“The crisis in Cyprus is a good opportunity to take a step back and remind ourselves how incredibly broken the Eurozone remains.
For one thing, the whole reason the Eurozone has these sovereign debt crises is because while the countries share a common currency, they don’t share a common Treasury. So it is literally possible for a country to just run out of cash. That can’t happen in a country like the U.S. or the U.K., which are capable of creating their own money.
And then even beyond that, the single monetary policy isn’t helpful. The periphery needs much more stimulus, whereas Germany is worried (perhaps fairly) about bubbles, as everyone rushes cash into its borders. Plus, Germany has virtually no unemployment, so it sees no need for stimulative measures.
Economist and professor David Beckworth looked at the big picture on Monday, pointing out how the system needs some serious structural reforms to function properly.
One reform is to alter ECB policy so that it actually tries to stabilize nominal spending for the entire Eurozone, not just Germany. Since it inception, ECB monetary policy has been biased toward Germany at the cost of destabilizing the Eurozone periphery. This could be fixed by having the ECB abandoned its flexible inflation target and adopt a NGDP level target. Another complementary reform, would be to create meaningful fiscal transfers in the Eurozone similar in scale and scope to the United States. Both of these options, however, would face stiff opposition from Germany. For the former would require temporarily higher inflation than Germany desires and the former would require large fiscal commitments for the Eurozone from Germany. Neither is likely to happen.
The Eurozone made its first step towards a true structural reform last summer, when the ECB announced its “OMT” program, which begins to establish the central bank as a lender of last resort, backstopping governments that get into trouble.
That’s cooled the crisis a lot (reducing government borrowing costs) but the catch is that to be eligible, countries have to put on handcuffs (reforms, austerity, etc.) and that’s sent the economies of various countries right into the toilet.
Here, for example, is the unemployment rate in Italy.
That’s hardly an unusual looking chart.
Outside of Germany, pretty much every economic indicator in the Eurozone just gets worse and worse….”
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