Good News and Bad News From the EU Meeting

    The good news is that they had an announcement that suggests more fiscal union and the markets think this is great. And the EU is ruling out a breakup:

    According the current ECB President Mario Draghii, the possibility of an EU breakup, "seems quite far-fetched."

    http://pragcap.com/europe-has-been-saved-right

   Still despite the euphoric reaction by markets, many notable economists and others are less than impressed. Paul Krugman: "European stocks are up today, and I have no idea why. I’m with Felix Salmon — this looks like a disastrous meeting. More austerity, more posing of the crisis, wrongly, as being all about fiscal deficits; no mechanism for ECB funding. Somehow southern Europe is supposed to deflate its way to prosperity, while everyone runs a trade surplus, presumably against that potentially habitable planet we’ve discovered 600 light-years away."

    http://krugman.blogs.nytimes.com/

     Or Cullen Roche: "Let’s remember, the cause of the sovereign debt crisis is rather simple.  These countries are all using the same currency so there is no floating exchange rate to help balance trade.   This leads to persistent trade imbalances.  There is also no federal government.  So what happens over time is that trade deficits are built up in certain regions and largely financed trade surplus nations.  There is no currency sovereignty in the region because there is no direct linkage between the ECB and the governments.  In other words, the ECB serves as a sort of foreign central bank making the governments users of foreign denominated debt.  This results in all the countries being currency users which creates a real solvency risk (unlike in the USA).   The situation is precisely the same in the US for the states.  There are trade deficit and surplus states in the USA and there is a very real solvency risk at the state level.  Although all the states use the same currency, the difference is that the states in the USA are part of a union with political and fiscal cohesion.  The US federal government makes large disbursements to the states on an annual basis helping them fill any budget gaps that might appear over time.  Europe does not have this fiscal transfer mechanism.  So, no FX to balance trade.  And no fiscal transfer system to eliminate the solvency crisis as it inevitably appears over time as trade imbalances grow."

     While Italy's yield is beneath 7% it is at 6.3%, unacceptably high for the long term.

     http://pragcap.com/europe-has-been-saved-right

     The trouble is that the EU is kind of moving to fiscal union but at a glacial pace. The EU is again acting like they are not on fire that they have the luxury of time. Take the EMU idea that is now supposed to go along with the EFSF-it's not supposed to start till next July. Sounds like the EU thinks that while this is a problem there is time to deal with it. That's a serious misconception. And Germany's hands are still all over it with all the talk about meeting budget requirements, blah, blah, blah. As Roche shows above Germany has benefited from its huge trade surplus in the EU whereas most other member states are in deficit. This is why they have no right to be self-righteous. While it's true that the EU was structured to facilitate trade initially not bail each other out the fact is that they have benefited disproportionately from the EU trade over the first 13 years.

   These then remain the big misconceptions: that this was caused by fiscal profligacy and that there is time to iron out the fine details. It's like Mike Kimel's description of FDR during the Depression: "There's a time to think and there's a time to act. And this, gentleman, is no time to think."