Wed Sep 25th, 2013 at 01:30:20 AM EST
There is great suffering in the peripheral countries of the Euro zone and the existing 'austerity' policies are gratuitously inflicting economic damage and destroying lives, especially in Greece and Cyprus, but also in Portugal, Spain and Ireland. At present, Germany has no motive to change anything and is the chief beneficiary of the existing crisis. This seems likely to continue so long as German workers accept their reduced circumstances and blame them on 'lazy southerners'. Germany is adamant about maintaining a hard money Euro and keeping all debts segregated by nationality while refusing to approve any surplus recycling mechanism within the Eurozone. These positions seem unlikely to change any time soon. Splitting the EMU into two monetary unions could provide a path to a resolution.
I believe that the monetary policy of any monetary union of which Germany is a part will have to be similar to the present situation - unless and until it massively fails. It has been noted many times on ET that a consequences of Germany leaving the EU would be that sales of their products would immediately plunge due to the strength of the new Deutsche Mark. I believe that the same thing would happen to the products of a new Neuro Monetary Union consisting of Germany, Netherlands, Finland and whoever else wanted to be a member.
Meanwhile, with a Seuro, even without France, led by Italy and Spain and joined by Greece, Portugal, Malta, Cyprus and, hopefully, Ireland, there would be a group of countries who need an expansionary monetary policy. It would only be worth doing were the Seuro Central Bank be prepared to be a lender of last resort for banks in the union and if sufficient monetary union was accepted by the members to allow for the creation of a Seuro Treasury and development bonds with liability shared by all member states. Full fiscal union would not be required, but it must be accepted that basic monetary policy must be directed according to the needs of all of the members, not just the largest. The effects of an interest rate that is too low for the needs of some members could be compensated by increased prudential regulation, for instance.
Proceeds from such bonds or money created by the SCB should primarily be used for projects that would both clearly be self liquidating and that would provide employment within the Seuro zone and it would have to be agreed that trade surpluses within the zone would have to be recycled through investment in deficit countries so as to produce balanced trade within the bloc. I believe that such a union would soon prove overwhelmingly attractive to many other current members of the EMU, probably starting with Belgium and France. Options that would be available for the treatment of legacy debt issues held by entities outside the Seruo zone would provide further negotiating power for the Seuro zone Treasury and SCB.
Countries in the Seuro could agree to mutual policies that allow for the level of social solidarity that existed prior to the crisis, as they could maintain the value of their currency via the exchange rate mechanism. If all countries within the union agree to certain standards of wages and benefits and agree, if necessary, to protect their economies by both capital controls and tariffs they could, to a considerable degree, opt out of global wage arbitrage. Citizens, I believe, would gladly trade higher prices for some consumer goods for a higher degree of social cohesion and stability. Living wages, renewable energy and full employment instead of 'Always low prices'.
The problem will be getting such a proposal adequately presented to the target populations and electing governments that would be prepared to follow the policies that would be necessary in order for such a monetary union to come into existence. Such a proposal will naturally be opposed by global financial interests as it would seriously limit the possibilities for looting in the Seruo zone.