terça-feira, novembro 23, 2010

Get a grip and fiscally unite!

"Europe must compromise to solve its debt crisis " por Gavyn Davies, no FT

" So why have the financial markets taken such a pessimistic view of the default risk in these countries? I think we all know the answers. Within a monetary union, the fiscal tightening cannot be cushioned by a currency devaluation, and it may therefore become so painful for the economy that it becomes politically untenable. And, also within a monetary union, the resolution of a banking crisis cannot be helped by the actions of an independent central bank, so rescuing the banks can become an impossible burden for a small economy to bear. (This is especially the case if the banking sector is large relative to rest of the economy, and if the full scale of its losses remain somewhat obscure.) Consequently, the chances of troubled economies being able to stay the course during a fiscal retrenchment are less than would be the case for a country which can pursue an independent monetary and exchange rate policy - the UK, for example.

There is little point in the EU seeking to deny all this, since it is by now apparent to everyone in the markets. If politicians want to preserve the monetary union (and it appears that everyone still does), they will need to come to an agreement under which there is some further fiscal co-operation between member states while the budgetary tightening takes effect in the periphery. And in exchange for this there will have to be much tougher long term budgetary and regulatory arrangements, so that the financial free riding which occurred in the boom years (and which actually affected private debt, rather than public debt) can never again take place. "

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