CC Francois Hollande on Flickr
Sunday the 6th of May 2012 might become a significant date in European politics. The Greek election results and above all the election of Francois Hollande as new French President might be the start of political change in Europe. I (and others on SEJ) have argued for a long time that the Angela Merkel driven European strategy is bound to fail. It has strangled economic recovery in Europe and now the predictable political feedback has started to materialise.
Europe is a strange place in these days. There is no crisis mood in Germany as most people still believe – led by politics and some part of the media – that all problems are exclusively due to the action of foreign governments in the European periphery. There is also a lack of understanding of macroeconomic interconnectedness and how the rapid economic decline of more and more parts of the Eurozone is bound to hit Germany too sooner rather than later. On the other hand, the crisis experience in southern Europe is leading more and more people into desperation and populist right and left wing fringe parties are having a ball.
It is high time that a workable solution to the Eurozone crisis is elaborated and yesterday’s elections hopefully create a momentum that can be channelled into a new policy dynamic. Above all, we need a detailed plan for growth and jobs, ways to finance the necessary investments and how these investments can strategically position the Eurozone economy for the new global economy that is taking shape. These are issues SEJ will deal with in the coming months.
In the meantime, I think there is still a big problem with the crisis diagnosis. I recently gave a talk at a conference in Manchester on the issue. Find the video below in case you are interested…
Henning Meyer on the Eurozone Crisis from Social Europe Journal on Vimeo.
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While I accept that their is a lack of understanding of macroeconomics, there is an even greater lack in respect of monetary mechanics and reserve accounting. Fiscal management and monetary management are intwined. The reality is that governments manage the money supply and not central banks. Central bank intervention in monetary management is either worthless or destructive to the economy. Government manage the money supply directly by Creating, spending, taxing and borrowing. Taxation and borrowing merely removes excess money supply from system and does not fund government expenditure, which precedes both.
The market should determine interest rates for private sector borrowing as it currently does. Governments decide on bond coupon rates as they do. Bond sales merely presents a non destabilising investment opportunity to savers and in that respects, it removes money of low velocity and value from the system. Governments are then able to introduce money of higher velocity and value into the economy through welfarism which is the greatest generator of local demand.
No wish to defend Cameron’s excuses but I’d be more worried if believed low demand for exports in the Eurozone doesn’t matter to the British economy.
Ian, as I said in the talk: it does matter but exports into the Eurozone are only 13% of British GDP whereas 73% are domestic economy. If you look at these proportions it just does not make sense to blame the Eurozone for Britain’s economic woes. EZ problems certainly have a negative impact, but a much less severe one than the wrong domestic policy decisions.