Wednesday, September 28, 2011

The problem of gradualism in the EU

In economics, things take longer to happen than you think they will and then they happen faster than you thought they could. 

- Rudiger Dornbusch (from Lawrence Summers editorial in the FT 9/19/2011)

want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self-preservation strikes its jarring going - these are the features which constitutes the endless repetition of history.

Winston Churchill

The monetary framework is not working for the EU. The single mandate of the ECB has placed strain on the financial system given that they have to step gently around the issue of bailing out the fiscal problems of countries. Given it does not have oversight of banks, it is difficult to deal with issues of capital requirements across the entire EU banking system. The coordination issue is even further exacerbated with respect to fiscal policy. There is no EU bank market and there is no universal taxing authority; consequently, all policy will move slowly. 

The issues will not be solved easily so the process of adjustment will take longer than expected.

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