I’ve always liked Martin Feldstein, he was chairman of the Council of Economic Advisers for Ronald Reagan, he is a professor at Harvard and a member of The Wall Street Journal’s board of contributors. Although he is known for his economic acumen, his latest contribution to fixing the Euro zone crisis is typical of most economists trained in manipulating the arcane data that underwrite Keynesian thought. His latest contribution was an admission that the only way to prevent the dissolution of the Euro zone would be for the European Central Bank to orchestrate a sharp decline in the value of the euro relative to the dollar and other currencies. Team Lumaj thinks that Dr. Feldstein should admonish the creators of the Euro zone for the same reasons that prompted Dr. Milton Friedman: the Euro zone is intrinsically weak and no amount of tinkering by Keynesians will fix it.
The socialist dream of competing with North America (read Capitalism) through a Monetary Union among distinct secular market based nations is foolish. Why? Because the dream of a monetary union (notice how the veneer of Marixian centralization remains with Keynesians) absent political reform in nations with distinct and separate languages, laws, customs and treasuries was bound to fail.
These foolish Keynesian ‘centralizers’ still think that a political union through forced monetary assimilation of fiscal transfers is sustainable. I suppose the real question is how do Marxists and lovers of centralized life still hold utopian convictions in the light of persistent empirical failure? As the late great Anne Schwartz has written with great clarity: liquidity is not the problem; the problem are the policies, the socialist political convictions of the politicians. For no amount of liquidity will reduce sovereign bond yields in unsustainable political economies.
Dr. Feldstein believes that nations along the southern euro zone periphery can remain in the Euro if they correct four difficult problems:
1. lower fiscal deficits that reduce the interest on sovereign bonds
2. pursue policies of economic growth that shape the opportunity for political consolidation
3. recapitalize commercial banks to prevent deposit runs to preserve lending capacity
4. eliminate large trade deficits to stop cash transfers
We here at Team Lumaj think that politically difficult decisions can resolve the first three problems, for a change in labor laws can unlock barriers to productivity to provide stronger economic growth, this would give Euro zone governments the fiscal capacity to address systemic problems. Please notice that solving the first three will not immediately permit one to gain traction on the fourth problem. The periphery’s staggering trade and current account deficits hit each nation’s competitiveness with dreadful consequences.
As of this writing, some unproductive Euro zone nations locked into the Euro could adopt their own currencies followed by devaluation and fiscal consolidation, this would be the fastest way forward. It would also be painful! Politically, this is not feasible in democratic nations, it would likely open up a cauldron not easily contained, especially socially or racially given the demographic make-up of the Euro-zones massive welfare state. We must remember that Euro devaluations cannot change trade imbalances or productivity, for many of the social and political barriers that are intrinsic to the Euro-zone can only be addressed through fiscal strength. As of now, southern Euro-zone nations with high unemployment can drastically increase their exports through local national currency adoption and devaluation, effectively raising their GDP, providing growth while reducing deficits.
So what happens if the above noted nations do nothing?
Simple. The unsustainable sovereign bond market itself will deliver the austerity; the conditions needed to eliminate the drastic current account deficits and un-productivity that underwrites the utopian dream currently being played out.