Wednesday, 28 September 2011

Towards Europe's New Economic Policy.

The Eurozone unlike the USA does not have wealth transfers yet needs them in some form.

My opinion

The founders of the Eurozone knew this was an issue so put systems in place to avoid USA style wealth transfers to support states falling behind as lacks a political will to have some central european tax and spend arm of government.

The Eurozone founders to counter this problem compelled members of the zone to follow the The Growth and Stability Pact. A pact which would eliminate the need for wealth transfers by enforcing rigorous fiscal discipline on member states.

If everybody is control of their finances, there isn't any need for USA style wealth transfers between states run by some central federal authority.

The EU system was designed to be resilient without the need for a central political authority to manage national economy's
But when faced with global credit crunch, deficit spending has risen and the Growth and Stability Pact has proven to be a fiction. Our political leaders assumed the growth and stability pact would prevent problems occuring.

Why would they assume that the growth and stability pact would be enough to ensure long term stability of the eurozone? Policy makers for decades have had a huge blind spot. They have believed in error, that the principle agent of economic harm is the state itself. So the growth and stability pact was to keeps national governments in line. Policy makers were not aware of the disaster the markets were building up to.

In actual fact it has been state action, state direction that has responded to the crisis. And as we look again into the precipice which threatens to swallow our european republic. We look to Europe's political leaders to come up with a plan.

The nations which have found themselves at the mercy of the bond markets, notably Greece and more worryingly, Italy have only on the table as a policy response: Austerity. With the prospect of growth hammered, the only way to have reasonable bond rates is Austerity.

But what if the european union can build into the present system a new mechanism to boost growth? If growth of indebted nations becomes more believable, then the absolute necessity for austerity measures can be a little less desperate.

WHAT WE MIGHT DO: Devalue, Boost single market flexibility, Increase potential size of economy:

1) Deal with the emergency. 
Go broadly with the plan to use the ESF fund to borrow a further €2trillion to give us breathing space and to devalue the €: We've moved into negative trade imbalance again, so the eurozone ought to devalue.

2) Deal with problems between member states.
What should follow is a growth plan, particularly for member states which have a negative trade balance with the eurozone. Instead of interstate cash transfer we might try a more hands off solution: Based on the size of a trade deficit, the EU single market should allows a member state to use subsidy and possibly tariffs. This would encourage inward investment into member states which currently lack production capacity.

3) Increase the potential size of the economy
Based on the principle that a sound political economy factors in, Energy Supply, Industrial Capacity and Priority Selection. Then the EU should work to boost the supply of cheap energy to the economy. If cheap energy is on tap, then the markets will do the rest and exploit such supplies for purpose of production.

So with step 1, we prevent the EU falling apart
with step 2, we make the EU economy as a whole more coherent.
with step 3, we make the potential size of the EU economy larger overall, and can therefore can promise the bond markets long term, that devaluation by ECB printing money is indeed temporary.

Disqus for A New Red Dawn