A Brief Return to the Ongoing Drama...

[FitzFord]

I was struck by how baldly and scathingly the NYT Editorial  titled: "Who Can Bring the E. U. to Its Senses" (3/31/2013 - link below) assessed the EU institutional structure and attendant behavior. As it is our profession to make recommendations to clients on PFM issues, should we take on a serious (even if futile) effort to define a path to sanity in this ongoing political/institutional failure and the attendant tragedies? I am reluctant to start it, as my views are fairly well known by now, and I am not a member of a EU country, so I will leave it to you to decide if the experience so far in this sad story is worth serious examination again, and to suggest possible solutions, as we would to a client. Stages, Steps, Specific Country Roles and Positions would contribute to the realism of suggestions. Don't hesitate to draw on the Scotland situation, as well.

If the product is sufficiently interesting we may want to find an outlet beyond this forum to publish it.

Fitz.

Here is the link. I hope it works, as my experience has been mixed:

 http://nyti.ms/ZNDUQX

[John Short]

"A better governed E.U. would put more emphasis on reviving growth in the south and stimulating consumer demand in the north."
However that is still shutting the stable door after the horse has bolted! The problem is that ruinous domestic policies have been "allowed" in member countries in the first place from Ireland's property boom fuelled by a banking/political cabal to Cyprus' refusal to tackle its banks in the years after the banking crisis had hit, but waiting for the inevitable bail out, which was somewhat different from previous bailouts in the other member states.
You are right to ask for "realism of suggestions" but the politicians are only interested in the short-term election cycle in their own countries!  The EC tries to act like a country, but it is not one.

[John Short]

The euro zone as we know it must end or be radically reformed. Current mechanisms being used to manage the euro crisis are inadequate at every level. And as Cyprus shows us, the euro-zone crisis is far from over.

In new research from the Institute of Economic Affairs, The Euro: The Beginning, the Middle … and the End?, leading economists in this field, analyse the problems with the current approach being taken to resolve the euro zone crisis and argue:

• Product and labour markets in euro-zone member states are far too rigid to respond adequately to economic shocks. The result has been high unemployment and prolonged recession in a number of euro-zone countries.

• The EU must therefore face up to the inadequacies of its policies both in terms of the long-term structural errors in policy and of the short-term management of the euro-zone crisis.

• There should not be a debt union of any form. Governments must be responsible for servicing their debts without bailouts.

• Euro-zone countries must deregulate their labour markets and reduce government spending. Decentralisation and the promotion of a market economy must be at the heart of EU policy.

The report outlines several options for radical reform of monetary arrangements within the euro zone, including:
• A complete and orderly break-up of the euro and a return to national currencies combined with the vigorous pursuit of free trade policies.
• The suspension of Greece, and possibly other failing euro members, from all the decision-making mechanisms of the euro. These countries could then re-establish their own national currency to run in parallel with the euro. Both would be legal tender currencies with free exchange rates. Such an approach should be part of a more general agenda for decentralisation in the EU. This proposal mirrors the “hard ecu” proposal of the UK government before the euro was adopted as a single currency.
• The enforcement of strict rules relating to government borrowing and debt that all member countries would have to meet. Member countries who did not obey the rules would not be able to take part in the decision-making mechanisms of the ECB. Furthermore, the ECB should play no part in underpinning the government debt of member countries.
• A system of liberalised free-banking within which businesses and individuals choose the currency they wish to use.

Commenting on the report, its editor, Prof. Philip Booth, said:
"Current policy in the euro zone is not resolving the crisis but postponing it. The EU elite must decide whether to abandon the euro or put it on permanent solid foundations. However, if the euro is maintained, there must be radical reform both of the currency and of the European Union more generally."

[FitzFord]

I wonder how many of us agree with the economists from the Institute of Economic Affairs? Perhaps I am too committed to Institutional Economics but I find the proposals outside of the realm of reality. A long term association of disparate bodies composed of groups with divergent commitment to particular operational principles will not survive if the net benefits to each does not exceed zero.  This does not require that each member gains (or loses) the same relative amount in each area of their association. However, each one's assessment of net benefits over a medium term must be positive for the union to survive.  The instruments that are most important in binding the group are common government at some level, a common income and expenditure program at a certain level, a common legal system at a certain level, a common currency (or perhaps a fixed exchange rate among currencies, which translate to the same result), and a common legal system at a certain level.

Although all debt may not be pooled, a substantially predominent portion of it must be, if there is to be a common currency that is effectively managed.

Although deregulated labour markets are desirable, and necessary to a certain extent, that aspect is not as crucial all the time; for example, educational achievements are dependent on the school systems and traditions; these are among the items that would need at least a medium-term framework to bring about coherence or, (if desireable), parity. (I could expand on this point but I am trying to be brief in this note). Perhaps the underlying message of the IEA position is - don't have a European Union.

Fitz.

[John Short]

Perhaps the underlying message of the IEA position is - don't have a European Union.

  I suspect (sic) that this is the case. The underlying case for the EU was political rather than economic and the fudge which was the economic rules is now unravelling.  The problem is the cost is now too great relative to the benefits of the original rational and the rules are now being worked out at too great a cost to those who enjoyed tasting the fudge.

[petagny]

An 'orderly break up of the euro'! That would be a neat trick!! Probably, the least disorderly break up would be a partial one with Germany (and perhaps the Netherlands) leaving. This is what George Soros has recently suggested as an option (if Germany is unwilling to shoulder the burden of injecting a bit of demand into the euro economic space - which we know won't happen.) This is not such an outlandish idea and seems to have happened more frequently than the departure of a weaker member from a currency union.

[harnett]

If the € broke up tomorrow it wouldn't be orderly.  It's been disorderly for years now.  The best that could be hoped for is the least disorderly!!

I suppose my concern now is more the precedent set in Cyprus that individuals' deposits are now not safe.  So we can now expect more austerity + raiding of deposits - apparently something brought up in a meeting recently between the Fed and the BoE.