Unless you’ve been living in a bubble these past two years (and, arguably, many of Europe’s leaders have been) you’ll no doubt be aware that Europe is in a spot of bother at the moment. European Central Bank president Jean-Claude Trichet recently warned that a Eurozone default risks provoking a “Lehmans-style crisis”. This would be what financial types call a “major credit event” and could tip the world back into recession. When you pause to consider that the US is now just days away from a (thoroughly preventable) default, then the crisis takes on almost Biblical proportions.
Paul Nuttall, a Member of the European Parliament (MEP) with the UK Independence Party (UKIP), appeared recently on Russia Today arguing that the only option left was for the Euro to break apart and countries to devalue.
The only way out of this mess is for those countries to back on their national currencies, to devalue, to get growth moving and to get exports going.
It should also be clear that devaluation works if you can ensure that you’re the only one that does it. Britain enjoyed benefits from leaving gold in part because it took others so long to follow suit. And while tiny Iceland can competitively devalue without generating responses from trading partners, Italy and Spain almost certainly could not. If everyone devalues, then no one gets a trade boost.
This is, of course, without mentioning the risk that Greece or others might leave the Euro only to find themselves facing both a bank run and growing debts still denominated in Euros, encouraging default as well as devaluation. None of the options available are particularly attractive.
Debating Europe has been having a conversation with @Pekkatron on Twitter recently, where he has been suggesting an even more radical alternative solution.
Pekkatron seems to be arguing that central banks (including, or perhaps only, the European Central Bank) should print money and give it away for free, rather than in the form of loans to private banks that then lend it to businesses and individuals. This seems like a recipe for inflation, whereby the more money is in circulation the less the relative value of that money. Could this be a solution to Europe’s woes?
All of these arguments sound perilously close to those being made in the 1930s about devaluing to competitiveness, exporting to growth, raising trade barriers and inflating away debts. Those arguments didn’t produce such good results. As always, the problem is that what might be beneficial for one economy is suddenly very damaging if ALL economies follow that path.
As Conor Slowey points out in his blog, the uncomfortable truth is that there are no easy quick-fix solutions. Every policy choice we could make faces obstacles, pitfalls and challenges.