Europe and the Imaginary Crisis

'Europe is no longer on the edge of the abyss'; 'the financial crisis is calming down'; 'The elements of a stabilisation of the financial situation in the world and in Europe are in place.'  That's what President Sarkozy thinks.

If only it were true.  

Today's EU Summit in Brussels is supposed to end in a "new fiscal compact."  Leaders will codify the proposals from the Dec. 8 summit, which include measures to tighten budgets, centralize fiscal oversight, and expand the bailout fund.  These would appear to be good ideas to help stem a fiscal crisis. The problem is that the Eurozone is not in a fiscal crisis.

How many times does it need to be said? Europe is not in a fiscal crisis. When Greek debt noticeably accumulated at record pace in the wake of the 2008 financial crisis, this exposed that both the EU model and EU banking system are fundamentally broken.  But somehow public opinion perceived it as a problem of 'lazy Greeks'.

How easily we forget that Greek debts are European assets; that there are at least two willing participants in every trade.  When Germans sent goods to Spain, Portugal, and Greece, they sent IOUs back.  Paper for products - that's how the periphery financed their trade deficits and more pointedly, that's how they did business. Yet somehow this is all the periphery's fault as if they hoodwinked the Germans into accepting their debts.  But did the Germans not agree to these terms? They like - nay, loved - these terms.  The trade surplus became Germany's Delphi -  a national treasure - which reversed the uptrend in German unemployment, sending it to its lowest level in nearly 20 years.  Never did they consider its consequences.  

The Germans could have addressed these imbalances at any time, but instead they accumulated debts, spreading an "unevenness" across the periphery economies.  Now, we are left in an odd position where the periphery has no private sector to sustain itself because for so long it didn't need one; and the Germans face the hard truth that there may no longer be enough final demand for the things they make. 

This is hardly a novel telling of this narrative, but somehow it continues to escape inclusion in the one that goes on to forge EU policy.  I'll say it again this is not about excessive government spending, this is about balancing trade.  This is about the Eurozone not having a mechanism for internal adjustment. Now it's okay if leaders decide that they don't want to return to an exchange rate mechanism. But you still need something to re-balance cross border payments as economies ebb and flow.   

Until they recognize the need for a new re-adjustment mechanism, the EU crisis will only get worse. President Sarkozy's optimism isn't going to mend anything. In fact, it's precisely that kind of logic which could prove dangerous.

As FT columnist Wolfgang Munchau writes:

While I have yet to meet anybody who can explain what good the treaty will do – except as part of some circular logic – the damage it will do is more evident. Just think of the entirely unnecessary fight with David Cameron, UK prime minister. But the British problem pales in comparison with the treaty’s truly destructive powers. It will encourage eurozone member states to adopt extremely pro-cyclical policies.

Capt Merkel, I think it's because we aren't going fast enough.