Everyone has heard of Marie-Antoinette screaming from her balcony at the Palace of Versailles in the early hours of the French Revolution: “if there’s no bread, then let them eat cake!”. Right! Poverty-stricken Frenchmen had access to cake, of course, didn’t they! Well, anyone would think that today’s announcement by the European Central Bank board member, Jens Weidmann in a speech in Paris that EU states must be “allowed to go bankrupt” stands somewhere along the same line as the beheaded Queen’s fateful speech. Is he for real?
Weidmann stated that budget consolidation via spending cuts will allow for greater growth in the economy. It will also build on consumer confidence, which incidentally seems to be decidedly lacking in some EU states. Just as one telling example, the figures for Italian consumer confidence dropped from 86.3 in April to 85.9 in May. Admittedly, Italian consumers have been dragging their heels in the Eurozone and have been far from confident for a while now. But, is it any wonder that they having got the bunting out to celebrate a so-called imaginary confidence trick that they are still looking for? The number of Italians that have now officially entered deprivation has doubled in the last two years. That means that today the number of deprived people stands at 14% (or 8.6 million people). That’s hardly a cause for celebration. It’s hardly a reason to imagine that these countries can be allowed to fail.
Failure would mean that the whole EU image would be dragged down. The rest of the world would look on calmly as the EU project imploded and people were left destitute. Aren’t we too far into this now, that getting out of it would be too hard? Hasn’t the Marie-Antoinette attitude of ‘let them eat cake’ got to stop? Yes, Weidmann is right, there have to be cuts, we can’t maintain public debt at present levels. High levels of debt will stop central banks from maintaining some sort of price stability. But, Weidmann went on to add that inflation expectations, even if they were anchored, would not guarantee any future stability. He sees no conflict between budgetary consolidation and growth and any holding back on that consolidation would lead to uncertainty on the markets being intensified. All future stability will depend upon this in his opinion. Without consolidation, future financial solidity of countries will be a thing of the past. The dithering on the budgetary restraints and the uncertainty on the markets will also limit sovereign bonds.
The economic situation is challenging. But, letting countries fail would be the wrong choice. Weidmann told the French yesterday that they should catch up with Germany and that he welcomed them to do so. Follow me? I’ll open the way? Certainly, letting EU countries in financial crisis fail would provide great buoyancy to the markets and make them feel a whole lot happier. But, wouldn’t it be the trumpet call for the start of the end? If we allow those in real trouble to fail, then the knock-on effect will be enormous. Not just in Europe either. Ripping of the band aid now, means we are opening the wound to infection. Surely, that’s not the answer is it Weidmann?
Originally posted