Thursday, July 19, 2012

Common sense from France

Today's WSJ has a lovely editorial from Pascal Salin, professor emeritus of economics at the Université Paris-Dauphine. It echoes many of the things I've said about the euro crisis, but with deeper political insight....and it's from France.

A few tidbits with comment
Contrary to what is claimed daily in the media by politicians and many economists, there is no "euro crisis." The single currency doesn't have to be "saved" or else explode.
The present crisis is not a European monetary problem at all, but rather a debt problem in some countries—Greece, Spain and some others—that happen to be members of the euro zone. ... there is no logical link between these countries' fiscal situations and the functioning of the euro system.
A currency union can work just fine without fiscal union.
..the deficits now plaguing these countries were, in large part, justified only a few years ago as necessary to initiate so-called "recovery policies."  But it is always an illusion to believe that governments could increase total demand and thereby induce producers to produce more....The present state of affairs in countries that engaged in stimulus blowouts in 2008 and 2009 should serve as proof of the failure of the Keynesian model.
A letter from Europe that rejects the confusion between common currency and sovereign default, and  sees the abject failure of stimulus? There is still hope. 

I found Prof. Salin's view of the political situation most interesting:
The "euro crisis" is a pure political construction without any economic content. It could even be said that the crisis is a splendid opportunity for many politicians to impose some of their longstanding goals on everyone else. For instance, before the introduction of the euro, many politicians who called themselves Europeans considered monetary union a stepping stone to political union....
So, in Prof. Salin's view, the Euro worthies are deliberately linking sovereign default to breaking up the euro zone in a deliberate effort to scare wary voters into accepting fiscal union. 
This process has begun and continues to develop. Politicians now argue that "saving the euro" will require not only propping up Europe's irresponsible governments, but also reinforcing and centralizing decision-making. This is now the dominant opinion of politicians in Europe, France in particular.
It's really the "centralizing decision-making" that is the problem not "political union." The US at least historically had a political union without requiring the rules on provenance of prosciutto to be written by bureacrats in Brussels.
There are a few reasons why politicians in Paris might take that view. They might see themselves as being in a similar situation as Greece in the near future, so all the schemes to "save the euro" could also be helpful to them shortly....
Yeah, but the Germans may not have any money left by then!

What to do instead? Someone else likes "shock liberalization:"
The real solutions to Europe's debt problems lie in tax cuts and deregulation, and it's here that national politicians should turn their attention. Pan-European cooperation won't deliver any government from its fiscal or economic crises. Only national governments, each working independently to implement the best possible policies, can hope to achieve that.
What a breath of fresh air.

I can't wait to read Prof. Salin's next letter on France's 75% tax -- especially in the face of the UK's disastrous and quickly repealed experience with a 50% tax.  (16 billion pounds forecast revenue turned in to two.)