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15 october 2011, not just yet

At the more sensible end of british think tanks on europe, the centre for european reform has maintained a cogent analysis of the euro crisis, which is essentially that its genesis lies in the inbuilt need for wages to fall for competitiveness to be maintained in one part of the eurozone vis a vis others, because the traditional way to do that, devaluation, is no longer an option. Over the euro's lifetime, germans have done precisely that, becoming both keenly competitive and also, because wages and consumer confidence have stagnated, avid savers, so depressing consumption. Being so competitive, exports boomed, great for germany, but bad for those uncompetitive areas sucking in imports, where wages and asset prices boomed instead, including through those infamous irish and spanish property bubbles. When all that ground to a halt in 2007, investors didn't know where to put their money, as suddenly debts in many countries looked unsustainable, whilst returns in the sensible ones remained as low as ever. Nothing the eu has done since has changed that essential outlook, which they argue is worsened by the (german-led) course towards more fiscal rectitude, which lowers further domestic demand. The centre's basic solution is that the only way out is growth, which I agree with, but I don't with their contention that the only way to achieve that is massive government borrowing, taking advantage of cheap money desperate to land. My problem is tectonic plates: somehow, at some point, we need to realise that it was debt that got us into this mess, and it will not be finding a reassuring way to get back to such levels of debt that will get us out. The time is never, ever, going to be right to deleverage: but here we are. In their latest publication, reaching the endgame, they've rather succumbed to the british club of pessimists, seeing the euro's first decade also as its last. A shame, as that's the easy, but wrong, analysis.

Attached File: 15 oct 2011.docx