I agree with both David Brooks and Paul Krugman today, which is not very common. Brooks is dead right that rewarding bad fiscal behavior by bailing out Southern Europe while penalizing good governance by countries like Holland and Germany is a horrible example of moral hazard. The key to fiscal disicpline is fiscal discipline, period.
But that isn't the actual crisis we are now facing. Krugman is being proven right. If Merkel gets her way, Europe is on the edge of a major deflationary spiral. What this could do to the euro area, the entire EU (Britain is by no means immune), and the US is alarming. If that were to happen alongside the euro disintegrating, we have the most serious crisis in Europe since the Second World War. At this point, you do what you have to do, as Paulson and Bush did in 2008. The far-right euro-skeptic Ambrose Evans Pritchard makes the case:
Yes, Article 123 of the Lisbon Treaty makes it illegal to purchase government bonds directly. The article is absurd. It is a fundamental design-flaw of monetary union.
But the ECB is already flouting the rules in the worst possible way by buying the bonds of states in trouble, and doing so incompetently at €8bn a week — enough to scare residual bondholders by reducing them to junior creditors (below the ECB) without being enough to solve the problem. The policy is idiotic.
What they should be doing is quantitative easing, which is perfectly legal under EU treaty rules and the bank's mandate. Doesn't the ECB's twin pillar doctrine say that M3 money should be growing at 4.5pc? Well it is not doing so. It contracted in October, month-on-month. So get on with it.
The crisis can undoubtedly be halted immediately by the ECB. The bank can reflate Club Med off the reefs. It chooses not to act for political reasons because this mean higher inflation for Germany. That is the dirty secret. Everybody must be crucified to keep German internal inflation under 2pc.
Today, Merkel told the Bundestag that fiscal union was underway – to ensure future spending is controlled in the euro area. Maybe this is the condition required for the ECB to do for Europe what the Fed has for the US. It's just hard to see how such a stringent fiscal union can be created in time; and how more short-term austerity might be self-defeating.
Britain, which aggressively tackled its debt problem early, is showing the result. The Coalition government has seen its growth targets drop to near-double-dip levels, and the new debt thereby acquired is requiring more years of future cuts, as Osborne admitted in his autumn statement this week. A deflationary debt spiral is far too close for comfort. If cutting debt destroys growth and then adds more debt, requiring more austerity, we're in a great deal of trouble. I understand why the Brits did what they did, and they have escaped a run on sterling. But in comparison, the American gradualism of Obama is looking like a shrewder response to the crisis.
The Dish 