Milton Friedman, Bernard Connolly, John Taylor and Robert Mundell were the first writers in their respective fields of macroeconomics to anticipate fundamental, structural errors underwriting the Eurozone charter. The complete lack of enforcement controls regarding debt, deficits or depreciation; the massive securitization of homes without flexible labor markets, inflexible regulations and high taxation all seem to have proven that the above named politicos understood the implications of the Euro-dream better than the technocrats in Brussels.
With Cyprus now on the chopping block, it’s a good time for a review.
“The Rotten Heart of Europe” by Bernard Connolly is the world’s finest exposition of the Eurozone crisis. It was written long before the Eurozone debt crisis began. It frightened his superiors so much he was fired on its first printing.
According to Connolly, the political impact of the Eurozone crisis will be the rise of Neo-Fascism!!
Why? Because either Germany continue to support disproportionately growing deficits in non-productive southern nation states or political reform! Neither will happen and this crisis will roll on damaging everyone involved.
Connolly was running the European commission’s Monetary Affairs Committee when he began to anticipate that Germany will not permit itself to be used. It will not subsidize others at a permanent rate of exporting 10% of its GDP yearly!!!!
Although Connolly now works at American International Group he still believes that forcing a monetary union where countries don’t have control of devaluation, don’t have local treasuries will lead to political and economic disaster. Without having economic fundaments correct through badly needed political reform, both the U.S. and Eurozone nation states can’t expect growth!
The crux of the matter were skyrocketing interest rate spreads. Looking at the fiscal, macro aggregates in the Eurozone means acknowledging the growth trend differentials concerning inflation, nominal GDP and structural entitlement driven deficits. All three compound together to make the Eurozone fiscal crisis. Nation states that printed bonds just exploded their balance sheets. Without real productivity, wage growth, disinflation, price stability its just a Ponzi scheme.
The crisis cannot be fixed with budgetary rules. You must have price stability, wage growth, low inflation, sound money. You must have productivity. You must have sound macro/fiscal paper!
To make all the political economies sound again requires a social/political revolution: leadership in its indigenous political class! Absent that, what the politicos at macro did was massive depreciation. Welcome to the world of currency wars!
How will this play out? We should expect sectarian civil war along social, ethnic lines of engagement.
The sad political truth is this: the Socialists in Brussels won’t permit anyone to leave the Union! Watching the social trajectories of varying nation states compete against one another will lead to war.