Warren Mosler recently got back from Washington DC and his takeaway on the situation in Europe is not pretty:
“My takeaway from two days in DC is that Europe is headed to a blood in the streets outcome. While ECB funding remains ongoing even as it’s uncertain, in any case the underlying theme remains austerity.
There is no plan B. Just keep raising taxes and cutting spending even as those actions work to cause deficits to go higher rather than lower. So while the solvency and funding issue is likely to be resolved, the relief rally won’t last long as the funding will continue to be conditional to ongoing austerity and negative growth.
And the austerity looks likely to not only continue but also to intensify, even as the euro zone has already slipped into recession. So from what I can see, there’s no chance that the ECB would fund and at the same time mandate the higher deficits needed for a recovery, In which case the only thing that will end the austerity is blood on the streets in sufficent quantity to trigger chaos and a change in governance.”
We’re in a sort of damned if you do and damned if you don’t situation. Europe can effectively end the solvency crisis via fiscal union. But remember, this is still a problem of structural trade imbalances and the only way a fiscal union will resolve that structural imbalances is by doing what the USA does and ensuring that the supranational entity transfers funds. I’m not quite as bearish as Warren is on the situation (I don’t know how much deeper many of these European countries can contract), but he’s absolutely right that further austerity will not resolve the structural problem or help to create economic growth. But let’s take one win at a time. IF (that’s still a big if) Europe actually moves towards fiscal union then that’s a huge victory for the European people as a whole as we’ll have removed the potential for a horrible credit crisis and depression from the table. But we can’t expect to resolve a 10 year long crisis in the making overnight….