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Response to Demeter (Reply #18)

Wed Dec 5, 2012, 08:21 AM

19. The euro is heading for a permanent state of depression

 

http://www.telegraph.co.uk/finance/comment/jeremy-warner/9647248/The-euro-is-heading-for-a-permanent-state-of-depression.html

A year ago, monetary union looked as if it was heading for certain death, with the European banking system in apparent meltdown and extreme divergence in monetary conditions across the single currency area. In all but name, monetary union had already ceased to exist.

Action by the ECB, first with the cash-for-debt Long Term Refinancing Operation and, more recently, the promise of unlimited bond purchases, has succeeded in stilling the waters, at least to some degree. Even a Greek exit seems, for the time being, to be off the table. With more austerity, Berlin seems minded to give Greeks another chance until the next bail-out, in any case.

But, though the single currency may have been saved from imminent death on the operating table, it seems now to be heading for a scarcely more appetising alternative a condition of chronic, long-term illness where still very tight monetary conditions in many parts of the eurozone in combination with lockstep austerity threaten to induce a virtually permanent state of depression. Even Germany shows every sign of slipping back into economic contraction.... Without bail-outs at least three eurozone countries would already be completely bust, and several others would fast be heading in the same direction. Deprived of access to the capital markets, these countries would be forced into a degree of fiscal austerity that would make present programmes look like a stroll in the park. Fiscal stimulus, or even the normal operation of automatic stabilisers, is not an option for some eurozone countries.

In any case, the growth problem in Europe is not so much one of too much austerity as the straitjacket of the euro itself. This has prevented both the natural corrective of exchange-rate adjustment and the application of appropriate monetary policy to counteract the fiscal contraction. It has also prevented the sort of burden sharing between creditor and debtor nations that has to take place if the crisis is ever to be resolved...

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