Who asks about my views on what actually should be done about the euro crisis.
OK, we have two entirely different things here, the short and the long term. They\’re all tied up with each other, of course, but they are different things and need different answers.
1) Short term.
A falling, at least a rapidly falling, money supply is a sufficient occurence to have a recession shading into a recession. It is not a necessary one, there are other ways that people can fuck up to cause these. It is however sufficient, even if not necessary.
Money supply in the periphery countries, in the Latin/Southern eurozone countries is falling rapidly. I\’ve seen numbers like 17% and 24% for Portugal and or Italy.
This will cause recession/depression, the implosion of the banking systems, vast and massive decreases in the living standards of the population.
This is, if you\’d like to label it, the Milton Friedman analysis of the Great Depression itself.
The solution is not to allow the money supply to fall. The central bank must, as the Fed and BoE did not last time around but have this, and as the ECB is still refusing to do, print money, hand it to any bank that asks and simply get on with it.
This is lender of Last Resort style stuff and is the reason that we actually have a central bank with the ability to print money.
Austerity, reining in government spending, all being good little Germans, none of these matter at this point, have any effect at all on what is happening. They\’re all irrelevant at the one to three month timescales we\’re talking about. As are politics, fiscal responsibility pacts, jury rigged eurobonds and all the rest.
2) Long term.
The euro simply is not an optimal currency area. It is possible that it could become one, in a few decades, if the southern/Latin/periphery countries all had the supply side revolutions they so desperately need. Fiscal austerity can get them there: depress living standards enough and even Italian pharmacists will allow a bit more free market.
Similarly, it is possible to deal with the alarming disparity in the productivity of labour. What the Germans did for example, a decade long grinding down of wages while investing heavily in the education/capital goods that increase productivity. Except that the gaps are large enough that this will take two to three decades.
It\’s even possible to do this through Keynesian stimulus (yes, I know, spit, spit) although not in the manner Keynesians think of it. Fiscal stimulus to bring about growth won\’t do it. Fiscal or monetary stimulus that increase German/Dutch/Finnish etc inflation, particularly and especially wage inflation, over and above Portuguese/Italian/Greek etc would do it. We\’d need a nice 2 or more % gap in that labour costs inflation rate (which will have to fight against the general tide of improving labour productivity anyway, so nominal will be higher than this) for a decade or two.
If anyone can think of how to engineer that please let everyone know, we\’d all love to hear it. Can\’t think of any mechanism that applies to all of the eurozone that will achieve this, specifically higher northern wage inflation than southern.
Or we could have full fiscal union, make the EU like the US Federal Government. That does mean being ruled by Brussels for evermore. It\’s also true that very serious US economists have estimated that it took the US some two centuries to become an optimal currency are by this method. Probably wouldn\’t take as long in a modern economy but think of having solved it this way by 2050 or so.
Or, break up the euro, return to national currencies and let the currency devaluation take the strain.
Of these long term solutions I personally benefit from the supply side/differential inflation/full fiscal union methods. I earn in $ and £ and the worse the economy gets the better off I get relative to those around me.
I very definitely lose from the break up the euro one. I own property in Portugal that would fall substantially in value were that to happen.
Thus my recommendations for policy action.
Get on with printing to sort out the short term money supply thing. Break up the currency to deal with the long term. On that latter, yes, it is indeed possible to find all sorts of economic orthodoxy to say that we shouldn\’t do that. And, quite frankly, fuck orthodoxy when you\’re going to condemn a hundred million or more to three decades of grinding austerity.
Economics, even economic orthodoxy, is a tool, not a Bible.
Thus sayeth The Worstall. Largely cribbed from Milton Friedman/Scott Sumner/Ambrose Evans Pritchard. Those three roughly cribbing from the one previous in the list.