Blanchflower: ‘The Europeans have run out of options’
David Blanchflower believes that Europe’s dithering has been fatal to the EMU. In an interview with Bloomberg Television, he said that Europe had an opportunity to get ahead of the sovereign debt crisis when it was just Greece. But now he believes they have run out of option as contagion has spread. “It really feels this week like panic has set in.”
Blanchflower also says (correctly I believe) that the eurozone is not about to dissolve straight away. The question is “how do they get to Monday”, he says. The question about contagion really hinges on the ECB at this point. The EFSF is too small to deal with either Spain or Italy effectively. But the ECB is an unreliable provider of liquidity. And political cohesion is all but gone in the euro zone. This makes a double dip recession and a worsening debt outlook all but certain.
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Blanchflower is a former Bank of England Monetary Policy Committee member and currently a Professor of Economics at Dartmouth College.
“political cohesion is all but gone in the euro zone.”
The only way the euro survives is if the German people, in a series of elections, vote to adopt the Greek, Portugese, Irish, Spanish and Italian people.
Think they will?
The Euro will eventually lose a number of members, because they are too weak. David Blanchflower has been much more hawkish in the debts when he was in the Bank of England. I suspect that the collapses will eventually come thick and fast once the losses are tallied up. French banks could lose big but then so could UK and US banks as a result of credit default swaps. At that point I suspect another global credit crunch. Credit markets have been tightening for months and I think a big loss will snap them shut completely. Central Banks need to try a different approach. Let the banks fail. Then seize them and create new clean banks. That will eliminate the trillions of tax losses that are hurting sovereign fiscal accounts.
Ultimately the Euro area will be smaller and may disband eventually but at first it will be the periphery that leave, and not all immediately. I suspect that Ireland might hold on as long as possible before succumbing to the inevitable.