Tags: Telegraph | Europe | Prolonged | Depression

UK Telegraph: Europe Faces 'Prolonged Depression'

By    |   Wednesday, 14 Dec 2011 11:25 AM

If you think a European fiscal union will end the eurozone debt crisis, forget it.

Last week's agreement, designed to resolve the eurozone debt crisis, will instead all but guarantee a prolonged depression for much of Europe, Jeremy Warner writes for The U.K. Telegraph.

Fiscal union is inherently impossible for Europe, he says. That kind of union means centralized taxing and spending powers that allow money to be transferred from wealthier regions to poorer ones and from wealthier people to poorer ones.

That might be tolerated within a single country, but Germans are not about to send their money south of the Alps.
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Peripheral countries like Greece don't have those fiscal transfers to help them. Nor can they deflate their currencies to pay debts. Instead, he says, they have been forced into repeated rounds of self-defeating austerity measures.

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(Getty Images photo)
In any case, last week's agreement offered no real move to either a fiscal or political union. It only called for more oversight of national budgets to enforce austerity.

Such legally required austerity in current conditions is "an economic absurdity" that, instead of fostering fiscal union, will mean a prolonged depression for peripheral countries, he writes.

Because eurozone leaders failed to find a solution, another crisis is likely. It's only a matter of time, Warner says, predicting another crisis by a week or two into the new year.

The European Central Bank remains opposed to purchasing large amounts of sovereign bonds. Instead, ECB President Mario Draghi has agreed to provide liquidity to banks which, in turn, could buy the government bonds. That won't help even if it happens, according to The Telegraph. Loading up on risky sovereign bonds won't help the already financially squeezed European Banks.

"As for Germany, hell will freeze over before it accepts joint liability for periphery debts," he writes.

The Telegraph is not the only one lambasting the recent euro plan.

Economist Paul Krugman, writing in his column for The New York Times, says it guarantees a recession but fails to address the real problem.

Some people thought the deal would give the ECB cover to purchase large amounts of Italian and Spanish bonds, which would down interest rates and contain the crisis.

"But as far as anyone can tell, the monetary cavalry aren’t coming. And the bond market has figured this out," Krugman writes.

The Germans and the ECB will reject a bond-buying spree and will cling to their belief that only austerity is needed even while the euro disintegrates, he says.

"Given a choice between saving Europe and remaining righteous, they’ll choose the latter."

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If you think a European fiscal union will end the eurozone debt crisis, forget it. Last week's agreement, designed to resolve the eurozone debt crisis, will instead all but guarantee a prolonged depression for much of Europe, Jeremy Warner writes for The U.K....
Telegraph,Europe,Prolonged,Depression
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2011-25-14
Wednesday, 14 Dec 2011 11:25 AM
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