Adonis Diaries

Paul Krugman on the Euro crisis: He on purpose Avoided the critical story

Posted on: January 14, 2011

Paul Krugman on the Euro crisis: Avoiding the critical story

Paul Krugman, economics Nobel laureate, wrote a lengthy article of four full pages in the International Herald Tribune.  Krugman compared the conditions in the State of Nevada and Ireland and wrote: “They have much in common. Both are small economies of a few million people and highly dependent on selling goods and services to their neighbors.  Both were boom economies for most of the past decade.  Both had huge housing bubbles.  Both are now suffering 14% unemployment. Both are members of larger currency unions (the dollar and the Euro respectively).  But Nevada’s situation is much less desperate than Ireland”.  Why?

First, the fiscal side is less serious in Nevada: the spending of nevada residents depend mainly on income from federal programs and not just State programs.  Retirees who moved to Nevada are covered with Social Security checks and Medicare health coverage.

Second, the residents of Nevada do not have to worry about the cost of bank bailouts because most real estates losses are shouldered by federal government sponsored mortgage companies (Fannie Mae and Freddie Mac);

Third, residents enjoy labor mobility:  they can move to other States for employment, speaking the same language, and living the same life-style.

From this comparison, Krugman draws the conclusion that the European Union jumped over several necessary preconditions to making the Euro a sustainable decision.  Invariably, the Euro bashing economists and financial analysts write that the financial and political elites in Europe deemed it necessary that a common currency would strengthen the sense of European unity, although the elites knew that certain preconditions were necessary and needed to be considered first.

For example, conditions such as fiscal integration that treats all EU citizens to the same standards in health coverage, retirement rights, and joblessness remuneration… And condition of labor mobility, and a central government with executive powers in crisis periods…

I think that it is preferable to enumerate the four scenarios presented by Krugman for resolving the Euro crisis in order to seeing the big picture before dwelling on details.  Krugman extend the following scenarios:

First, the “Toughening it out” scenario applied by the Baltic States (Estonia, Latvia, and Lithuania).  It is the policy of enduring pain and suffering rather than defaulting or devaluing their currencies.  It is a policy of harsh fiscal austerity combined with declining income (paycheck cuts) called “internal devaluation” with the EU market.

Second, the “Dept restructuring” that might reduce foreign debts by two third. The drawback is that this policy might spread from Ireland and Greece to Spain, Italy, and Belgium.  In 2007, Ireland and Spain employed 13% of its workforce in construction, double that in the US and suffered greatly from the housing bubbles.

Third, the “Full Argentine” scenario of defaulting on foreign debts and abandoning linkage to the dollar; thus,  allowing the Argentine peso to fall by more than 2/3.  It worked in Argentina.  Can the EU States unlink with the Euro? How?  I guess those European States not within the Euro currency can try it.  Iceland adopted this policy and is thriving. As for the Euro States that cannot unlink with the Euro may try a different track.  How? I reiterate my suggestion that a complementary “Euro B” currency, much more devalued than the Euro, be used for internal trade within the EU States and not for foreign trade exchanges.  In this case, high debt States such as Greece, Ireland, Spain, and Portugal can grow by expanding export within the EU vast internal market (much bigger than the US).

Four, the “revived Europe” such as adopting, as a first step before fiscal integration, issuing “E-bonds” by a European debt agency at the behest of individual State.  Obviously, a transfer union where States not going bust rescue weaker States would be instituted like in the US.

Krugman wrote “experience shows that citizens accept real wage decrease through devaluation of a currency than direct cut in their paychecks and presents the lame analogy of Milton Friedman of the daylight saving time where all businesses prefer to be in synch”.  Krugman failed to mention that citizens are no dupe:  They know that paycheck cuts affect mainly the lower middle class, which constitute 60% of the population and account for 70% of internal trades, leaving the upper middle classes immune to lower standards of living.

Krugman, like many other economists, has nothing more to say on why the EU decided on the common currency (the Euro), but to mention the romantic cliché “The idea of the Euro had gripped the imagination of European Elites that it would instill a new sense of confidence in the European States that had historically been considered investment risks.”

It appears that most economists and political pundits are regurgitating that romantic notion and refusing to scratch a bit deeper into reasons far more potent than a simple decision by elites.  They fake to forget  that colonial European nations have learned for over 5 centuries of exploiting nations around the world, and  to “milking even the ant“.  That is double the existence of the United States of America history.  They want to hide under the carpet the fact that colonial Europe was engaged in all kinds of financial and economic businesses before the USA was born as an independent nation.

It is frustrating and highly disturbing that almost all economists are unable to explain the decision for a Euro from an economic, financial, or geopolitical foundations.

Krugman avoided the real story.  Fact is, the EU Elites (in finance, economy, politics…) knew since 1997 that a worldwide financial crisis is in the making and ripe to explode at any moment.  They knew that the timing decision for its breaking was in the hands of the US Administration.  The precursor crises go back in the decades of Reagan and Thatcher when Latin American States experienced turmoils for two decades and “blood knee-deep” as Paul Volcker predicted when he was the FED chairman as a result of political devaluing of the dollar and flooding the Americas with subsidized goods and services.

Then the Asian financial meltdown and then the Twin Towers collapse.  They knew that the US preemptive war on Iraq was a physical repositioning in the heart of energy sources in order to better control the coming financial crisis.  The after occupation didn’t turn out as expected and the Republicans waited for the election of Barak Obama to break him the bad news after infusing 800 billion in the coffers of the financial multinationals.

Consequently, by 1999, the EU Elites had to reposition the European Union in order to withstand the financial inevitable crash.   They reasoned that a common currency was the best strategy to warding off the dismemberment of the EU market into small entities that will be chattered if not bonded by a common currency.

The Euro currency was the best decision to uniting the EU States in major crisis and it was very timely.  They can suffer as a union so that they may grow as a union.

The main advantage for not devaluing the Euro at this junction, a possibility in the near future after catching a short reprieve, is that every citizen in the EU States learn from actual pain and suffering that easy devaluing solution, applied since WWII by all western States, will not resolve the problem in the medium-term.  The citizens will learn the value of “what is real economy” and “what is real fiscal balance”. The EU citizens will learn to be more responsible and aware of the piracy and highway robberies methods of multinational financial institutions.

If the EU surmount the harsh and painful transition of the “toughing it out” scenario in the coming two years then, it will be far better positioned to withstand the financial storms that the US and China are about to unleash very soon.

Note: England didn’t join the Euro currency because  the EU lacked the “preconditions”:  England wanted to grow with the EU, but refused to suffer with Europe.  It wanted to go the US financial strategy of devaluing the currency in time of crisis and , backed by the US, to blackmail the rest of the world.  The day will come when England would like to join the Euro but would refuse EU fiscal integration.  England is to remain the black sheep of Europe.

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January 2011

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