JPMorgan: The Euro area adjustment: about halfway there

“In the early days of the crisis, it was thought that these national legacy problems were largely economic: over-levered sovereigns, banks and households, internal real exchange rate misalignments, and structural rigidities. But, over time it has become clear that there are also national legacy problems of a political nature. The constitutions and political settlements in the southern periphery, put in place in the aftermath of the fall of fascism, have a number of features which appear to be unsuited to further integration in the region. When German politicians and policymakers talk of a decade-long process of adjustment, they likely have in mind the need for both economic and political reform.” [Emphasis added]

Yes, you read that right. It’s in dry, banker-ese, but the authors have basically said that the laws and constitutions of southern Europe are a bit too lefty, a product of their having been written by anti-fascists. These “deep-seated political problems in the periphery,” say authors David Mackie, Malcolm Barr and friends, “in our view, need to change if EMU is going to function properly in the long run.”

You think I’m perhaps exaggerating a smidge? They go into more detail in a section describing this “journey of national political reform”:

“The political systems in the periphery were established in the aftermath of dictatorship, and were defined by that experience. Constitutions tend to show a strong socialist influence, reflecting the political strength that left-wing parties gained after the defeat of fascism.”


“Political systems around the periphery typically display several of the following features: weak executives; weak central states relative to regions; constitutional protection of labour rights; consensus building systems which foster political clientalism; and the right to protest if unwelcome changes are made to the political status quo. The shortcomings of this political legacy have been revealed by the crisis. Countries around the periphery have only been partially successful in producing fiscal and economic reform agendas, with governments constrained by constitutions (Portugal), powerful regions (Spain), and the rise of populist parties (Italy and Greece).”


"The other trigger of a shift to a new narrative would be if social dislocation in the Euro area were judged to have passed some form of tipping point. At present this appears unlikely, but it is possible that reform fatigue could lead to i) the collapse of several reform minded governments in the European south, ii) a collapse in support for the Euro or the EU, iii) an outright electoral victory for radical anti-European parties somewhere in the region, or iv) the effective ungovernability of some Member States once social costs (particularly unemployment) pass a particular level. None of these developments look likely at the present time. But, the longer-term picture (beyond the next 18 months) is hard to predict, and a more pronounced backlash to the current approach to crisis management cannot be excluded."

Jpm the-euro-area-adjustment-about-halfway-there from Gaetano Zappulla