As explained yesterday on the Deep End, Germany has finally agreed that the European Central Bank can make unlimited purchases of bonds issued by Eurozone debtor nations. As long as the agreement holds, this should mean that the likes of Greece and Spain won’t be going bust any time soon – thus ensuring the continued survival of single currency.
However, as George Soros explains in his landmark essay for the New York Review of Books, this is not the end of the matter:
- "Unfortunately, even unlimited intervention may not be sufficient to prevent the division of the euro area into creditor and debtor countries from becoming permanent. It will not eliminate the risk premiums, only narrow them and the conditionality imposed on the debtor countries by the EFSF [a bail-out fund] is likely to push them into a deflationary trap. As a consequence, they will not be able to regain competitiveness until the pursuit of debt reduction through austerity is abandoned."
- "The line of least resistance leads not to the immediate breakup of the euro but to the indefinite extension of the crisis."
In other words, this is the sort of medicine that keeps you alive, but stops you from ever getting better. Soros goes on to describe the kind of Europe that will result from the new dispensation:
- "It will be a hierarchical system built on debt obligations instead of a voluntary association of equals. There will be two classes of states, creditors and debtors, and the creditors will be in charge. As the strongest creditor country, Germany will emerge as the hegemon. The class differentiation will become permanent because the debtor countries will have to pay significant risk premiums for access to capital and it will become impossible for them to catch up with the creditor countries."
In fact, far from catching-up, the structural imbalance between the debtor and creditor nations will drive further divergence:
- "Both human and financial resources will be attracted to the center and the periphery will become permanently depressed. Germany will even enjoy some relief from its demographic problems by the immigration of well-educated people from the Iberian Peninsula and Italy instead of less qualified Gastarbeiter from Turkey or Ukraine. But the periphery will be seething with resentment."
You might think that this is something that already happens elsewhere in other major economies – such as America, where people and power are drawn to core regions, while others become permanent backwaters. But actually it’s not the same at all. We’re not talking about the marginalisation of mere regions, but entire nations.
Furthermore, whereas America keeps its poorer states going through federal spending transfers, in the European new order the peripheral nations are expected to borrow what they need. Given the permanent state of economic backwardness that the wider system condemns them to, how are they supposed to pay this money back?
George Soros is surely right when he says this of the Eurozone’s new order:
- "The prospect of a prolonged depression and permanent division into debtor and creditor nations is so dismal that it cannot be tolerated. What are the alternatives?"
As we’ll see tomorrow, two alternatives are proposed – humane, logical, far-sighted alternatives – but, as we’ll also see tomorrow, neither of them have a hope of succeeding.