European Monetary Union
Europe’s problems today are partly a product of the initial success of the single currency. After the euro’s launch, the European financial system quickly became integrated, and cross-border lending exploded. Easy money fed booms, which flattered government fiscal positions and supported bank balance sheets.

In aggregate, the euro area’s debt metrics may not look daunting: the total euro-area public debt burden is lower than that of the United States or Japan, and its current account with the rest of the world is roughly balanced, as it has been for some time.

But as is now blindingly obvious, these aggregates mask large internal imbalances.

For example, since 2007, public debt in Spain increased by 30 percentage points of GDP, in Portugal by 40 percentage points, in Greece by 50 percentage points and in Ireland by 80 percentage points…and counting. Much of these increases are the consequence of private losses in real estate and banking sectors. Indeed, the euro crisis reminds us that, one way or another, excessive private debts usually end up in the public sector.

Further, price stability across the euro area has been composed of large differences in national inflation rates. In the eight-year run-up to the crisis, inflation in the crisis economies was about twice that of the core countries.

Most importantly, unit labour costs in peripheral countries shot up relative to those in the core economies, particularly Germany. The resulting deterioration in competitiveness has made the continuation of past trends unsustainable.

Europe is now stagnating. Its GDP is still more than 2% below its pre-crisis peak, and private domestic demand sits a stunning 6% below.

The contraction is driving banking losses and fiscal shortfalls. These are understandably receiving much attention, but it should be remembered that these challenges are symptoms of an underlying sickness: a balance-of-payments crisis.

Read more on what the Europeans should do…

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Scott Warner:

This speech is aimed at furthering the notion of the “global” economy. I do not subscribe to that notion and really you can see that we pay a huge penalty here for the experiments of the global socialists. Ask yourself as you watch your investments dwindle each day while the “stock” market posts triple digit declines … why should your reitrement savings be devastated just because some people in Greece don’t want to work? Beware people that will try to tell you “its not that simple” … it walks like a duck …

Tuesday, June 26 at 7:19 am | Reply

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