The most worrying aspect of the Eurozone crisis is there is no sign that anyone with significant influence in the Eurozone even understands what the fundamental problem is at the moment. The level of ignorance about how the Eurozone functions as a monetary system, and how different this is from states with their own sovereign currency, is alarming. Few seem to appreciate that a currency system in which all money is created through bank credit (because the ECB may not support deficit spending) will eventually become insolvent. This is result of the fact that all new money created through bank lending has a matching debt. Add the money that has to be found to pay interest on these debts and it is obvious (at least to me) that the currency system as a whole cannot accumulate net financial assets. What happens instead is that some parts (e.g. Germany) accumulate net financial assets at the expense of others, who accumulate matching net debts. It has nothing to do with Greece, Ireland or Spain being profligate, uncompetitive or badly run. If they did not exist it would simply be another country with a Euro balance of payment deficit (and there must always be at least one in the Eurozone) that was forced into insolvency and penury. The Eurozone as currently structured is a zero-sum game where countries have to fight to the death to avoid insolvency. This was predicted, by the way, in the 1990's by economist such as Wynne Godley, who remains ignored by the mainstream to this day.
Admittedly, even if the problem was recognised the solution - for the ECB to restore the system to solvency by injecting debt-free money via supporting deficit spending - would be difficult to implement in a way seen to be fair to all Eurozone members.
Probably the best we can hope for may be for the ECB to provide unlimited liquidity to the banking system, but this won't solve the solvency problem. At the moment I think the paralysis and/or incompetence on display makes we wonder whether they will do that. They may well be prevented from intervening by Germany and other creditor states, in which case we can expect another global meltdown as banks collapse across Europe and beyond and payment systems freeze up.
What is amazing is hearing suggestions by the mainstream that debts should be written off and inflation induced in the Eurozone. These solutions seem a strange preference to the more constructive and far less damaging one of central banks allowing and supporting fiscal deficit-spending through tax cuts and/or spending increases. Recall that deficits are opposed because of self-imposed rules designed to reduce the RISK of inflation. Now policymakers and economist are proposing inducing CERTAIN inflation and having debt write-downs. Surely it would be better to allow central banks to support deficit spending to enable growth driven by increased demand and employment. That way debts could be paid off and inflation probably avoided.
Excuse the rant but I find it dispiriting that the obvious solutions are not even being discussed by the mainstream. It is a sad comment on the collective blindness of the financial and economics profession.
Admittedly, even if the problem was recognised the solution - for the ECB to restore the system to solvency by injecting debt-free money via supporting deficit spending - would be difficult to implement in a way seen to be fair to all Eurozone members.
Probably the best we can hope for may be for the ECB to provide unlimited liquidity to the banking system, but this won't solve the solvency problem. At the moment I think the paralysis and/or incompetence on display makes we wonder whether they will do that. They may well be prevented from intervening by Germany and other creditor states, in which case we can expect another global meltdown as banks collapse across Europe and beyond and payment systems freeze up.
What is amazing is hearing suggestions by the mainstream that debts should be written off and inflation induced in the Eurozone. These solutions seem a strange preference to the more constructive and far less damaging one of central banks allowing and supporting fiscal deficit-spending through tax cuts and/or spending increases. Recall that deficits are opposed because of self-imposed rules designed to reduce the RISK of inflation. Now policymakers and economist are proposing inducing CERTAIN inflation and having debt write-downs. Surely it would be better to allow central banks to support deficit spending to enable growth driven by increased demand and employment. That way debts could be paid off and inflation probably avoided.
Excuse the rant but I find it dispiriting that the obvious solutions are not even being discussed by the mainstream. It is a sad comment on the collective blindness of the financial and economics profession.
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