Posted by: Dr Churchill | June 12, 2012

European short term economic policy needs a serious RETHINK for Project Europe to be saved

Europe should speed up both the discussion of a common banking system and the implementation of the European Project’s fiscal responsibility integration. And thus Europe will also foster less inequality between member states. Mainly because more equality promotes economic growth and also there is no way in which when an economy goes into a downturn it will be able to sustain policies that will restore growth without a form of a unified European economic system. Since the Euro-zone members lack monetary policy controls, fiscal responsibility integration is key here…

The essence is that regardless of economic model to be followed by Europe we need far more core integration and quickly. Whether we choose Germany’s austere market based economic orthodoxy or the Scandinavian and the South’s people services based economic model, we will still need to reform our European project and the unwritten constitution… made up of treaties and regulations.

This position was also bolstered recently by Joseph Stiglitz — noted government macro economist — who was the main economic adviser to US President Bill Clinton, and a long-standing critic of the European austerity policies, because they stymie economic growth. He has also written several Macro-Economic books attacking the International Monetary Fund for policies it has imposed on developing countries as a precondition for emergency loans. He mainly disputes the IMF because they failed to bring the desired results for the Peoples around the world and because their policies promote income inequality and the disappearance of the Middle Class in those societies observed.

Stiglitz goes on to say about the German led EU macro-economic policy:

“What the European Union has done so far has been minimal and wrong in its policy direction. Because austerity measures to restore risk have the effect of reducing growth and increasing debt.”

“Having firewalls when you’re pouring kerosene on the fire is not going to work. You have to actually face the underlying problem, and that is, you’re going to have to promote growth,” Stiglitz said.

Instead, of Austerity best we engage in rather sweeping reforms in order to make Europe more of a fiscal union.

Stiglitz favours this position and says that reforms are needed to solve the debt crisis, reinforce the single currency and ultimately help Germany which, as the richest country in the union, will have to bear the highest cost of guaranteeing any commonly issued debt and providing more resources to boost public spending.

“Germany keeps saying that the strengthening is fiscal discipline, but that is a totally wrong diagnosis,” Stiglitz said.

Still, Germany is expected to propose at the end of June a road map toward a European fiscal union, but Berlin favours joint euro bonds, backed by all the area’s governments, only as a medium-term goal, once other countries have fixed their high debts and budget deficits through austerity measures so they are not reliant on Berlin’s deep pockets.

“Eurobonds is just one institutional arrangement that could work, there are others: a common treasury,” said Stiglitz adding that ultimately “there has to be a way of raising revenue across Europe, to support the weaker countries in case of an economic downturn.”

While the economies of Spain, Greece, Italy and Portugal are contracting, Germany grew 0.5 percent in the first quarter. The divide in the euro area in many cases reflects austerity programs to tackle debt and deficit problems.

Critics have said the focus on cutting costs is aggravating Europe’s crisis and jeopardizing the future of the single currency. Greek elections this Sunday favour parties opposed to the tough conditions attached to the country’s EU and IMF-led rescue plan and raise the possibility of Greece leaving the euro zone quickly thereafter.

Not a good prospect for the Union as a whole because it might become completely broken and dysfunctional to the point of dissolution. With Greece leaving, the sky will not fall in but the Union might collapse same like the Titanic skimming the iceberg…

Stiglitz clearly seems to think this way too: “Germany is going to have to face the question, do they want to pay the price that would follow from the dissolution of the euro, or do they want to pay the price of keeping the euro alive?” Stiglitz said. “I think the price they will pay if the euro falls apart will be greater than the price they will pay for preserving the euro. I hope they will come to realize that, but they may not.”

And maybe they really won’t get it…

As an example we look at Spain’s latest banking and sovereign debt storm.

Because the plan to lend Spain up to 100 billion euros ($125 billion), agreed last Saturday by euro zone finance ministers, was bigger than most estimates of the needs of Spanish banks that have been hit by the bursting of a real estate bubble, recession and mass unemployment.

If requested in full by Madrid, the bailout would add another 10 percent to Spain’s debt-to-gross domestic product ratio, which was already expected to hit nearly 80 percent at the end of 2012, up from 68.5 at the end of 2011. That could make it harder and more expensive for the government to sell bonds to international investors.

With Spanish banks, including the Bank of Spain, the main buyers of new Spanish debt in 2011 – according to a report by the Spanish central bank – the risk is that the government may have to ask for help from the same institutions that it is now planning to help.

“It’s voodoo economics,” Stiglitz said, just before the weekend deal to help Spain and its banks…

“It is not going to work and it’s not working.”




In my view the low Euro has been helping Germany’s exports and that is an engineered and fully expected German bonus and a reward for maintaining this massively faulty economic Policy during the most difficult European Crisis we have ever faced as a Union…

Short termism and private gain as well as tribal instinct trumps the greater good that is ultimately the best way for all.

So for the Germans, the lesson of this crisis is to abandon the other “homeless” countries suffering exposed to the weather and the elements, and to advise them to trim down and exercise. All the while the well fed Burgomeisters, encourage them from within their well heated and well furnished homes to hang in there and weather it on…

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