by Joerg Bibow
Mario Draghi’s pledge to do “whatever it takes” to save the euro has been widely hailed as a watershed event. Both the markets and euro politics have since been operating on the premise that the euro’s survival is ensured. Unfortunately, that is not a safe assumption at all. Not only because even agreement on the Single Supervisory Mechanism, the easiest element in any banking union-to-be, proved to be anything but easy. But even more so since concentrating energies on preventing future crises is somewhat premature anyway, as long as the current one remains largely unresolved. The point is that the policy strategy that has been adopted for overcoming the crisis, with or without any ECB liquidity promise in support of government bonds (i.e. Outright Monetary Transactions), is doomed to fail. The underlying causes of the crisis have been thoroughly misdiagnosed, and the medication ill-conceived as a result, while reforms of the flawed euro policy regime are so ill-designed as to ensure the euro’s final demise.
The ultimate fear of the Maastricht regime’s designers was that fiscal profligacy of nations lacking Germany’s legendary “stability culture” could usher Euroland into hyperinflation. The Bundesbank’s worst nightmares seemed to come true when Greek budget deficit (ratio) numbers were revised strongly upwards in 2009. So the ill-named pact that has so far failed to deliver on either stability or growth was further strengthened, with fiscal discipline henceforth to be anchored in national law. Irrespective of the collateral damages already endured, the big austerity stick will keep on bashing the Euroland economy for years to come.
This ignores the key flaws in the Maastricht regime of the EMU and the true causes of the crisis. One original sin was to put no one in charge of minding the store of the giant integrated euro economy. No demand management was foreseen in good times, no lender of last resort in bad. Predictably, the Euroland economy has proved prone to protracted domestic demand stagnation and conspicuous reliance on exports for its meager growth, while crisis management has been by trial and error; and errors with no end it would seem. The second original sin was to forget what fifty years of European monetary cooperation were all about, namely to forestall the risk of beggar-thy-neighbor currency devaluation. The euro provided the coronation of that very endeavor in the sense that exchange rates disappeared with national currencies. But this only meant that under the EMU trends in national unit labor costs have taken on the role of determining intra-union competitiveness positions alone. The golden rule of monetary union therefore requires that national unit labor cost trends stay aligned with the common inflation rate that union members have committed to – when they didn’t. continue reading…