Wednesday, March 03, 2010

"an air of euro-doom"

Brendan Brown is head of economic research for Mitsubishi UFJ Securities so might be thought to have a clue about stuff. If he didn't he would be sacked. So his article today in Forbes is quite devastating,

"One year on from those self-congratulatory speeches by the European Central Bank's top officials at their monetary union's tenth anniversary celebrations, an air of euro-doom has filtered into the market-place.

For some, doom spells an eventual divorce in which Greece or another economically-distressed member of the union (EMU) breaks away. For others, doom has a deeper meaning of despair on whether there will ever be reforms to address the serious flaws in the union. A faint hope flickers that a divorce might be the catalyst to those countries which stay together implementing reform.

He goes on to go into the history of the Euro, both political and economic - forthere is no other way - and then flags up what he describes as three key errors in its creation,
Time or no time, his (Ottmar Issing) flawed monetary construction together with French-inspired euro-nationalism doomed the EMU in its first decade. Three big fateful monetary policy errors occurred.

First, immediately following the EMU's birth in January 1999, the euro-monetary bureaucrats slashed rates, arguing that actual inflation at 1% per year during the brief economic weak spell of 1998 was already too low. This action triggered a serious destabilising run on the new currency over the next 18 months, with the U.S. dollar/euro rate slumping from around 1.20 to almost 0.80.

Second, in 2003 the ECB lapped up to such an extent the prevailing IMF anti-deflation prescriptions in the global recession which followed the dotcom boom that legendary Bundesbanker Otmar Emminger would have turned in his grave! Amidst much fanfare, Otmar Issing unveiled in Spring 2003 a model-two version of the monetary framework including safety valves to prevent inflation ever falling significantly below 2% per annum.
This created a false vision,
"As financial markets warmed under the glow of growing monetary disequilibrium, bankers and investors in Northern Europe poured funds into the booming economies to the South. As euro-banking groups expanded at break-neck pace, excited euro-nationalists described the ever more glorious world of European integration. They ignored the already-to-be-heard warnings about a growing credit bubble.

In late 2003 the euro-nationalists, strengthened by the appointment of Claude Trichet to the head of the ECB, joined in an unholy alliance with Washington to launch an attack on the Asian dollar bloc. This added new force to the downward pressure on the dollar already falling under the weight of the Federal Reserve's aggressively easy monetary policy. In a state of alarm at the resulting rise of the euro, the ECB in 2004 put off any tightening of its own monetary stance.

The bursting of the credit bubble, starting with a series of credit quakes in the summer of 2007, led to the third, fateful monetary error. The ECB blocked risk-free rates collapsing to zero as would have happened under classical monetary rules. Instead the ECB actually drove risk-free rates higher out of concern that the oil bubble would cause the inflation target to be missed.

These three fateful policy errors have produced no political reaction. Whilst Professor Bernanke has had to face the hurling of "you are the systemic risk" by Senator Bunning or the success of Congressman Ron Paul's book End the Fed, European monetary incompetence continues in a sea of complacency".
He ends with some possible future but not one envisaged by the elite.
If the current Greek crisis spreads to Spain then the sea might divide. Towards preserving a monetary union of core members, Berlin would likely agree to the ECB fighting off any speculative onslaught against Italy (which unlike Spain or Greece has no underlying need for exchange rate adjustment). In return, Berlin would be in a position to demand real reform of EMU. As yet, the list of demands is unknown.
That might be reform, but who apart from Germany would be left to refornm in these circumstances?

Go read the whole thing

No comments: