Hurricane Trichet Hits Jackson Hole
After watching Jack Laytonâ€™s state funeral, I noticed that Jean-Claude Trichetâ€™s speech from Jackson Hole is online. The European Central Bank president does not seem to get it. Far from acknowledging that last monthâ€™s interest-rate hike was premature, he touts â€œprice stability.â€
His main theme is that the economic divergence between Eurozone countries is comparable to that between American states. From there, he jumps to the non sequitur that what both Europe and the US need is more â€œstructural reform,â€ specifically deregulation of labour and service markets.
What he misses (or deliberately overlooks) is that the US is a fiscal union, in which transfers help to supportÂ hard-hit regions. The lionâ€™s share of public borrowing is done by the central government at low interest rates underpinned by a sovereign currency (regardless of missives from S&P).
The Eurozoneâ€™s problem is being a monetary union without any semblance of a fiscal union. Member economies cannot adjust through different monetary policies or fiscal transfers. National governments must borrow at their own interest rates, which reflect a lack of currency sovereignty.
The solution to the Eurozone crisis is for European institutionsÂ such asÂ the central bank, which has sovereignty over the Euro, to stand behind the (Euro-denominated) public debts of member states. However, Trichet wants to diagnose the problem as being â€œover-regulatedâ€ labour markets.