Economics 20/05/2010: Germany's new plan for Europe

“Berlin means business” says Spiegel about the latest plans by German Government for an EU-wide revision of fiscal and financial architecture.

This Tuesday, “EU finance ministers announced efforts to both rein in hedge funds operating in Europe and to introduce a tax on financial transactions”.

Wait a second, folks – take Ireland: a sick financial system with plenty of financial services taxes, including a stamp duty on transactions, all the way down to bank cards levies. Has the presence of the Tobin tax here helped to prevent the crisis? Will it work in Europe? Not really. Why? For several reasons:

1. Tax is avoidable by offshoring trades outside the EU. The effect of this will be – higher cost of capital raising for companies, selection bias in favour of larger companies in access to the capital market (AIG advantage anyone?), lower after-tax returns to investors and higher cost of financial services to all of us. Falling listings in Europe and greater state pensions reliance. Which part of this equation makes any economic sense?
2. The tax will not fund sufficient insurance provision against the need for future bailouts. When you think of the magnitude of bailouts we’ve witnessed, the levels of taxation would have to be so high, there will be no financial markets in Europe left.
3. The tax will, however, fund general Government spending in the Eurozone. Which, of course, means more of our money (yes, yours and mine – as long as we have pensions, savings, investments or if we work for companies that have listed shares or have plcs as their clients…) will be going to noble causes of public sector retirement and wages packages, social welfare spending, politically motivated pet projects, and so on.
   
4. The tax will retard economic development in Europe. One of the reason why European banks are so sick is because European companies are heavily reliant on banks lending. European businesses are based on loans, not equity - in other words, they are based on debt. Vast amounts of debt. And when such culture of financing collides with an asset bubble drivers of exuberant expectations, banks balance sheets swell with bad loans. The new tax will only perpetuate this inherently inefficient utilization of equity financing across Europe. Which means less growth, fewer businesses and fewer jobs.

Next, of course, in the line of fire are the hedge funds. They had to be reined in because… no wait, remind me, why exactly? Hedge funds did not cause the current fiscal crisis (they have no control over the Governments’ borrowings and spending), nor did they pollute banks balance sheets or caused the property bubbles. Why are they a target then? Because for European leadership, ‘Doing right’ means ‘Doing politically easy’. Hedgies have no strong lobbyist interest behind them, unlike the banks, property developers, sovereign bondholders, sovereign bond issuers, farmers, trade unions and public 'servants' - all who inhabit the vast ques to the trough of Government subsidies. So here you are – we attack a bystander to pretend that we are tackling the criminal in sight.

After hedgies, came in other imaginary villains. On Tuesday night the EU banned naked short-selling and the trading of naked credit default swaps involving euro-zone debt. Oops.. before Tuesday night we knew what markets were betting on into the future – the short positions revealed actual expectations with the power of having real money put behind them. Now we do not. This, per EU leaders, is some sort of transparency. Socratic cave analogy comes to mind.

The EU ban target two types of trading that “have been blamed for exacerbating the financial crisis and Europe's sovereign debt crisis.” Actually, IMF explicitly said (here) in its report last week that the entire CDS markets - not just short sales in these markets - were not enough to cause the crisis. Never mind - EU leaders know how to deal with independent advice from international experts. Any hope, then, that Mrs Merkel's pipe dream of 'independent budgets oversight' (see below) can come true in this land of pure politicization of everything - from rating agencies, to traders, to investors?

It turns out, folks, that European crisis was, after all, not about absurdly high levels of public debt carried by PIIGS, nor by fraudulent (yes, fraudulent) deception by some Governments of investors about the true extent of national deficits. It was not exacerbated by the decade-long low growth recession across the Euro area, nor by a recent severe depression that afflicted Euro area economies. Nope. The cause of this, per Mrs Merkel & Co, were investors who were betting on all of these factors adding up to an unsustainable fiscal and economic situation in Europe. Off we fighting the evil windmills, then, Don Quixote from Berlin!


Worse than that, on top of the ridiculous policies decisions made over the last two days, Chancellor Merkel has also been working hard “on far-reaching changes to the treaty underpinning Europe's common currency, the euro.” Per Der Speigel, “Merkel would like to see increased monitoring of member states' annual budgets, the introduction of stiff sanctions for those in violation of euro-zone debt rules and the suspension of voting rights in the European Council. Furthermore, Germany wants to establish bankruptcy proceedings for insolvent euro-zone countries.”

Really? I wrote about the actual chances of any of this working to the desired effect in the earlier post (here). But now we have some details to the plan:

“According to the document, Germany would like to see annual budgets in euro-zone countries undergo a "strict and independent check." Berlin proposes that the job be taken over by the European Central Bank or by a collection of economic research institutes.”

Now, the problem with this part is that there are no independent organizations in Europe left. The ECB is now a full hostage to Europe’s push for retaining fiscal sovereignty while maintaining unsustainable prolificacy. ‘Institutes’ Mrs Merkel has in mind are a host of EU-funded ‘Yes, Minister’ organizations that populate the realm of economic policymaking on the continent (with a number of them operating in Ireland). By-and-large, they have no capability of delivering anything of real value, let alone anything independent. Even the likes of the OECD – a very capable organization with some degree of independence – is not free from European political interference.

"Euro-zone member states that do not conform to deficit reduction rules should temporarily be disallowed from receiving structural funds," the draft reads. In extreme cases, that funding could be permanently eliminated.”

Imagine Greece today, receiving €110 billion bailout today, being told, ‘Naughty! We will withhold some €5 billion in funds.” Apart from being unrealistic, this idea is potentially quite dangerous. Structural funds go to finance infrastructure and other longer term investment programmes. Many of these rely on co-funding from the Member States and/or private partners. All have private contractors. Impose this potential penalty and cost of public projects financing will have to rise due to uncertain nature of the funding stream.

Withholding these funds will either be meaningless (if the funds withheld are small, as it will cause no damage and will have no power of prevention) or it will cause an economic mayhem as bills go unpaid and workers lose jobs (in which case the sanction will be undermining the process of fiscal recovery and triggering more bailouts).

In short, the threat is either toothless or self-defeating. Either way – it is a cure that threatens to make the disease incurable.

Two more proposals are mentioned in the Spiegel.

“Earlier this month, Schäuble had mentioned the possibility of suspending member states' votes should they find themselves in violation of European debt rules, an idea which is mentioned in the draft proposal.”

This should make wonders of the EU efforts to strengthen its democratic legitimacy. And would this extend to suspending MEPs powers too? European court judges? Commissioners? Where does the buck stop? Should this come to pass, Italy, Greece… no wait – at 60% debt to GDP level, virtually the entire EU will be suspended (see table here). Who will end up voting in Europe? Germany won’t – its own debt/GDP ratio is 72.5%... Ditto for the deficits benchmark.

Finally, per plan: “Should all else fail, the draft calls for a plan to be established for euro-zone members to declare bankruptcy.”

Err… what? Hold on – bankruptcy? Given that the EU own rules to date have so spectacularly failed to contain debts and deficits from breaching EU-own rules, that would be a collective bankruptcy then… One presumes with Germany in tow?

Economics 19/05/2010: Euro rescue and tax burdens

So the Euro has hit 1.219 against the USD last night and has been bouncing erratically throughout today. The markets are flashing red across pretty much entire listings on the back of German 'talking tough' to the speculators. Rumors of Greeks contemplating an exit from the euro are swirling across the forex traders'-frequented blogs. ECB has abandoned all caution and previous policy mandates and is now pumping euros out of FX markets. Sterilizing Europe's economy into a liquidity crisis, before the insolvency crisis is resolved.

In short, there is a clear lack of conviction in the markets about the Euro area plans for more fiscal discipline, as well as a general apprehension about the bans of naked shorts. This is a direct corollary of the 'rescue' package and the political rhetoric that surrounded German Government decision to back the PIIGS - or more aptly BAN-PIIGS - debts. Yesterday, John Cochrane of UofC, my old professor - had a superb analysis of the whole circus (here).

Of course, banning naked shorts for their alleged role in causing market panics is like banning oxygen for its role in causing fires. Short sales positions are about the last bastion of transparency in the murky waters of sovereign finances.

But take a look as to why the entire package of 'fiscal oversight' proposed by the EU has no legs.

First there is an argument to be made that the 'new package' is really 'old news'. In effect it simply front-loads the Stability Programme Updates reporting (currently submitted to Brussels for approval ex post adoption of the budgets). In theory, supplying SPU statements prior to the budget is supposed to provide for (1) time to adjust budgetary positions in response to the Commission criticism; and (2) a chance for 'peer-review' of the budgetary proposals. Apparently, no individual lines of either spending or taxation will be considered, but instead, the headline figures (macro side) will be looked at.

What's wrong with this picture? A lot.

1. Stability & Growth pact already tasks the EU Commission with such oversight and with tools to fine serial abusers. Yet, countries like Greece have been in an obvious violation of the SGP criteria since at least the late 1980s and nothing was done to enforce the existent compliance mechanism. France has been in violation for about 8 out of 11 years of SGP application. Italy - since the foundation of EMU. The list can go on.
2. Peer-review by fellow countries does not work in international policy processes. Look no further than heavily edited (by Member States) 'consultative' documents from the IMF, the OECD, the World Bank and so on. States do not criticise states and there is no real mechanics for ensuring that euro area peer review is going to have any more integrity than the 'business-as-usual' Brussels approach to policy making and analysis.
3. Creation of a formal Eurozone-wide supervisory mechanism will de facto guarantee future bailouts, thus inducing a massive moral hazard on future Governments and fueling risk appetite for the markets. After all, if the budgets are approved collectively, there is at least an implicit collective responsibility when things go wrong. As rightly argued in John Cochrane's article linked above, such a guarantee will be an open invitation to continued unsustainable risk-free lending to the reckless sovereigns from the bond markets.
4. With peer review mechanism having no real power, the power to police deficits will fall with the Commission. Does anyone have any serious belief that the Commission has whereabouts to enforce the restrictions it cannot adhere to itself? After all, the Commission has failed, repeatedly, to clear its own budgets in the past. And very little positive can be said about the Commission historical ability to produce high level macroeconomic policy analysis. Do we need to be reminded of the Lisbon Agenda or the Social Economy or the Knowledge Economy or the latest pie-in-the-sky Agenda 2020?
5. Lacking specific powers to go through the member states' budgets line by line - covering all of the expenditure and revenue measures - the oversight process will simply be out of power to either alter anything in response to adverse findings, or to even understand the nature of and risks involved in each headline budgetary projection.
6. Front loading SPU reporting will do nothing to the Budgetary outcomes, as SPUs, alongside the Budgets are subject to built-in assumptions/expectations. Are we really saying the Commission will be able to tell, for example, Irish Government: 'Boys, you are assuming here economic growth of 4% in year X. That's not going to happen. Revise?' I doubt it.
   

Notice, I am disregarding the longer-term economic side of the proposal. The EU Commission, as well as many peer states in the review process will have a heavily pro-tax Government spending-favoring and economic growth retarding policies. The Commission, alongside many peer member states consistently believe that budgetary / fiscal health is assured when tax revenue equals tax expenditure (roughly speaking). And they believe that more expenditure is a good thing. Thus, the process is likely to be biased heavily in favour of high-tax, high-spend economic development model. Of course, there isn't a country on earth that has been able to deliver such a model while maintaining dynamic economy. Are we settling Europe into a slow decay model that suits declining demographics of the Continent?

Here is the comparative table on tax revenue collected by the various advanced economies in the boom year of 2007. Notice that the countries currently in trouble - the BAN-PIIGS (Belgium, Austria, Netherlands + PIIGS):
What does this analysis tell us?

• Tax revenues as a share of economy is well above average for BAN-PIIGS. So low taxes are not a problem that caused their bankruptcy.
• The structure of taxation - the spread over various tax heads, is pretty much even across various heads, suggesting that over-reliance on a specific tax head is not a cause of excessive deficits.
• The deficits, at least on revenue side, simply could not have been caused by the adverse recessionary shocks.
  

All of this means that the deficits are structural. And that the debt accumulation was not only visible well before the crisis (which of course means that SGP supervision has failed) but was also caused by the expenditure side of the Government balance sheets.

Remember, these figures are from the boom-time 2007! And take a look at Ireland, expressed in GNP terms. The table below is self-explanatory:
So we do live between Boston and Berlin, folks? And we do have exceptionally low tax burden? We really do need more the Brussels-styled fiscal discipline?

Economics 17/05/2010: BofI rights offer - back of an envelope

Update: Tasc have published a very interesting piece of research (here) mapping the real Golden Circle of Ireland's interconnected political and economic elites. Fair play to Tasc for covering semi-state bodies and companies. Well done to the authors! (hat tip to RDelevan)



Back of an envelope calculations for the BofI rights offer - self explanatory stuff:
But what about taxpayers' buy-in into BofI under this deal? Well, if the value of this offer is negative at the buy-in price of 55 cents per share, think what the value is for the taxpayers, who bought at €1.80 per share! Ok, let's do the maths: we have post-rights price of BofI at 81.9 cents, for which we paid 180 cents - the net return is the loss of 98.1 cents per share bought by the Irish Exchequer... Amazingly, there is no reason for this loss whatsoever - as an existent shareholder in the bank, Irish Exchequer is entitled to participate in the same deal offered to all current shareholders. we, therefore, could have limited our losses to 24.75 cents per share from 81.9 cents per share and still done the same deal!


Note: the above estimates are based on straight forward linear model of equity-price relationship. These are, therefore approximations. Based on expected balance sheet model, the returns can be estimated different - with upside growth scenario over the next few years potentially yielding a positive return, while downside growth scenario can yield an even deeper loss. You be the judge, but my figures should be treated as being closer to risk-adjusted (static model) averages.

Disclaimer - I do not hold any shares or any other financial instruments (equity or debt) in any of the Irish banks.

Economics 17/05/2010: Jose Maria Aznar's proposals that ireland should adopt

When Spain beats you in a race of setting out pro-market reforms, can you still claim you are open for business? Well, that's a conundrum Ireland is likely to face. For 'all talk, no action' Messrs Cowen & Lenihan, here's a proposal from Spain's José Marià Aznar - a rather sensible list of reforms Spain needs to adopt in the next few years, published in FT:

1. Large-scale labour reform to transform collective bargaining (equivalent to killing off our own Social Partnership to which Messrs Cowen & Lenihan seem to be totally wedded), deregulate labour recruitment services (which is now out of reach for Ireland since Messrs Cowen & Lenihan subscribed to the Croke Park deal) and, lower taxes on employment (which is, of course, an impossibility for Ireland as we continue destroying our domestic and exporting capacity by saddling workers with the bills for banks and public sector rescues) and encourage the unemployed into work (a possible by-product of the next wave of public spending cuts, but not a concerted effort that pairs both negative and positive incentives and access to training and entrepreneurship resources for the unemployed);
2. a new energy policy to avoid the shutdown of nuclear plants, deregulate markets and cut subsidies on inefficient renewable energy sources (which, of course, would run counter to our Government's insistence on preserving ESB's market power and building windmills to escape modernity. Do note that our refusal to properly deregulate energy distribution rests on the Government continued protection of the ESB trade unions' interests in maintaining their ownership of the national grid);
   
3. a bank shake-up, including authorising the investment of private capital in savings banks (yeah, right, as if we really have a chance of reforming our banks with Nama assuring they will remain zombie lenders for a good part of the next 10 years);
   
4. sweeping reforms to reduce the size of regional administrations and create a viable and efficient state (again, we have no reform agenda on local authorities, and no reform agenda on creating any meaningful efficiency gains in the public services);
   
5. changes to the state pension system to guarantee its mid-term and long-term sustainability (in Ireland's case, this is equivalent to the earlier Government promise to... create a new compulsory quasi-tax on our incomes that would underpin state-controlled, privately supplied pension system, while maintaining the status quo of inefficient, and politically manipulated social security);
   
6. deregulation to increase competition, including reforms to the welfare state and further privatisation of public companies (Messr Cowen & Lenihan have not got this far, and are unlikely to get there in the future. Instead of stimulating private growth by opening state-controlled markets to competition and breaking up Government near-monopolies, our Government is keen on actually providing more cash for semi-states to engage in 'investment' which normally - DAA, anyone, or ESB - yields no real returns to the economy, but always acts to increase market power of these semi-states);
   
7. tax reform to foster competitiveness (again, not a peep on this one from Messrs Cowen & Lenihan. Instead of tax reforms, we have Commission on Taxation report and a promise of pushing tax rates even higher in the next couple of years. Take a wild guess which 'programme' will this Government pursue).
   

That's right, folks. Our ex-politicians now line up to take state jobs at the insolvent banks. Spain's ex-leaders are trying to design new policies. Any idea who's got a better shot at a recovery?

Economics 16/05/2010: IMF on fiscal stability IV

So continuing with the IMF Fiscal Outlook report data, building on the three previous posts: Part 1 (here), Part 2 (here) and Part 3 (here), take a look at another wonderfully ludicrous myth perpetrated by the Irish Left: the Myth of Underinvestment in Public Health in Ireland.

The Myth of Healthcare has two parts to it: Part 1: "Irish Government has under-invested in Irish public health." Part 2: "We need to ramp up Health spending to achieve better services".

Hmmm:
The data above is taken from the paper that formed the background to the IMF report, titled “From Stimulus to Consolidation: Revenue and Expenditure Policies in Advanced and Emerging Economies”, Prepared by Fiscal Affairs Department, Approved by Carlo Cottarelli (30-Apr-10). My calculations cover GNP comparatives and ranked results, plus the change between 1990 and 2007. IMF reports changes between 1960 and 2007 and 1970 and 2007. I find these data problematic, because of a large number of gaps in the data for these years. In addition, I would have trouble comparing Ireland between 1960 and 1970 through 2007 to majority of the countries on the list, as arguably, Ireland was not a developed or advanced economy in the decades prior to 1990.

What the table above clearly shows is that:

• In 2007 Irish Government spending on public healthcare was 8th highest in the group of advanced economies, measured as a share of our income.
• Accounting for the size of the recession in Ireland and a lack of significant fall-off in public spending on health in Budgets 2009-2010, one can relatively safely assume that we at least retained this position in 2010.
• In terms of increases in spending, we are clearly nowhere near the bottom of the league. We recorded 8th highest increase in spending in the last 17 years of all countries in terms of GDP.
  
• We achieved second highest increase in spending as a share of national income in the sample of developed nations.
• Our increase in health expenditure as a share of GDP was 21.4% above the average for the group of countries. It was 107% (more than double) above the average in relation to our GNP.
• A large number of countries - marked in bold red - to my knowledge offer superior health services to their citizens compared to Ireland while spending less, sometimes vastly less, public resources on healthcare provision. This statement does not take into account that many of these countries have much older population than Ireland.
• Have the FF/PD Governments been any worse (or better) than other Governments in financing health expenditure increases (or dumping good money after bad, if you want)? I don't know - the data above cannot tell me quality differentials or efficiency of spend. But what I can tell is that until 200 we were spending less than the group average on health. In 2007 we were spending above the average (based on GNP).

The problem, of course, is that we cannot perfectly measure the output we get for the money we spend on public health. Alas, somehow, I know that any foreigner living in this country runs for the airport the minute they get sick, desperately trying to avoid HSE's kingdom. French, Italians, Germans, Belgians, Spaniards, Czechs, Dutch - you name a country within the EU - all have been dreading the need to face our 'centres of excellence' where medical staff needs to be reminded to wash their hands and lines of sick patients stretch the length of the lines to the infamous Lenin's Tomb's in the hey days of the CPSU.

It looks like, according to hard data, this adverse reaction is not due to the lack of cash in the health system...

Economics 16/05/2010: EU on the brink

Before I begin the post on Euro, let me bring you a piece of really good news I've learned about last night. Although it has been publicly released few weeks ago, I learned about this just last night. Ireland is ranked third in the world as a centre for research in immunology (details here). Interestingly, I was informed by an anonymous source close working in scientific R&D field that the DofF is putting loads of pressure on science funding organizations to provide 'commercial return'-linked 'Irish drugs' products backed by the above-mentioned research. In immunology, like in any other field linked to phrama or biopharma, it takes around 15 years on average and scores of millions of euros in funding before a drug can brought to the market. We are just at the beginning of what is now internationally recognized to be successful undertaking in immunology research. Sometimes, DofF needs to wait patiently for a payoff! Let's hope they do.


Ambrose Evans-Pritchard, in today's piece (link here) has a superb analysis as to why Euro is in the end game, with pat not an option for its fierce opponents. And, incidentally, why it's the markets that are getting things right in nailing Euro zone. Let me quote few passages (as usual, comments are mine):

"Geneva professor Charles Wyplosz said EU leaders made the error of overselling up their shock and awe package [€750 billion rescue package issued two weeks ago] before establishing any political mechanism to mobilise such sums. The fund is an empty shell, he wrote at Vox EU. Worse still, crucial principles have been sacrificed for the sake of unconvincing announcements."

Bingo: Wyplosz is 100% correct, as I wrote here, the package is a bizarre amalgamation of impossible, improbable and outright reckless:

• It contains guarantees that cannot be backed by resources
• It shoves more debt onto the shoulders of already insolvent sovereigns
• It turns Germany - a solvent nation - into an implicitly (as long as guarantees remain implicit) insolvent nation
• It contains no real mechanism for imposing any sort of discipline on Eurozone sovereigns who might continue engaging into reckless deficit financing
• It demolishes any credibility built up by the ECB over the last decade and with it tears the fabric of the Euro
• It represents a massive cost imposition on Eurozone's economies

"Brussels was unwise to talk of smashing the wolf pack speculators and defeat the worldwide organised attack on the Eurozone. As Napoleon said, if you set out to take Vienna, take Vienna. Besides, the language of the EU priesthood ex-ECB board member Tomasso Padoa-Schioppa talks of the advancing battalions of the anti-euro army frightens Chinese and Mid-East investors needed to soak up EU debt. These metaphors are a mental flight from the issue at hand, which is that vast imbalances masked by EMU, indeed made possible only by EMU have been decorked by the Greek crisis and now pose a danger to the entire world."

Bingo again! Since the foundation of the EU in its modern incarnation - in other words since the mid 1990s, Brussels did nothing in terms of economic policies other than issue lofty plans and guidance documents - which promptly went nowhere real, and blame 'others' for its own troubles. At times, this reminded me of the good old Sovietskies whose entire edifice of the state was supported - from the early 1970s through the late 1980s - solely by the threat of 'others' coming to take over the Motherland.

"One can only guess what Mr Trichet meant when he said we are living through the most difficult situation since the Second World War, and perhaps the First. ...was Mr Trichet alluding to something else after witnessing the Brussels tantrum by President Nicolas Sarkozy? According to El Pais, Mr Sarkozy threatened to pull France out of the euro and break the Franco-German axis at the heart of the EU project unless Germany capitulated. To utter such threats is to bring them about. You cannot treat Germany in that fashion."

And herein is where the trouble's brewing. One thing for people to say Germany should exit the troubled Euro to save itself. Another thing for the country like France, which never really bothered to comply with the budgetary restrictions of the Maastricht Criteria or SGP to threaten to pull out, leaving Germany to pick up the pieces...

"The German nation is moving on. I was struck by a piece in the Frankfurter Allgemeine proposing a new hard currency made up of Germany, Austria, Benelux, Finland, the Czech Republic, and Poland, but without France. The piece entitled The Alternative says deflation policies may push Greece to the brink of civil war and concludes that Europe would better off if it abandoned the attempt to hold together two incompatible halves. It can be done, the piece says."

So the rationale for a German exit is there. As it has been since the first day of the Euro creation and the massive pan-European euphoria (or call it chauvinism) that engendered the idea (no matter how absurd) that EU can absorb the entire Continent into its folds and stretch into Asia via 'acquisition' of Turkey, plus the grand delusion of the Euro becoming the reserve currency of the world. Only now, this rationale has real feet - the markets gave them these by exposing the weakness behind Europe's great experiment. The markets did exactly that with the USSR in the 1980s, with Asia in the second half of the 1990s, Russia in 1998, New York in the 1970s, Orange County in the 1990s, Latina America in the 1980s and then in 2002-2003. They will, once the European day-dreams are fully dealt with, do the same to China's economy on state steroids. After all, this is what the markets are designed to do - expose lies and support the true value.

But, says Evans-Pritchard, "What makes this crisis so dangerous is not just that Europe's banks are still reeling, with wafer-thin capital ratios. The new twist is that markets are no longer sure whether sovereign states are strong enough to shoulder rescue costs. The IMF warned in last weeks Fiscal Monitor that the tail risk of a widespread loss of confidence in fiscal solvency could no longer be ignored. By 2015 public debt will be 250pc in Japan, 125pc in Italy, 110pc in the US, 95pc in France, and 91pc in the UK."

Do I need to remind you what it will be like in Ireland? Check out here. And that's with only direct cost of Nama factored in. 122% of the national income by 2015! And our Minister for Finance dares to call us turning the corner.

Evans-Pritchard is right in his analysis of 'solutions' to the Euro crisis: "There is a way out of this crisis, but it is not the policy of wage deflation imposed on Ireland, Greece, Portugal, and Spain, with Italy now also mulling an austerity package. This can only lead to a debt-deflation spiral. ...The only viable policies short of breaking up EMU or imposing capital controls is to offset fiscal cuts with monetary stimulus for as long it takes. Will it happen, given the conflicting ideologies of Germany and Club Med? Probably not. The ECB denies that it is engaged in Fed-style quantitative easing, vowing to sterilise its bond purchases euro for euro. If they mean it, they must doom southern Europe to depression. No democracy will immolate itself on the altar of monetary union for long."

Note to all folks eagerly rubbing their hands in hope of getting their hands on Government 'stimulus' to offset deflationary effects of austerity in Ireland: Evans-Pritchard is talking about Euroarea-wide massive emission of liquidity. I called for that months ago in the Indo and in Mail articles. And on this blog as well. Back then, before the current sovereign bonds crisis hit, I thought an issuance of €1 trillion directly to citizens of Europe would do the trick. Now, we are more in the need of issuing €3 trillion. This should be split as follows:

• €2 trillion issued directly to each adult and child inhabiting Europe (EU27) and
• €1 trillion issued to the EU16 sovereigns on the basis of each sovereign share of the total Euroarea population.

Wait another month, and we'll need €4 trillion...

Of course, there's always an option of Germany leaving the Euro and setting up a separate, credible currency. It's the lower cost solution, for it requires no replay of the same crisis 10 years from now - which is, of course, an inevitability given the nature of the Euro area. No matter whether fiscally integrated or not.