Will the Euro survive?: EU at its critical hour
Most of analysts agree that the chances for the Euro to survive the current debt problem in the EU , goes along with Central banks focusing on financial stability as much as they do on price stability.-
The problem is that in most of the world economies ,Central Banks have made of price stability a trade mark based upon its importance for sustainable economic growth. But as the financial crisis of 2008 (and many other crisis as well) showed , it is hard to get economic growth ,when banks cannot keep the cash flow working.
There are a lot of reasons for Banks to be in a weak position, but probably the most complicated deals with confronting speculative forces. This is one of the reasons that the “lender of last resort” comes along as key partner to control what it might be a liquidity problem to become a solvency problem, because the fall of the financial system ,imply a longer and more difficult period of recovery.-
When such a lender of last resort it is not available, Banks must go on its own. In this scenario nobody trust nobody, and hoarding money becomes an alternative ,although it means a higher chance of credit crunch for productive purposes. Thus , at this stage it is the moment when the price stability focus , become a source of recession instead of growth.
This paradox is to say the least puzzling because it contradicts the main stream of macroeconomic policies, whether it is monetary or fiscal policy , which is to play rules concerning economic growth stability. Therefore, there are three simultaneous variables for central banks to take care of : Price stability, financial stability and economic growth stability. This is not an impossible triangle, but it assumes the availability of proper tools both legal and economics ones.-
The EU economic institutional framework, was not designed for situations like the current one .If that would have been the case, probably the Euro never would have come to live, because economic discipline was a necessary condition for the whole experience to be successful .However , some country members saw the monetary arrangement , as a ticket to wasteful spending anyway .Most of them thought that they were too big to let them fall, but a few if any, thought that at the same time , they could become too big to save without risking the fundamental of the Euro currency principles.
The EU is trapped within its own design. Any modification needs more time than it is available. Besides, without the lender of last resorts, the options are between two social cost : economic recession, or the euro going to the economic history book.-
