Sunday, July 22, 2012

William Pfaff does a head-scratcher column on the euro crisis

William Pfaff is one of my favorite commentators on international affairs. He recognizes that the euro and the European Union are in trouble. But I'm not sure he has a very good idea of why. In Euro Zone in Stalemate Commonweal 07/19/2012, he writes:

The European Union is at risk of being destroyed by the euro. The credit crisis founded on the swindle by Wall Street and retailed to Europe's banks has created divisions that are undermining what was supposed to be mutual confidence and solidarity among the 17 members of the euro zone.

"Making Europe Work" is an urgent need and was the subject of the fifth conference on EU reform held last weekend in Siena, Italy, under the joint sponsorship of Armand Clesse of the Luxembourg Institute for European and International Studies and Nobel laureate Robert Mundell. It was not a cheerful affair, ending, after two days, in an even divide between those who think the EU will survive the euro crisis and those who think it will not. This, it is worth noting, from an academic and professional group disposed to support the European unity project.
Good point. But then he offers up this paragraph:

The euro is a rootless currency in that it was issued by fiat to replace the national currencies of the members of the European Monetary Union and to conduct a fiscal policy that "maintains price stability." This overriding mandate reflects the German obsession with inflation, because of its own experience in the 1920s, and the consequent inheritance and practices of the German Bundesbank.
What, has he been in deep conversations with goldbugs trying to sell him investment scams? The US dollar is also "issued by fiat". The goldbugs talk about "fiat currency" as though it meant that it was phony money. If you listen to Ron "Papa Doc" Paul talk about currency, he gets very explicit about thinking that the dollar is worthless. The term "fiat currency" is a legitimate financial term. But it's a technical term, meaning that the currency is based on the official status decreed upon it by law ("fiat") rather than being tied to some other thing, such as a commodity like gold or silver.

It's certainly the case that the charge of the European Central Bank (ECB) to maintain price stability is an "overriding mandate" that "reflects the German obsession with inflation." But that has nothing to do with the euro being a "rootless currency", whatever that might mean. And while the German inflation of 1923-4 has taken on theological status among conservative economists, the 2012 German obsession with inflation is part of the general One Percenter preference for using the depression to slam down workers' incomes and undermine union rights and weaken regulation, not because German CEOs are brooding about 1923 every morning when they wake up.

He goes on to discuss the sovereign debt crisis in a garbled way, although he does get it right when he identifies as a big problem "Germany's refusal to permit a consolidation of euro debt into European bonds, or a European Central Bank assumption of the role of lender of last resort to the zone, and effectively the ultimate guarantor of all euro debt," although by the fuzzy term "euro debt" he apparently means sovereign debt denominated in euros. But many readers might well assume that he means by "euro debt" any debt, public or private, denominated in euros.

I'm surprised to see the level of confusion that appears in Pfaff's piece, and I have to wonder if editing it for space may have wound up compromising its content. Some German politicians have groused about forcing Greece to leave the eurozone. But that is not the German government's official policy even toward Greece (at the moment of this writing anyway). And there is no official procedure in the eurozone laws and treaties for an exit from the euro. So I don't know where Pfaff gets a statement like, "Germany says that if [the austerity] solution is impossible, then Greece -- and probably others -- may have to quit the euro zone."

He does remember, unlike so many commentators on the euro crisis, that depressions handled poorly can produce unpleasant political results:

The consequences could be politically dramatic for Europe as a whole, leading to popular discredit of democratic governments with dictatorial nationalist parties taking power, repudiating foreign debt, imposing confiscatory tax policies and possibly expelling foreign workers, immigrants and foreign residents. Such a (minority) party already exists in Greece, and EU members Romania and Hungary -- candidates for eventual euro zone membership (if the common currency survives) -- are already under internal challenges to democratic norms to a degree that preoccupies the European Commission in Brussels and the European Parliament. These troubles are not directly economic in cause but contribute to the climate of developing political crisis.
I hope Pfaff is right that the deterioration of democratic institutions in Hungary and Romania "preoccupies the European Commission in Brussels and the European Parliament." Because it seems to me that they are treating the situations in Hungary and Romania more like minor problems while they obsess about making sure the European banks' stockholders don't have to bear any losses from their risky speculations and their investments in eurozone sovereign debt.

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