Frau Merkel, it really is a euro crisis
By Ambrose Evans-Pritchard
September 27th, 2011
Angela Merkel told German industry today that we are not facing “a euro crisis, but a debt crisis.”
She is wrong. Total levels of private and sovereign debt in the eurozone are lower than in the UK, the US, and far lower than in Japan.
Greece’s debt levels are around 250pc of GDP, at the lower end of the developed world.
Spain’s sovereign debt is admirably modest at around 65pc. Italy’s household debt level is the envy of the rich world. It has a primary budget surplus. Italy has many problems, but the budget deficit is not one of them.
So why is there such a destructive and long-festering crisis in the eurozone? Why have three countries required an EU-IMF bail-out? Why is the ECB having to shore the debt markets of five countries — soon to be six — with direct bond purchases, including Spain and Italy?
Not because of debt, except in the most superficial sense.
The reason this crisis keeps grinding ever deeper is because the euro itself is a machine for perpetual destruction. The currency is fundamentally warped and misaligned.
It spans a 30pc gap in competitiveness between North and South. Intra-EMU current account deficits have become vast, chronic, and corrosive. Monetary Union is inherently poisonous.
The countries in trouble no longer have the policy tools — interest rates, QE, liquidity, and exchange rates — to lift themselves out of debt-deflation.
Just as they had few tools to prevent a catastrophic credit bubble during the boom. Their travails were caused in great part by negative real interest rates set by the ECB (irresponsibly) for German needs.
Their fiscal deficits (and remember, Spain and Ireland ran big surpluses in the boom) have exploded because of the Great Recession itself — as they have in the UK, US, and Japan.
Draconian fiscal tightening might be manageable for these countries if the Teutonic bloc is willing to offset the contraction in demand by cranking up their own stimulus, allowing the intra-EMU imbalances to close from both ends. But the Teutons instead cling to their pieties, and their morality tale. The result is the downward spiral that we can all see.