Barbarians v. Romans At The ECB

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

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It is being reported that professional economists favor the hawkish-dovish north-south axis to run the euro. The Frankfurt-based European Central Bank (ECB) at once likes German post-Weimar hawkishness on inflation as well as only Germans to ensure that that continue to be the case. The retiring Trichet was a Frenchman but a German at heart and he had it easy. The European Economic and Monetary Union (EMU) with the new euro had prospered to afford low inflation, not vice versa, during a time of unprecedented global expansion, albeit its sustainability being still in question, that had lasted until 2007.

Now Europe cannot afford low inflation and stalled growth at the same time, Greece being the case in point, especially as the Maastricht debt criterion becomes the only savior to keep the euro’s exchange rate low relative to the dollar even in the worst case black swan scenario of a precipitous fall in the dollar both due to the currency markets and the foreign debt markets.

The high levels of temporary debt that the EMU is currently fearing could in fact end up rescuing the global economy, should investor sentiment turn against the United States, while rescuing Europe in the process as foreign capital streams into Europe, in search of safety, just as it did into the United States in the late ‘90s. The United States is resilient to the most negative black swan shocks, but the EU is not given its current framework, but neither can withstand the closing of their societies (a circumlocution for fascism ― the implicit variable in the short run Phillips Curve), the preemption of which must be the objective of economic policy. The trigger, when it is not inflation, will be unemployment.

The woes of Greece should be well understandable for Mario Draghi who had spent a big part of his career at Goldman Sachs. His Wall Street alma mater had sold financial innovation to Greece and finally the fat lady is singing in Athens. The trouble with that innovation through, as Draghi might perhaps appreciate having served both in the financial markets and in government, is that it was non-transparent. Greece had borrowed from Goldman Sachs what it could not do by issuing legal euro debt without circumventing the EMU rules. And Greece may not be the last, which is why Draghi is better suited for the ECB presidency than Germany’s Axel Weber who does not want to use the printing presses invented in his country to bail out the Greeks. On the one hand, German monetary policy cannot expect to carry Europe on its shoulders while on the other abdicate responsibility for both failing to catch a brewing crisis as well as to come to the aid of a member country. Germany making monetary policy cannot convert the EMU into Germany.

The European Commission (EC) and the European Central Bank (ECB) need to learn flexibility to enlarge the European Union (EU) and the EMU. As a first step, the governments need to establish a fiscal buffer in Brussels to redistribute to countries in trouble. As a follow through they need verifiable mechanisms to ensure that country economies are being monitored well for the purposes of monetary policy without only having to rely on aggregating country statistics in Frankfurt which does not capture the heterogeneity of the structure of the EMU economy as a whole while expecting monetary policy to enforce discipline.

Independent supranational monetary policy is not viable without it being complemented by some level of country-level surrender of economic sovereignty in favor of harmonizing regulations, labor market policies and economic reporting across the eurozone to raise the average quality of institutions across the EMU. Europe is perhaps fast approaching the moment of truth where countries within Europe have to band together into smaller unions based on similar economic behaviors or the EC must recommit itself to making the larger EMU work.

If Weber succeeds Trichet, perhaps the Italian Mario Draghi must succeed the Frenchman Dominique Strauss Kahn at the International Monetary Fund (IMF), because the IMF would be busy filling the gaps in the Maastricht Treaty in the absence of any European reforms at the EC and getting ready to better monitor private global capital flows to avoid repeats of Greece all over the planet, let alone in Europe, especially if the U.S dollar liquidity seeks short term high returns elsewhere around the world.


About Chandrashekar (Chandra) Tamirisa
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