Monday 28 March 2011

Nowotny's Austrian Economics

The sad mess in Japan and the attack on Qaddafi have in the past few weeks proven to be something of a boon for the European Finance Ministers. This year was after all meant to be the denouement for the Euro area, with Greece, Spain, Ireland, Portugal and maybe even Italy in a very parlous place when trying to raise money on the bond markets to keep their economies going.

So using this cover, what have the European Politicians done? Oh, dear, not a lot. The Portuguese have refused to pass an austerity budget last Friday and now last night the well-known ECB bank member has given a rather unfortunate interview of Austrian television. In it he said 2 main things, firstly that Portugal should accept a bail out as soon as possible and secondly that Greece's ability to keep funding itself  (with European loans!) will be on a knife edge for the next 4 years. He also slipped in that Austria's inflation at 2.7% was much to high to be sustained; like a good Austiran should.

Now there are bigger problems in the world than ranting ECB members. However, the passing of time has not really led to any steps forward being taken by Germany. Germany is in an interesting political mood, feeling strong enough not to join in attacking Qaddafi and also not wanting to cave into demands for a European debt union.

The trouble is, with the outer Eurozone countries failing in the heat, there is only a choice between more meaningful bail out (i.e. on terms that actually help the stricken countries), a debt restructure (which will hurt EU zone banks) or a shock as these countries leave the Euro and devalue.

None of these meals is very appetising, but worse is that no decision is being made about which one to choose.


Bill Quango MP said...

Good point CU.
there has been a deafening silence since the Greek bailout.

The economist had a piece back in December. Something along the lines "Just because its impossible to conceive something as monumental as the end of euro zone happening, doesn't mean it can't happen. The first world war was unimaginable. The wall street crash. The disintegration of the USSR... "

They were hinting that those events are quite predictable with hindsight. But the speed of events was not.

The EU seems to have a policy of 'its unthinkable for the Euro to break lets not think about it.'

Old BE said...

You are right, a key factor is whether the lender states are prepared to lend at a rate at which the debtor states have any chance or repaying or whether the bailouts just delay the inevitable. If the PIIGS cannot grow their economies they will never get out of the debt spiral. Who wins then? Certainly not the German taxpayer.

I think that the stability pact needs some sort of re-statement with a line drawn in the sand to say "OK we'll sort this out now but after that countries have to take responsibility" and perhaps some enforceable rules this time around?

Nick Drew said...

since I've known CU he's always said it would be Spain that broke the EMU

€450 billion they're gonna need ...

(more than twice the other PIGs combined)

Budgie said...

The problem (one of them anyway) is that repaying debt is twice as hard as staying out of debt. In effect the nation has to not only make a profit to pay for government spending but an extra profit to repay the existing debt and interest.

That means Greece et al must have a productivity higher than Germany's. Ain't gonna happen.

However don't assume the ECB/EU wants it to happen. The EU loans lock the PIIGS into the Euro like nothing else. That is why the EU has pushed Eire and now Portugal to the point of instability where they must take the bait, sorry, loan.

Sean said...

..and the Irish are saying something about senior debt holders ect.

The more pressure you keep and pump in the can, the more it will blow

measured said...

Hence why 'Hasta la vista, Baby' is in Spanish?

Andrew Zalotocky said...

Any decisive action like a "meaningful bail out" would be very politically difficult. It would cost a huge amount of money, so the leaders of Germany, France, the UK, etc. would have to agree to make themselves extremely unpopular in their own countries.

It would also require lengthy negotiations, all conducted in bad faith. Each government would try to con the others into bearing most of the cost and the European Commission would try to con them all into giving it more power.

So the most likely outcome is that no clear decision will be made. In that case, what is the default (ha ha) position? Does the Eurozone break up or just sink into a long period of economic stagnation?