Creditor countries calling the tune by which debtor countries dance is not a new invention. But using the language of insolvency to do so is new. So when and why did it happen? The single European currency project, in depriving member states of the ability to issue their own currency, has created the conditions for something close to national insolvency when economies slump. With high debt-to-national output ratios, current account deficits, fiscal deficits, and, putting it mildly, shaky banking systems, the debtor countries of Europe look very much like insolvent firms to the markets. Their sovereign power to issue currency is gone, meaning only painful deflation through the wage channels are possible. Leaving the currency union is very, very costly. The solution is national austerity. Indeed, in some cases, like Cyprus, Ireland, and Italy, the banking systems are so big relative to the rest of the economy as to make the sovereign itself almost vestigial.
The saving of the banking system and the system as a whole is the prime concern of Europe's policy makers — typically representing the interests of creditor countries — but what will take its place? A more or less autocratic system of coercion is the logical outcome of these policies. They come from using ideas like national insolvency to reduce the grip a people have on their sovereignty.
But there is no asset valuation concept in the founding documents of any nation state; nor should there be.
But there is no asset valuation concept in the founding documents of any nation state; nor should there be.
(Stephen Kinsella, no Blogue da Harvard Business Review)
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