The Euroslide Continues

You might have heard that the S&P downgraded several European nations this week.  What you probably didn’t hear was why.  Hidden in the appendix of the downgrade report is this gem.

In our opinion, the political agreement does not supply sufficient additional resources or operational flexibility to bolster European rescue operations, or extend enough support for those eurozone sovereigns subjected to heightened market pressures.

We also believe that the agreement is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone.In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the EMU’s core and the so-called “periphery”. As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.

While “fiscal profligacy at the periphery” is still part of the S&P equation, the ratings agency now recognizes that the capital flow imbalances between the “core” and the “periphery” played a major part in destabilizing the Eurozone.  Austerity is driving the Eurozone to default and it won’t stop until they recognize that the Euro is a failed experiment.

Why did this happen?  In a nutshell, Germany didn’t play fair in the Eurozone.  They treated the Eurozone periphery as a “captured market” for German exports.  By keeping their employment high and their inflation low, they were able to maintain a significant trade surplus with the periphery, thereby extracting capital from the peripheral countries.  This imbalance impoverished those peripheral countries.  Combined with the rampant core-zone speculation in the periphery (Greece in particular) pretty much guaranteed the failure of the system.

What we’re witnessing is a validation of MMT and a complete repudiation of neoclassical economics.  Nations without their own currency are subject to monetary destabilization from outside.  Nations with a sovereign currency do not run this risk.


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