El nuevo Pacto fiscal,recientemente aprobado, computa los objetivos de deficit en términos  estructurales (es decir en funcion de la posición del pais en el ciclo económico). No se nos está aplicando ahora.

España en 2012 acordó cumplir un deficit del 6%, en 2011,  del 4,4%, en 2012 y del 3% en 2013. Ello basado en tasas de crecimiento en los años respectivos de 1.3% ,2.3%  y  2.4%.  Las tasas de crecimiento seran,mas bien,0.7%, -0.1%, -0.3.

Es imposible cumplir los objetivos de deficit nominal establecidos en 2010 con tasas de crecimiento negativos. (Guillermo de la Dehesa. El pais hoy)

Parece tambien evidente que las  inversiones públicas, contrastadas por la Comision Europea, no debieran contar  como defit.Existe acuerdo mayoritario. Si se contrastan por la Comision,insisto. Ello ayudaria al crecimiento de hoy y de mañana.(Mario Monti.La Stampa.7 Mayo)

Habrá gestores externos que evaluen  a nuestros bancos, aunque debieramos conocer, por medios propios, su estado de salud.

Parece que no es así, o al menos  que los inversores no se creen lo que les decimos.  Los  gestores externos -aunque solo fuera por su propia reputacion- tratarán de encontrar agujeros mayores de los  que se sospechan.  Sobre todo en un entorno de disminucion de nuestro crecimiento. Los encontrarán? . .Si es así, qué haremos entonces? Cómo tapamos los agujeros? Ejecicio  arriesgado.(Luis Garicano.El Pais hoy)

Y ademas,  el périodo en que estaremos sumidos en la incertidumbre sobre nuestra realidad financiera,  será largo.Un mes necesitará la  evaluacion externa para  una primera estimacion y dos meses mas para un análisis completo, se nos ha dicho. Hasta septiembre,pues. Cómo salvar esta “trampa-tiempo”.

Despues de las resoluciones del G8 -llamada al crecimiento y empleo-  hay un Consejo Europeo informal y otro formal en este mes. Sin renunciar a la estabilidad fiscal, hay que ser consecuente con crecimiento-empleo.Todos lo necesitamos.

Editor’s Note: This article appears in the Summer Issue of Europe’s World published in May 2012.

The Issue: Could the Euro Destroy the EU? Our Verdict: Only “More Europe” Can Avoid a Deeper Crisis.

Kemal Derviş Vice President and Director Global Economy and Development.Brookings Institution.

Javier Solana Distinguished Senior Fellow.Brookings Institution. President ESADEgeo

The European project has had to overcome many difficulties in the past, but the challenges it will face in the next two or three years are going to be momentous. Not only the eurozone but the European Union itself is in danger.

Even in a worst case scenario, some areas of intra-European co-operation will surely survive. But it is hard to see how the EU as we know it today could survive even a partial disintegration of the eurozone. The sense of failure, the loss of trust and the damage that would be done to so many if two or three countries had to leave the eurozone would be of a magnitude to shake the entire Union.

Nobody can foresee exactly what the dynamics would be, or how finance and trade could cope, and more important still what the political fall-out would be. Those who argue that one or more countries in the periphery should take a “holiday” from the euro underestimate both the economic and political repercussions this could have.

Resentment has already built up between the “North” and the “South”, and it could get much worse. The European Union has been built by incremental steps towards greater integration and co-operation. Overall, these steps were perhaps slow, and certainly they were often complex, but they were successful. There was a sense of momentum, of the strength of soft power, and of progress that was almost inevitable.

All this has been shaken by the crisis that started with Greece, spread to other peripheral countries and continues to challenge the sustainability of the monetary union, and through that, the EU itself.
The difficulties that now face the eurozone have a number of interconnected dimensions.

The one that was most apparent right from the start was the loss of confidence in Greece’s sovereign debt and then of other peripheral countries. A good example of just how quickly market sentiment can shift was the way the spread Greece had to pay over German bonds exploded from very little back in 2009 to hundreds of basis points in less than two years. The Greek crisis suddenly made it very clear to the markets that there was a fundamental difference between eurozone sovereign debt, and U.S., Japanese or UK sovereign debt; the individual countries making up the eurozone no longer had national central banks capable of printing money to stop a run on their sovereign debt.

The European Central Bank could technically play that role, but not only did it not have to play that role but also it seemed legally barred from doing so. That turned Greece, Portugal, Ireland, Spain and even Italy into typical developing countries undergoing a debt crisis, as had happened elsewhere so often in the 1980s and 1990s. Ireland, too, became a problem country, although its difficulties being entirely due to the banking sector set it somewhat apart.

Developing countries have of course had national central banks capable of printing domestic money, but their currencies were not reserve currencies, so while a developing country could try to pay for its domestic debt by printing money, it could not do so for its foreign debt, in contrast to the U.S., Japan and the UK, whose monies are reserve currencies that foreign governments, institutional investors and even private citizens are willing to hold at reasonable interest rates.

The peripheral eurozone countries were thus left without such cover, and that was at the heart of the crisis until the European Central Bank (ECB) finally intervened with sufficient heft at the beginning of November 2011. It didn’t do so by directly buying massive amounts of peripheral debt, but by offering a trillion euros of liquidity to the European banking system with three year maturity at a 1% interest rate and with liberal rules as collateral.
The ECB’s massive liquidity provision was a clever and necessary move because it was able to reduce indirectly not only the pressure on sovereign debt, but also the second dimension of the eurozone crisis: the perceived weakness of many European banks

Some of that weakness was linked to the aftermath of the financial sector’s sub-prime mortgages crisis imported in 2008 from the United States. But much of it was quite simply a reflection of the euro-periphery’s sovereign debt crisis. Essentially, the sovereign debt and the banking crisis were two sides of the same coin as most European banks held large amounts of peripheral eurozone debt on their balance sheets. A decrease in the value of that debt threatened the capitalisation of these banks. Commercial banks in the peripheral countries of course held large amounts of their own government’s debt, so many of them were therefore particularly vulnerable. This vulnerability of peripheral countries` banks added a further dimension of risk to the European banking crisis.

European banks also need more capital now because of the greater stringency of the Basel III capital adequacy requirements that are to be phased in from 2013. But the main reason for their re-capitalisation will be the lower value of peripheral countries’ sovereign debt if and when they have to show these losses on their books.
How great the banks’ re-capitalisation needs are going to be will depend crucially on how the value of sovereign debts evolves. As the sovereign debt and banking crises are so closely inter-linked, the weaker a bank is the less will be its willingness to hold or buy peripheral sovereign debt. By the same token, the lower the value of peripheral sovereign debt, the weaker will these banks be and the greater their need for capital.

The ECB has moved to relieve the pressure coming from both problems. The banks are being provided with almost unlimited liquidity, which gives them time to try to restructure and find enough capital. At the same time, some of that liquidity is being channelled into buying peripheral sovereign debt, given the very high spreads compared to the cost of the ECB’s money at 1%. Spanish and Italian banks in particular have bought a lot more of their own country’s sovereign debt.
It should be noted, though, that compared to the purchasing of debt by the ECB itself, the commercial banks continue to carry the sovereign risk on their balance sheets. Neither the underlying creditworthiness of the sovereign borrowers nor the capitalisation of the banks is “solved” by these ECB credits, but both the sovereign debtors and the banks are given time to take more fundamental measures.

The third and most difficult dimension of the challenge faced by the eurozone is the difference in production costs and competitiveness that has accumulated over time and is reflected in the substantial current account deficits of the “problem countries”. Unit labour costs in Greece, Portugal, Spain and Italy grew between 20-30% faster than in Germany, and faster than unit labour costs in Northern Europe as a whole. This was due to both differences in productivity growth, and even more to differences in wage growth. The inflows of capital into the South, broadly speaking, led essentially to a real revaluation and a lowering of the domestic savings rate relative to investment, resulting in structural current account deficits in the balance of payments.

In Greece, large fiscal deficits accompanied and exacerbated this process, but the situation was very different in Spain where the counterpart of the foreign inflows was private sector borrowing. The eurozone crisis will not be resolved until this internal imbalance is reduced to a point where it becomes sustainable.

There`s no need in the long run for every eurozone country to run a balanced current account. Some countries can in principle finance some of their investment with foreign savings. Over the remainder of this decade, however, the peripheral countries will not have much room for substantial current account deficits as they must reduce not only public but also private debt in relation to their GDP.

There is therefore a need not only for fiscal adjustment, but also for an adjustment in the balance of payments. To facilitate this adjustment there is need for a real exchange rate adjustment inside the eurozone, with production costs in the peripheral problem countries falling relative to the costs of production in the countries of the “broad North”, Germany being by far the largest.

Real exchange rate adjustments inside a monetary union, or among countries with fixed exchange rates, can take place through differentials in the rate of inflation. The real value of the Chinese Yuan, for example, has appreciated considerably compared to the U.S. dollar, despite very limited nominal exchange rate changes because Chinese domestic prices have risen faster than prices in the United States.

For a similar adjustment to take place within the eurozone, assuming similar productivity performances, wages in the peripheral problem countries of the South must rise more slowly than in the North for a number of years, thus restoring their competitiveness.

With the overall eurozone inflation rate targeted at 2%, and with Germany and the other northern surplus countries behaving as inflation hawks, pursuing policies that keep their own inflation close to the eurozone target, the real exchange rate adjustment inside the eurozone requires actual wage and price deflation in the southern problem economies.

This pressure on the peripheral countries to deflate their already stagnant economies is turning into the eurozone’s greatest challenge of all. The ECB’s provision of liquidity has bought time, but cannot solve the overall problem. But unless real adjustment takes place, the eurozone cannot be cured of its ills.

The required real adjustment could be achieved with less real income losses and wage declines if productivity in the peripheral economies were to start growing significantly faster than in the North, thereby allowing prices to fall without wages having to fall. Structural reforms could undoubtedly lead over time to an acceleration of productivity growth, but this is unlikely to happen in an environment where investment faces deep cuts, where credit is severely constrained, and where many young people with skills emigrate.

Price deflation is in any case not very conducive to bringing about the sort of relative price changes that could accelerate a reallocation of resources. It is much easier to change relative prices when there is modest inflation than when these changes have to be achieved by actual nominal price reductions. The need for better productivity performance in the problem countries is undeniable; yet achieving such an improvement in the present climate of extreme austerity and deflation is very unlikely given the atmosphere in them of either latent or open social conflict.

These economic adjustments would become much easier if the eurozone as a whole were to pursue a more expansionary policy “on average”. If the target inflation rate for the eurozone were to be set temporarily at, say 3.5%, and if the countries with surpluses in the current accounts of their balance of payments encouraged domestic inflation rates somewhat above the euro-zone target, then there could be real internal price adjustment inside the eurozone without actual price deflation in the peripheral problem countries.

This would and should be accompanied by an overall depreciation of the euro. Such a “softening” of the dilemma, to be achieved by targeting a somewhat higher inflation rate in the eurozone, is not a panacea. Courageous structural reforms would still have to be pursued in the peripheral countries, and indeed throughout Europe. High public debt levels would still have to be reduced to create fiscal space and keep interest rates low so as to restore long term confidence. The eurozone would still need to strengthen its firewalls as well as its mechanisms for co-operation. But a temporarily and modestly higher inflation rate would facilitate the process of adjustment and give reforms a chance to work.

Deflation is not conducive to optimism and a sense of a better future. Putting the whole burden of adjustment onto the countries of the South with current account deficits, while the North continues to run current account surpluses, would actually obstruct adjustment. Letting the “magic” number of 2% inflation determine the overall macroeconomic framework is irrational. If lower is always better, why not set the target at 1% or even zero? There are times when 3-4% is better than 2%, and Europe is at such a moment.

Beyond any economic analysis of the eurozone’s problems there lies the deeper question of what kind of Europe is now politically feasible.Truly cooperative economic policies require truly cooperative European politics.

First, it is clear that if the eurozone survives it will not include the whole EU but will continue to be just part of an EU that for the foreseeable future will exclude the United Kingdom and perhaps a few other countries. There is therefore the great challenge of defining the future of the relations between the eurozone and the UK. It`s going to be a crucial aspect of the EU`s future, but is also beyond the scope of this essay.

Second, the closer co-operation inside the eurozone that is essential for its survival will as of right now require more integration and harmonisation, particularly in fiscal policies and financial sector supervision and regulation. Temporarily breaking up the eurozone by allowing some countries to take “vacations”, would be economically and politically much more disruptive than the proponents of this view seem to realise. Even finding the legal means to do so without completely wrecking the EU treaties would be a major challenge. These would be vacations from which the holidaymakers would probably never return.

But integration means more sharing of sovereignty in matters close to the core of the nation state. That will not be a trivial exercise and is why Europe is at the cross-roads. Either it moves ahead with greater sharing of sovereignty, or it may well disintegrate. Key to success is that this sharing has to take place through transfers of sovereignty to accountable institutions.

The legitimacy of the operation has to be achieved through a democratic process. For legitimacy, citizens must have the feeling that the institutions that govern them account for their interests and make them part of the decision-making process, which implies a union based on rules rather than power. The present situation is increasingly perceived by public opinion as one where a reduced number of countries – sometimes only one – seem to chart the EU’s future without any referral to a pan-European political process. Such sentiments are likely to make the whole process of co-operation unsustainable.

The fact that the EU does not instantly have all the answers to its problems does not mean that it has no future. The EU is and will continue to be an experiment which, as with all experiments, entails a degree of uncertainty.

The search for solutions cannot just be technocratic but must be embedded in a truly pan-European democratic discussion.
Interdependence in Europe, with its many dimensions, is now well established. And future economic and social dynamics will pull further in that direction.

To try to adhere to a narrow Westphalian concept of sovereignty would in today’s world be at best an anachronism and at worst a dangerous gamble for any EU country that must exist in the global economy and be part of the international community.
For those countries that are part of the already highly integrated eurozone it is even more impossible. Legitimacy and democratic consent will require that states and their citizens give up some of their sovereignty to institutions based on the equitable sharing of that sovereignty, rather than to a group of countries representing current creditor status or economic might.

The sharing of sovereignty has of course to recognise the relative weight of countries, and reaching agreement on these weights is a very difficult process. Inter-governmental decision-making processes have of late had the upper hand in Europe and will no doubt continue to play an important role.

But unless they are complemented by the emergence of a European political space which backs European institutions built on further sharing of sovereignty, neither the eurozone nor the European Union is likely to overcome the current crisis.

A partir de los asuntos relacionados con Bo Xilai, en China se han desatados las sospechas,rumores etc, sobre quiénes más podrían estar involucrados en tramas de corrupción entre la jerarquía China. En particular entre los denominados “Princeling “, familiares  de los colaboradores estrechos de Mao caidos en desgracia y posteriormente rehabilitados por Den Xiaoping. Convertidos en un grupo  especial, educados en las mejores escuelas y preparados para ascender en el escalfón del Partido Comunista, han aprovechado al máximo las oportunidades ofrecidas.Todo parece indicar que algunos  lo han hecho en exceso, tal es el caso de Bo Xilai y su familia Será el único?

Adjunto el link  de un artículo del NYT que lo analiza con mas detalles aportando algunos ejemplos que dan idea de un cierto”spoil sistema” el las alturas de la nomenclatura.

Not a Drop to Drink: The Global Water Crisis

by Stewart M. Patrick
May 8, 2012

Geovani Santos collects water from a weir which has nearly dried up as a consequence of the drought in Maracas at Bahia state, northeast Brazil May 4, 2012. (Ricardo Moraes/Courtesy Reuters)

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The recent UN alert that drought in the Sahel threatens 15 million lives is a harbinger of things to come.

In the next twenty years, global demand for fresh water will vastly outstrip reliable supply in many parts of the world. Thanks to population growth and agricultural intensification, humanity is drawing more heavily than ever on shared river basins and underground aquifers. Meanwhile, global warming is projected to exacerbate shortages in already water-stressed regions, even as it accelerates the rapid melting of glaciers and snow cover upon which a billion people depend for their ultimate source of water.

This sobering message emerges from the first U.S. Intelligence Community Assessment ofGlobal Water Security. The document predicts that by 2030 humanity’s “annual global water requirements” will exceed “current sustainable water supplies” by forty percent. Absent major policy interventions, water insecurity will generate widespread social and political instability and could even contribute to state failure in regions important to U.S. national security. (Look here for a webcast from the Woodrow Wilson Center of experts and U.S. government officials discussing the findings.)

The simultaneous ubiquity and scarcity of water is one of Earth’s little ironies. Globally, 97.5 percent of H2O is contained in world’s oceans. Of the planet’s “fresh” water (the residual 2.5%), more than two-thirds is encased in ice packs and glaciers, particularly in Antarctica and Greenland, another thirty percent in groundwater, and almost one percent in high latitude permafrost. That leaves us with about 0.4 percent of global fresh water to account for: about two-thirds of that is contained in freshwater lakes, with the rest distributed among soil moisture (12 percent), the atmosphere (9.5 percent), wetlands (8.5 percent), rivers (1.5 percent) and vegetation (1 percent).

The need for reliable sources of fresh water is as old as our species, of course. What is new today is the combustible combination of surging global demand for increasingly scarce fresh water in certain volatile regions of poor governance. Several factors are driving this trend.

• Demographic pressure: By 2025, the world’s population will swell from seven to nearly eight billion. The vast majority of this increase will occur in the developing world, particularly Africa. In rapidly expanding urban centers, demand for fresh water will rise for personal consumption, sanitation, industry, and hydroelectric use.
• Declining Fresh H2O supplies: According to Global Water Security, “one third of the world’s population will live near water basins where the water deficit will be larger than 50 percent by 2030.” Many regions that are already experiencing water stress will become “extremely more stressed” or even “exceptionally more stressed.” In some areas, rapid depletion of underground aquifers will be the culprit. In others it will be reductions in meltwater as glaciers recede. In the Andes, hundreds of glaciers will simply disappear in coming decades, eliminating dry season water supplies. Similar, though more gradual, dynamics will be at play in the Himalayas, sometimes referred to as the world’s “third pole”.
• Changing dietary preferences: Meanwhile, the global middle class will surge from 1.8 to 4.9 billion by 2030. Wealthier populations will consume more meat, requiring a shift to more energy and water-intensive agriculture focusing on the raising of livestock and feed grain. Already today, some 93 percent of fresh water consumed is devoted to agriculture (from a combination of riverine, lake, and groundwater sources). Without massive behavioral changes, changing land use and food consumption patterns will place even greater pressures on fresh water resources.
• Poor Water Management: Adapting to a new era of water scarcity will require enormous investments in integrated water management, particularly in the developing world. This would include improving agricultural efficiency through new irrigation systems and drought-resistant crops; renovating infrastructure to reduce urban “water leakage” (which averages 30-50 percent in many cities); clarifying rights to the use of subterranean, riverine, and lacustrine water resources; and introducing pricing mechanisms that reflect the true economic value of water—admittedly a politically volatile step in societies where free (or cheap) access to water is viewed as an inherent, longstanding right.

Significantly, the intelligence community does not predict that increased competition for water resources will, by itself, be a source of violent conflict—a finding borne out by a richbody of research. And yet the same document warns that water stress may well “contribute to the risk of instability and state failure,” particularly “when combined with poverty, social tensions, environmental degradation, ineffectual leadership, and weak political institutions.” The accompanying map makes clear that many of the countries likely to be hardest hit are fragile and/or authoritarian states located within the broad arc of instability encompassing North Africa, the Horn, the Arabian Peninsula, and southwest, central, and south Asia. In other words, states least able to cope.

Regional tensions over shared river basins will also rise. States will use diplomatic and other leverage to preserve their water interests, and “upstream” states will be tempted to use water as a diplomatic weapon, including by threatening to impede flow. Nonstate actors, notably terrorists and other extremists, may also seek to sabotage dams and other infrastructure.

Regional stability and peace, therefore, increasingly depend on effective management of the world’s 263 shared international water basins. “Today, water basin agreements often do not exist or are inadequate.” Analyzing the current capacity to manage seven major water basins, Global Water Security assesses mechanisms to govern the Brahmaputra and Amu Darya to be “inadequate,” and those governing the Tigris-Euphrates, the Nile, and the Mekong as “limited.” (The Indus and the Jordan rivers earn a higher, “moderate” score.)

By revealing the scale and consequences of global water crisis, the intelligence community has performed a great service. But the policy response to date has been just a drop in the bucket.

The Coming Eurozone Austerity Battle

Recent elections in France and Greece pose significant challenges to the strict economic austerity policies Germany has called for in response to the eurozone sovereign debt crisis. Still, Germany has resolutely rebuffed any efforts to alter the European fiscal compact agreed to late last year, explains CFR’s Sebastian Mallaby. “There’s a battle coming up between Hollande and his European partners as to quite what a growth agenda might mean,” he says. At the same time, the political situation in Greece is “more potentially cataclysmic in its consequences,” Mallaby argues, because it could not only signal a Greek exit from the eurozone, but also undermine European financial institutions and facilitate further sovereign debt contagion.

Voters in Greece rejected the country’s mainstream political parties, and, by extension, the latest EU-IMF bailout. In France, voters elected François Hollande to implement pro-growth policies in a worsening economic climate. What are the implications of these recent elections on EU efforts to resolve the eurozone debt crisis?

In the case of France, what François Hollande has done by defeating [current President Nicolas] Sarkozy is basically to put on the agenda a “growth pact.” The question is how to define that rebalancing of European policies away from the austerity formula that has driven it so far. The problem is that there are three competing definitions of what Hollande’s growth agenda might mean for Europe. There’s a kind of [ECB President] Mario Draghi version of this, which is that the growth pact should involve the kinds of structural reforms for the labor market and so forth that have already been put in place in Italy and Spain. The problem with that is that although it drives better growth in the longer term, in the short term, labor market reform means firms can fire people more easily, and those structural reforms actually will drive a reduction in employment and demand in the short term and make recession worse. There is a different version of what a growth pact might mean and one that François Hollande is more keen on, and that is ideally to relax the austerity pact–the fiscal responsibility pact, as [German] Chancellor [Angela] Merkel called it. But Germany has rejected that option. So there’s a battle coming up between Hollande and his European partners as to quite what a growth agenda might mean.

The Greek election is much more potentially cataclysmic in its consequences, because what Greek voters did on the weekend was to reject the two political parties that have provided stability for Greece for the past two generations: the sort of center left [Socialist Pasok party] and center right [New Democracy party], which were the two parties that supported working with the European Union partners and with the IMF to reform the budget, reform the economy, and try to gradually work Greece’s way out of the debt crisis. Those two parties between them got just under one-third of the vote. It was a really dramatic rejection of the policy of working with the outside partners and tolerating austerity.

Meanwhile, the extremes from the left and the right got two-thirds of the vote, and in particular, the new rising leftist [Syriza] party headed by Alexis Tsipras. He is very blunt in saying that the result of the election means that budget cuts are now politically illegitimate because they’ve been rejected by the polls. The problem is, Greece has a big deficit, and if it won’t try to deliver on the cuts that it’s promised to the outside funders–the European partners and the IMF–those partners will turn the taps off in terms of the aid promised two months ago. And if that were to happen, Greece [could] start printing its own money–IOUs–which would circulate in parallel with the euro. Most people would see that as a first step toward the fall of the euro in Greece, and it would trigger a collapse in the business framework to transact with any Greek company, and essentially drag the economy into a death spiral. We’re on a real collision course.

What steps can the EU take to prepare for a Greek exit from the eurozone?

The good news is that they’ve already restructured–basically a controlled default–on privately held government debt, so there isn’t going to be much of a shock to private holders of Greek sovereign debt because they’ve already taken the hit. That takes off the table one form of contagion out of Greece and into the rest of Europe. The problem is that there are other channels of contagion that still exist. One is that private Greek companies have borrowed from other European lenders, including from French banks–such that if private Greek companies stop paying back, maybe because the country’s left the euro or it’s gone into an even worse recession than it’s in already, the hit to French bank capital would be very significant, and the French government would have to recapitalize French banks. That could drive the French debt-to-GDP ratio toward the sort of really bad levels faced by Italy.

So that’s one channel of contagion, and the other one is psychological: If Greece really gets into terrible trouble and Greek creditors in Greek banks realize that they have these euros that they’ve saved up and they’ve put in a Greek bank, that could be actually changed into some revived drachma, I think the effect on Portuguese savers who have their money in Portuguese banks, or on Spanish savers who have their money in Spanish banks, could be quite bad–and you might start to see a bank run developing across peripheral Europe.

To come back to France, what are the kinds of growth measures endorsed by Hollande that Germany might be willing to accept?

The most obvious compromise is to accept a beefing-up of infrastructure investment, channeled through the European Investment Bank, and possibly through other European Commission funding. That would allow Hollande to go back to his electorate and say, “I promised you that we would do something on the growth side, and now we’ve done it.” In numbers, its actual quantitative effect on the contraction that’s happening in the economy of all the debt-stricken countries is not going to be enough to turn it around.

So austerity is likely to continue to be the main European policy response?

Well, I think to get out of austerity, you either have to relax or set aside the recently agreed European fiscal pact, and that is something that Chancellor Merkel has rejected. In other words, getting to a relaxation of austerity would be to partially neutralize government debt in Europe–and there’s always proposals on the table to have a European-wide sovereign bond, which would give Spain and Italy the ability to borrow money while piggybacking off the credit rating of the whole eurozone. That could reduce the cost of funding and therefore to take some pressure off the budget.

But is Merkel also unlikely to accept a eurobond?

That’s certainly the position now. The big judgment at the back of all these discussions of Europe is whether one thinks the grim dynamics of debt and deflation are going to win, or if they will ultimately be trumped by the political forces, the weight of blood and history. If one accepts that the central achievement of German leaders since 1945 has been a) to reunify Germany, and b) to place Germany in the context of a union of peaceful democracies, it takes a lot for [Merkel] to want to be the chancellor who undid sixty years of integration.

The German economic miracle has been based on export performance, which in turn was based on an undervalued euro relative to how competitive German companies are. You’d quickly lose that export-driven German economic miracle if you had the deutschmark, because the deutschmark would appreciate just like the Swiss franc has appreciated–choke off that engine of growth. Germany has both self-interested economic reasons as well as grand, historical, German-destiny reasons to try to get itself out of this box: that you have to have austerity and everybody has to do labor market reform. The experience of the last year or so is that when you really get to the cliff, the Germans do not want to jump off. That’s the drama we’re watching: will they in the end jump off or allow others to jump off? I give it slightly higher odds that Germany’s perception of its own self-interest is ultimately to put eurozone cohesion above a stated commitment to not having the eurobonds, sticking with austerity, and so on.

Lastly, what are some of the parallels between what’s happening in Europe and the U.S. economic situation? How does the U.S. fit into this debate over austerity versus growth?

It’s a comparison that is often made, but rather glibly. The U.S. federal debt-to-GDP ratio is rising and uncomfortably high–around 73 percent right now–but it’s not like Italy, which is around 100 [percent], and Greece, which is above that. Nor is the [United States] as uncompetitive as some of these peripheral European economies. Most crucially of all, the U.S. has its own central bank and a flexible currency, and that makes the U.S. position so very different to that of any of these crisis-afflicted economies. When you’ve got your own currency and it can drift downward, that can be a way of correcting a problem with your competitiveness and boosting growth through exports. Ultimately, if you have your own central bank, you will monetize your debt; in other words, you will print money to fuel your deficit before you’ll default. The U.S. has serious budget challenges, which it will have to grapple with after the election at the end of the year, because that’s when the Bush tax cuts are due to expire; that’s when we hit the debt ceiling again; that’s when the automatic spending cuts agreed to last year in the sequester kick in. And there will be some fascinating brinkmanship around that. But it really ain’t Europe.

US Council of Foreign Relations.

Os sugiero su lectura.