There was a good piece by Martin Wolf recently on the Eurozone travails. His conlcusions were spot on:
The eurozone confronts a choice between two intolerable options: either default and partial dissolution or open-ended official support. The existence of this choice proves that an enduring union will at the very least need deeper financial integration and greater fiscal support than was originally envisaged. How will the politics of these choices now play out? I truly have no idea. I wonder whether anybody does. [Full piece here; perhaps subscription to FT required to read this]
Well-known (ex) blogger and Citigroup Chief Economist Willem Buiter has questioned the logic of Martin Wolf’s column on whether the German Bundesbank or indeed the European Central Bank has really been funding the fiscal deficit of the member States.
The counter-argument is built on the arcane system of payments and transfers that the European Central Bank engages in with the central banks of the Eurozone member countries. I am yet to read Mr. Buiter’s counter-argument.
But, I managed to read Gavyn Davies’ rejoinder who partially questions the Wolf column here. Again, I would sidestep the issue of whether the European System of Central banks has been funding the GIPS (this is better than PIGS; PIGS is clearly pejorative). Gavyn Davies too argues hat they have not been funding the GIPS sovereigns.
But, there is one interesting point that Gavyn Davies makes: had this crisis occurred under the fixed exchange rate system of the European Exchange Rate Mechanism (ERM), it might not have become this big. From there, it is a small step to argue that had there been no fixed exchange rate at all, the problem would not have arisen at all, since these countries would not have enjoyed AAA status until 2008 or 2009, interest rates would have risen, loans would have been marked to market, banks would have stopped lending and currencies would have depreciated giving external trade a short-run boost and, as my friend argues, making it cheaper for foreign direct investment to happen in these countries.
In other words, the more we let markets execute their role of signaling without suppressing it, the better off economies would be.
Something for the world to remember in the case of China which has been suppressing market prices more than any other key world economy.