11/18/10

"The horrible truth starts to dawn on Europe's leaders"

"The entire European Project is now at risk of disintegration...

...[EU President Herman Van Rompuy] is admitting that the gamble of launching a premature and dysfunctional currency without a central treasury, or debt union, or economic government, to back it up – and before the economies, legal systems, wage bargaining practices, productivity growth, and interest rate sensitivity, of North and South Europe had come anywhere near sustainable convergence – may now backfire horribly.

...fellow fathers of EMU were told by Commission economists in the early 1990s that this reckless adventure could not work as constructed, and would lead to a traumatic crisis. They shrugged off the warnings.

They were told too that currency unions do not eliminate risk: they merely switch it from currency risk to default risk. For that reason it was all the more important to have a workable mechanism for sovereign defaults and bondholder haircuts in place from the beginning, with clear rules to establish the proper pricing of that risk.

But no, the EU masters would hear none of it. There could be no defaults, and no preparations were made or even permitted for such an entirely predictable outcome. Political faith alone was enough.

...Now we are seeing what happens when you build such moral hazard into the system, and shut down the warning thermostat.

...The purpose of EMU was political, not economic, so the objections of economists could happily be disregarded. Once the currency was in existence, EU states would have give up national sovereignty to make it work over time.

...Far from binding Europe together, monetary union is leading to acrimony and mutual recriminations.

...All are having to knuckle down to Europe’s agenda of austerity, without the offsetting relief of devaluation and looser monetary policy.

...My one thought for all those old friends still working for the EU institutions is what will happen to their euro pensions if Mr Van Rompuy is right?"

Ambrose Evans-Pritchard

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