Friday, 6 July 2012

Fixing Europe’s Budget Mess

"This is both simpler, and harder, than Fixing America’s Budget Mess. .....The problem is a structural one. Germany has a larger stronger productive capacity than the other nations of the EU. It also has a stronger work ethic and more tightly focused and controlled economic structure. Basically they work harder, smarter, and save their money. In the merger of nations that made the EU, Germany essentially got a built in Mercantilist Advantage.
......Part of the basic problem facing Greece, Italy, and Spain is that they are overpriced, being in German dominated Euros. Furthermore, if they can not practice Austerity and cut their expenditures, the only alternative is to repudiate those expenditures and debts. (Higher taxes will not work, thanks to the Laffer Curve). That repudiation can be a formal default, but that is highly disruptive. Still, it has been done. The more polite mode is the slow default of inflation; but that can only be done if the currency inflates.
......I expect the EU will instead go for more taxes, more interventionist central government policies, more tight integration and less flexibility. That won’t work, but it is what I expect they will do. Germans are sure that they can fix things if only they had more control, and the PIIGS are sure that holding tight to the EU and Germany will bring more German money. All of them are sure that they can fix things with enough higher taxes. None of them will want to take the “risk” that a cold plunge into lower taxes and freer economies would entail. Fear and greed. Fear of market solutions and greed for others peoples money."

No comments: