Saturday, 28 April 2012

"There is no solution to the euro problem"

Spain is clearly the next big problem in the seemingly never ending euro crisis. Foreign Minister Jose Manuel Garcia-Margallo has admitted that Spain faces a "crisis of huge proportions", with unemployment already at 24% and another downgrade of government debt: 
Unemployment shot up to 24 percent in the first quarter, one of the worst jobless figures in the developed world. Retail sales slumped for the twenty-first consecutive month as a recession cuts into consumer spending.

"The figures are terrible for everyone and terrible for the government ... Spain is in a crisis of huge proportions," Foreign Minister Jose Manuel Garcia-Margallo said in a radio interview.
Standard and Poor's cited risks of an increase in bad loans at Spanish banks and called on Europe to take action to encourage growth.
Read the entire article here
The problem is that there is no solution to the euro crisis, according to Tim Worstall, writing in Forbes. The huge transfers of money to the Southern European countries that would be needed to "save" the euro, are not forthcoming: 
Leave aside the willingness of the European North to make such transfers to the European South. Ponder instead whether it is actually possible. This depends on how much actually needs to be sent south.
We might take at the low end that, what, four or five percent of GDP that is incorporated in the military and health care. Or we might take at the top end the 20 odd percent of GDP that is collected and spent by the federal part of the US Government. Neither of these numbers is right but a useful assumption would be that the necessary fiscal transfers inside Europe would be somewhere between these two numbers that make the US system work.
The thing is though, in northern Europe the government already takes 40-50% of the entire GDP to pay for those lovely welfare states and free health and child care and so on. It’s extremely dubious that there’s room to collect another 5% of GDP to send south and absolutely impossible to imagine another 20% being so sent.
As everyone has been saying ever since Robert Mundell wrote on optimal currency areas, to be one requires fiscal transfers. Money raised in tax in rich areas and spent in poor ones. If we use the US as an example of the size of the transfers necessary then we find that the EU simply cannot do this. Not at the required size: for government is already too large to make it possible to collect the necessary taxes.

Thus there is no solution to the euro problem. Or to be more accurate, there is no managed solution: the best that can be hoped for is break up and starting again, however messy and painful that would be while it was actually happening.

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