The economic malaise of the Eurozone and particularly of Greece – that has eclipsed that of the United States in the 1930’s – is the direct result of deliberate policy by EU elites, said Lord Mervyn King. The former Governor of the Bank of England (2003-2013) made the claim in the presentation of his new book The End of Alchemy on Tuesday, March 1st.
Interest Rates trap
Lord King’s main argument is that a common interest rate has triggered a loss of competitiveness along southern members of the union against Germany, increasing their trade deficits, which are at the heart of the Eurozone’s problems. Despite the unprecedented fiscal consolidation of more than 12% from 2009 to 2015, the debt to GDP ratio has surged to unsustainable levels. Fiscal austerity has proved self- defeating because the exchange rate could not fall to stimulate trade; demand is taken away from the economy without any form of compensation.
An Argument with a past (in the U.K)
It should be recalled that shared interest rates across the Eurozone in Britain were at the heart of the debate in the late-1990s when Britain weighed the pros and cons of joining the European Monetary Union. The cautious British Chancellor of the Exchequer, Gordon Brown, suggested in 1997 that Britain would not be joining the first wave of countries, but considered joining later on in 2002.
On the plus side the BBC analysts acknowledged that a large monetary union made speculation of the kind possible against national currencies unlikely. At the time, this was an argument Britons were willing to heed because of the speculative attack launched by George Soros against the pound, which resulted in the Black Wednesday. Another plus was sharing German credibility that would result in lower borrowing costs for states and private individuals alike, particularly mortgages. On the minus side, analysts foresaw that the coordination of 15 (at the time) diverse economies was historically unprecedented and was bound to be problematic. That is because other factors of mobility beyond capital, such as labour, would be immobile. Monetary policy would then fail to respond to the needs of “pockets” of the eurozone where unemployment and growth was not sufficient.
So, in a sense Lord Mervyn is merely evoking conventional wisdom among central bank analysts of his time.
Destined to failure
Evoking the precedent of Latin America in the 1980s, Lord Mervyn King suggests that only when public debt is offloaded recovery is possible. His conclusion is simple: taking into account denting unemployment, short term costs outweigh long-term benefits for the South’s periphery. Lord King concludes that the southern periphery needs to return to its natural currencies. In his view disintegration is more likely due to popular discontent rather than the creation of a competing monetary union. In making this claim he evokes the two hang parliaments in Spain and Ireland.
Addressing the Criticism
The European Commission has defended its solid support for the so-called “virtuous triangle” of fiscal consolidation measures, austerity, structural reforms, and investment. To do so, supporters evoke the examples of the Baltic State’s austerity programs – particularly Latvia – but, more recently, Ireland as well.
Others have suggested that there is a double-standard approach. The EMU pact originally obliged member states to maintain budget deficits below 3% and a total sovereign debt-to-GDP ratio no more than 60%. It may be recalled that Chancellor Schröder sought French and, ironically, British support to revise these criteria as Germany had been stack into a chronic economic slump. The idea of letting Germany off the hook was then opposed by the former Prime Minister of Luxembourg Jean-Claude Juncker, on whom, Prime Minister Blair and Spanish Prime Minister José Luis Rodríguez Zapatero were exerting pressure to concede. Later on, the loosening of that pact was reversed when Greece fell into trouble, as Spiegel reminded us.
(The Telegraph, BBC, Spiegel)