The war wasn’t going well so the Government drafted famous Surgeon X for duty as a front line medic. Even though what he was famous for was doing heart transplants. The litter bearers brought in a wounded patient. He’d stepped on a mine and his left leg was mangled, bleeding heavily.

Surgeon X

Nurse, prepare for a heart transplant

Nurse

Yes doctor but doctor the patients left leg is …very bad.

Surgeon X

Hmn... I’ll have to have a look at that after I finish the heart transplant

Far fetched? Read the magisterial Martin Wolf on last week’s Eurozone conference .A Merkel and Sarkozy joint heart transplant.

No surprise since Merkel and Sarkozy came to do heart transplants rather than fix the real problem. What real problem? Round up the usual suspects: Ireland, Greece, Portugal, Spain, Italy and Estonia. and let’s see if they were guilty of….

Deficits.?

(In the December 6^th FT Wolf provided the information that follows. The FT does not permit a link)

 Eurozone rules restrict   a member’s average deficit to 3% of gross domestic product. So the six suspects had been flagrantly violating that limit, I suppose.…..Not exactly.

 From 1999 to 2007 Ireland, Portugal, Spain, Italy and Estonia were pure as the driven snow. Only Greece overspent. If Merkozy’s proposed inflexible regulation on deficits had been in place prior to 2007 it would have changed nothing.

OBTW if you look at who was next in line during those years, sure enough it was Italy, But right after that came France, Germany and Austria.

Well then if enforcing the Eurozone limit on deficits wouldn’t have prevented the Euro banking crisis how about

Public Debt.?

Enforcing the E-zone’s ...rules on public debt would have caught not just Greece but also Italy and Portugal. But not Estonia, Ireland and Spain. In fact not only did those three suspects comply with the rules on Public Debt, they also had a better record for public debt than…….Germany.

So while enforcing the rule on deficits would have only caught Greece, this rule on public debt would additionally have been a red flag for both Ireland and Spain.

But also Germany. Germany. We might ask whether it would have been a great idea to enforce a rule which would have required Germany to interfere with the Eurozone’s most successful economy. But let’s go on. How about

Current Account Deficits.?

Now you’re talking. From 99 to 2007 the countries with the highest balance of payments deficit were Estonia, Portugal, Greece, Spain, Ireland and Italy. Eureka!  What the six sick economies had in common was not their deficits and not their debt it was a balance of payments that was unbalanced. They couldn’t pay their bills. Not the foreign bills that is. To quote Wolf

               This, then is a balance of payments crisis.

So how did Friday’s Eurozone conference deal with this balance of payments crisis? A heart transplant. By rules restricting the deficits and public debt. .

So as Wolf summarized

If the most powerful country in the eurozone refuses to recognize the nature of the crisis….

We are as GHW Bush would have put it

 in the deep do do.

..