Running out of questions

Because the answers aren´t forthcoming. Ezra Klein has been most perceptive on the EZ “thing”:

“Ladies and gentleman, we’ve got a euro deal. Maybe. Sort of. We at least have a deal that Angela Merkel, chancellor of Germany, and Mario Draghi, head of the European Central Bank, say they’re happy with. The deal doesn’t include the United Kingdom, which wanted special carve-outs, or a handful of other E.U. countries, but it does include all 17 members of the euro zone, in addition to six others. The assembled leaders even said the new treaty could be signed by March. That’s more agreement, and a speedier timetable, than many observers thought possible. You can read the deal here (pdf). But is it enough? Here are a few questions that need to be answered”:

Does it solve Europe’s crisis? The answer to this is clear: No. But then, it was never going to solve Europe’s crisis. The question is whether this deal persuades German and the European Central Bank to act to solve the crisis. Everyone thinks that the real bargain here is that if Germany and the ECB get what they want out of the long-term deal, they’ll do what’s necessary to ensure the short-term survival of the currency union. And so far, Germany and the ECB seem pretty happy with the deal. So now we see whether they ever intended to save the euro zone. If they don’t act soon, the idea that they ever will act loses credibility, and then Europe really falls apart.

Will it be enforced? Assuming the treaty is changed and Germany and the ECB put out the fire, does this actually change the treaty enough to matter? It’s hard to say. At this point, there’s not much in the way of enforcement mechanisms in the deal. And because a handful of E.U. countries — including the UK — are refusing to sign on, it will be difficult to use existing E.U. mechanisms. So it’s not clear what separates this suite of fiscal promises from previous packages of fiscal promises. Citigroup’s Steve Englander voices the skepticism: “For those of us of a certain age, the fiscal language looks to be copied and pasted from the original Stability and Growth Pact with a few bells and whistles added to imply that ‘this time we mean it.”

Will it work? The deal is pretty much about deficits, reflecting the German belief that the crisis is pretty much about deficits. But that’s wrong. The debt burden in many of the weak European countries is a function of the financial crisis and the expectation of continuing slow growth. If growth picks up, then perhaps the euro zone could abide by these rules. If it doesn’t, there’s no way this kind of austerity is sustainable. And this deal says nothing about growth. Nor, to be fair, is there much that it could say. But in the long-term, it’s growth that will decide whether the euro zone lives or dies.

But as Keynes once said: “In the long run we´re all dead”!

Update: My Spanish friend Luis Arroyo at Ilusíon Monetaria coined it best:

“El euro va bien cuando Alemania va mal y hay que bajar los tipos de interés. El euro va mal cuando Alemania va bien. Y va peor cuando Alemania, exultante, pretende imponer sus reglas. Insostenible”.

Which translates as:

The euro does well when Germany does badly and has to lower interest rates. The euro does badly when Germany does well. And does worse when Germany, triumphant, tries to impose its rules. Unsustainable.

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