This morning, as the data were coming in from Europe for Q1 GDP, I got a reminder from Twitter about the inherent deflationary nature of the euro area’s design. And this goes directly to how to think about credit risk in Europe.

I followed a twitter post to a Charles Goodhart article from 1997, written before the European Monetary Union and he was saying things that the late British economist Wynne Godley was banging on about five years earlier when the Maastricht Treaty set out the terms for euro. Here’s the crux as it relates to credit risk in Europe:

The conventional economic analysis of Emu compares the balance of savings in transactions costs-the cost in money, convenience and risk of dealing in more than one currency-against a potential worsening of difficulties in macroeconomic adjustment. After all a country’s declining competitiveness can be mediated, and the blow softened, by a declining exchange rate. If there is no insulating national currency, declining competitiveness must translate directly into unemployment. Proponents of Emu tend to be both more optimistic about the size of the transaction cost saving, and more sanguine about any worsening of adjustment difficulties. Those more sceptical about Emu stress the absence of a trans-European mechanism to aid adjustment by transferring wealth from rich areas to poor areas via taxes and benefits, as occurs now within nations. They also doubt the magnitude of the transaction cost savings, and contest the claim of Emu supporters that without a single currency the single market is threatened. Both sets of arguments quickly progress from the economic to the political.

Here’s what Goodhart was saying: Emu was created or mostly political reasons. That’s why when you argue about the economics ofthe eurozone, the argument quickly turns political. The whole affair was a political construct right from the start. And so the examination of the economics of Emu amongst policymakers was deficient.