Today, I (and others, of course) took part in a Daily Telegraph webchat with Ambrose Evans-Pritchard and I thought it might be of interest if I posted a transcript of part of the proceedings.
Q1. The Chancellor of the Exchequer has this morning talked about the “remorseless logic” of eurozone fiscal union. Why is the Chancellor (and the British government) so much in favour of “ever closer union”?
A1. Because he is terrified. Because we are on the cusp of a 1931 moment. If the eurozone makes a total hash of this, Britain will be engulfed. It is by far the biggest British crisis of my life-time. I am 54
Q2. If you’re advocating Germany to leave the Euro, then plain and simply surely others would follow. Why are you placing the entire burden on Germany?
A2. If the weak countries leave, they will not be able to honour their euro denominated debts with a devalued currency. There will mass default. If Germany leaves, the new D-Mark will shoot up, but holders of German bonds will enjoy a windfall. The damage would be much easier to manage. It would be a blow to German exporters, but they are going to face that blow anyway if EMU disintegrates in chaos. Besides, the current mercantilist advantage of German exporters over Club Med through a rigged currency is completely unsustainable. That what the crisis is all about.
Q3. A comment about the economic situation of France please – not actually very good – and do you see it going the way of Spain and the others – if not why not?
A3. If Spain goes down it will blow the EFSF-ESM to pieces, and take Italy with it. French bank exposure to Italy and Spain combined (plus trade exposure) would be fatal. If the legislative elections produce a Front Populaire parliament as in 1936 with Communists playing a big role, there may well be capital flight. We will have some idea on Sunday.
Q4. How can this crisis end? Indeed, can it end without a fundamental re-think regarding the EU’s relationship with the citizens of the member countries? Is the single currency compatible with democracy and nation states?
A4. The ECB can halt the immediate crisis in ten minutes by acting as a real central bank and lender of last resort. It should act on a massive scale like the Swiss National Bank, the Fed, the BoE, the Danes, etc. Any half-hearted bond purchases would backfire by subordinating other creditors. Has to be the Powell Doctrine of overwhelming force. Germany won’t allow it so we are stymied. Let me add, it is not the job of a central bank to manipulate the consumer price level. This is a foolish and primitive mandate. The job of a central bank to ensure financial stability. It has failed. Shocking
Q5. George Soros reckons we have 3 months! What’s your perspective on this?
A5. Three months? No, I think it is too late to reverse the mistakes. The root cause of the disaster is the 20% – 30% currency misalignment between north and south. You cannot correct this through wage cuts and “internal devaluations” in the south for a decade. Such policies are already tipping the whole EMU system into a deflationary downward spiral. They “work” by driving unemployment to such high levels that it eventually breaks the back of labour resistance to pay cuts. This was the 1930s policy. It borders on criminal. Soros’s Trent speech was brilliant. He put his finger on the diabolic nexus of EMU’s crippled sovereign states and crippled banks, each propping the other up. He wants to save the original EU dream – understandably given his traumatic youth in the Budapest Ghetto under Nazi occupation – whereas I think the project itself has become the chief threat to democracy and stability in Europe. It is not an object that should be pursued.
Q6. Final thoughts, Ambrose: how long will the eurozone crisis last?
A6. You never know what the final trigger will be. It was the Invergordon mutiny by Royal Navy ratings in 1931 – who sang the Red Flag and refused to set sail in four ships in protest over pay cuts – that forced Britain off the Gold Standard in 1931 and set off the chain reaction. Politics will decide the outcome. Politics in Germany, and politics in Latin Europe. It is a race to see where revulsion will emerge first. If we have a synchronized global recession later this year, it will be the straw that breaks the camel’s back. The camel’s back is weakest in the Bundestag. Auf Wiedersehen.