Monday, 17 May 2010

Today's Economics Lesson:

The bad news is that the outburst of fiscal virtue is likely to strangle in its infancy the anemic European recovery—the EU and euro zone grew at an annual rate of only 0.2% in the first quarter, Spain's economy grew a tiny 0.1%, and Portugal's growth rate of 1% was the highest in the EU. Unlike Germany, with an export machine that will be helped by the falling euro, the drop in the euro will provide no such stimulus to the non-competitive economies on the euro zone periphery to offset fiscal tightening.
So cuts in spending and increases in taxes are likely to throw those economies back into recession. That will reduce tax receipts, further widening the fiscal deficits. Even worse, prices have already begun to fall in Ireland and Portugal, which might cause consumers, already hard hit, to rein in spending even more in anticipation of further falls in prices.
It is difficult to predict whether the euro can withstand the social tensions created by this deleveraging of public sector finances. My guess is that it will: the ruling classes have too big a stake in the European "project" to allow the euro to pass into history as an interesting experiment.

Eurocracy reigns supreme. But for how long?