Wednesday, October 01, 2008
Brussels and Fiscal spending
Expect "revisions" to the Maastricht treaty. The markets will force their hand much as it forced the hand of our own politicans during this latest imbroglio. The "revisions" will be couched in terms of increased subsidiarity to the EU members, but will in reality seek to strip more economic sovereignity from its members. This will fail.
With individual countries having self imposed constraints on budget deficits, they cannot spend to address faltering domestic demand, and the PIGS certainly cannot issue more debt. Brussels has no fiscal authority among the several countries and does not insure bank deposits in the several countries. External debt can unwind VERY quickly.
We see that the Euro area is aping the U.S. "rescue package", and it has failed, at least initially. Recall that the Treaty has never been battle tested. We will see what it is made of.
And it is in serious trouble at the moment. The area needs US dollar funding more than their domestic currencies. The UK has also felt this lack of liquidity, but they of course can deficit spend as required to maintain aggregate demand.
The ECB is speaking strictly from a self-preservation standpoint (the reason detre of beurocrats) when it calls for order in the global markets.
My largest fear (longish term)is a return to conventional warfare. Europe has been at peace for 50+ years (not counting recent troubles in the Balkans). That is longest period of peace in over 1000 years. I am an Economic Determinist (Marx did have some good analytical tools, even if I think he came to some terrible conclusions) and when the chips are down, the Euro area does not exactly have the best record for picking themselves back up in a peaceful, collaborative manner.