I have tried to express the true fix for the Euro crisis, but Martin Wolf has explained it far more eloquently than I can. In a recent FT piece (HIGHLY recommended reading), he explains why the true fix to the Euro crisis involves resolving the external imbalance that results from the flawed single currency system:
“Why do external deficits matter?
First, external deficits mean that residents are spending more than their income and financing the difference abroad. If creditors decide such borrowers are no longer creditworthy (be they private or public), they will cut them off, thereby causing a recession and a plunge into – or deepening of – fiscal deficits. Second, prolonged external deficits also shape the structure and competitiveness of an economy.
Third, sustained deficits lead to huge net external liabilities, often intermediated by banks. When the external lending halts, the banks are likely to implode, undermining both the economy and the fiscal position. As Goldman Sachs notes, the inability to devalue also rules out a way of adjusting net liability positions that has proved helpful to the US and UK. Worse, the only available mechanism – an “internal devaluation” (or falling domestic price level) – will make the burden of external debt even greater. The improvement in the current account balance must then be even bigger than it would otherwise need to be.
Most important of all, people care about what happens to their own country. The inhabitants of a depressed member country will hardly console themselves with the thought that others are booming.
Inside the eurozone, adjustment of imbalances remains essential. But it is also vastly difficult, because the exchange rate has gone. In its place, comes adjustment via depression and default. A currency union with structural mercantilists in the core now threatens a permanent slump in the periphery. Solving that is the true cure. Can it be done? I wonder.”
Beautiful explanation. Remember, the true fix to the Euro crisis is not throwing money at the banks or the EFSF. The true fix is resolving the currency imbalance and that can only be achieved via the creation of autonomous monetary states. So, we either need a break-up of the union or a full fiscal union. Germany will fight fiscal union tooth and nail, but I am not sure they can fight this inevitability forever. This crisis will force greater action at some point….But who knows when that happens and how much longer they kick the can via temporary fixes?
Worse yet, could the whole thing actually unravel? I don’t think so, but you never know. Germany could be buying time to minimize the damage for their big exit….One thing is clear – the resolution is on the table for the taking. How much more pain we have to endure in getting there is entirely up to the ability of the Europeans to work together or realize that they will never be able to work together. But a decision must be made and it must be made sooner rather than later as the poverty of millions of people hangs in the balance….