Martin Wolf’s latest piece on the Euro crisis is a must read. Naturally, I think it’s excellent because he agrees with most everything I’ve been saying recently, but in all seriousness it is very good. I’ll keep this short and sweet so as to avoid repeating much of what I said the other day, but the gist of it is as follows:
1) The European Monetary Union has failed in its current format.
2) There are only two ways out – disband or full unity.
3) All of these bailouts and can kicking strategies will not solve the structural problems.
4) None of the options out of this are going to be particularly enjoyable.
5) The longer they delay the inevitable the greater the risks become.
Martin Wolf’s comments can be summed up in three paragraphs:
“The eurozone, as designed, has failed. It was based on a set of principles that have proved unworkable at the first contact with a financial and fiscal crisis. It has only two options: to go forwards towards a closer union or backwards towards at least partial dissolution. This is what is at stake.
…Events have, in short, thoroughly falsified the premises of the original design. If that is the design the dominant members still want, they must remove some of the existing members. Managing that process is, however, nigh on impossible. If, however, they want the eurozone to work as it is, at least three changes are inescapable. First, banking systems cannot be allowed to remain national. Banks must be backed by a common treasury or by the treasury of unimpeachably solvent member states. Second, cross-border crisis finance must be shifted from the ESCB to a sufficiently large public fund. Third, if the perils of sovereign defaults are to be avoided, as the ECB insists, finance of weak countries must be taken out of the market for years, perhaps even a decade. Such finance must be offered on manageable conditions in terms of the cost but stiff requirements in terms of the reforms. Whether the resulting system should be called a “transfer union” is uncertain: that depends on whether borrowers pay everything back (which I doubt). But it would surely be a “support union”.
The eurozone confronts a choice between two intolerable options: either default and partial dissolution or open-ended official support. The existence of this choice proves that an enduring union will at the very least need deeper financial integration and greater fiscal support than was originally envisaged. How will the politics of these choices now play out? I truly have no idea. I wonder whether anybody does.”
The whole piece is definitely recommended.