… The European Commission and the ECB have been unable to stop the bank runs because there is no euro-wide deposit insurance. So, when depositors begin to doubt their country’s future in the EZ, they withdraw their savings and move it to a safer location, like Germany. Here’s more from Reuters:
- “Spaniards alarmed by the dire state of their banks moved money abroad in March at a faster rate than at any time since records began in 1990, official figures showed.
- The 66.2 billion euros net capital flight occurred before the nationalisation of Spain’s fourth biggest lender, Bankia in May due to massive losses from a burst property bubble….
- The European Central Bank stepped up pressure on Thursday for a joint guarantee on bank deposits across the euro zone, saying Europe needed new tools to fight bank runs as the bloc’s debt crisis drives investors to flee risk.” (Reuters).
The eurozone is not sufficiently integrated, fiscally or politically, to deal with the problems it now faces. It does not have a centralized bond market that collectivizes the debts of the member states in order to keep borrowing costs low. Nor is there a mechanism for fiscal transfers to help level the playing field so that account imbalances do not become unmanageable and destructive. EZ managers have rejected the traditional methods for integration and, instead, settled on punitive austerity measures that are designed to purge large deficits through internal devaluation. The process has created record unemployment, severe recession, and widespread social unrest. Still, Brussels persists with the same policy ignoring the fact that it has only deepened the crisis.
The EZ troubles are not difficult to grasp or remedy, in fact, former economic advisor to Barack Obama, Austan Goolsbee explained the problem in an article in Thursday’s Wall Street Journal. Here’s an excerpt:
- “At root, the euro-zone problem remains the locking together of very different economies into a monetary union without a way to adjust….Normally, exchange-rate adjustments would reduce this gap…. But without an exchange-rate safety valve you need an alternate way to rebalance economies. Moving, inflating, struggling, or subsidizing are your only choices…(Either) Southern Europe can struggle through the problem—grinding down wages through high unemployment and structural labor-market reforms ….(or) Northern Europe could decide…, that it is willing to permanently subsidize euro-zone countries with low productivity growth. That could be through explicit subsidies or through bailouts and broad-based guarantees.” –A Fiscal Union Won’t Fix the Euro Crisis –The only practical choices are more geographic mobility, inflation, or subsidies” Austan Goolsbee, Wall Street Journal)
There it is in a nutshell. The problem is not particularly hard to understand or to fix, but if it’s ignored or if deficit zealots (like Angela Merkel) feel as though they can apply their own nonsensical remedies (austerity), then the bank runs will gain pace, a wider panic will ensue, and the monetary union will be torn apart, which is what’s happening now.
Goolsbee’s article also provides an interesting breakdown of how fiscal transfers work in the US:
- “Last year, the Economist compiled census data from 1990 to 2009 for all 50 U.S. states on the amount of federal spending in each state minus the amount the state’s residents pay in federal taxes. Over 20 years, states like Minnesota and Delaware annually paid in about 10% more of their state GDP than they got back. On the other side, for the last 20 years New Mexico, Mississippi and West Virginia have received annual subsidies of more than 12% of state GDP. While not a perfect measure of subsidy, it conveys the basic point well. These are big. Greece’s entire 2011 deficit, for example, was 9.1% of GDP.”
The reason the US is able to successfully use one currency–despite the fact that some states are more productive and competitive than others– is because the weaker states are subsidized via Pentagon contracts, unemployment benefits, federal infrastructure programs, food stamps etc. These “fiscal transfers” are necessary to make the US-currency union work. The same rule applies to Europe, but EU leaders reject the idea saying that fiscal transfers are tantamount to “financing other governments” which is banned under the Stability and Growth Pact. This is idiocy in the extreme. The fact is, economists and experts have repeatedly explained what needs to be done to make the EZ a viable currency union, but EZ leaders refuse to make the changes. Their obstinance has thrust the 17-member monetary union to brink of annihilation.
In China, the evidence of a slowdown is also beginning to mount. The recession in the eurozone has taken a toll on Chinese exports which has hurt manufacturing and retail sales. (China’s PMI slipped to 50.4 from 53.3 a month earlier.) As the slump in the eurozone deepens, China’s economy will cool even more forcing policymakers to lower reserve requirements while boosting stimulus to increase investment by the state-owned enterprises. The recent signs of capital flight from China has experts worried that the boom-times may be over and that China may be headed for a hard landing. Here’s a clip from economist Tim Duy on the topic:
- “…the exodus of cash could indicate that the Chinese story is coming to a close – and that will have significant consequences for the global economy. It is another signal that emerging markets will not be supporting global demand anytime soon. I think .. this story is slipping under the radar while we all have our eyes focused on the farce in Europe. But it could be the real game changer in the global economy.” (“Capital flees China”, Tim Duy, economists view)
China’s industrial production and electricity use are falling fast, while the number of non-performing loans has ballooned to new highs in the last year. Efforts to stimulate the economy have also fallen short as businesses continue to reduce their borrowing to see if demand picks up later in the year. New bank loans have dropped 8% y-o-y, while consumer credit has slowed to a trickle. Here’s more from the Wall Street Journal:
- “The lack of confidence is due to the overhang from the last blowout. All of that investment in industrial capacity and real estate is now coming on line. Companies and local governments are finding it difficult to make their new assets generate enough revenue to service the debt. Inventories are piling up, and China is seeing capital flight for the first time in decades…
- The worry is that China has gone more than a decade without a painful slowdown. During that time, the government held down interest rates at artificially low levels to encourage investment. Such conditions often precede particularly long and painful contractions.” (“China Is Stimulused Out”, Wall Street Journal).
China, the US, and the eurozone are all running out of gas at the same time. If shares continue to tumble as they have in May, the Federal Reserve will resume its Quantitative Easing (QE3) program to prop up stock prices. But liquidity injections alone will not provide the jolt the real economy needs to increase activity, add jobs or grow. Absent another round of fiscal stimulus, the economy will continue to drift sideways or dip back into recession.
Mike Whitney lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached here.