The above quote is from the concluding statement of the International Monetary Fund’s mission to the UK for the so-called Article IV Consultation, released on 22 May 2012.

A statue holds up a symbol of the euro in front of the European Parliament building in Brussels. Getty Images

The previous two posts Part 2 and Part 1 tried to explain why the sovereign debt of eurozone countries seem to be far more fragile than that of countries with their own central banks.

This issue is a relatively new one, so far as I know. But it is extremely important.

One of the questions raised in the subsequent discussions is why the possibility of illiquidity-induced default (as in the Spanish sovereign debt market) should be any different in impact from the possibility of a devaluation and inflation (as in the gilt market).

I have three suggested answers.

So why has the experience of the eurozone members been so different and so painful and what can be done to remedy the problem?

There are two possible explanations, which are not mutually exclusive.

In my most recent post, The journey towards becoming Japan, I noted the similarities between what has been happening to the US and UK and what happened earlier to Japan. But the question obviously arises: why has eurozone experience been different?

Let us start by looking at what has happened. For this purpose, I compare countries of roughly similar economic size: Germany, France, Italy and Spain, which are, of course, members of the eurozone, and the UK.

The time since the signing of the Maastricht Treaty in 1992 can be divided into three periods: 1992-98, which was when interest rate convergence was achieved among the eurozone members; 1998-2008, when all eurozone bonds were treated as being essentially identical, while UK yields diverged a little, from time to time; and, finally, 2008 to today, which has been a period of growing divergence in the eurozone, with Germany acting as safe haven and revulsion from Italian, Spanish and, more recently, even French debt.

On May 10 2012, the yield on the German 10-year bund was 1.44 per cent, on the US 10-year Treasury was 1.85 per cent and on the UK 10-year gilt was 1.9 per cent.

These are extraordinary numbers. They are particularly striking in the cases of the US and UK, which unlike Germany, run very large fiscal deficits and are experiencing very rapid increases in public sector indebtedness.

This combination of falling government bond rates with very rapid rises in public sector indebtedness reminds us, of course, of the experience of Japan since 1990. (See charts below)

On these vital issues, the EU is coming to the wrong conclusions. That is the UK’s view. I agree with it. But the UK is, once again, in a minority of one.

In my latest column, I discussed the state of the UK economy. Since the column does not contain charts, I have decided to post a few on the Wolf Exchange.

Let us start with gross domestic product since 1970. The chart shows quarterly GDP at constant prices and the pre-crisis trend in quarterly GDP, extrapolated up to the first quarter of 2012. Over this period the trend rate of annual economic growth was 2.5 per cent a year. It will be seen that we do see a period of above trend levels of activity in the 2000s. It will also be seen that, since the third quarter of 2008, GDP has shown a growing negative deviation from the trend. In the first quarter of 2012, the deviation was 8.9 per cent below the long-term trend.

Does fiscal contraction improve actual fiscal outcomes or are the effects on GDP so dire that outcomes do not improve?

I have defined the fiscal tightening as the percentage point change in the structural (or cyclically-adjusted) general government deficit from 2008, the year of the crisis, to the forecast for 2012. The assumption is that this change represents the results of policy, rather then cyclical effects. I have taken growth as being the proportional change in GDP from 2008 to 2012.

“The share of total income going to the top 1 per cent of income earners has increased dramatically, from 9 per cent in 1970 to 23.5 per cent in 2007, the highest level on record since 1928 and much higher than in European countries or Japan today. Meanwhile, the top tax rate has fallen by half, from 70 per cent to 35 per cent.”

In fact,

“because the top 1 per cent has captured about half of income growth since the 1970s, income growth for the bottom 99 per cent has been only about half of the macroeconomic growth we always hear about in the press.”

The second of the quotations is from an interview with Emmanuel Saez of Berkeley, winner of the John Bates Clark Medal, which goes to an outstanding economist under the age of 40. The first is from an article entitled “Taxing High Earnings” that prof Saez wrote jointly with Peter Diamond of MIT, a winner of the Nobel memorial prize in economics.

"Occupy Wall Street" protests at Zuccotti Park in New York. Getty Images

Both come from a collection of essays by well-known commentators and analysts, in response to the Occupy Wall Street movement.* The authors include, among many others, Raghuram Rajan of the University of  Chicago’s Booth School of Business, Daron Acemoglu and James Robinson, of MIT and Harvard, respectively and Michael Lewis, the well-known author. Even Gillian Tett and Martin Wolf of the Financial Times are to be found in this list.