According to financial heavyweights
Boone and Johnson
Europe’s periphery also needs to recognize that it signed up to a currency union, and that requires a new approach to adjustment. Instead of having huge devaluations like those suffered in Mexico under Mr. Zedillo, in Indonesia under Mr. Suharto or in Poland under Mr. Walesa, Europe’s troubled nations need to raise competitiveness by reducing local costs.
That must primarily come through wage reductions and more competitive tax systems.
This is sounding more like mandatory chemotherapy for the citizen and less like reform of the financial system. They continue
Putting in place a huge financial package is not enough. Policies have to adjust across the troubled euro-zone countries so that nations stop accumulating debt, and the periphery moves rapidly from being among the least competitive nations in the euro area to the most competitive — and this includes lower real wages, even if debts are restructured appropriately.
Again these heavyweights argue that nations are responsible for the success of financial institutions. Professor Bill Mitchell
thinks otherwise
The Boone and Johnson approach – which involves scorching the domestic economy by undermining pension entitlements and the wages and conditions of the workers and entrenching unemployment and business failure while hoping for an external boost will never work in the current situation.
One country might get away with it but not all countries. The only reliable way to avoid a fallacy of composition like this is to maintain adequate fiscal support from spending while the private sector reduces its excessive debt levels via saving. That strategy is also likely to be the best one for stimulating exports because world income growth will be stronger and imports are a function of GDP growth.
The austerity lobby are not only undermining the rights and welfare of the citizens but are also undermining the source of the export revenue – domestic aggregate demand.
After the recent collapse of the financial bubble
any advice from a fund managers has to be approached with caution. Economist Kash Mansori tries to set the picture straight, by
arguing that the problems of the EU were created by financial managers of the EU;
One of the principal goals of Europe’s common currency has always been to promote greater financial market integration between member countries... the adoption of the euro as a common currency was designed to cause large capital flows from the eurozone core to the periphery—and it is those very capital flows that set the stage for the crisis...Investors in the core were happy about the relatively high returns they were getting in the periphery, the periphery countries enjoyed an economic boom financed in part by this easier access to the abundant capital of the core, and exports from the core to the periphery surged...
..So what triggered the sudden stop, if it wasn’t irresponsible behavior by the periphery countries? The financial turmoil of 2008 and ensuing deep recession in 2009 are probably sufficient explanation. ..we know that one of the main features of the worldwide financial crisis that struck in 2008 was that investors suddenly had no interest in any but the very safest assets. So when it came to investments in the eurozone’s periphery, they decided it was time to cash in their chips. Add to that the ensuing recession, which caused budget deficits to explode in the periphery—along with everywhere else—and those countries probably didn’t stand a chance, no matter how responsibly they had managed their finances.
So there we have it, countries being run as hedge funds by financial managers with expensive tastes.
