Monday, 14 November 2011

Scattershot thoughts on The Eurozone (a bit wonkish)

Fresh from a dinner with an international economics professor and an international political economy professor (no prizes for guessing which ones), I've been thinking more about the problems in the Eurozone.

Various views were expressed and some of the debates we had, all great food for thought, are published below:

1. The crisis represents an opportunity for policy entrepreneurs to push through new integration, particularly in the Eurozone. The 'mask and shield' argument, applied not to the law but to economic policy.

2. A very eminent professor of international political economy with specialist European knowledge predicted that the ECB would ultimately become a lender of last resort - but only for a limited Eurozone of France, Germany and core-Satellites, but with the peripheral economies stripped out.

3. The ability of France to remain in the Eurozone was called into question in the long run, not a subject I had wondered about previously but given the path of the crisis so far, with various countries slowly being dragged into trouble by the contagion that started out as just Greece, it has to be up for question.

4. Another concern is - can the ECB actually solve the problem? If the ECB promises unlimited fire power behind shakey debtor nations, would this lead to them simply monetizing peripheral debt? That could potentially bring about a hyperinflation catastrophe scenario, or it might just rule out one of the multiple equilibria and thereby quell bond markets. My guess is the later, but can we be sure it won't be the former?

5. What capacity do these new technocratic governments in the peripheries have to bring deficits and debt under control? Probably not much. At the end of the day, they still have to overcome groundswell political opposition, which may not be as straightforward as they think.

6. Interestingly, inflation concerns were raised, which personally I disagree with strongly as its hard to see a wage-price spiral in the absence of any wage inflation, which is being held down by historically high rates of unemployment. Current high inflation in the UK was raised, which I put down to temporary fluctuations - devaluation, VAT rises and volatile Commodity Price upticks. This is reasonably testable - in inflation continues to rise over 2012 then I will be wrong, if it falls back sharply to around 2 or 3% I will be right, if it gets to mid 2012 somewhere between 3% and where it is now (around 5%) then doubt will remain. (nb, ceteris paribus).

This is a big moment for the European Project.

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