Southern Europe Must Revolt Against Price Stability

It’s time for a revolution in the eurozone; the time for polite discussion has ended. What is at stake is not a percent or two of economic growth in the South, but rather the difference between a future of prosperity and a future of depression. The mindless happy talk of unity, solidarity and an ever closer union is now irrelevant and in bad taste. People are eating out of trash bins, and an entire generation is living on the dole.

If the South continues to permit the North to administer the poisonous medicine of monetary deflation and fiscal austerity, it will suffer needlessly for years. Yes, we all know that the ECB was modeled after the Bundesbank and part of the deal for Germany was that the euro would be as strong as the mark. But that was then, and this is now.

The eurozone is a multinational republic in which no country, no matter how high its credit rating, can act as hegemon. Germany has just two votes on the ECB’s governing council, not control and not a veto. Germany is  just another member of the union, and the Bundesbank is just another regional branch of the Eurosystem. The ECB treaty was not intended as a suicide pact, and it can be interpreted liberally enough to permit what has to be done. If the constitutional court objects, then Germany can exit. She can’t force anyone else to.

The revolution must be led by France, Italy and Spain. They have already acted together at the last summit, when Monti refused to adjourn until Merkel made major concessions (since rescinded) about bank bailouts. These three men, Hollande, Monti and Rajoy, must form the nucleus of a bloc within the eurozone that demands open-ended QE until eurozone nominal growth rises to the mid-single-digits, and stays there.

First of all, there may already be enough votes on the governing council to ram QE through the Berlin Wall. Failing that, the bloc can refuse further austerity and threaten exit unless the ECB capitulates. Sadly, Mario Draghi is a cipher in all this, having sworn allegiance to the single mandate in order to get Merkel’s approval as president. He cannot lead the rebellion, nor would it be appropriate for him to do so.

What I am advocating is a public break with the Bundesbank and its ideological satellites, and a categorical rejection of minimal nominal growth and fiscal retrenchment. The Southern Bloc must demand nominal growth targeting, unsterilized bond-buying, and an end to self-strangulation by austerity. Those policies have been tried and they have failed for two years.

The South cannot balance its budget without inflation, nominal growth, and rising nominal government revenue. Structural reform is nice but at this stage quite irrelevant. Budget cuts and labor market reforms are not and must not be a prerequisite for nominal growth. Those are shibboleths unrelated to medium-term growth, and they would be much easier to implement in the context of growth.

Before this heart-rending tragedy is over the South will revolt, but probably when it is too late. The time is now, before Spain and Italy are forced to drink the Troika’s strychnine and arsenic. France, as a continental leader with market credibility, must lead this effort. Germany and its allies will think twice before going mano a mano with France.

The cost to the creditor powers will be higher inflation and a decline in value of their claims on the South, but that must occur one way or another. Inflation is much preferable to repudiation, which is the only other viable alternative.

Maybe it would be more prudent to conduct this revolt in private, but my sense is that it can only work as a public ultimatum. Europe successfully stared down Russia on many occasions during the cold war; she can do the same with Germany today.