1. Gideon Rachman says wind it all up now. Monetary union needs fiscal union. Euro leaders will never agree fiscal union. So end it all now, or more accurately, find those countries willing to agree to fiscal union and have them in the Euro.
2. Martin Wolf says that the consequences of a break up are so horrendous that there will be institutional changes to the Euro to save it. I think he agrees with Rachman that full fiscal union is a way away. So he asks, correctly, what steps will save it? He thinks cheap Eurozone bonds are impossible, due to political constraints. So he calls for
The answer is through a buoyant eurozone economy and higher wage growth and inflation in core economies than in the enfeebled periphery.And suggests this can be sustained with expansionary demand.
In yet another excellent post, he makes some more valuable points.The German response. A senior official at the German finance ministry writes that short-term help from Germany will raise moral hazard and so will not help in the long run. Martin responds by saying that without a short-run fix, we will not even get to the long run.
1. Southern Europe cannot go for Keynesian expansion since noone will lend to them. End of.
2. So we need a backdoor bailout: Germany and NEurope have to reflate their economies and perhaps have higher inflation to help Southern Europe. Will those citizens accept this?
4. I think they would if they saw S. Europe reform. But S. Europe wont reform if they are bailed out. So N. Europe won't bail them out. Return to point 1.
5. Thus my prediction is
- 45% probability: breakup with N. Europe coutries staying in.
- 10% prob: breakup of whole Zone. Emergence of 1930s type insularism. Very bad.
- 45% probability: muddle through with implict subsidy from ECB. High inflation down the track when ECB finds assests on their balance sheet are worthless.
My student Anjalika points me to the New York Times on how a slow motion bank run might undo the Eurozone and how Germany stands to lose via its Target2 payments.