Euro Debate Heating Up Again

by Dirk Ehnts, Econoblog101

The Telegraph reported last week:

Mediobanca is Italy’s second biggest bank. It does not call for a withdrawal from EMU and a return to the lira, stocially [sic!] accepting that discipline is the only way forward. Yet the logic of their Magnum Opus is that Italy would be far better off outside EMU, and the implicit threat is that Italy will have to do so if the Northern creditor powers persist with their destructive regime.

The banks are watching very closely what regulators are doing, and the bank capital rule has been delayed. The political economy behind this is clear: if some banks would not be allowed to operate under the new rules, they have all the incentives in the world to lobby against them. Maybe a last backstop would be an exit from the euro to save the banks? It would not be a surprise to me after what we have seen in the crisis so far. This is how people from Iceland see it, too. The IB Times reports:

However, Gunnlaugsson also noted that Iceland’s ability to bounce back has as much to do with its independence from the European Union as it does with having a small population and the fact that it gave up on its banks and defaulted on the debt. At the time, it was a decision that was widely condemned by political and financial leaders around the world, who said that Iceland would be isolated from financial markets and would essentially be the black sheep of the world. It didn’t last and Iceland now operates in global financial markets and still has healthy trade with the European Union and the United States.

The prime minister believes that European countries and banks must look at them and learn.

He said,

“The European banks survived but haven’t learnt from the experience. They are still functioning on the regulations that brought down the Icelandic banks.”

At the same time, US Treasury Secretary Jack Lew and the IMF lobby for more expansionary policies in Germany. As the FAZ reports, at issue is “bloodless domestic demand” in Germany, which it goes without saying is the result of falling real and lacklustre government spending in the face of a depressed economy.

These two issues belong together. If another bubble doesn’t happen (see my post from yesterday), demand must come from somewhere. Higher wages and more government spending is an option.