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Münchau: We are fighting the wrong crisis

Wolfgang Münchau wrote a piece that was carried online today at Der Spiegel. I haven’t seen an English language version so I thought I would say a few words about the piece I saw in German. Münchau says that Standard and Poors was right – not necessarily about the ratings downgrades, but rather that Europe was fixated on the wrong problem, budget deficits. in his view – and mine- this is only going to make things worse. Austerity has already led to a worsening outlook for Europe with even Germany now expecting 0.7% growth for all of 2012.

In Münchau’s view, the reason for the downgrades was that Europe is fighting the wrong battle. S&P even said in their message on the downgrades that an austerity-centered approach would make matters worse. Wolfgang noticed that German Chancellor Merkel and her Finance Minister Schäuble responded to this message by exhorting Europe to push through their austerity packages more quickly. Clearly they don’t get it.

Wolfgang goes on to say that the problem is not in the public sector but in the private sector, where high debt, deleveraging and then recession caused a gaping hole to open up in the public sectors’ balance sheets. Moreover, in what Münchau calls the single currency "strait jacket", the economies of Euroland have diverged rather than converged and that has meant current account imbalances and private debt accumulation in the periphery.

To me this situation looks pretty hopeless frankly. Policy makers in Europe just don’t get it. The best we are going to get is austerity and partial monetisation by the ECB until the union breaks or sovereign debtors default and banks are recapped. The question is why are they leading us down the abyss. Wolfgang says it’s because the government deficit story is an easier narrative to tell and simpler to attack within the existing institutional limitations of Euroland. That makes some sense politically, but it tells me that this crisis will continue to get worse.

Source: Wir bekämpfen die falsche Krise, Spiegel

P.S. – Just a reminder that I will be on BNN in just over an hour and a half talking about this. I won’t have a lot of good things to say.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

5 Comments

  1. abgary1 says:

    Steve Keen is telling the same story but on a worldwide scale. Debt forgiveness for the masses.
    You straighten out the balance sheet of the little guy, the rest will take care of it’s self.

  2. Anonymous says:

    He is spot on. Right up until the crisis the UK Conservative party were promising to stick with the Labour governments spending plans. Only once the crisis stuck and they were in power it became an issue of profligacy by the previous government. 

    Enforcing debts are repaid only benefit the 1%. If politicians mention moral hazard, well that went out the window when they bailed out the banks. That was what holed the Irish balance sheet, and is holing the UK, French and German balance sheets. The german banks are in trouble and have been bailed out via the periphery being blackmailed into guaranteeing the bad loans made by the core nations banks. In the 19th Century banks would have had to take the losses and start again. Why have things changed so much and not necessarily for the good. 

    The real crisis is jobs. Create those and the deficits will vanish, as they have incomes and can pay taxes.

  3. Anonymous says:

    Consider that the powers-that-be are not stupid, they do get it, and they are tanking the economy on purpose, because they have cash and *think* they can buy assets cheaply and make out like bandits when thing recover.

    Unfortunately, they may be wrong about “recover”…

    But either way, the crisis will continue to get worse.

    • Anonymous says:

      Yes but expect revolts if politicians are seen to benefit, while others suffer. The Arab spring was just a sample of the trouble to expect when this happens. Politicians get executed when societies collapse, or are they playing poker and do not expect their bluffs to be ever caught?

  4. Credit was a bubble as Steve Keen has definitively proven and quatified. 

    The credit machine is broken. Capitalism really only works on savings not lending! The latter is mercantilism as all banks are licensed, geddit??

    Some austerity is therefore baked in as consumerism depends upon credit! Non-repayment is only part of it.