There are many mentions made of structural difficulties within the Eurozone. One left out, of course, is the invisibility of resource prices and the effects on a resource- based economy.
Another is the dual- headed nature of monetary and fiscal policy making.
Consider the euro as being little more than a Deutchmark in drag, this would make the Bundesbank the equal of the ECB. Nominally the ECB makes monetary policy for the entire Eurozone but is without the means to follow Walter Bagehot’s famous advice for crises; to “lend and lend freely”. Jean-Claude Trichet is probably a really nice guy but he is not the evil genius that is Ben Bernanke.
Bernanke’s response to the same liquidity failure faced by Europe currently was to create numerous lending facilities and to expand the Fed’s balance sheet. Bernanke never appeared to lose his cool the way Trichet seemed to do last weekend buying various Euro- bonds by the fistful … on the street corner in downtown Brussels.
At the same time, the de facto head of the Eurozone’s banking empire is the Axel Weber, the President of the Republic of Germany’s Bundesbank. During the run of the Greek debt implosion it is hard to recall any peep from Weber who may or may not be on vacation.
Right now there are two more or less amiable and not particularly forceful gentlemen playing Alphonse and Gaston while the money markets are getting the bends. Another couple of weeks of this nonsense and the freefall in finance markets will begin (if it hasn’t already.)
A difficulty parallel to faulty structure and watery leadership personalities is the lack of a unified Europe- wide fiscal approach. The Monetary Union and the regulating ECB are not structured to modify fiscal or economic structures within their ambits. Like all confederations, the structural weakness of the monetary union undermines the individual elements within it. Europe’s nations rely on the other member nations as they cannot do so on the union itself.
This creates a dilemma for Germany. Monetarist Germany resists the idea of stimulus fearing inflation. Considering what James Galbraith pointed out previously about nations (Eurozone/Germany) having the ability to lend to themselves in their own currencies (euros) in unlimited amounts creating low service costs in the process it behooves the Germans to seize the day, kick the ECB to the side of the road and start guaranteeing money markets. The alternative is to allow the onrushing money- panic to gain momentum.
We wouldn’t want that, would we?
As for inflation fears; in today’s business environment of high unemployment, high and rising real fuel costs and excessive slack in production … show me the inflation! The danger is wildly overstated. At the same time, the deflationary episode wolf is at the door!
Bernanke needs to get on the phone to his Bundesbank counterpart. The ECB’s mandate is opaque. Germany does not have this restriction. Being the dominant economic member of the Eurozone and having the strongest currency position within it, the monetary and fiscal tools are at Germany’s disposal.
This is Germany’s moment. It can become the real leader in Europe by casting aside short- termism and me- firstism and use its tools to dampen the panic.
Germany has an historic choice: it can remain merchantile and see later how little business remains after its customers are all bankrupt.
Similarly, Germany must take the lead in restructuring its own banks. Here is another area where Weber has been AWOL. I suspect the few banks have been restructured due to the widespread fear that such actions would be fatal. Two years of non- restructurings look fatal, what now? The world’s energy gluttony is fatal, time to start minimizing damages and stake leadership positions.
The real idea is that the current crisis is like all the others since WWII; that is, liquidity shortages coupled to inventory imbalances and inappropriate interest rates. Repeats of this version of recession have been training grounds for monetary and fiscal policy makers. The solution has always been to finance the next asset bubble with cheap credit, a bastard- form of ‘Keynes- lite’. This idea needs to be jettisoned. The passage of two years’ time has demonstrated the notion’s hollowness. Both the energy and finance balance sheets of almost all modern nations are unbalanced. The imbalances have become entrenched. It is imperative that adminstrators take charge so as to reduce immediate panic: to buy some time and use that valuable time to restructure.
What the markets are telling the moribund finance world is that business as usual is done for. Time for something new approached with at least reasonably clean balance sheets.
There is nothing that either Trichet or Weber has done during the course of this crisis since the beginning of the year that inspires confidence. Someone needs to give Weber the wake- up call. The Bundesbank has an opportunity to make a difference. Some leadership and discipline would be appreciated right now.