It is clear to most analysts by now that the reason no comprehensive solution for the European sovereign crisis has been found so far is the German nightmare of a repeat of the hyperinflation that crushed the Weimar republic and delivered the State in the hands of the Nazi party, the blog linesofanalysis writes.
This seems to be the only possible reason an exporting country could impose austerity all over its main export markets: irrationality bordering on madness. It is not a repeat of hyperinflation of the Weimar Republic Germans should be worried about, but the serious deflation experimented by the same Republic.
If creditors are worried that European Sovereigns will struggle to repay their debts, it is not because the debt is high in itself, but rather because it is high as a percentage of GDP. The focus of rational investors in the credit markets is therefore on growth as much as it is on debt.
Addressing a Debt/GDP ratio imbalance can be likened to shooting a moving target, with the notable difference that the shot can move the target. The issue with using only, or prevalently, austerity measures is that the benefits on debt can be offset by damage to GDP. If the State increases taxes , that very act may depress growth so much that the effective tax revenue is lower than the one the State would have had without a tax rise. This way what economists call a debt spiral can be started. Once started, exiting a debt spiral can be very difficult…..
Find out more at http://linesofanalysis.blogspot.com/2011/12/euro-and-weimar-deflation-why-efforts.html
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