The EMU Blame Game
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