bnn.lv Latviski   bnn-news.com English   bnn-news.ru По-русски
Sunday 21.01.2018 | Name days: Agne, Agnese, Agnija

Bloomberg: The eurozone must be split to save EU

FaceBook
Twitter
Draugiem
print
(No Ratings Yet)

On the eve of the American Civil War, Abraham Lincoln famously said that «a house divided cannot stand.» Today, the European Union — committed for decades to the quest for ever closer union — must confront an agonizing truth. Lincoln’s maxim must be inverted. For the EU to survive, the euro must divide, according to Bloomberg.

Author: PantherMedia/SCANPIXThe economic crisis in southern Europe shows that the euro system, at least in its current form, has instead become a mortal threat to both.

Greece, Spain, Portugal, Italy and Cyprus are trapped in a recession and cannot restore their competitiveness by devaluing their currencies. The euro area’s northern economies have had to join in repeated bailouts and put aside their notions of prudent finance. A vicious circle of resentment and populism in the south and strengthening nationalism in the north is tearing the union apart.

And the crisis isn’t yet abating. France, Europe’s second-largest economy, is now sinking into a grave economic slump. Like the southern countries, it must restore its competitiveness; like them, as part of the euro system, it lacks the means. Because of its size and because of the guiding role it has played in the EU’s development, France will be crucial in breaking the vicious circle.

The single currency entrenched — indeed, worsened — the competitiveness gap caused by differences in inflation rates and unit labor costs.

With devaluation ruled out, these imbalances can be addressed in only two ways — through cross-border transfers or “internal devaluation.”

Internal devaluation means that deficit countries try to restore competitiveness by reducing government expenditure and increasing taxes, which they hope will lower prices and wages. The short-term effect will be to weaken domestic demand.

Latvia and Iceland show how steep the economic and social costs of internal devaluation can be, compared with the costs of external devaluation. From 2008 to 2010, GDP contracted only half as much in Iceland (external devaluation) as in Latvia (internal devaluation).

The main alternative is transfers. Deficit countries can cushion their contraction with transfers from surplus countries, rather than internal devaluation. The problem is that such transfers will no longer be painless.

Before 2008, they took the form of cross-border private lending to governments and banks, which in many cases lent the money on to borrowers offering real estate as collateral. Since the credit bubble burst in 2008, these private financial flows have been replaced by state budget transfers, ballooning budget deficits and growth in the implicit liabilities of peripheral countries in the European Central Bank’s settlement system (known as Target2). The fiscal position of many uncompetitive euro-area economies has become unsustainable without transfers from Germany and the others.

Such transfers will be of taxpayers’ money — provided either directly through the European Stability Mechanism or indirectly via banks in the creditor countries.

This prospect is political dynamite. Such transfers are therefore made conditional on strict budgetary discipline and structural reform. Despite that tough conditionality, taxpayers/voters in creditor countries such as Germany might never be reconciled to the idea, creating the risk of an anti-EU backlash. Such a backlash would become certain in the all-too-likely event that the rules were bent or shelved.

Many debtor governments would prefer their transfers in the form of money printed by the ECB — with fewer, if any, strings attached.

So the outlook for the euro-area debtor nations is one of relentless fiscal tightening and years of deficient demand. This will result in shrinking or, at best, stagnating output and living standards. Meanwhile, anti-EU and specifically anti-German sentiment is building — witness the scenes on the streets of Nicosia after Cyprus fell into crisis.

Could a United States of Europe save the day? Some early proponents of the euro acknowledged in the late 1990s that the project involved “economics getting ahead of politics.” They saw the single currency as a way to put the continent on an irreversible course to full political union — a goal that Europe’s electorates would have rejected had it been put to them directly.

Greater labor mobility might be one feature of such a union. One could imagine the populations of depressed countries such as Greece, Portugal, Spain and Italy migrating to rich Germany and Finland. In this scenario, whole countries could end up resembling depopulated rural regions — such as those in France, which the young and well-educated largely abandoned in the postwar years, moving to the cities and leaving behind an aging population heavily reliant on social insurance. Language and cultural barriers make this form of economic adjustment unlikely, however.

Bloomberg says that something has to give — and it will have to be the euro system itself. To preserve the EU, the monetary union must be dismantled. The all-too-relevant historical parallel is the defense of the gold standard in the interwar period, which came close to destroying democracy all across the world. Only one country can plausibly take the lead in advocating a controlled segmentation of the euro system by means of a jointly agreed exit of the most competitive countries. That country is France.

A splitting of the euro system would be in the best interests of both France and Europe because it would speed the EU’s return to economic growth — the only sure guarantee of European stability and unity.

Ref.110.110.110.4216


Leave a reply

  1. Rod says:

    What a wise man Lincoln was! this article is so right…divided is Europe and country by country the EU will fall.

    Thumb up 0 Thumb down 0

Week in Lithuania. Fake news on Lithuanian Defence Minister planted on news portal

The Tv3. lt news website was hacked on Thursday, January 18 - a fake news story about Lithuanian Defence Minister Raimundas Karoblis was posted claiming that Karoblis allegedly harassed Ridas Jasiulionis, a journalist at the Žinių Radijas radio station, and admitted being gay.

BNN summary of the week: final report on Oligarchs case and ordered attacks on e-health

BNN offers a summary of this week’s topical news in a variety of categories: Change; Fight; Attack; Growth; Decline; Opinion; and Study.

Economist: the most important reform has to happen in people’s heads

«Of all the clever things taught to us in school about psychology, one thing that has stuck with me over the years is the idea of internal/external control point. There are people who believe they make their own fate. There are also people who believe our fate depends on external powers. I suspect people in Latvia explain successes and failures with external factors much more than people in Switzerland or any other country that has enjoyed its freedom longer than Latvia,» comments Luminor Bank’s economist Pēteris Strautiņš.

Minister promises bigger wages for working people and support for country’s industry

«Latvian Economy Ministry’s priorities for 2018 include increasing wages for working people and providing support to the country’s industry. For Latvia’s centenary year, every resident should have the right to experience the increase of the personal and state welfare,» promises Economy Minister Arvils Ašeradens.

Latvenergo: electricity price has declined 30% in the past three years

Average electricity price in Latvia has declined in recent years. The average price of electricity has declined by 30% at Nord Pool exchange between 2014 and 2017, allowing end user costs to decline, says Latvenergo.

Alcohol sellers in Estonia to be checked by little «police»

To find shop assistants illegally selling alcohol or tobacco to minors, Estonian police introduces the method of sending minors as police aides to retail shops to try to purchase the products banned to them.

EY study: cyber security has become a priority to banks this year

Over the course of the year, priorities of banks around the world have switched from reputation and risk management to data security matters, as concluded in the latest EY Global Banking Outlook 2018.

Political association: UGF and Harmony are covering up state capture

«Parliamentary investigation of Oligarchs case has shown what is what in the Saeima of the Republic of Latvia. Green farmers are in full harmony, covering up Aivars Lembergs and the fact of state capture. They and Inguna Sudraba have made the parliamentary investigation into a farce. Unfortunately, the power in those people’s hands is no farce – rather misfortune for all of Latvia. I hope citizens will take all that into account when they go voting,» says leader of Kustība Par! Daniels Pavļuts.

Tallinn-Helsinki tunnel plan lacks ambition, says «Angry Birds» game maker

While Finland and Estonia work on plans of an under-sea tunnel from Tallinn to Helsinki, the construction of which could start in the 2030s, a Finnish businessman, previously involved in development of Angy Birds video game, has presented plans to finish the massive construction project in 2024 already.

Experts: healthcare financing law will deny healthcare to the least protected

In a discussion regarding healthcare, experts said that Latvian President Raimonds Vējoņis’ proposed Healthcare Financing Law is economically unjustified and ineffective. The document lacks principles of a socially responsible state, because healthcare is becoming less accessible, which will likely worsen public health indexes, says Kustība Par! political party.

Branded «aggressor state», Russia says Ukraine buries Minsk peace agreements

As the Donbas War continues, the parliament of Ukraine has passed the so-called Donbas reintegration bill after three days of debates defining territories controlled by pro-Russian separatists in the east of the country as temporarily occupied by Russia.

Weather to remain winter-like in Latvia during the weekend and next week

On Friday and Saturday, no major increase of snow is expected. Air temperature will increase slightly, but colder masses of air will slow into the country on Sunday, as reported by Latvian State Environment, Geology and Meteorology Centre.

Winter storm in Netherlands and Germany turns tragic

A powerful winter storm in western and central Europe has claimed the lives of eight people.

Lithuanian bishops: skipping fasting on February 16 this year is not a sin

In an unprecedented move, the Conference of Lithuanian Bishops, the governing body of the Lithuanian Catholic Church, said that meat dishes okay for the people of faith on February 16, which marks the 100-year anniversary of Lithuania's statehood and the Lent Friday, which is traditionally a day of fasting for religious Catholic people.

Coincidence? Votes from Harmony and UGF ensure Sudraba remains the head of Oligarchs case committee

On Thursday, 18 January, the majority of Saeima members voted against the proposal to dismiss Inguna Sudraba from the post of the head of parliamentary investigative committee in charge of the review of the infamous Oligarchs case.

Kaljulaid criticised over involvement of acclaimed, but unrestrained director in centennial reception

As Estonia readies for the presidential reception to honour the 100th anniversary of Estonia, its President Kersti Kaljulaid is being criticised in an open letter for trusting Tallinn’s NO99 theatre, whose director physically assaulted a female colleague.

22.1% of Latvia’s residents subjected to risk of poverty

In 2017, 425 thousand persons or 22.1 % of Latvia population were at risk of poverty in 2016 – 0.3 percentage points less than in 2015. Equivalent income of this part of the population were below 330 euros monthly.

LAAC: Latvia’s milk market can be sorted out by joining forces in exports

Latvian Association of Agricultural Cooperatives (LAAC) has received support and praise for the public discussion regarding rapid milk procurement price changes, which is something that has recently affected the majority of agricultural cooperatives. This has helped cooperatives band together in order to sort out the milk market. This idea came from the example set by grain producer cooperatives, which did the same thing fifteen years ago, as reported by the association’s representatives.

Forevers announces its decision to exit from Latvian Federation of Food Companies

Forevers meat processing company has decided to exit from Latvian Federation of Food Companies (LFFC). The contract between two parties will be terminated in January.

Saeima’s Oligarchs case investigative committee hastily approves final report

In spite of objections, grammatical errors, criticisms about lacking effort, as well as Inguna Sudraba’s unfit status to lead the committee, members decided to move the meeting from 11:00 to 08:00 and approve the final report in a rushed vote.

Removal of 1 and 2 euro cent coins from circulation suggested by Bank of Estonia

Estonian central bank is willing to follow the eurozone trend of limiting the circulation of euro 1-cent and 2-cent coins and in time to remove them entirely from circulation in the Baltic country.

Cert.lv: attacks on e-health system and LETA were likely ordered

Attacks on e-health system and LETA agency were likely ordered, said Cert.lv deputy manager Varis Teivāns in an interview to Rīta Panorāma programme of LTV.

As Catalan parliament reconvenes, it elects pro-independence speaker

The Catalan regional parliament has in its first sitting since its ousting and snap December election elected a separatist-minded politician as its Chairman, which indicates that the attempts to break the region away from Spain would continue.

Latvia’s National Armed forces receive new Harris tactical radio equipment

In 2017, Latvia received tactical military radios worth USD 10.5 million from American Harris Corporation. Procurement of radio equipment will further improve command function and help develop a lasting communication system with other NATO member states, as reported by Latvian Defence Ministry.

MEP: Europe continues strengthening its energy independence

«The European Parliament has voiced strong support towards Europe’s energy independence and moving its energy policy away from Russia’s monopoly by investing in energy efficiency and renewable energy resources,» said MEP Krišjānis Kariņš after the vote on Clean Energy Act’s first reading in Strasbourg.

Would you be ready to boycott something in your life?

View Results

Loading ... Loading ...

Polls Archive



Category feed: Feed: