Hindsight is a luxury not available when amidst the maelstrom of fast-moving real-time events.
Just look at the haggard nature of both EU politicians and Eurocrats and one wonders if they have time for enough kip let alone time for reflection on the strategic direction the EU is taking.
On the other hand “the action is on the tails” and we are amidst a protracted tail-event in the form of a prolonged EU downturn coupled with a synchronised global slowdown – notwithstanding signs of green shoots over the other side of the pond in the US.
- A single currency but with no single national fiscal policy, let alone fiscal federalism
- So a second-best co-ordination of fiscal stances through nominal criteria was set up via the Maastricht Criteria and the Stability Pact…best referred to as the Instability Pact
- Free movement of peoples and capital in the EU led to flows of capital to the less developed south – in turn fuelling asset bubbles and related rise in private consumption through equity withdrawals.
- Southern Governments became “free riders” of EU growth, relying on lower financing cost rather than any intent to focus on supply side reforms, leading to rising gaps in productivity with northern EU-ers (eurogroup or not).
- In the meantime, the northern Eurozoners continued to innovate and move along on the productivity chain. Germany re-emerged from the German re-unification process successfully and like its near neighbours, showing a massive 25-30% rise in productivity over the last decade.
- The financial crisis that stated with the sub-prime problems, voodoo financial engineering had a direct hit on European banks. That in turn filtered through to the sovereign debt.
- QE by central banks (inc. the ECB) has helped to allay – but not resolve – a pending banking crisis by massive injection of liquidity that is now cycling back into sovereign debt, helping to lower yields.
- But credit to the real sector remains moribund across the Eurozone as banks rebuild balance sheets by borrowing at near-zero rates from the ECB and investing in high yielding (non Greek ) sovereign bonds of the rest of the southern Eurozone.
- Distressed Southern Eurogroup members have been bailed out to varying degrees with further write-downs a near-certainty.