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rumbles in the Eurozone « Previous | |Next »
June 2, 2011

The politics of austerity in the Eurozone currently means that Germany has to bail out the periphery in order to save its own banking system. Greece is required to restructure its debts rather than pay them back in full through spending cuts and privatisations, which could leave the country with declining GDP and rising unemployment for more than a decade.

Instead of this old, destructive IMF playbook Greece could restructure its debts rather than pay them back in full. Greece is an embattled nation and its people are near revolt. Ireland and Portugal are also embattled.Martin Wolf in Intolerable choices for the eurozone in The Financial Times says:

The eurozone, as designed, has failed. It was based on a set of principles that have proved unworkable at the first contact with a financial and fiscal crisis. It has only two options: to go forwards towards a closer union or backwards towards at least partial dissolution. This is what is at stake. ...The eurozone confronts a choice between two intolerable options: either default and partial dissolution or open-ended official support. The existence of this choice proves that an enduring union will at the very least need deeper financial integration and greater fiscal support than was originally envisaged. How will the politics of these choices now play out? I truly have no idea. I wonder whether anybody does.

What we do know is that both the IMF and European Central Bank (ECB ) have imposed pro-cyclical policies that make recessions worse.

William K. Black in his post Bad Cop; Crazed Cop – the IMF and the ECB in New Economic Perspectives says:

A nation that gives up its sovereign currency by joining the euro gives up the three most effective means of responding to a recession. It cannot devalue its currency to make its exports more competitive. It cannot undertake an expansive monetary policy. It does not have any monetary policy and the EU periphery nations have no meaningful influence on the ECB’s monetary policies. It cannot mount an appropriately expansive fiscal policy because of the restrictions of the EU’s growth and stability pact.

| Posted by Gary Sauer-Thompson at 2:27 PM |