect of meltdown is the adoption of the euro as quickly as possible. There is no need to switch over tomorrow. All we need tomorrow is a credible and firm accession strategy – one for each country – which would include a firm membership date and a conversion rate, backed up by credible policies.

Obviously, this would require the long overdue abandonment of the eurozone’s defunct entry criteria. Of those, the most nonsensical is the reference rate for inflation, calculated as the average of the lowest three national rates. Soon, this will be a deflation rate. So an aspiring member state would be in the absurd position of having to deflate as a precondition for euro entry.

The inflation criterion is not only insane, it is also in conflict with other parts of European law. Since price stability counts as an important overriding goal of EU economic policy, enforcing a deflation criterion would be a clear breach of this objective. The same goes for the exchange rate criterion. Forcing a country into a two-year sentence of membership of the exchange rate mechanism – in which its currency would fluctuate against the euro in a fixed band – is an open invitation to speculators and would risk further instability. The accession criteria are inconsistent with basic stability rules. They should be declared invalid and certainly not be abused as a bureaucratic hurdle to prevaricate in a dangerous crisis.

If calamity strikes, the EU will pay up. This is laudable, but will probably not solve the problem, especially if the crisis spreads. Granting financial aid without a firm commitment to euro membership would be irresponsible. Euroisation is the way to go.

And here is a somewhat more epic missive (styled by modern armageddon-ist mythology?) by Evans-Pritchard at UK's Daily Telegraph, for those who still feel fairly cool ...

Dire straits, indeed!