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Europe is misdiagnosing the source of its economic problems, argues Prof. Norman Bailey

Date: May 20, 2013

The article below by Prof. Norman Bailey appeared in Globes: Israel’s Business Arena.

Europe embraces fecklessness
Flooding the market with liquidity is doing nothing to solve the real problem or promote economic activity.

Feckless (adj.); “Lacking purpose; feeble, weak, ineffective, careless, irresponsible, incompetent, futile.”

The feckless European “leadership” has failed yet again to accomplish anything of importance. The EU finance ministers met and failed to agree on a plan for a banking union to regularize bailouts and produce a plan for dealing with insolvent financial institutions. As has been detailed in previous columns in this series, one of the serious problems with this proposal is that it misdiagnoses the illness as one of illiquidity rather than insolvency, so that if the ministers had indeed decided on a plan, it would have solved nothing. In short, in this case, fecklessness actually can be said to have been a blessing.

But that would be too facile. The fact is that the only measure that the countries involved have been able to agree upon since the inception of the crisis, six years ago, is to flood the market with ever-greater quantities of liquidity, which adds to the overall level of debt and which is not used by insolvent institutions to finance productive economic activity. As a result, Europe sinks back into recession while ministers and central bankers make constant contributions to aggregate demand for hotel rooms and caterers. The most recent country to submerge is France.

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