Most of the focus in Europe this week has been on the acute financial situation, and whether Greece is about to run out of Euros, forcing it to default.
But there were also larger discussions of economic policy, and how to get Europe growing again which, after all, is going to be key if the sovereign debt issues are resolved.
Among other things, Tim Geithner encouraged Europe (the Germans, mostly) to do more fiscal stimulus, and Germany rejected him.
But Germany really should be spending more to grow the economy.
Here’s the problem in a nutshell…
Theoretically, in a recession, a government should have no problem cranking up spending, because the private sector has retrenched, and retrenchment means more savings, and more savings means more money in banks, and more money in banks means more bond buying, and thus the circle is squared. Private sector savings mean public sector deficits aren’t a problem.
But in Europe the cycle is broken. Italian and Greek savers are under no compunction to save domestically, and long-story-short a ton of money is flowing specifically into German bunds, where yields are at record low levels.
Here’s a look at the German yield curve. You’ll see the numbers are pretty similar to those in the US.
So there’s tremendous demand for German debt (because there’s nothing good to invest in, and nobody wants the debt of any other country), and in theory this should make it super-easy for Germany to crank up spending. But due to the German’s unwillingness to do these kinds of things, the money just goes into German bunds and just sits there, accomplishing nothing, yielding very little.
So the cycle doesn’t work in Europe, because of the weird thing where countries share a currency, but don’t share a Treasury.
What’s sad is that, officially, Europe doesn’t seem to get that that’s its problem. How else to explain this notion that Tim Geithner shouldn’t lecture Europe because the US has high government debt? High government debt isn’t a problem in the US, and really it’s not the problem in Europe either.
Any attempt to ‘solve’ Europe without recognising the inherent brokenness of a system that divorces the monetary authority from the fiscal authorities is doomed to fail, and nobody seems to realise that yet.
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