Sunday, December 11, 2011

The Stagnation & Austerity Pact

Last week's European summit continues the now three-years-old tradition of solving the wrong problem when it's already too late. The Stability & Growth Pact has become the Stagnation & Austerity Pact. Governments will be prevented from running large deficits in order to limit borrowing levels. The only problem: deficits didn't cause the crisis. As Sean Corrigan explains:
Just pause to think what is at work here. In the 2 1/2 years from the end of 2008, Germany ran a current account surplus of around €335 billion, two-thirds of which (~€220 billion) originated in the trade surplus the country ran with its EZone partners.

In this period, German households put €385 billion into building their nest egg of net financial assets, with non-financial German corporates likewise adding €125 billion to theirs. With the state swallowing up €190 billion as a result of its lurch back into hefty deficit financing, a closely comparable €320 billion was therefore left to be disposed of abroad, sending the funds back whence they came—in aggregate at least, if not necessarily in every devilish detail.
Or take this analysis from the Wall Street Journal about Spain:
In 2007, before the crisis struck, Spain had a modest debt load representing just 36% of its economy, according to European Union figures. And those responsible Germans? They had 65%.

During the past decade, Germany repeatedly breached the euro rules by running too large a budget deficit. Spain actually ran a modest budget surplus in the years before the crisis hit.

But haven’t things changed since then? The German economy has powered through the crisis while the Spanish economy has languished, so you would think the two would have traded places.

You’d be wrong. Last year, Spain’s public debt load represented 61% of its economy. Germany’s rose to 83%. In fact, Spain’s debt burden last year remained below that of the Netherlands (63%), France (83%) and, for comparison, the U.S. (93%).
We have a trade imbalance in the eurozone,  fuelled by German quasi-merchantilism as the ECB seeks to do Germany's bidding in terms of providing the optimal interest and exchange rate environment for its exporters. The Stagnation & Austerity Pact simply ignores the true cause of our current dilemma.

But it gets worse. The real solution - growth - is not part of the agreement about to be foisted on us (with or without a referendum). Nor is it obvious what a 'one-size-fits-all' growth strategy for the eurozone should look like. Megan McArdle notes the terrible demographics now weakening the long term growth prospects for Greece, Italy and Spain (Germany isn't far behind by the way). Indeed, economic prospects for the eurozone are so bad right now that is likely only two member countries will be able to 'achieve' the targets set out in last week's deal.

So in this respect David Cameron did the right thing last week. Britain's financial services sector is worth nearly 10% of GDP, and - absent any other obvious source of growth for the UK (its own economic prospects are equally grim) - he probably had no other choice.

What all this means for Ireland's prospects next year and beyond is harder to say. Though 'rosy' isn't the word that comes to mind. Fasten your seatbelts...


  1. Both measures have to be studied accordingly. They have to come up with an ideal strategy.

  2. I guess deficits didn't cause the crisis at all. There are more reasons to be considered like debts or mortgage.

    mortgage leads.


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