Monday, July 30, 2012

The euro is like a bumblebee. Why does it not flight any longer?

In this post (Here Bee Draghi) Krugman shows his skills as reader and observer, and also the non critical flock behaviour of journalists and media. From last speech by Mario Graghi, he choose the passage below, indeed a very interesting and significant one (that did not received significant attention from the press):
  • The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years. And now – and I think people ask “how come?” – probably there was something in the atmosphere, in the air, that made the bumblebee fly. Now something must have changed in the air, and we know what after the financial crisis. The bumblebee would have to graduate to a real bee. And that’s what it’s doing.
Krugman recalls why it did flight (the model of the crisis, see previous post, in portugese, my other blog):
  • The thing is, we know pretty well why the bumblebee was able to fly: massive capital flows from the core to the periphery, which led to an inflationary boom in said periphery, and which therefore also allowed the German economy — which was in the doldrums in the late 1990s — to experience a big gain in competitiveness and hence a surge in its trade surplus without needing to go through painful deflation. This meant, in turn, modest inflation in the eurozone as a whole — slightly above 2 percent over 1999-2007.
And what to do to make it flight again
  • To keep the thing flying, you’d need something like a reverse play along the same lines: an inflationary boom in Germany, so that the periphery can regain competitiveness without devastating deflation. And it would actually have to involve a higher rate of inflation, both because the required adjustment is bigger and because the periphery is a smaller share of euro area GDP, which by the math means that overall inflation needs to be higher to accommodate a given amount of relative adjustment.
But reality still seems far from this scenario.

Update, 30th July: Free Exchange,  The Economist blog, deals with this "bumblebee" discourse in a post entitled When Draghi isn't everything. But it raises a "non technical" issue: what does it mean to save the euro - which euro has BCE a mandate to save? The present euro configuration or a a new geometry of countries (without Greece and may be others)?
  • The ECB could take some of the pressure out of the crisis by pursuing an appropriate monetary policy: by acting more aggressively in order to push nominal output back to trend, even though that would mean higher inflation in Germany. But this is no longer the ECB's crisis to solve. It might have been, at one point. Political leaders, by acknowledging the real possibility of exits, have taken on full responsibility for whether and how the crisis is brought to an end.
 The bumblebee seems to have changed to a highly political animal. May be yes, may be not. Charles Wyplosz comments in Vox (Welcome to ECB):
  • there always is a risk of reading too much in a central banker’s unavoidably cryptic statements
Update 2: Krugman also wrote a commentary on NYT: Crash of the Bumblebee:
  • First of all, Europe’s single currency is a deeply flawed construction. And Mr. Draghi, to his credit, actually acknowledged that. “The euro is like a bumblebee,” he declared.
  • In the long run, the euro will be workable only if the European Union becomes much more like a unified country.
  • Well, why was the bumblebee able to fly for a while? Why did the euro seem to work for its first eight or so years? Because the structure’s flaws were papered over by a boom in southern Europe.
  • What could turn this dangerous situation around? The answer is fairly clear: policy makers would have to (a) do something to bring southern Europe’s borrowing costs down and (b) give Europe’s debtors the same kind of opportunity to export their way out of trouble that Germany received during the good years — that is, create a boom in Germany that mirrors the boom in southern Europe between 1999 and 2007. (And yes, that would mean a temporary rise in German inflation.) The trouble is that Europe’s policy makers seem reluctant to do (a) and completely unwilling to do (b).
  • The euro can’t be saved unless Germany is also willing to accept substantially higher inflation over the next few years
  • Should it be saved? Yes, even though its creation now looks like a huge mistake. For failure of the euro wouldn’t just cause economic disruption; it would be a giant blow to the wider European project, which has brought peace and democracy to a continent with a tragic history.
Update 3 (13 August 2012): The Economist has two important papers. The Merckel memorandum contemplates a sinister view about the future, as seen from the PICS (Portugal, Ireland, Cyprus and Spain): a plan to expel, under controlled conditions, these countries (together with Greece) from the euro zone - but not from European Union. This "bolder plan B" would be the preferential option, as seen from the German side. It would give a new geometry for eurozone ("unfortunately" including Italy and France: the political options and economic costs to expel them from the new eurozone would be too big). The new eurozone would include a banking union and some kind of debt mutualization (of course not available for the five expelled countries).  This is very much related with our previous Update 1 to this post. See also "The euro: tempted, Angela?", the other (companion) article related to the memorandum:
  • The euro could have been saved a long time ago, had the politicians agreed on who should pay what or on how much sovereignty to surrender. Rather than push forward, Mrs Merkel has waited, hoping that fiscal adjustment and structural reform will lead to economic growth in southern Europe and that the politicians could sort out their differences. 
  • The evidence, though, is that time is not on her side. Southern Europe’s economic rot is deepening and spreading north. Politics is turning rancid as the south succumbs to austerity fatigue and the north to rescue fatigue (see article). Populism only makes a grand bargain more elusive. For the moment, breaking up the euro would be riskier than fixing it. But unless Mrs Merkel presses ahead, the choice will be between an expensive break-up sooner and a really ruinous one later.
(Italics our responsability)

No comments:

Post a Comment