Posted by WARREN MOSLER on August 22nd, 2011
First, the euro funding issue/crisis could vanish with a simple announcement, like:
The ECB hereby guarantees all the debt of the national governments.
But they won’t do that.
They are worried about their ability to subsequently enforce the Growth and Stability Pact, which has already proven unenforceable.
In fact, the only enforcement tool for austerity seems to rest with the ECB, which conditions its funding on austerity.
This is also the disciplinary principle behind my proposed ECB annual revenue distribution of maybe 10% of euro zone GDP to the national govts on a per capita basis-
The ECB would have the right to withhold future distributions to members who fail to comply with deficit rules. But this proposal isn’t even a consideration, so not likely to happen.
Mosler bonds (in the case of default they can be used for payment of taxes) for individual euro nations offer real hope, but time is short and the political process long.
That leaves the euro zone with what it’s been doing all along.
Muddle along anticipating, entertaining, debating, various funding proposals,
when it gets bad enough,
relying on the ECB writing the check and buying national govt debt in the market place to facilitate ongoing funding.
All contingent with the member nation in question complying with terms and conditions of austerity set by the ECB.
It’s all highly deflationary, strong euro medicine, while it lasts.
It’s also operationally sustainable.
And phase 1- where austerity reduces deficits- has proven politically sustainable as well.
However we may now be entering phase 2,
where austerity results in falling GDP and higher deficits for all the euro members.
Yes, it’s operationally sustainable and continues to support the euro.
So the question is whether austerity measures intended to bring deficits down, that instead cause deficits to increase, are politically sustainable.
And, if not, what next?
How bad does it all have to get before they change policy?
And what change would that be?
The first step would probably be some ‘new’ form of QE,
and maybe even an interest rate cut,
which only make things worse,
as they wait for the appropriate lag before said policy ‘kicks in’.
And how long would it all continue to deteriorate before they stop waiting for it to ‘kick in’ and again change policy?
US deficit reduction round 2 coming soon as well.
To again quote that carpenter working on his piece of wood,
‘no matter how many times i cut it, it’s still too short’.
Is a misguided fuss over a reserve drain going to bring down global capitalism?