I think most of us try to make some sort of sense of the world around us. Somewhere down the line we need a "world view" even if, as in my case, we are only dimly aware of what that view is. I keep returning to the European debt crisis partly because, I admit, I find it a fascinating intellectual challenge even as we sink ever deeper into the quagmire! I mean, we can't just go on saying "it's all the fault of...." or "all we need to do is...", even though the temptation to do just that is sometimes almost irresistible.
All of this is a lead-in to an interview (rather clumsily translated) with a French economist called Christian Saint-Etienne. What he has to say is in my view extraordinarily interesting, not least because it dates back to early July of this year. What do you think?
In your view, what problems do the euro present in its current form?
The euro zone has a structural problem: it joins countries that have no business being in the same monetary zone. On the one hand, the northern countries, Germany, the Netherlands, Austria, that have chosen an industrial export model; on the other, the southern countries, France, Italy, Spain, etc., and their consumption model, whose motor in France is public expenditure. The former, because of their strong industries, have the means to remain competitive with a euro at $1.50. The others are not beyond $1.30. The 2008 crisis made this schism worse. The euro cannot continue as it is.
What do you recommend?
The ideal solution would be to federalize the zone, which the Germans refuse to do. It would be a partial federalization of nine countries, grouping France, Benelux, Germany, Austria, Italy, Spain, Portugal. The Greeks would be left with a euro that would be, as a result, devalued. And a "new euro" would be created, with an economic government and a real federal budget of 7% to 8% of the GDP. This would permit the redistribution of the money among member-states to make up for their differences of economic structure. The central bank remains independent, even if one can imagine rewriting Maastricht so as to give it, in addition to its mandate of stable prices, a mission of economic growth. Such a zone would become the world's second power. But let's be clear: the probability of such a zone is just about zero.
So what are the other scenarios?
The southern countries can adopt the northern model, which is technically impossible with a euro at $1.40. It would have to come down, but that's not in Germany's interest. Or the northern countries can leave the euro. In that case, devaluation becomes possible. We're getting close to that now. The attack on Italy's debt no doubt foreshadows the same thing against Spain or France.
Then it's a partial blow-up of the euro zone?
That's the only coherent solution, which avoids intolerable disorder in Europe. There would be therefore be two euro zones: one in the north with a strong euro, the other in the south with a devalued euro that would allow those countries to restructure their finances and rebuild an industrial base. The third solution is to continue to force austerity on people until they rebel.
Which of the different options mentioned seems to you the most likely in the short term?
If Italy's debt is attacked, it's no longer possible to patch things up as has been done so far. Federalization being very improbable, there remains Germany's exit. I estimate the chances of Germany's departure in the next three years at 30%.
Is France very exposed, in your view?
Our country has one of the highest deficit levels in the world, an exploding debt, a record public debt. It has deindustrialized itself spectacularly and has lost a third of its export shares in twelve years. In case of attacks, we would turn toward Germany, but this time, it's between 2000 and 3000 billion euros that would have to be lined up. It is entirely possible for Germany to say: I'm not paying, I'm leaving. There's a moment at which it will ask itself that question. The rest is worthless political chatter.
Should either national or European protectionism be established?
I'm for a carbon tax and a tax on countries that don't have social protection. But against a protectionism like the one the Front National is proposing, or the far left. People have to understand that we can't go on like this and continue spending our vacations in Thailand and buying Asian cellphones. If we close the borders, since we're no longer manufacturing almost anything of what we consume, good-bye to bananas and T-shirts produced for a euro in China and sold here for 7 or 8 euros. For most people, I think that the choice wouldn't be hard. Before raising barriers, we need to rebuild a productive system in France.
All of this is a lead-in to an interview (rather clumsily translated) with a French economist called Christian Saint-Etienne. What he has to say is in my view extraordinarily interesting, not least because it dates back to early July of this year. What do you think?
In your view, what problems do the euro present in its current form?
The euro zone has a structural problem: it joins countries that have no business being in the same monetary zone. On the one hand, the northern countries, Germany, the Netherlands, Austria, that have chosen an industrial export model; on the other, the southern countries, France, Italy, Spain, etc., and their consumption model, whose motor in France is public expenditure. The former, because of their strong industries, have the means to remain competitive with a euro at $1.50. The others are not beyond $1.30. The 2008 crisis made this schism worse. The euro cannot continue as it is.
What do you recommend?
The ideal solution would be to federalize the zone, which the Germans refuse to do. It would be a partial federalization of nine countries, grouping France, Benelux, Germany, Austria, Italy, Spain, Portugal. The Greeks would be left with a euro that would be, as a result, devalued. And a "new euro" would be created, with an economic government and a real federal budget of 7% to 8% of the GDP. This would permit the redistribution of the money among member-states to make up for their differences of economic structure. The central bank remains independent, even if one can imagine rewriting Maastricht so as to give it, in addition to its mandate of stable prices, a mission of economic growth. Such a zone would become the world's second power. But let's be clear: the probability of such a zone is just about zero.
So what are the other scenarios?
The southern countries can adopt the northern model, which is technically impossible with a euro at $1.40. It would have to come down, but that's not in Germany's interest. Or the northern countries can leave the euro. In that case, devaluation becomes possible. We're getting close to that now. The attack on Italy's debt no doubt foreshadows the same thing against Spain or France.
Then it's a partial blow-up of the euro zone?
That's the only coherent solution, which avoids intolerable disorder in Europe. There would be therefore be two euro zones: one in the north with a strong euro, the other in the south with a devalued euro that would allow those countries to restructure their finances and rebuild an industrial base. The third solution is to continue to force austerity on people until they rebel.
Which of the different options mentioned seems to you the most likely in the short term?
If Italy's debt is attacked, it's no longer possible to patch things up as has been done so far. Federalization being very improbable, there remains Germany's exit. I estimate the chances of Germany's departure in the next three years at 30%.
Is France very exposed, in your view?
Our country has one of the highest deficit levels in the world, an exploding debt, a record public debt. It has deindustrialized itself spectacularly and has lost a third of its export shares in twelve years. In case of attacks, we would turn toward Germany, but this time, it's between 2000 and 3000 billion euros that would have to be lined up. It is entirely possible for Germany to say: I'm not paying, I'm leaving. There's a moment at which it will ask itself that question. The rest is worthless political chatter.
Should either national or European protectionism be established?
I'm for a carbon tax and a tax on countries that don't have social protection. But against a protectionism like the one the Front National is proposing, or the far left. People have to understand that we can't go on like this and continue spending our vacations in Thailand and buying Asian cellphones. If we close the borders, since we're no longer manufacturing almost anything of what we consume, good-bye to bananas and T-shirts produced for a euro in China and sold here for 7 or 8 euros. For most people, I think that the choice wouldn't be hard. Before raising barriers, we need to rebuild a productive system in France.
In the recently updated "austerity plan" introduced by the French Government, I was surprised that the retired emerged unscathed from the series of, let's face it, pretty mild measures aanounced by François Fillon.
ReplyDeleteOverall, the retired enjoy a higher standard of living than the active population. That can't be right, surely?
It's the same over here and no, it can't be right.
ReplyDeleteBut by and large it's the retired who vote!
A very interesting post Barnaby.
ReplyDeleteA raison d'etre (excuse my French) for setting up the Common Market in the first place and deepening that to the current EU, was the idea that linking the European countries in this way would minimise the risks of major wars between them in the future following the two dreadful WWI and WW2 wars.
That sentiment was positive but I doubt that it is meaningful. The current Eurozone debacle illustrates only too well the different characteristics of each nation and that when the chips are down the individual country's national interest or at least what is perceived to be such, predominates. EG the Germans quite understandably given their history want no truck with any Qauntative Easing strategy by the ECB. However that might suit the Italians.
Germany's brilliant manufacturing expertise eg with their motor cars and French delicious food and drink, make for some fantastic export surpluses.
The UK with our brilliant penchant for liking racy looking motor cars and quaffing fizzy wine, has a fantastic balance of trade deficit which we fund by the City of London derivatives etc casino.
These kinds of different national characteristics make us already quite inter-dependent. If the UK did not import, the German and French exporters would suffer quite substantially. That inter-dependence would deter another European war with or without the EU. However the advantageof each country remaining quasi independent is that each can maintain its own way of doing things. EG when the City of London is not delivering, the UK can gently devalue or print a few more £s. Others in the
As the current Euro debacle shows, the more we are all tied in to nations with vastly different ways of doing things the more the stresses and strains begin to show. EG the EU wishes to tax the UK City's casino which puts a strain on UK sentiment as naturally the UK would pay the lion's share of such tax.
The Euro experiment is not proving successful in its current form. To make it work the participating countries need to federalise like the USA. That in turn would cause them each to lose individual sovereignty over their own affairs. For some that might be attractive but others like the UK, have ways of life which are so idiosyncratic that the national loss resulting from federalising would be difficult if not tragic.
My answer would be to have a 3-tier Europe. The 1st tier would comprise Germany and its neighbours in a federalised Eurozone. The 2nd tier would be the group of countries who remain in the EU but do not or cannot enter the Eurozone. The 3rd tier should comprise those like the UK and maybe others in the former EFTA group, which should not be in the EU at all but with free trade with the other two tiers bearing in mind that without the UK markets, the exports of tier 1 and 2 countries would suffer greatly.
Thanks so much for your response, Jerry. It's nice to have an informed opinion such as yours, as I know next to nothing about finance or economics (we didn't go in for that sort of thing at Beaumont, did we?).
ReplyDeleteI was particularly interested in this paragraph:
"The Euro experiment is not proving successful in its current form. To make it work the participating countries need to federalise like the USA. That in turn would cause them each to lose individual sovereignty over their own affairs. For some that might be attractive but others like the UK, have ways of life which are so idiosyncratic that the national loss resulting from federalising would be difficult if not tragic."
Spot on, in my opinion. It is indeed a very tall order to ask countries with wildly different traditions and histories (not ot mention languages) to come together under the banner of the United States of Europe. After all, it took the USA hundreds of years and a civil war to reach their present state. And yet, unlike you, I wonder whether in the end a USE might not be the best answer. The different American states retain a fair amount of autonomy and are intensely proud of their identity. Couldn't we do the same here in Europe, or is that wishful thinking?
Greetings Barnaby
ReplyDeleteTX for you interesting (and flattering)response.
Hopefully I can post a proper rejoinder or as they used to say in Common Law, surrejoinder, over the w/e.
No Right answers to these questions Barnaby as Angela Merkel and David Cameron have just made plain.
ReplyDeleteHowever certain sectors of the German Press have got it right when they suggest that the UK needs to decide whether it is in Europe or not.
A problem for us on this island is that the Europeans have never really welcomed the UK. Charles de Gaulle's strident "non" is as firmly imprinted on the memories of many here as President's Kruschov's "niet" although admittedly there were no French shoes being banged on the table at the time of de Gaulle.
Even when the Europeans eventually said 'yes' it was only after the well stocked UK fisheries and oil fields were put at the disposal of our continental friends and our taxes used to subsidise their hugely inefficient farming smallholdings that Europe permitted us to join their then rich men's club. Sadly that latter epithet aptly described subsequent EU arrangements made to continue to feather bed its rich farmers at the expense of African etc allotment holders; (also as it happened alas at the expense of Commonwealth food producers)
So here we all are rich and less rich men and women of Europe in a real financial mess.
Your own remarks about a possible way out of the mess being the EU or at least the Eurozone section of it changing to become like the USA as regards its dollar zone, may represent the only viable solution. However that would entail even more cash transfers being made by the remaining rich men countries to their poorer EU brother and sister nations just as the wealthier USA states essentially transfer cash to the poorer ones. Of course in the USA there is also a national bank and national government which facilitate the regulation federal cash. These all have the effect of making $1 worth the same throughout the USA. the absence of such equivalents in the EU at present is potentially fatal.
As Germany is so predominantly the rich man of Europe at present the lion's share of the burden of such transfers would fall upon the German taxpayers shared to a lesser extent with its other N. European neighbours. The trouble is that West Germany is still struggling with the huge cash transfers made upon reunification with the East Germans. West Germans however could quite easily associate themselves with the ties of kinship with East Germans and so take the financial sacrifice in their stride - well almost. But I wonder if the cash or the will exists in Germany to make the same sacrifices for the poorer EU nations of today. Even if the cash exists which is by no means clear, can ordinary Germans empathise with the new EU poor in the same way as West Germans empathised with those in East Germany? I wonder?
Reverting to the UK: If the Germans do decide to make that huge sacrifice to the outer EU then morally the pressure on the UK likewise to consider committing to Europe increases despite the sacrifices and I would then like to see us rising to the challenge of such moral leadership. Even then though the other poor in the world like the African allotment holders should not be prevented by rich men's club rules like the EU CAP from enrichment by free trade with countries such as the UK.
However if the richest countries of the Eurozone today cannot make the necessary and very real financial sacrifices to bring about an USA type solution to current woes, then we in the UK should quit.
Finally Barnaby I hope that you will not object to my posting this comment as a separate blog post on my own blog as posting fatigue is now setting in!