We have been distracted by many events in the past few days, and an important document by the Commission did not have the attention it deserves. In a Communication on the social dimension of the Economic and Monetary Union, sent to the Council on October 2nd, there are a number of very interesting elements. In general, what I find remarkable is the association of deeper social integration with the more general objective of macroeconomic rebalancing. It is never said explicitly, but the Commission stance is that stopping macroeconomic divergence requires more social cohesion and, ultimately, solidarity among Member States. It goes without saying that I find this important and welcome news.
Not too much of a choice here. The first post of a European Gloomy Economist needed to be on the origin of our troubles. Let us start with a few stylized facts:
- The EMU is not an Optimal Currency Area.
- The single currency inevitably led to capital transfers from core to peripheral countries, and to the corresponding current account deficits of the latter (no need to explain; it is remarkably done here).
- Compression of domestic demand (a not too surprising effect of the Hartz reforms) in Germany created a mass of savings ready to fly into high return countries apparently made safe by the Euro.
- Only Greece had a public finances problem, at the onset of the crisis. On the other hand, all of the peripheral countries had an external imbalance.
- Capitals come, but capitals go. The reversal of capital flows is what is creating liquidity (or solvency) problems.
So what? So, the problem is not a Greek (periphery) problem; or, at least, it is as much a Greek/periphery problem as it is a Germany (core) problem.
What should have we done, then? There will be time in the future to discuss these issues in detail. For the moment, it suffices to mention them: Balance demand (more in the core, less in the periphery, to make examples) to reduce the deflationary impact of austerity measures; insist on medium-to-long-run fiscal adjustment, and not on the illusion of expansionary short-term consolidation; accept/trigger a modest inflation surge in core countries, in order to allow peripheral countries to improve their real exchange rate without going into deflation.
In two words: symmetry and solidarity. Two dirty words in the current debate on the EMU