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Europe must drop the euro, Germany abandon mercantilism

By Peter Morici   |   Oct. 20, 2014 at 10:30 AM

http://cdnph.upi.com/sv/em/upi/UPI-2301413802206/2014/1/e289f96b7c4d6f3aef62d9e567a22179/Europe-must-drop-the-euro-Germany-abandon-mercantilism.jpg
Europe faces yet another recession, and the prospect is shaking global financial markets. To eliminate the persistent threat of collapse, Europe must drop the euro, and Germany must abandon mercantilism.

When the euro was adopted in 1999, domestic prices -- the face values for bonds and loans -- and bank accounts were translated into euros according to prevailing exchange rates for national currencies at the time.

Initially, the single currency posed few significant problems. Over time, however, differences in labor market policies and geographic conditions that are difficult for governments to alter caused productivity to grow more rapidly in Germany and other northern economies. Also, Germany and northern states pursued mercantilist, export-driven growth strategies.

Prices for many goods made in Italy and other southern economies became too high to be competitive in the north. Those countries imported more than they exported and financed the resulting trade deficits by borrowing from the north.

In Spain, a property boom permitted homeowners to run up large mortgages, and banks borrowed heavily from the north to finance those. In Italy and Greece, governments spent and borrowed heavily through bond financing to prop up employment.

In the wake of the global financial crisis, private borrowers and governments could not pay their debts. To obtain financial assistance from the IMF, European Central Bank and northern European governments, Mediterranean governments implemented severe austerity.

Budgets were slashed, and unemployment rocketed but fundamental problems went unaddressed. Wages and prices remain too high in the south, and German Chancellor Merkel clings to mercantilism.

Europe never fully recovered from the Great Recession. Unemployment exceeds 12 percent in Italy and Portugal and is about 25 percent in Spain and Greece.

Deprived of markets for exports in the south, industrial production in Germany fell this summer, and across Europe inflation is nearly zero.

The European Central Bank, unlike the U.S. Federal Reserve, is prohibited by its charter from purchasing trillions of euros of bank and government securities to prop up growth but in any case, that would be only a temporary fix.

With mortgages and businesses loans denominated in euros, it is tough for prices to fall the 25 percent needed in southern economies to make exports competitive in the north. If workers and businesses took wage and price cuts that large, they would default on loans underwritten by creditors in the north.

However, if southern countries again had their own currencies, their exchange rates against the German and other northern-country currencies could fall enough to make their exports competitive in the north.

For the perpetual economic crisis in Europe to end, two things are necessary.

Europeans must recognize that the euro is a straightjacket that impedes price adjustments to compensate for differences in productivity among countries and permit markets to function effectively. The euro is not necessary—the European Union enjoyed prosperity, not unending recession, before the euro.

Germany and other northern states must recognize to have adequate markets for their exports they must import too, or their southern customers must borrow ever larger sums—something financial markets cannot accommodate. Northern governments must readjust their economies to balanced trade with the south, and substantially increase domestic consumption, likely through increased government spending.

Germany, having the largest economy and being the most significant creditor state, must recognize these realities but Merkel, like a medieval doctor bleeding a patient, clings to the false notion that austerity and double digit unemployment will cure southern Europe -- it simply won't.

Italy and other southern states must abandon their antiquated labor market policies and profligate government spending. Germany must reform too, and the euro must go.

Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and a national columnist. He tweets @pmorici1

© 2014 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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Tesla could face sales ban in Michigan

Tesla does not sell any vehicles through dealerships. They have their own personal showrooms, consultants and sell online as well.
By Aileen Graef   |   Oct. 17, 2014 at 4:10 PM

| License Photo
DETROIT, Oct. 17 (UPI) -- Michigan Gov. Rick Snyder is contemplating signing a bill that would ban Tesla to sell directly in the state in order to protect dealerships.

The bill would prohibit automakers from selling directly and force them to sell through franchised dealerships. The bill does not mention Tesla by name, but the electric car company is the only one trying to sell their product directly.

Tesla does not sell any vehicles through dealerships. They have their own personal showrooms, consultants, and sell online as well.

"States are fully within their rights to protect consumers by choosing the way cars are sold and serviced," said National Automobile Dealers Association spokesman Charles Cyrill. "Fierce competition between local dealers in any given market drives down prices both in and across brands. While if a factory owned all of its stores, it could set prices and buyers would lose virtually all bargaining power."

Tesla called the bill a "raw deal" in a statement posted to their website, encouraging Michiganders to contact Snyder's office and speak against the legislation.

Elon Musk and Tesla have faced similar resistance in Georgia, Missouri, New Jersey, New York, Ohio and Pennsylvania but eventually resolved the issue through compromise.

Follow @AileenGraef and @UPI on Twitter.
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© 2014 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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