Sunday, December 11, 2011

Whats the matter with Europe? part 1

I would like to put what David Cameron did yesterday into the wider perspective of what's going on in the Eurozone; for his veto of the the proposed Treaty flew in the face of a deeply pernicious agenda being advanced by Germany's Angela Merkel and her finance minister Wolfgang Schauble.

The story so far: In 2002, most of the countries of Western Europe did away with their individual central banks and the individual currencies issued by those banks in favor of adopting the euro as a common currency. With this adoption, the memeber countries effectively signed over their ability to make monetary policy to one central bank, the ECB, located in Frankfurt. 
Normally, each country's central bank would set an interest rate target appropriate to the economic condtions of that country; if unemployment was running high and inflation running low, the central bank would "cut" rates by easing monetary policy; if the reverse was true, the central bank would tighten. Because each nation's economy behaved differently at different times, the multiple currency system allowed for each country to set its own policy as it saw fit. 
But since 2002, there has been effectively ONE monetary policy setting the SAME interest rate policy for the entire eurozone. And this little problem has created the set-up for the sovereign debt crisis that is threatening to break-up the euro area. From 2008-2009 the entire eurozone, much like the rest of the world, was in a recession- as a result, the ECB did what central banks always do: it lowered rates and kept them low. But while the downturn was symetrical, effecting the entire eurzone equally, the recovery has been anything but. To be specific, Germany has experienced a strong recovery on the back of its persistent current account surpluses, while the periphery- Spain, Italy, Portugal, and Ireland, remain deeply depressed. (to be continued)

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