The Finally Final Deal

... to save the Euro. Yawn. I was on Monocle Radio and Berlin Inforadio during the recent Brussels summit, trying to explain how the latest package was going to help. It's not an easy question. While British isolation garnered a lot of headlines, the substance could hardly be more depressing. First of all, the much-touted "fiscal union" is no more than a growth-and-stability (for which, read, austerity-and-stagnation) pact writ large. Let's forget the problem that the old rules were never implemented, and skip over the question why these ones should be. Austerity is the answer, with debt-brake rules to be written into constitutions, etc. The idea that this will solve anything is more of a collective form of delusion (along the lines Benabou's brilliant paper) than economic policy proper. Sure, it would have been nice if Greece and Italy had saved a bit more during the noughties. But take Spain - it ran government surpluses for much of the post-Euro time. It had debt-to-GDP ratios way below Germany's for much of the time. Even if the current treaty had been in place (and implemented) have helped? Not at all. Spanish wages and prices won't fall by 20%, to make the country more competitive, any time soon. It'll take 10 or 20 years until German wages have risen enough so that Spain restores competitiveness and can seriously start to export. Of course, as house prices slide ever faster, it'll become easier to fill the export gap with asset sales. But effectively - a few niceties apart - the current setup condemns the Club Med to decades of stagnation and high unemployment.

The best thing that could happen? Another Black Wednesday. On Sept 16, 1992, Britain was ejected from ERM, due to a speculative attack by George Soros - an event much lamented in the press back then. It turned out to be a great blessing for Britain, which avoided the worst of the early-1990s recession and entry into the Euro as a result. The recent rout in bond markets, if it were to resume (and I see little reason why it shouldn't) could play a similar role, ejecting Spain and Italy from the Eurozone. In the short term, there would be real blood on the floor -- banks needing recapitalization, capital flight, etc. But in a few years time, people would recognize it for a heavily disguised blessing -- the only plausible way out of the current stagnation and austerity union.