Sunday, December 11, 2011

UK Isolated in Europe?

I follow economic news closely. But, if I think it is just politics, I gloss over it. I'm only interested in economics. Therefore, the recent European Treaty business, seems a bit of a non-event. I don't really see what the EU have proposed to 'save the Euro' I only see a recipe for prolonged austerity, low growth and deflationary pressure.

The Deal Excludes:
  • No real Fiscal union with a common Eurobond which would mutualise the debt.
  • No attempt to make ECB lender of last resort and help reduce interest rate yields and make markets have more confidence in Eurozone debt.
  • No attempt to deal with fundamental disequilibrium in the Eurozone which is at the heart of the crisis. (Southern economies with overvalued exchange rate and suffering from fundamental lack of competitiveness and low growth)
  • No plan to target a higher rate of economic growth and reduce unemployment.
The deal still assumes that the problem is only irresponsible spending and an issue of high government debt. It ignores the fact that Spain and Ireland had very low levels of debt at the start of the crisis.

The deal only seems to be a glorified 'growth and stability pact' with stricter rules and penalties for exceeding budget deficits. But, this growth and stability pact doesn't deal with the fundamental cause of the Euro problem with is this two speed Eurozone economy.


A disequilibrium between different areas in the Eurozone.

From a political perspective, Britain may have been moved to the edge of the EU. But, from an economic perspective, there already is a two speed Eurozone.

Relying only on stricter budget deficit penalties is recipe for either political wrangling about foreign interference in national budgets and or a recipe for prolonged spending cuts, austerity and lower economic growth.

It is unfortunate, if we lack a degree of harmony and understanding with our European neighbours, but there are some things which it might be better to be isolated from.


1 comment:

QP said...

I don't think you can ever separate politics from economics, although Greece and Italy are clearly trying!