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In the name of Love, say Financial Markets and the spread to Europe

I have a dream that one day on the red hills of Georgia, the sons of former slaves and the sons of former slave owners will be able to sit together at the table of brotherhood.

 

Oh how not to agree with Paul Krugman when he notices that explaining the euro crisis because of the differences in economic performance across states of the Union is a weak explanation at best. Greece and Portugal? Fine, what about Mississippi and Alabama? Or Otter Pradesh and Orissa in India?

Yes, Krugman is right, we the Europeans are no nation. No, Krugman is wrong, we dont need a Secession war to become one.

But what does it mean exactly? To be a nation?

I think of another couple of monetary unions, closer to home. The Italian and the German ones. The first one almost collapsed recently when the Northern League was pushing many of its supporters to say “enough with the South”. The second one never had one moment of lack of credibility given the incredible and convinced economic support the West gave to the East.

A Nation is a contract. A union among diverse communities to become more powerful and to better expand or protect one’s values. To be stable, not to be threatened within, while democratic it must: a) tolerate differences and b) provide equal treatment. The first requires politics, the second one economics. Both of them, needed politics and needed economics, share one necessity: solidarity. If one or both of these are denied, through the denial of solidarity, the Union collapses.

So it goes for the euro area. Market spreads are high not so much because Greece lacks productivity, not so much because Greek politicians are heavy spenders, but because both of these two features seem to be little tolerated by other member countries. Markets know that intolerance is at the root of the break-up of a Union.

Therefore here are your spreads, explained.

Which brings about the interesting issue of the unintended and paradoxical fact that currently in the euro area the most important supporter of tolerance, solidarity  and diversity is the Market. That’s right, financial markets. They are the ones that have most to gain from  the right shift in the name of values toward a truly United Europe. They are the ones that might push for the right solution. Unbelievable.

Therefore here is the explanation of how to save the euro, obvious.

Transfers from the rich states to the poor states are the quintessential need of a monetary union. I agree with Krugman. Forget about European banking supervision, forget about centralizing fiscal policy. Maybe ECB direct purchases of bonds and a Greek bail-out, as they both embed a certain amount of tolerance and understanding for those who have sinned and will sin again, will provide a respite. But then you will need – in addition – to annually be able to transfer from Germany to Greece large chunks of money like Massachusetts does with Mississippi. Are we ready for this? Are we ready for saying yes the Greek, the Italians, they are bad spenders and they are incapable of doing reforms as well as other do but we will trasnfer money to them nonetheless, from here to eternity for the sake of the greater Europe we want to build? Like the West Germans have promised to the Easterners?

No, Prof. Krugman, no war is needed.

I have a dream. I know, I know. But it is my dream and you can’t take that away from me.

5 comments

  1. Bell’ articolo. Ma questo non implica che gli economisti dovrebbero darsi da fare anche sul piano politico? Di movimenti ce ne sono tanti, pieni di entusiasmo, capaci di fare massa critica ma il problema è che si presentano troppo spesso come degli improvvisatori mossi più da generose spinte ideali che da effettive capacità progettuali, per di più non sempre in grado di sostenere alla pari un confronto dialettico serrato.
    Perché gli economisti restano sui loro blog e le loro cattedre e non si impegnano a dare voce ai movimenti secondo le loro altissime competenze scientifiche? Non fa parte del suo sogno?

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  2. Grazie, mi interessa molto. Credo che oggi un movimento politico non solo abbia bisogno del contributo di economisti di alto livello animati da un autentico ideale ma che sia assolutamente necessaria una partecipazione più attiva e più consapevole da parte dei cittadini. Ben vengano quindi i blog come il suo e se poi ci fosse anche un movimento politico con un progetto che non si limiti alla constatazione delle immutabili leggi di natura e che finalmente si basi su un autentico know how economico garantito da persone come lei, sarò lieto di aderire.

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  3. In un post successivo, Krugman (http://krugman.blogs.nytimes.com/2012/06/24/revenge-of-the-optimum-currency-area/) dice anche che per rendere l’Euro “workable” potrebbero intanto aiutare un potere della BCE come lender of last resort, un supporto federale ai bilanci bancari e un target di inflazione piu’ alto: In fondo, sono tre aspetti di quell’Europa-nazione a cui fai riferimento, ma chi lo spiega ai tedeschi?!? Gustavo, il sogno e’ anche il mio, e se c’e’ qualcosa che si puo’ fare, anche a me piacerebbe saperlo…

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