EMU: Dave's Falklands moment?

Once more it’s déjà vu all over again. The French and Germans have had another Tory hand-bagging. Is this Dave’s Falklands moment that will win him the next election?

So what’s it all about?

The simple truth is that the Eurozone countries are in denial. Looking for someone to blame other than themselves, they put the whole crisis down to Anglosphere speculators and City of London bankers. Sarko is out to destroy them.

We in the real world know that there were two main causes.

First, the Eurozone created a mountain of debt. The ‘one size fits all’ nature of the Euro unleashed a torrent of cheap money which led to property bubbles in Spain and Ireland (a friend of mine visiting Ireland recently was offered an €850,000 house for €200,000 in a village where an entire development of 87 houses is standing empty and rotting away).

It encouraged Greece to live high on the hog without bothering to collect taxes.

Italy has had no growth since 1998,  and its labour costs are 25% above what they should be.

Euroland created lavish welfare, ‘social Europe’, medical, social, retirement benefits, without providing ways of paying for them.

Governments vastly increased the size of the state by expanding the public sector work-force in a monstrous bribery of socialist voters and trade unions. The increase in UK alone under the Blair/Brown elective dictatorship created nearly 900,000.

When all this started to go tits-up in 2007, the recession caused tax revenues to fall and welfare payments to rise because of unemployment. And billions were poured into the rescue of bad banks.

The second cause was the opposite of debt – excessive savings. If this sounds like a contradiction, it is not. Throughout most of the lifetime of the Euro, the developed economies – Germany in particular – have squeezed wages and production costs that enabled them to build up huge surpluses. Instead of shifting them into productive investments they preferred sub-primes and Greek bonds. This led to unsustainable imbalances between the north and south. In effect, the Club Med had the life sucked out of it. Real growth is productivity with reducing unit costs. Suppressing wages when consumption  is what supports growth is poor economic management.

This is what Ambrose Evans-Pritchard has to say in the DT:

‘the disaster was caused by current account imbalances (Spain's deficit, and Germany's surplus), and by capital flows setting off private sector credit booms. They have to whip up a witchhunt against somebody, so why not Anglo-Saxon bankers? Nasty reflexes are at work. German and French politicians in particular should be very careful about inciting populist hatred against a group that makes such easy prey. We have been there before’.

The fix that Dave walked away from does nothing to solve the problems of the Eurozone. It attempts to deal with fiscal issues when these are not the problem. Only Greece is truly insolvent. The other members of Club Med have been running budget surpluses.

What Sarko, facing electoral defeat, and Angular can’t accept is that all the remedies are too unpleasant to contemplate.

Here are a few.

1.     Having a bloody great war has been the solution in the past. It was WW2 not FDR that got the US out of the Great Depression. But that won’t work because most of the 27 have no armies to fight with.

2.     Inflate your way out, thereby reducing the real value of EMU bonds. But this has failed in Japan.

3.     Default. Ireland will probably do this at some stage. Greece should be allowed to depart from the Euro and default on its sovereign debt. This would be a political and socio/economic disaster, but the Greek economy is tiny in relation to Europe. The bond ‘haircut’ destroyed investor confidence, so that the contagion rapidly spread elsewhere.

4.     Sustained austerity to pay down debt. But this may be counterproductive. It depresses economic activity at a time when growth is sorely need. It causes hardship, bankruptcies and unemployment, which lead to further loss of tax revenues. The IMF prescription is ‘devalue and tighten your belts’. This can’t be done in EMU.

5.     Admit that EMU has been a disaster, destroying wealth, jobs and whole economies. And then the solution is obvious.

And as we all know, Emus can’t fly!