Eurocrisis: An evaluation

That the euro might disappear is a thought that keeps on circulating. Today I heard that even some Irish banks are working along that scenario. A poor decision if you ask me. Political will to carry on with the euro-project is big and no economic law dictates that the eurozone should break up any time soon. Let's not forget that the euro is still a strong currency; in the end there is more room for a devaluation than for abandoning the euro altogether. The problem with the eurozone is that we have one currency that covers 27 different budgets, 27 different debts, 27 different wage policies, etc. Without getting too technical this makes the eurozone, and indeed the euro itself, vulnerable to asymmetric shocks. These are caused when one of the covered countries spends beyond its own economic payment capacity in the spirit that it is protected by the European umbrella. If one country starts to slip down the slope toward financial disaster, others soon follow. Just do not put the blame entirely with Greece and other 'small big spenders'. It were German and France banks who kept on financing in the search for profit. After all their risk was covered by government and taxpayer.

ECB president Mario Draghi, who brought the main rent
down to 1%, the lowest figure ever in the ECB history.

Now how get out of the difficult situation we're in? No two economists can seem to agree so what I will say next is certainly up for criticism. It is an opinion, but an informed opinion too. Something most EU politicians seem to agree upon is that Europe should get more grip on national budgets. Last night, 23 countries agreed to a (new) stability pact. They will implement the common rules: only 3% deficit, a public debt under 60% of BNP, etc. This formula exists since long, but this time the Commission and the European Court play a major role. In the past countries had to monitor themselves which obviously wasn't a big success. Less agreement can be found when it comes to the role of the European Central Bank. The ECB has announced yesterday that it would not keep on buying government bonds. For you who are not at home in the world of finances: Europe won't keep supporting indebted countries without limit. ECB president Mario Draghi stressed that the ECB does not have the proper mandate to do so. Yet, there is something the ECB could do instead: release the inflation genie! Inflation is the diminishing value of money over time, which manifests itself in rising prices. Generally, inflation is caused by wages going up faster than productivity or by a huge amount of new money being printed.

"Some more inflation would not be so bad
concerning our 1,5 billion of public debt"

Now why would the ECB want to print money? First of all, higher inflation means that the public debt of states would shrink. A quick example: I owe you hundred bucks and the rent is two percent, I have to pay you a 102. However, if in between inflation has risen from zero to three percent, those 102 are now worth 99 in real terms. I thus payed back less than I owed you. This isn't magic, but just a logical consequence of the inflation rate being higher than the rent. Additionally, high inflation allows the ECB to combat the speculators and strengthen Europe's concurrence position. Of course inflation is in the short run harmful to consumers and savers, common people already hit hardest by the economic crisis and budget austerity. Whilst not fair, it is paramount that we come clean. Inflation is in this a unique instrument. Sure, we need to handle it with care and no doubt that eventually we will need to get control back. But for now I can no longer agree with the neoliberal view that inflation is an ultimate evil. No wonder I was happy when the ECB reduced its most important rent from 1,25% to 1% yesterday - widening the inflation-rent gap with 25 percent points.