In the UK, around 20% of the ‘Greater South-East’s’ GDP goes North. Following the American Civil War, about 20% of the North’s GDP flowed south. Much of American Growth from then until 1914 was merely the south catching up with the North’s industrialisation. After unification, about 20% of West German GDP flowed east.
The moral of the tale is that if a highly invested, competitive area (like Germany & Northern Europe) finds itself in a currency union with an uncompetitive area (Like the Club-Med), funds must flow from the competitive area to the uncompetitive area, so that the capital investments can be made to allow the uncompetitive area to catch up. It may never do so, as East Germany or the American South found. The damage done to the population’s competitiveness by socialist idiocy or slave-agrarian economics, is just too great.
What is happening instead, right now in the Eurozone is that capital is fleeing the periphery, rather than flowing to it. This is because savers ask themselves ‘Why have a bank account in Italy or Spain and risk holding Pesetas or Lira in a few years, when you can open one in Germany and ‘risk’ holding Deutchmarks?’ The result of this (amongst other effects) is a massive collapse in the money supply in the periphery nations, which central bank action cannot counter, because monetary policy is set for the core. Big falls in money supply lead to depression. Against this backdrop, attempts to stabilise the debt by fiscal contraction in Italy or Spain are like a sticking plaster on an arterial bleed.
Note that the leftist argument that it’s fiscal contraction which is causing the lack of growth is complete twaddle. THERE IS NO MONEY because IT’S ALL GOING TO GERMANY, so THE ECONOMIES WILL CONTRACT. Firing a few Spanish or Italian civil servants and building fewer roads is neither here nor there as far as their GDP numbers go.
But the UK is in a slightly different position to Italy and Spain because it’s in control of it’s money supply. We’re not Greece, we’re not Italy or Spain because we didn’t join the Euro. What the left-wing plan to spend more risks is the Japan’s disease where a pig-headed unwillingness to write off bad investments facilitated through expansionary fiscal “stimulus”, left them with the highest per capita public debt in the world. And still their economy doesn’t grow, despite decades of stimulus.
The evidence appears to suggest that expansionary fiscal policy (running a deficit) loses any stimulus effect on GDP growth when public debt hits around 80% of GDP (France, Germany, The USA), and debt kills growth entirely when it hits about 120% of GDP (Italy, Japan). Thanks to decades of overspend, there is no Keynesian firepower when it’s needed. So there’s no argument for more “stimulus” here, as the “Iron Chancellor” spent all the ‘stimulus’ long before the bust. Gordon Brown was a disaster for which I will be paying for the rest of my life. It Could have been worse, had Blair got his way and taken us into the Euro.
So, back to the Eurozone: Spain and Italy need Quantitative easing to ease the monetary pressure caused by the capital flight. Germany is simply unwilling to risk inflation and will sacrifice the economies of southern Europe on the altar of price stability. Meanwhile, the rest of Northern Europe are simply unwilling to make the transfers necessary to sustain currency union, let alone to allow the investment necessary to allow ‘the South’ to catch up.
What we’re witnessing is the simple logic of currency union. Brits are broadly happy to subsidise other Brits farther north. Germans are content to throw money at Germans farther east. Ditto Yankees are happy to subsidise the ex-confederacy to their south. But Brits and Germans are NOT content to see vast sums head south to subsidise people whom their electorates consider feckless because they still enjoy siestas. Without a ‘Demos’ there is no democracy. And for the same reasons, there can also be no currency union without fiscal union. And fiscal union in the EU is impossible unless we all think of ourselves as ‘European’.
And we don’t. So the Euro will fail.
There MIGHT be enough political will to hold it together, for now. Indeed I think this is the most likely outcome. But eventually, decades of increasingly grinding poverty to which the Euro will condemn Spaniards and Italians will persuade the Spaniards and Italians vote to leave; or Germans will tire of writing cheques and vote to kick them out. Either way, the Euro’s a doomed project.
It’s not ‘if’ but ‘when’ and ‘will there be piles of rotting corpses on the street again as a result?’