Crash of the Bumblebee, by Paul Krugman, Commentary, NY Times: Last week Mario Draghi, the president of the European Central Bank, declared that his institution “is ready to do whatever it takes to preserve the euro” — and markets celebrated. ... But will the euro really be saved? That remains very much in doubt.
First of all, Europe’s single currency is a deeply flawed construction. And Mr. Draghi, to his credit, actually acknowledged that. “The euro is like a bumblebee,” he declared. “This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years.” But now it has stopped flying. What can be done? The answer, he suggested, is “to graduate to a real bee.”
Never mind the dubious biology, we get the point. In the long run, the euro will be workable only if the European Union becomes much more like a unified country. ...
But ... a United States of Europe won’t happen soon, if ever, while the crisis of the euro is now. So what ... could turn this dangerous situation around? The answer is fairly clear: policy makers would have to (a) do something to bring southern Europe’s borrowing costs down and (b) give Europe’s debtors the same kind of opportunity to export their way out of trouble that Germany received during the good years — that is, create ... a temporary rise in German inflation... The trouble is that Europe’s policy makers seem reluctant to do (a) and completely unwilling to do (b).
In his remarks, Mr. Draghi ... basically floated the idea of having the central bank buy lots of southern European bonds to bring those borrowing costs down. But ... German officials appeared to throw cold water on that idea. In principle, Mr. Draghi could just overrule German objections, but would he really be willing to do that?
And bond purchases are the easy part. The euro can’t be saved unless Germany is also willing to accept substantially higher inflation... — and so far I have seen no sign that German officials are even willing to discuss this issue...
So could the euro be saved? Yes, probably. Should it be saved? Yes, even though its creation now looks like a huge mistake. For failure of the euro wouldn’t just cause economic disruption; it would be a giant blow to the wider European project, which has brought peace and democracy to a continent with a tragic history.
But will it actually be saved? Despite Mr. Draghi’s show of determination, that is, as I said, very much in doubt.
2) However, the effects of such bond purchases on core countries is not clear. On the one hand, exports to the periphery will increase; but, on the other hand, nominal interest rates in the core are likely to increase as well because of higher expected Eurozone-wide inflation. Therefore, for the core countries, the effect of the ECB's intervention will be small, or maybe even contractionary. As a result, purchases of GIIPS bonds will improve the economic situation in the periphery countries, but at the cost of preserving the existing structural imbalances. If the ECB could control core interest rates by buying German and French bonds, the ECB's intervention would be more effective, but such scenarios probably lead us to the land of economic fantasy.
3) Of course, fiscal policy would be a much more effective way to increase inflation in the core countries, but that option is probably not politically acceptable since many core countries are already close to full employment (e.g. Germany, Austria, the Netherlands).
4) Since it may be difficult to produce large inflation differentials between the core and the periphery, and since nominal wages in the periphery are still low compared to the core, the Eurozone is right to put so much emphasis on productivity gains in the periphery.
5) Yes, the Eurozone is probably pushing austerity measures a bit too far, and yes, it probably should do more to limit nominal interest rates in the periphery (by the way, that’s the EFSF/ESM job, not the ECB’s), but its overall strategy makes sense and has a reasonable chance of success.
Hire another 7 million people.
There's a little more than 400 billionaires out of a working population of roughly 147,000,000 million people.
It's entirely a problem of perception.
{For failure of the euro wouldn’t just cause economic disruption; it would be a giant blow to the wider European project, which has brought peace and democracy to a continent with a tragic history.}
Well put, PK. You have put your finger on what most Europeans feel is the "raison d'être" of the EU - so riven over the centuries has it been by war.
A common economic dependence brings the peace that has escaped Europeans for more than a century and a half since the demise of the Pax Romana.
Which answers your next question. {But will it actually be saved?}
Yes, of course, because it must be saved.
And do not dismiss Draghi. He is Italian and quite used to the fecklessness of politicians. If push comes to shove, he will do his duty, rather than go down in history as the head of the ECB who failed at saving the Euro.
History has more importance in Europe than the US - where history was five minutes ago and ancient history yesterday.
Draghi's too proud to allow the collapse of the EuroZone to happen. We'd do well to worry more about an ineffectual Fed under Bernanke.
Flight Of The Bumble Bee Is Based More
On Brute Force Than Aerodynamic Efficiency http://www.sciencedaily.com/releases/2009/05/090507194511.htm
"We decided to go back to the insect itself and use smoke, a wind tunnel and high-speed cameras to observe in detail how real bumblebee wings work in free flight," said Dr Richard Bomphrey of the Department of Zoology (Oxford), co-author of a report of the research published this month (May '09) in Experiments in Fluids. ‘We found that bumblebee flight is surprisingly inefficient – aerodynamically-speaking it’s as if the insect is ‘split in half’ as not only do its left and right wings flap independently but the airflow around them never joins up to help it slip through the air more easily.’
Such an extreme aerodynamic separation between left and right sets the bumblebee [Bombus terrestris] apart from most other flying animals.
"Our observations show that, instead of the aerodynamic finesse found in most other insects, bumblebees have a adopted a brute force approach powered by a huge thorax and fuelled by energy-rich nectar," said Dr Bomphrey. "This approach may be due to its particularly wide body shape, or it could have evolved to make bumblebees more manoeuvrable in the air at the cost of a less efficient flying style." ...
These statements can only be construed as an attempt to pacify skittish investment Markets and investors into supporting the Euro.
BTW, its been 5 days since Draghi made his pronouncement. What has he done since then?
(and don't tell me "it's the weekend". When a Continent is on fire, you work overtime)
the parallel between the post civil war US and the zone nowis over looked
there was no transfer union to speak of back then aqnd we tied ..retied the dollar to gold
check out dixie during that period
it wasn't just the struggle between the race nations down there that turned our ante bellum
export dynamo into a poverty sump
if the parallel isn't clear to ya
you ain't thinking about it much
content pull out ?
the protracted date range
1866 to ......1936 !