Europe – Still In Denial

Warren Mosler cites several articles showing that European leaders are still in denial over what needs to be done in Europe. The problem in Europe is still quite simple.  Because there is no floating currency there is a natural competitive imbalance between trade deficit and trade surplus nations.  This exists in the USA as well among the states, but it doesn’t result in periodic solvency crises because the Federal government disburses 20% of state funds directly to the states each year.  Of course, that mechanism doesn’t exist in Europe even though the ECB is currently avoiding the worst case scenario by allowing budgets to be filled without default.  And the austerity measures aren’t helping this process – they’re creating a positive feedback loop as we continue to see in Greece and their now monthly “rescues”.

I’ve long said that Europe needs to go fully federalized and quickly into the direction of a US of Europe.  I still think that’s inevitable.  The big question mark is how big that US of E will be and whether they’re going to let these peripheral nations be part of what is increasingly becoming an unsustainable relationship (as is).  My guess is that Germany would love to toss out the dead wood, but they can’t do that just yet without blowing up their own banks.  So round and round we go.  Where she stops nobody knows….

About

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering asset management, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

View all posts by
Member
4 years 3 months ago

In fact, the reason Germany does not have solvency crisis is that they also have a “balanced budget amendment”. The only state that does not have a balanced budget is Vermont. If Greece has a balanced budget amendment from way back they would not have gotten into this trouble.
http://en.wikipedia.org/wiki/Balanced_budget_amendment

What MMT/MMR guys don’t get is that if your budget it so far out of balance that you have debt over 100% of GNP and a budget that is nearly twice taxes and you print your own money, then you get hyperinflation. On some level you admit that if there is not enough taxes to create demand for the currency then you will get inflation, but nobody tries to look at the numbers of how much taxes are needed. I recommend a book by Bernholz.
http://pair.offshore.ai/38yearcycle/#mmthyperinflation

Member
4 years 3 months ago

” This exists in the USA as well among the states, but it doesn’t result in periodic solvency crises because the Federal government disburses 20% of state funds directly to the states each year.”

The reason states don’t often have solvency crisis is that nearly all the states have “balanced budget amendments”.

Guest
beowulf
4 years 3 months ago

Well, what state officials always forget to mention those balanced budget amendments are only possible because of direct payments from Uncle Sam and indirectly, federal spending and transfer payments that boost state economies and tax rolls. That’s why I’m not worried about a federal balanced budget amendment becoming law.
It may in fact pass the House and Senate with two-thirds majorities, but it would never get three-fourths of the state legislatures ratifying. There are enough state govts smart enough (of course I exclude South Carolina and the like) to realize they’d be cutting their own throats since they’d never be able to balance their own budgets without the half a trillion in revenue sharing Congress kicks them every year.

Guest
Ben Wolf
4 years 3 months ago

What really amazes me is the sheer ignorance of so many armchair experts regarding trade imbalances. Outside MMR/MMT blogs you just don’t see this being discussed. Everyone talks about Greek debt and overspending without considering why the overspending occurred, resorting to stock “Greeks are lazy/greedy” answers designed to stop thought.

Guest
I'llHaveADouble
4 years 3 months ago

Ditto. These are basically the only good blogs. Some new Keynesians come close by not completely excoriating the Greeks and saying, “Well, it’s complicated…” For everyone else, it’s basically just, “Germany runs surpluses because they’re awesome – everyone should do it!” and “The Greeks are lazy – cut, cut, cut.”

It’s weird that something so important and so full of money would lend itself to unmethodical and even irrational analysis and commentary – and that those tendencies should prove resilient over many periods. Engineering isn’t like this. Medical science isn’t like this. But when doctors and engineers start talking investing and the economy, they start spouting the same stuff you’d hear on CNBC or at a truck stop Denny’s.

Admin
4 years 3 months ago

Yep. Until you understand the euro is a gigantic vendor financing scheme gone bad, you don’t understand nuthin’ about dose problems in the eurozone.

And there might be a few people talking about this outside of the MMT/MMR blogs but they are few and far between, and largely ignored by the press.

Guest
Dan Kervick
4 years 3 months ago

Yes, maybe the plan is to toss out some of the “periphery” countries somehow, build a fully federalized union out of the remaining core, and then offer a conditions-strewn path for re-application and re-admittance of the ejected countries .

There is no mechanism for kicking countries out, right? So the only way to get them out is to make life so miserable for them they eventually leave on their own accord.

Guest
Dan Kervick
4 years 3 months ago

Sure, as long as I don’t start ventilating about my master plan for the Soviet People’s Republic of Europe. 🙂

Guest
AndyCFC
4 years 3 months ago

Dan as I understand there is no mechanism for either leaving or getting kicked out.

Guest
Dan Kervick
4 years 3 months ago

Yes, that’s my understanding too. But in the end its all based on treaties, so under international law people can back out of treaties based simply on the rights as sovereign nations under international law.

Guest
AndyCFC
4 years 3 months ago

Agreed will be very messy though. Historically these sorts of things are very dangerous, only one I can think of recently that wasnt messy was the Czechs and Slovaks every other one was nasty.

Admin
4 years 3 months ago

I think Michael Hudson is on to something when talks about seeing how far countries can be pushed before they revolt. Greece is a small test case.

Guest
beowulf
4 years 3 months ago

Hudson is the most cynical person in the world, which I fear, makes him the most clear-sighted.
Its hilarious some of things he does to stir the pot… like writing to the Premier of China to explain how to stick it to The Man (“use their excess dollars to buy out US investment holdings in their countries, at book value”).
http://michael-hudson.com/2010/07/dollar-hegemony-and-the-rise-of-china/

wpDiscuz