The EU Panics

It's more than passingly ironic that David Cameron, an arch conservative, should find himself the last defender of Keynesianism in Europe. Probably he doesn't see it that way but Cameron's entirely correct rejection of a new, treaty-imposed fiscal straightjacket means that the UK, alone among EU member states, will retain the ability for government to step in and spend when the economy experiences a lack of demand. For the rest of the EU the new treaty will mean leaping from the frying pan into the fire: national adjustments to balance of payments problems within the EU will become more difficult, not easier, and by concentrating on government debt instead of the regulation of financial markets the EU is only setting itself up for more market manipulation. In the throes of predictable balance of payments crises, one country after another will face withering fire from "nation state short-sellers" in the bond markets. The European financial crisis is about to get much worse.