Sunday, June 13, 2010

Connolly's Rotten Europe Re-visited

Last week I returned for a brief visit to Brussels, the "Rotten Heart Of Europe", and took the chance during the journies to read once again the book of that title by Bernard Connolly, on the past woes of the ERM, details here. Returning home I considered what a disaster it was that men of Connolly's vision and talent were disposed of by the EU and pondered why he had yet to write on the disaster that the common euro currency has clearly become in further confirmation of the dirty tricks over the ERM which he previously so carefully described. I did find this paper "Dark Vision" by Mr Connolly, which predicts the events unfolding today and provide a link to the pdf file for readers of this blog..... here.... Amazing is it not? It appears to have been written in 2002! Here is a very apt prediction from page 6 of 10 from Dark Vision ============================== Within EMU, Ireland, Portugal and Finland have all gone through the up phase of a cycle generated by a discrepancy between the anticipated rate of return on capital and the ex ante real rate of interest. They are now clearly in the down phase of that cycle. In Ireland's case, the boom was so fierce that cock-eyed optimists can contemplate a sharp fall in the growth rate as perfectly absorbable. But in none of these countries -- with Greece to follow rather soon -- will the process end with a nice, smooth return to a "sustainable" long-run growth rate. All of them will face depression, deflation and potential default. Public sector financial positions in all of them will deteriorate with amazing speed (in the "peripheral Europe" boom-bust cycle a decade ago, for instance, government borrowing as a percentage of GDP increased in several countries by more than a dozen percentage points of GDP in just three or four years), yet all of them begin with public sector debt ratios higher than was Argentina's at the beginning of its recession. And the accession countries will assuredly follow a similar path when they join EMU. Can the EU stand idly by and watch this happen? At first, yes. The ECB will claim that individual country developments are not its concern. And the EU as whole may argue that the countries concerned knew the rules, including the budgetary rules of the so-called Stability Pact: they have made their own beds, now they must lie on them. But that attitude cannot possibly persist. For however small these countries may be, financial markets will be aghast once the full horror of the slump, and it sociopolitical implications, becomes apparent. Ultimately, the ECB will be forced to behave as if it were the central bank of the small countries, easing monetary conditions massively depreciating the euro to keep the small countries afloat -- at the expense of inflation elsewhere in the area -- until a "political" solution can be arranged. What the politicians will decide will be to change the rules that currently prohibit EU bailouts of individual member countries. Bailouts will be instituted in return for the forced signature of the smaller countries on a new treaty which will extinguish what remains of national political independence in Europe. The progenitors of EMU knew exactly what they were doing. Thus Jacques Delors, for instance, said in 1995 that, "Monetary union means [our emphasis] that the Union acknowledges the debts of the member states of the monetary union". The syntax is contorted, but the logic is clear: the "no bailout" provisions in the original EMU setup were a sham, designed merely to reassure the German public, which had always intuitively tended to believe that a monetary union without a political union must become a debt union. =========================



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