The Automatic Earth
MAY 29, 2018
Around and around the carousel spins, ever faster, while the support poles groan and the screws strain at their stripped threads. The last bastions of reserve, of savings, of gold and silver, become more value with each passing day as debt-drowning nations inch closer to oblivion.
What to do when your currency is shackled to the past reckless decisions of a neighbor, but the responsible policy decision for your nation, on the back of so you’ve many made previously, is one of restraint and fiscal discipline? Such is the question Northern Europeans are forced to asked themselves with increasing urgency as Italy and Spain edge toward forms of unrest not just economic, but civil.
Sometimes it takes a little uproar to reveal the reality behind the curtain. Italy, perhaps some more than Spain, would long since have seen collapse if not for the ECB. In essence, Mario Draghi is buying up trillions in sovereign bonds to disguise the fact that the present construction of the euro makes it inevitable that the poorer south of Europe will lose against the north.
Club Med needs a mechanism to devalue their currencies from time to time to keep up. Signing up for the euro meant they lost that mechanism, and the currency itself doesn’t provide an alternative. The euro has become a cage, a prison for the poorer brethren, but if you look a bit further, it’s also a prison for Germany, which will be forced to either bail out Italy or crush it the way Greece was crushed.
Italy and Spain are much larger economies than Greece is, and therefore much larger problems. Problems that are about to become infinitely more painful then they would have been had the countries been able to devalue their currencies. If you want to define the main fault of the euro, it is that: it creates problems that would not have existed if the common currency itself didn’t. This was inevitable from the get-go. The fatal flaw was baked into the cake.