Hurricane Trichet Hits Jackson Hole

The European Central Bank president does not seem to get it. Far from acknowledging that last month’s interest-rate hike was premature, Jean-Claude Trichet’s speech touts “price stability.”

His main theme is that the economic divergence between Eurozone countries is comparable to that between American states. From there, he jumps to the non sequitur that what both Europe and the US need is more “structural reform,” specifically deregulation of labour and service markets.

What he misses (or deliberately overlooks) is that the US is a fiscal union, in which transfers help to support hard-hit regions. The lion’s share of public borrowing is done by the central government at low interest rates underpinned by a sovereign currency (regardless of missives from S&P).

The Eurozone’s problem is being a monetary union without any semblance of a fiscal union. Member economies cannot adjust through different monetary policies or fiscal transfers. National governments must borrow at their own interest rates, which reflect a lack of currency sovereignty.

The solution to the Eurozone crisis is for European institutions such as the central bank, which has sovereignty over the Euro, to stand behind the (Euro-denominated) public debts of member states. However, Trichet wants to diagnose the problem as being “over-regulated” labour markets.

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