European Quantitative Easers Let’s Talk

The Eurozone sovereign debt crisis is posing a real challenge to Europe’s policy makers. The un-abating liquidity squeeze on government borrowing is threatening to turn into a solvency crisis in which more Eurozone countries are at risk of defaulting on their debts. The interest rates at which governments are currently borrowing are for the most part unsustainable, with countries like Italy and Spain borrowing at dangerous levels previously reserved for the smaller members of the PIIGS group. Broadly, two schools of thought have emerged with solutions to the problems at hand, one we will call the Monetary Keynesians and the other the German School of thinkers. The former are represented by such personalities as Roger Bootle of Capital Economics, the famous Dr Doom Nouriel Roubini and the New York Times Econom ic’s Nobel Prize winner Paul Krugman, while the latter are represented by the likes of the resigned ECB Governing Council members Axel Weber and Jurgen Stark.

The first group is advocating using the printing press and nationalizing (or federalizing) distressed sovereign debt. That is to say they want the Eurozone, through the ECB, to print money to by debts that can’t be paid back by member countries who spend more money on goods and services than they produce. The excuse found to justify this action is that the fledgeling economies are actually able to produce enough wealth to sustain their social systems but that because of a temporary bleep of liquidity issues they need temporary help. Nothing could be further from the truth. France to name just one of the irresponsible countries (although not yet a crisis country) has not passed a balanced budget since 1973! Greece has lied about its overspending for years prior to the crisis and the Eurozone as a groupe only managed a budget surplus in 2001 in the last 20 or more years. What does this say about European fiscal rectitude? it says that it doesn’t exist the Eurozone has always had a structural deficit. The sovereign debt crisis has been in the making for a long time, the Keynesians excuse that it is a temporary problem needing papering over is bogus.

Not just bogus but also internally inconsistent. Keynesianism calls for counter cyclical fiscal policy, while american liberals like Paul Krugman say that pro growth spending is positive in bad and good times alike. In any case the Greeks have proved that policy wrong. Another solution proposed by the less hawkish of economists is to have the ECB double down on its LTRO or renew its sovereign bond buying program. Imagine the ECB mostly backed by Germany buying Spanish, Portugese or Italian bonds. Now imagine investors believe that the problem remains unfixed and that primary deficits can’t be fixed by liquidity improvements, yields will continue rising and bond values will continue dropping. The ECB will either have to print money to paper over its loss sparking inflation or it will have to beg the big Eurozone economies to bail it out. Now assuming Europeans remember what low growth high inflation looks like (see 70’s and 80’s) they will surely stay true to their feelings of entitlement and choose to pressure the Eurozone core to pay up.

Now the Germans, Finnish, Dutch et al. have already shown their distaste for profligate Mediterraneans’ bail outs, so does anybody really think the ECB will go down that road? Well you’d be right if you think it might happen, with all the German resignations at the ECB, the institution seems to be loosing its hawkish edge. Forget the stellar inflation busting record under Trichet, the ECB is going south.

These are disappointing times for some economists, the world is awash with exemples of virtuous macroeconomic policy and yet some continue to advocate tried and failed policies or policies that are untried and risky. Why does no one point towards Canada where austerity in the nineties have led to stable government expenditure levels today, or Germany where austerity was imposed, unit labour cost were lowered and how about Estonia which consolidated spending massively in the face of a deep contraction in output and today is one of the Eurozone’s fastest growing economies. The Eurozone periphery is small enough that deep primary-surplus generating government spending contractions wouldn’t affect he currency zone as a whole too deeply. Portugal and Greece could have been the next Estonias, instead talks of bailout and quantitative easing has inspired periphery politicians to stall and not make the necessary decisions for growth.

The PIIGS, France and all other fiscally week Eurozone countries need to do three things: stop dithering and waiting for someone else to bail them out. They need to emulate Mario Monti’s drive for competitiveness, shoot for growth and competitiveness. Then they need to emulate the tiny Estonian country and actually start generating budget balances through lower expenditure and not through heightened taxes. What the rest of the World needs to do is stop giving ball-less politicians excuses for their failures and easy solution proposition. The road to wealth has already been traced, it’s time Europeans stopped pretending they are smarter than the rest of the World and American liberals need to open their eyes to the reality that free lunches dont exist and the hard road is the better road!