Financial Times
January 11, 2012
The short version of the standard market world view is: America good, Europe bad. The US economy is surprisingly strong, while Europe is perhaps already in recession.
Stumbling from one inadequate recovery plan to the next, European leaders have failed to get to grips with the eurozone’s crisis. The latest plan, we are told, could be agreed this month.
It will not work. The demand for balanced budgets depends on the nebulous concept of government finances adjusted for the (unknown) position of the economy in the business cycle. It is hard to see this being enforced in court – even if the generalised get-out clause of a “severe economic downturn” is not activated.
If eurozone countries stick to the rules, the drastic cuts required would usher in depression. The first act of the new rules must be temporarily to exempt Italy, Belgium, Spain, Portugal, Ireland and Greece – a move hardly likely to raise investor confidence.
The commonly articulated view is that when the eurozone gets bad enough, Germany and the European Central Bank will act. In other words, don’t invest yet: things will get worse before they get better.
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