Monday, May 07, 2012

Eurozone: The coming New Deal

Thank heavens for democracy! 

In a world taken to the brink of financial implosion because of lax regulations of financial institutions, incompetence of regulatory authorities, pure greed on the part of the stakeholders in our investment banking industries (banks, merchant banks, regulatory agencies, regulatory authorities, lawyers, auditors and the like) and politicians effectively bought by the financial industry (in the USA especially, and to a slightly lesser extent in the UK), and a reluctance by politicians to buck the system and institute proper reforms, the voters in France and Greece have taken a stand.

They have said No to a one-sided, moronic, Hoover-like insistence on solving problems that were decades in the making in a few short years.

They have said No to reforms that offer simply pain but do not adequately reform the broken financial system, do not hunt down those responsible for bringing the system to its knees and punishing them, and do not offer the hope of growth.

Events in France and Greece have unsettled the markets. Voters, given the chance, have turned against austerity. Cutting budgets has been Germany's main remedy for solving the debt crisis. Francois Hollande's election challenges that by making growth his priority.

In one of his victory speeches, he pledged to "finish with austerity". Today Germany was ruling out any significant shift in its approach.

There would be no renegotiation of the treaty enforcing budgetary discipline as
Francois Hollande had called for.

The Germans do appear ready to attach a growth pact to the treaty but they will not accept countries borrowing more to boost spending.

Where might be the room for compromise?

The Germans would back funds from the European Union's structural funds supporting large-scale infrastructure projects.

They might agree to loosen some of the targets for reducing deficits.

The new French leader was told he would be welcomed with "open arms" in Berlin but it is not clear that Franco-German differences can be easily smoothed away.

The Germans will have to show some flexibility but they will not abandon insisting on tough new spending rules for the eurozone.

The forces now lining up are those who foolishly want to push back most of the reforms that Germany's Angela Merkel has insisted on as the quid pro quo for the stronger states coming to the rescue of the  weaker and undisciplined ones, and those in Germany who insist on austerity at all costs.

But the shape of the compromise is visible in the hints now floating around Europe.

The solution will take the form of continued support for the weaker governments, but with additional funds being provided to finance infrastructure investments.

This kind of compromise achieves several aims of Nanny Merkel.

It allows her to claim that the austerity program is continuing: disciplinary steps will continue.

It allows new funds by stronger countries (through supranational bodies which effectively are fronts for the European states) to be spent on matters that are not undisciplined and wasteful  as so many were in the past. Infrastructure spending meets this need because it is morally justifiable as a growth compact, and because it means money is spent within the EU, and not simply siphoned off to pay back the greedy backs and financial investors.

Just as President Obama has managed to sidestep the angry rightwingers in the Republican Party by disguising his new stimulus as infrastructure spending, so too Merkel will be able to sidestep any apparent relaxations of The Deal by earmarking new funds for morally acceptable nation building infrastructure projects.

And gradually, over the next 2 to 3 years, the reins can be relaxed so that inflation can start taking hold and allow the debt to be repaid with deprectiated currencies, and the idea can take hold that perhaps it is not really so necessary to pay down such a huge portion of the sovereign debt of the EU countries.

One idea to watch is whether President Hollande of France insists on reining in the excesses in the financial system (the greed of the bankers, the laxity of the rating agencies, the dabbling by banks in securitized products that they should not be dabbling in with government-guaranteed monies).

If he manages to get proper changes made to the financial system, then his first term will be a very constructive one for the world.

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