The cold, hard truth: the Euro is finished


by Frances Coppola    
9:05 am - October 25th 2011

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On Friday 21st October 2011, a group of economists working for the so-called Troika produced a devastating report, leaked to the FT and the BBC. Then the Telegraph released the full text of the report.

European politicians have been fighting ever since. Germany’s Merkel and France’s Sarkozy had an argument loud enough to be heard in the EU concert hall.

The Belgian finance minister left early and refused to attend the press conference. Merkel and Sarkozy jointly turned on Italy’s Berlusconi, and Sarkozy slapped down Cameron. Entertaining though the politicians’ antics are, they arise from a terrible truth.

The bailout plan they came up with on July 21st was totally and completely inadequate. Everyone knew this, of course. But the politicians didn’t want to admit it. Because actually they haven’t the faintest idea what to do.

The German official story goes that these countries have borrowed far more than they can afford so must take the pain of massive reductions in their bloated public sectors in order to reduce their debt and return to competitiveness. 

But if Greek debt had been entirely held by its own banks, it could have defaulted long ago – nationalised its banks, wiped its debts, started again. But its debt was held by giant foreign banks, systemically interconnected, crucial to their countries’ economies and seriously short of capital and liquidity.

The countries to whom those banks “belong” have waged a systematic campaign of disinformation to prevent the world realising that the Greek (and Portuguese, and Spanish, and Italian) sovereign debt crisis is also (and has always been) a BANKING crisis and the main suspects are French and German banks.

Every cent that has gone to “bail out” Greece has been paid straight to banks. Greece has not been “bailed out” at all. Far from it – it has been asset-stripped and its people impoverished to enable it to make some contribution to meeting its creditors’ demands.

Furthermore, those creditors have demanded severe fiscal austerity as the price of this “bailout”.

The reason why Eurozone creditor nations have demanded such austerity is that they see no other way that preserves the Euro. The only other alternative is for Greece to leave the Euro – and the fear is that other debt distressed nations would then follow.

This is the cold hard truth that Eurozone leaders are now facing. The policies they have pursued have turned a small sovereign default into a potential continent-wide debt crisis and banking collapse. And they have no other policies to offer.

Germany, whose taxpayers stand to take the biggest hit if Greece defaults, wants a 60% haircut. France, whose taxpayers will have to bail out its under-capitalised banks, can’t afford won’t accept anything more than 40%. Both of them are furious with (and terrified of) Italy, which owes far too much even for Germany to bail out.

Historically the European Central Bank has pursued monetary policies that suit the larger, richer nations, particularly Germany, and are disastrous for the smaller, poorer nations. It is still doing so now: it raised interest rates despite mounting evidence of impending recession throughout the distressed debtor countries, thus making their problems worse.

The only possible future for the Euro lay in fiscal and political union – the creation of a “United States of Europe”. But there can be no political union while politicians pursue the interests of their own countries at the expense of the rest.

The Euro is doomed. Exactly how it will break up remains to be seen.

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A longer version of this post is at Coppola Comment

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About the author
Frances is an occasional contributor to Liberal Conspiracy. She spent 17 years of her life working at a senior level in banks, but now is a professional singer, singing teacher and image consultant. She blogs here.
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Reader comments


The OP is right that the euro is doomed. No one would go back to the disastrous gold standard, but somehow people though locking together dozens of very different economies through a currenc was an even better idea.

The OP is totally wrong when they say this is another banking cruisis thugh. This time it really is the cause of governments having tooi much debt and markets r2-rating credit risk. Greece has 350bn of debt for a country of just over 10m people.

Banks don’t hold government paper for fun. They are forced to by by law, as regulatory capital….laws made by the governmets themselves. Banks are also primary dealers, so are obliged to show prices for this stuff to their pension and hedge fund customers. In this case at least most banks are pretty innocent, holding only what they are forced to, but have certainly been left holding a pretty ugly baby.

What complete and utter rubbish.

3. Frances Coppola

Tyler

It has always been a (potential) banking crisis due to the overleveraging of European banks, which most of them haven’t yet done much about. I’m not actually blaming banks though – this is not a crisis of their making, although it would have been better if they had addressed their lack of capital sooner. Sovereign debt is assumed to be risk free even though it isn’t, and there was also a tacit assumption that smaller Eurozone countries would be backed by larger ones. Lending loads to small Eurozone sovereigns wasn’t actually an unreasonable thing for commercial banks to do.

Why not just let Greece default on their debts? That won’t destroy the Euro. It might cause a few bakns to go under, but since banks’ contribution to the economy is a negastive one, that’d be a good thing.

I agree with all this, except it’s not just a banking crisis. Italian govt debt is predominately held domestically, but Italy really needs to devalue to restore competitiveness. There are plenty of numbers that would make Belgium too one of the PIGS (although it would mess up the acronym). There is history here, too – Tyler has already alluded to the Gold Standard. The 1929-31 Labour govt disastrously pursued austerity measures to sustain Britain’s membership of the Gold Standard; when the National Govt came off gold, the former Labour chancellor Snowdon is reputed to have said “no-one told us you could do that.” It provided the basis for Britain’s subsequent recovery in the 1930s. The break-up of the euro-zone is a lot less unthinkable than the end of the Gold Standard was then. The only alternative is to believe that the current crop of EU politicians are capable of devising and implementing rapidly a robust, coherent integration framework.

6. Mike Killingworth

[2] Which? The OP, or Tyler’s comment?

What the eurozone needs to do is to merge all its debts into one affordable loan. Then it needs to use 0% balance transfer cards for the next few years to avoid interest whilst it pays down the actual amount owed. Whilst it does this it should examine ways of improving its income by obtaining new skills and perhaps taking an evening job, whilst clearing out it’s wardrobe and selling the stuff on e-bay, making sure to wait for free listing weekends.

And the above is no different to the way the current coalition is managing the british economy.

@6 the OP – It doesn’t make any attempt to justify its initial assertion. It’s the usual “if only these foreigners would have the sense that they need to run their affairs in the way that suits the British ruling class everything would go so much better for them,” type drivel we’ve all had ad blasted nauseum. The telegraph has published something like this just about every day for the last ten years.

The euro is more stable than the pound. The eurozone has higher growth, lower inflation and lower unemployment than the UK. Eurozone business have easier access to an enormous market, while ours are stuck with huge exchange costs and uncertainty, just to suit the egos of polticians and to make a few money changers richer.

What the eurozone needs to do is to merge all its debts into one affordable loan.

You mock, but that is precisely what is being suggested as a solution – a Eurozone bond scheme. As Tim W has pointed out, that would basically be the world’s largest ever CDO…

The eurozone has higher growth, lower inflation and lower unemployment than the UK

Eurozone unemployment currently stands at 10% (with wide disparity between Austria at about 4% and Spain at about 20%. God knows what Greece is). UK unemployment is currently 8.1%.

Eurozone business have easier access to an enormous market, while ours are stuck with huge exchange costs and uncertainty, just to suit the egos of polticians and to make a few money changers richer.

Ah, it’s all the fault of the ‘money changers’. It usually is, somehow.

@Tim J

Thats because its very easy to mock ;-)

The actual solution is obvious but politically difficult if not impossible. Greece has effectivly been trading insolvently and fraudently, far more so than any another eurozone country, it needs to be kicked out of the euro. Then it can default on its debts and start again. Difficult but not impossible, and arguably less painful than what it is being forced to do so.

When Enron collapsed lots of people lost money, but nobody suggested that we should have bailed it out and leave the current management to make the company solvent.

12. Mike Killingworth

[11] Yup. Hey, it worked for Argentina (if you ignore inflation…)

Hasn’t inflation in argentina been lower over the past decade than in the previous decade (and certainly the one before that)?

14. Frances Coppola

Chris,

Funnily enough, I don’t think the UK runs its economic affairs particularly brilliantly either – but that’s another subject.

The Euro is a brilliant idea in principle, and it did confer the benefits you mention for a decade. But there are fundamental problems in its construction which are only resolvable through full political and fiscal union. The behaviour of European politicians at the moment makes it clear, to me at any rate, that there is no appetite for the surrender of national interests to the greater European good which would be necessary for full political and fiscal union. But without that union, the massive economic and cultural differences between member states will tear the Eurozone apart. That I believe is what we are seeing.

Hasn’t inflation in argentina been lower over the past decade than in the previous decade (and certainly the one before that)?

If you believe the official figures. Which nobody does.

At long last a euro-sceptical (literally) article on a liberal/progressive blog which, while short, goes to the heart of the matter, and does thiw with well-balanced liberal points, and not with the usual eurosceptics’ rant. See the difference?
Right from the start, it has been about saving eurocracy’s honour and at the same time bankers’ money. Those are intertwined in… bonds. All the rest is baloney or rubbish.

I remember having faced some angry backlash among lib dem ranks when I wrote at the beginning of what was then the early Greek crisis that it was high time for the Europhiles to admit that the dream (if any) was over. That was in March 2010 (read: http://www.libdemvoice.org/opinion-another-greek-tragedy-time-for-europhiles-to-admit-the-dream-is-over-18240.html, as well as a collection of articles and viewpoints about the euro crisis on http://www.mikeconomics.net).

Margaret Thatcher was much criticised for her TINA (there is no alternative) approach and mindset. That is exactly the way eurocrats, european elites -and these include more than 80 per cent of MEPs- and europhiles have behaved since the outburst.
That is exactly what Paul Krugman (not exactly a right-winger, is he?) wrote two days ago in the New York Times:
“For as one rescue plan after another falls flat, Europe’s Very Serious People — who are, if such a thing is possible, even more pompous and self-regarding than their American counterparts — just keep looking more and more ridiculous.”
And later:
“the European elite, in its arrogance, locked the Continent into a monetary system that recreated the rigidities of the gold standard, and — like the gold standard in the 1930s — has turned into a deadly trap.”

I agree with 90 per cent of what Guest wrote, but strongly disagree with the conclusion: “The only possible future for the Euro lay in fiscal and political union – the creation of a “United States of Europe”.
This is a chimera, based on the assumption that European nations (and regions) could merge and become a sort of state. This will NEVER happen. Charlemagne, Charles V, Napoleon, Hitler tried before the more peaceful way of the EC founders. All have failed.
So I might agree with Nick Clegg ontoday’s Guardian website (http://www.guardian.co.uk/politics/2011/oct/25/eu-referendum-vote-gove-tory-rebellion) that Britain should not leave the Union (even though I have some doubts here too) yet disagree that it should lead. Except the Franco-German bond (pun intended) now impersonated by “Merkozy”), there is no such thing as EU leadership. Or is there too much? Ask 25 member states.

“Hasn’t inflation in argentina been lower over the past decade than in the previous decade (and certainly the one before that)?”

The official figures are about 10%. Private sector economists estimate 20-25%. The Argentine Government has been attempting to jail said private sector economists (no, really).

The reasons it’s all so important is that about 25% of Argetnine govt debt is index linked. Fiddle the index numbers and government can screw the people who lent the government money.

As to hte eurozone, there are other ways out of this. ECB could just rpint money and buy the Greek Italian, Spanish, whatever) debt. Kown as monetising the debt and expressely forbidden by hte EU treaties. But they could do it, it would solve the problem. Cause a nice burst of inflation too but that would again be part of the solution.

There are quite a number of people who would point to this being what hte Bank of England is in fact doing. Two or three years of 5% inflation and we’ve moved the debt burden down very nicely indeed thank you very much.

18. Frances Coppola

@TimWorstall

Indeed they could monetize the debt. The point of the post is there doesn’t seem to be the political will to do anything so constructive. Nor would monetizing the debt solve the underlying problems of economic and cultural divergence. This is at heart more a political crisis than an economic one.

19. Frances Coppola

Mike Guillaume,

I wouldn’t say that statement was my conclusion, exactly. I was merely observing that such a union is really the only way a single currency could survive. I am personally convinced that the “United States of Europe” dream has vanishingly small chance of becoming reality, because of economic and cultural differences between member states that there seems to be no political will to overcome. My conclusion is therefore that the Euro, like the ERM that preceded it, is doomed.

Thanks, Frances. And agreed.
That makes me agree with you closer to a hundred per cent!

Francis,

I wouldn’t say that statement was my conclusion, exactly. I was merely observing that such a union is really the only way a single currency could survive. I am personally convinced that the “United States of Europe” dream has vanishingly small chance of becoming reality, because of economic and cultural differences between member states that there seems to be no political will to overcome. My conclusion is therefore that the Euro, like the ERM that preceded it, is doomed.

I would not be particularly confident on this – by shedding both those who are clearly not going to join, and those who are clearly not going to contribute (in terms of driving the project forward rather than dragging it down) this crisis could allow the core of European countries to integrate more closely. The impetus here will be political will, not economic measures, and if the political elites in the north-west European countries manage to survive this reasonably well (which I suspect they will) they will try to turn this to an argument for closer unity. In at least some countries, much of the young urban population at least (the only bits I can really say anything about – I hardly meet the rest) would probably buy this narrative.

22. Leon Wolfson

So, why do we have another Tory propaganda screed on this site? Why is the site currently being taken over by this issue, which is important ONLY to a minority of Tories?

Gratuitously talking the Euro down is at best useless, at worse damaging to this country. We can’t take ANY shocks, we’re going back to third-world status for the poor if you’re right and need to be building morgues and poorhouses.

Leon,

So, why do we have another Tory propaganda screed on this site?

Isn’t the Conservative party trying to support the Euro, according to its leadership (and implicitly the majority of its MPs)? This is basically saying they are wrong and it is pointless to do so. That many right-wingers agree with this is hardly making this propoganda, just an argument which neeeds addressing, not simply dismissing.

Mind you, it seems you may have confused Euroscepticism with one particular political position, which is rather narrow minded of you. Furthermore, you have rather erroneously attributed that position to a party which doesn’t have it (to be fair I think the Greens and UKIP are the only parties that do – both obviously similiar parties, just like the Tories…).

24. Leon Wolfson

@23 – It’s only a *priority* for the Tory anti-Europeans and the UKIP.

25. Northern Worker

I’m not all that well up on this stuff but from a layman’s point of view the euro has never looked viable. You have 17 countries working with an average exchange rate heavily influenced by the successful German economy. Interest rates were low – remember those people buying villas in Spain with cheap euro mortgages? – and the less successful like Greece indulged. Not only are the PIIGS stupid, so are the banks which lent them the money without any due diligence.

The only way out seems to be for the ECB to print money and buy all the worthless bonds back off the banks. Inflation takes care of some of the rest of the problem but no-one can devalue separately (like the UK) to further write off debts. And worst of all the profligate spending by countries like Greece doesn’t go away. All in all, it doesn’t seem fixable. Perhaps the only option is for Germany and France to leave the euro.

Leon,

It’s only a *priority* for the Tory anti-Europeans and the UKIP.

The future of the Euro is only a priority for a small proportion of people? Really? I guess the media are getting worked up over nothing again (actually, I’m not conviced they’re not, but I think that all politicians are in accord with them on this).

I think you are confusing the conclusions of the piece (that the Euro needs to be abandoned because it is now the problem) with someone opposing the Euro on principle. Frances may indeed have that position – I haven’t checked – but that does not mean you can ignore the piece, which is reasoned and well-argued, on that basis. If you disagree with it, say what is wrong with the analysis, don’t try to smear it as ‘Tory propoganda’.

The euro failed the day that the ECB started buying peripheral debt in the secondary market. The eurozone is a French construct with predictably disastrous consequences. The ECB buying in the secondary market contravened what was promised to the German people would not happen in order to get their agreement to give up the D-mark. What we are sealing with now are the consequence of failure and the political arguments are over what will replace the current euro. The peripheral yields are evidence of the failure, the external exchange value of the euro is irrelevant in terms of failure of the project. If the ECB was not supporting the Italian and Spanish debt markets they would be in the same position as the rest of the periphery in being unable to borrow at affordable rates.

There is nothing realistically that the European authorities can do to make the current EZ work. Everything that they come up with are sticking plaster solutions that eventually break down. Whatever they come up with over the next few weeks will also break down. The EZ does not work for precisely the reasons that good economics said it would not work. Politics said different and we are left to deal with the vanity of politicians.

An unrealistic solution is to move to a united states of Europe with a centralised treasury that can raise taxes, issue bonds against the credit of the central treasury, oversee local budgets and sanction miscreants, make fiscal transfers. Local politics will sink the only realistic solution that can work. Moreover, even if all the nations gave up sovereignty to make that work would not automatically make the current problems go away. One still has the problem of the ECB pursuing monetary policy to suit the needs and desires of the Germanic core. Therefore, there is no solution with the current members of the EZ. In the fullness of time what may come out of the EZ is two euro-zones. One for the north containing Germany, and a southern EZ which France should really be in. Quite possible eventually North African states could join that currency.

The peripheral states are in economic difficulties because they are trapped. A nation in economic difficulty should screw their creditors. We in Britain have centuries of experience in learning how to screw creditors. Hell, if you are really clever they don’t even notice. It is precisely because the European authorities and the straitjacket of the euro prevents them screwing their creditors that their difficulties are made worse. Moreover, their ways out of the economic hole are blocked and they are being forced to screw their own populations through internal devaluation. The easiest solution for them still carries a lot of turmoil and pain is to default and to devalue. What currently is being foisted on them is even worse and will lead to a not so gradual disintegration of their civil society.

I think this is nonsense. Their is a debt crisis of course however the global importance of the European market and high per capita income mean that the Eurozone has significant room for manoeuvre In twenty years the Euro will still be here, and i suspect doing rather well. However whether Greece is part of it is another matter.

29. Frances Coppola

@21 Watchman

The last sentence in this post does say “exactly how it will break up remains to be seen”, and in the longer post I do mention briefly some options for Euro breakup. I would regard your description of a possible resolution to this situation as being a type of breakup. Probably I should say the Euro “in its present form” is doomed. I could envisage a smaller Euro made up of, say, Germany, the Benelux countries, Finland and Poland. But that wouldn’t be anything like the Euro we have now, and it would be a long way removed from the dream of a pan-European single currency.

30. Leon Wolfson

@26 – I have, repeatedly. And yet more Tory screeds are posted.

@27 – And hard-right Tories like you keep on posting your opinion as fact. And you’re once more arguing for a British collapse and the building of morgues and poorhouses. Britain can’t remain a first-world nation in your scenario.

31. Frances Coppola

@22, @24 Leon Wolfson

I’m a bit concerned, Leon, that you regard a massive economic crisis in our nearest neighbours and largest export market as only of interest to Tory eurosceptics and UKIP. I am neither, actually. But I really don’t think we can carry on pretending that this crisis either doesn’t affect us or will be resolved without enormous structural change throughout the Eurozone, with consequent impact on our own economy. The longer post finishes with a stark reminder that the Eurozone is heading into deep recession, which will affect the whole world. That view is not mine alone – among others both Nouriel Roubini and Paul Krugman have predicted imminent recession in the Eurozone.

I am not “gratuitously talking down the Euro” (presumably to promote a Tory eurosceptic agenda). I am expressing my opinion, which is that because of the evident political disunity in Europe the Euro in its present form cannot survive. This is a free country and I am entitled to say what I think.

@23, 26 Watchman

Thank you.

For the record, I am not “intrinsically” eurosceptic. But I have real concerns with any type of fixed exchange rate system when there are massive cultural, political and economic differences and no political will to overcome them. My comment in @14 is a fair summary of my position.

@ 30. Leon Wolfson

” And hard-right Tories like you keep on posting your opinion as fact. ”

You really are a numpty, Leon. The EZ banking system is weeks away from complete implosion and you think that this issue is about ‘ hard-right Tories. ‘ Your clueless awareness of the situation knows no limits. First the peripheral sovereigns were locked out of the market, then the EZ banks were locked out of funding from the market. So Leon, what you going to do about it?

33. Frances Coppola

@25 Northern Worker

For someone who’s not very up on this stuff you’ve come up with an excellent summary!

And you are in good company. Your suggestion that the ECB should buy up all the worthless bonds is pretty much what George Soros has suggested….oh, and Tim Worstall in these comments, of course. But as you point out, the Euro would still need structural reform and some members probably to leave: exactly who leaves remains to be seen, as I said at the end of the post.

34. Leon Wolfson

@32 – Yes, yes keep it up. Gotta have that isolation at all costs!

I’m challenging your narrative as to the doom which will fall on us unless we all become willing subjects of your far-right corporatist hand.

@31 – It’s the truth, unfortunately for you. And we’re not in the Eurozone, we don’t get to have a say in how it’s restructured. Sarkozy is quite correct on the matter.

Of course the Eurozone is headed for a recession. Thanks to austerity, which made a problem far, far worse – into a crisis, indeed, when otherwise it would and could have passed without more than Greece being badly affected (as Ireland recovery has shown…although that will now come to an end, of course). The UK is showing them the way. You are and remain talking down the Euro for short-term party political advantage, with a reckless disregard for the consequences, since you keep stating your opinion as facts.

I raise my question below out of consideration for the citizens of Europe, not to make a snarky comment about the Euro Zone.

But wouldn’t it have been better for everyone for Greece to default/introduce New Drachma months ago, with Spain and Portugal following a similar but less dramatic process? I can’t entirely follow where the money that has been loaned to Greece/Spain/Portugal is going but it makes no difference when default is the inevitable consequence. It’s all just money down the drain, going into somebody’s pocket — and it is real money, guaranteed by nations that aren’t going to go bust, that does nothing to assist the borrower.

36. Leon Wolfson

@33 – Gotta get rid of the unworthy. And of course this is the UK’s business, given we opted OUT of the Euro. Gotta shatter the EU, so that you can have the satisfaction of being right.

All emotional responses and overlooking the impact on us – as I said before, you also need to be agitating here for poorhouses and morgues if you’re right.

Frances, it is pointless debating with Leon. He argues in bad faith by constantly making up stuff about other posters. Let’s see if Olivier Sarkozy the half-brother of Nicolas Sarkozy can convince him about the scale of the threat to the whole EZ banking system.

Europe’s dithering over banking risks 2008 again

By Oliver Sarkozy

Europe’s impending liquidity crisis requires urgent action to avoid the consequences of a collapse in the European and global financial systems. The parallels to 2008 when governmental inaction brought us close to a system-wide collapse are too stark to be ignored.

At issue is the overall size of Europe’s banking system and its reliance on the wholesale funding markets. With $55,000bn in assets, the sector is more than four times the size of its US counterpart. As a result, Europe’s banks are primarily funded by the wholesale markets, a much less stable source of financing than deposits. At roughly $30,000bn, the sector’s reliance on wholesale financing markets is roughly ten times that of the US

Europe’s unsecured bond market was closed in the third quarter to all but a few issuers, demonstrating the unreliability of such sources of funding. Limited access to wholesale markets requires European banks to repay these debts as they come due from internally-generated sources of cash (as opposed to issuing new debt as prior borrowings mature). Assuming a three-year average life to the $30,000bn in wholesale funding outstanding, the European banking system needs to generate over $800bn in cash per month to fund maturing obligations. This is unsustainable.

Danger signs abound. The credit default swaps markets, which foretold the 2008 crash, are back to or above the peak levels of late that year. Many of the eurozone’s largest banks have seen their CDS spreads well above their all-time highs. A major European bank, Dexia, has recently collapsed. The fear in the global capital markets is real.

38. Leon Wolfson

@38 – Invalid appeal to authority, as allways.

You gotta have those for the hard right, yes. And always a relative of someone famous…it’s about your defence of family privilege, as usual. The new nobility who will rule over us all.

Then you claim I’M arguing in bad faith. No, it’s called being a moderate left winger who ISN’T afraid of foreigners.

39. Frances Coppola

@34, 36 Leon Wolfson

Dear, oh dear, Leon. If you had bothered to link to my longer post you would have found this paragraph about half way down:

“But fiscal austerity in recession-hit countries doesn’t work, does it? Greece’s problems have got worse, not better. Its deficit is increasing, not decreasing. There is no prospect of it returning to economic health for at least a decade, if ever, if current policies continue. And this is the cold hard truth that Eurozone leaders are now facing. The policies they have pursued have turned a small sovereign default into a potential continent-wide debt crisis and banking collapse.”

Rather similar to what you’ve said, don’t you think? Oh, and my statement about fiscal austerity is supported – there is a link to a post from Credit Writedowns, who have been arguing for a long time now that fiscal austerity is the wrong medicine. You might want to read it.

The “cold hard truth” of the original post was not that the Euro is doomed, but that the austerity measures imposed by the Eurozone leadership have made matters FAR worse.

And towards the end of the original post I say the following:

“Greece’s economic decline has gone too far now for an orderly default with maybe a 60% haircut to be sufficient. What is required is comprehensive debt forgiveness and economic aid, not more loans.”

Do you STILL believe that I’m a Tory right-wing Eurosceptic who wants to introduce poorhouses and morgues?

40. Frances Coppola

@35 Charlieman

Sadly, I find myself in agreement with you. It probably would have been better for Greece to have defaulted and left the Euro some time ago. But there were a few reasons why this was problematic. Firstly, Greece has a primary deficit: unless it could hit the ground running with the New Drachma it wouldn’t be able to turn the lights on….Secondly the Greek government, and particularly its President, has always regarded personal and political credibility as resting on resolving this crisis without leaving the Euro. Thirdly, there is no provision in the treaty for a country to leave the Euro. The legality of such a move would therefore be questionable. And finally, leaving the Euro would then mean that Greece’s debts were denominated in a foreign currency against which its own currency would immediately be drastically devalued. Yes, it would default – but that doesn’t mean the debts would be completely written off.

@ 40. Frances Coppola

The IMF could have funded their primary deficit until such time as they could have generated a primary surplus through the collection of taxes. The manner that their economic difficulties are being managed means that they will be lucky if there is a state left by the time they obtain a primary surplus. Greece will never regain competitiveness while part of the euro. Meanwhile the resentment will grow where the local population will feel that they are suffering severe austerity to pay foreign creditors. That is unsustainable and only devaluation offers them a sustainable route to competitiveness. Default is only part of the solution. Private capital markets will never finance Greece again while they are still in the EZ. Therefore, unless they devalue they will be a de facto permanent ward of the ECB.

42. Leon Wolfson

@39 – “bothered to link to my longer post”

No, I’m going to read what you post here. I assume it’s the sanity-checked version.

It’s also utterly ignoring the real tax-based issue Greece has.

And introduce? No, you’re not reading what I typed. If you’re right, we *need* to be building them. Otherwise…er…I don’t think burning the corpses in the spring would go down well.

There is nobody apart from the group I mentioned who have been taking your obvious glee at what’s happening.

Thanks, Frances and Richard W.

Frances noted that Greece will still have to pay back part of EU currency loans following default. My stumbled question was intended to ask whether procrastination is making the economic situation worse for the citizens of Greece (and probably Spain and Portugal)? I presume that there is a negative impact in the countries that loaned the money as well. Has pretence in belief of the Euro damaged the lifestyle of citizens, even before it fails?

44. Frances Coppola

@42 Leon Wolfson

Actually, Leon, the longer post is the original version seen by Sunny. The version preproduced here is is edited to comply with the 600-word limit on LibCon – not “sanity-checked” as you assert. Obviously it has lost a lot of detail and some important points in the editing process. And it has also suffered a change of emphasis: in this version the focus is on my view that the Euro is doomed, but in the original post the point was the terrible damage being done by wrong-headed policies and political infighting. The real economics are contained in the longer post – along with the real anger that I feel about what the EU leadership are doing to the people of Greece, and will if not stopped do to the rest of Europe and to the world.

Glee? Horror is more like it.

45. Frances Coppola

@41 Richard W

Yes, I agree with you. There would have been ways around the practical and legal difficulties – had the political will been there to allow Greece to leave the Euro and default. But in the absence of political agreement from EU leadership for Greece to leave the Euro, I suspect the IMF would have been very reluctant to fund the primary deficit.

46. Leon Wolfson

Why do we need *another* piece talking about the fall of this country, by way of the EU, again then? Even if we were had not gone beyond EFTA membership, this would still be happening with the kind of trade we have with them.

I’m not seeing horror. I’m seeing glee and isolationism. Cameron was and is out of order, and it wasn’t in any way “entertaining” to read the tabloid reports of “antics”.

You have very real anger, sure, at the people who could still fix things, if the press and markets would stop undermining their efforts. The very real damage being caused by media pressure, the anti-EU effort you’re helping fuel to isolate England (not Great Britain, England).

I’m seeing even more glee in your full article. You’re ignoring the tax evasion in Greece, the true root of it’s problems. And while the EU might hit a recession, we’re now in a position where we’ll go into a depression and have a lost decade as the BEST possible outcome. Far more likely, you need to start thinking – as I said – in terms of morgues and poorhouses.

47. Frances Coppola

@43 Charlieman

I think you are right on both counts. The longer the inevitable default and exit are delayed – and the longer the Eurozone leadership fail to do anything remotely helpful – the worse the economic situation will be, not only for those countries that may have to default and leave but for the others as well. The Eurozone is heading into deep recession as a direct consequence of the Eurozone leadership’s defence of the euro. Germany will be as affected as everywhere else, because its export-driven economy is dependent on sales to its Eurozone partners. You might want to link through to my longer post, where I discuss this at more length.

I was reading a history of the Great Depression the other day and was struck by the similarity between the Eurozone’s defence of the Euro and the desperate maintenance of the Gold Standard in the early 1930s. The nations that clung on to the Gold Standard longest were those that fared worst…..if history repeats itself, heaven help Germany and France.

48. Leon Wolfson

To be clear, incidentally – I’m not saying you ARE gleeful, but that’s how it reads to me.

49. So Much For Subtlety

16. Mike Guillaume

That is exactly what Paul Krugman (not exactly a right-winger, is he?) wrote two days ago in the New York Times: “the European elite, in its arrogance, locked the Continent into a monetary system that recreated the rigidities of the gold standard, and — like the gold standard in the 1930s — has turned into a deadly trap.”

That is hardly fair. The Gold Standard allowed for individual countries to have their own individual interest rates. Kind of insisted on it in fact. If the European economies had their own interest rates, half this mess would have been avoided. The Euro-weenie geniuses have managed to come up with something even worse than the Gold Standard. We were better off when we were all trying to peg to the DM.

47. Frances Coppola

I was reading a history of the Great Depression the other day and was struck by the similarity between the Eurozone’s defence of the Euro and the desperate maintenance of the Gold Standard in the early 1930s. The nations that clung on to the Gold Standard longest were those that fared worst…..if history repeats itself, heaven help Germany and France.

Is that true? Did Hungary or Germany do better off the Gold Standard or on it? Did France? How do you measure how well they did? You mean by looking at economic growth alone? Well yes, but that is not really enough is it?

As far as I can see two things are true here:

1. Countries that did well on the Gold Standard tended, all other things being equal, to do better off it too. That is, culture matters. Countries that had a culture of fiscal irresponsibility continued to do so off the Gold Standard but only worse. There are a few special cases like Germany, but they were special.

2. Floating exchange rates allow people to avoid or, hopefully, only postpone tough decisions. They do not make those decisions go away. They are a band aid solution for that reason. A devaluation means, usually, that the government does not have to fight with the Unions for more wage flexibility in the economy. The outcome is the same for the workers – they get paid less – but it does not look like it. It is better for the country as a whole and for the economy if the government forces the Unions into sensible policies – without devaluation. In fact I have an article somewhere that compares Jamaica (which took the devaluation route) and I think Barbados that did not. Guess which has done better in the long run?

All of which means I am coming around to the Gold Standard. It forces people into a narrow range of economic policies. Which are mostly sensible and good. It limits the stupidity of the government. Which is always good. And it would force people to make the hard decisions. Britain did grow after it dumped the Gold Standard, but its economy was weak for the next 50 years until Thatcher did what had to be done. Britain would have been better off doing that in the 1930s.

50. Frances Coppola

@46, @48

Oh dear, Leon.

“You have very real anger, sure, at the people who could still fix things, if the press and markets would stop undermining their efforts. The very real damage being caused by media pressure, the anti-EU effort you’re helping fuel to isolate England (not Great Britain, England)”

Where on EARTH did this load of garbage come from? You certainly didn’t find it in my post. In fact the only mention I made of the UK in my post was quite critical, wasn’t it? Although you seem to have interpreted that as “glee”, somehow.

I may be wasting my time trying to explain to you where I actually stand, since you seem to think you already know. But I’ll try again in the hopes of getting you to put aside your prejudice and read what I actually say, not what you want to believe I say.

1) I am not a member or a supporter of UKIP
2) I am not a member or supporter of the Conservative party (any part of it)
3) I am not, and never have been, anti-EU
4) I am not “talking down the Euro” in the hopes of assisting in its demise
5) I am not trying to “isolate England” as a separate entity from Great Britain.

I don’t think I could put it any more clearly than this.

I don’t think the Euro in its present form is viable for the reasons that I have given both here and in the longer post. Furthermore I believe that a speedy and orderly resolution of the Euro crisis, including some form of default for at least one country and measures to restore the economies of those damaged by recession and austerity, is essential if we are to stand any chance of avoiding the Depression you rightly fear. You are free to disagree with me – I expect that – but please do so on the basis of reasoned, evidenced argument, not wild accusations regarding my motives.

I have not addressed the issues of tax evasion and corruption in Greece because this post was not actually concerned with what was wrong with Greece. It was concerned with the structural and political problems in the Eurozone as a whole. Greece’s history of corruption and tax evasion form part of the “cultural differences” that I identify as a major obstacle to sustaining a single currency. Clearly Greece needs to deal with these practices, but they are deeply entrenched in that society and will not be easy to fix. Tax evasion is also a major issue in Italy, as I’m sure you know.

You don’t seem to have noticed that this post actually wasn’t about the UK at all. I only included the spat between Sarkozy and Cameron as an example of political infighting. Whether Cameron was “out of order” wasn’t the point. And whether the UK goes into Depression and ends up with a lost decade is way beyond the scope of this post. I’m quite happy to address the prospects for the UK and the idiotic austerity measures being pursued by this government in another post. It wasn’t possible or appropriate to cover it here.

37. Richard W

” Frances, it is pointless debating with Leon. He argues in bad faith by constantly making up stuff about other posters. ”

50. Frances Coppola

” Oh dear, Leon.

Where on EARTH did this load of garbage come from? You certainly didn’t find it in my post. ”

He makes it up.

52. Leon Wolfson

@51 – You keep right on arguing for your 1%, Banker. Meanwhile, the rest of us have a discussion going on.

@50 – You can list who you don’t directly support, but I ask…who benefits? And I cannot see any way from the left to benefit from it, when there have been better analyses from my perspective on this site.

Your tone, as I said, reads much the same as the hard right Eurosceptic crowd. If you want to come across as an analyst rather than partisan, things like the crossing out of “Germany” need to go.

The reality is also that because of modern balances of trade, the countries you want to default will need hard austerity for *decades*.

“You don’t seem to have noticed that this post actually wasn’t about the UK at all.”

Well, pardon me for discussing the UK on a UK-based and focused site…again, I’m really not convinced by your tone. You’re picking and choosing what to address in a way I’m bluntly sceptical of, especially given your other articles on your site.

Avoiding discussing the logical consequences of what you see as “inevitable” (that is, you’re calling for) is a cop-out.

53. Frances Coppola

So Much For Subtlety

It was Brad DeLong’s history of the Great Depression. Link is here: http://www.j-bradford-delong.net/tceh/slouch_crash14.html

DeLong doesn’t blame the gold standard for the Depression, but he does note that America and France, who retained the gold standard in the absence of international cooperation, suffered higher unemployment and a longer and more debilitating slump than Scandinavian countries who abandoned the gold standard much earlier. His analysis is well worth reading, because the Euro does behave much like an artifical gold standard – although if anything it is even stricter.

I take your point to some extent about flexible interest rates under the gold standard – and under the ERM which was the predecessor to the Euro. In both cases interest rates were indeed variable. But they had to be used to defend the currency, even when economic circumstances really required a devaluation. Maintaining a currency peg at too high a level is economically debilitating and in the end unsustainable. I still remember when the UK was forced to exit the ERM after raising interest rates three times in one day…..

I don’t accept your argument that internal devaluation is always better. When an economy is in recession and its current account is in deficit, internal devaluation is likely to make the recession deeper and delay return to growth – as we are seeing in Greece. Currency devaluation is in my view a much better strategy under these circumstances. Unfortunately Greece can only devalue if it leaves the Euro.

54. Frances Coppola

@51 RichardW

Yes, I see what you mean. Fantasy.

55. Frances Coppola

@52 Leon Wolfson

It seems I was indeed wasting my time. You prefer to believe your own prejudices rather than what I actually say. Oh well, at least I tried.

Go back to your fantasy world, Leon.

David Glasner had a good blog post and charts responding to some waffle in the WSJ about U.S. industrial production and prices after the U.S. came off gold in 1933.

http://uneasymoney.com/2011/09/26/misrepresenting-the-recovery-from-the-great-depression/

http://fabiusmaximus.files.wordpress.com/2009/03/gold.png

57. So Much For Subtlety

53. Frances Coppola

DeLong doesn’t blame the gold standard for the Depression, but he does note that America and France, who retained the gold standard in the absence of international cooperation, suffered higher unemployment and a longer and more debilitating slump than Scandinavian countries who abandoned the gold standard much earlier.

I think we would all agree the Gold Standard is not to blame for the Great Depression, but I still think his view point is too narrow. Yes, perhaps going off Gold gave Britain and others a short term boost. But on the other hand, the post-Bretton Woods system gave everyone a boost too. Can we claim that as a success for the quasi-Gold Standard it represented? What I say is that you have to look at the longer term. The Scandinavians and the French are not the examples I would have chosen. Personally. Because they do little to make my point clear. But Britain came off and America stayed on. Whose economy did better in the long run?

Devaluation is the gutless solution. It works nicely in the short term but in the medium and long terms I do not think it is as good as a serious policy of economic reform to make the economy more flexible and adaptable.

His analysis is well worth reading, because the Euro does behave much like an artifical gold standard – although if anything it is even stricter.

As I said.

I take your point to some extent about flexible interest rates under the gold standard – and under the ERM which was the predecessor to the Euro. In both cases interest rates were indeed variable. But they had to be used to defend the currency, even when economic circumstances really required a devaluation. Maintaining a currency peg at too high a level is economically debilitating and in the end unsustainable. I still remember when the UK was forced to exit the ERM after raising interest rates three times in one day…..

But did the economic circumstances demand a devaluation – or rather did the incompetent and irresponsible fiscal policies of the governments concerned force one? Maintaining one at too high a level is a bad idea. But the solution should be economic reform so that the rest of your economy keeps up. The problem was that no one took the ERM seriously until it was too late. Governments continued to pursue economically stupid policies which directly contradicted the idea of the peg. The solution was to pursue more sensible policies. Hong Kong has a peg but it takes its peg seriously – and they did spend to defend it back then. China has a de facto one now.

I don’t accept your argument that internal devaluation is always better. When an economy is in recession and its current account is in deficit, internal devaluation is likely to make the recession deeper and delay return to growth – as we are seeing in Greece. Currency devaluation is in my view a much better strategy under these circumstances. Unfortunately Greece can only devalue if it leaves the Euro.

That may be true – in the short run. But the ideal solution is to avoid these problems. The Euro-economies have massive structural problems with wage inflexibility being one of the bigger problems. Now it does not matter if Greece devalues or not. It will have to devalue and default again and again and again unless it does something to correct these basic problems in their economy. The devaluation does not cure the problem. It just gives the patient a few more years of struggling on under life support.

Now I will half agree – like the famous Irishman said, it would be better if the Greeks did not start from here. If they had begun the process when they were in better shape and hence it would have been less painless. That is not an option now. Yes, higher interest rates, defending the exchange rate, all that will push Greece deeper into trouble. But if there is massive structural reform, if taxes are brought down over time, if regulations are freed up, if corruption and tax avoidance are reduced, in the longer term Greece will be vastly better off.

If, on the other hand, Greece defaults, leaves and devalues, then they will not carry out any of the necessary reforms. Greece will continue to be corrupt, incompetent, over-regulated, over-taxed and with most smart people angling for cushy government jobs. They will get poorer and poorer as the New Drachma is devalued again and again, but no one will notice. They will slide into the sea like Argentina did under the Perons. Unless of course the Army does us all a favour and takes power once again.

SMFS @ 56:

“But Britain came off and America stayed on. Whose economy did better in the long run?”

The Second World War might have had some effect there, so I’m not sure how helpful that argument really is.

59. Leon Wolfson

@51 – Well then. You refuse to take criticism on board, and there’s only one reason for that, especially given the corporatist who you’re figuratively in bed with.

You’re very clearly a hard-right sympathiser who has just lied, repeatedly, about her biases and friends. In fact, thank you for the GUIDE to who you’re writing for there.

I never mentioned the UKIP, but certainly they benefit from it. And your views are highly beneficial to the hard right of the Tory party. They are massively damaging to the EU, to the Euro and benefit the cause of the xenophobic elements in England.

That you think you can use snarky, clearly biased word choices and little word games to poke at the EU and then lie about it is a clear indicator of where your loyalties lie – with the 1%, with the anti-Europeans.

Your article would be at home on a Conservative site, it’s distinctly out of place here unless the purpose is to shift the site right-wards.

60. Frances Coppola

So Much For Subtlety

Hmm. It seems to me that you need to define “the long run” before you start asking whether US or British economy fared better in the Great Depression.

I don’t accept the use of currency pegs to force fiscal discipline. Fiscal discipline is necessary even under a floating rate system. Yes, there is always the risk that a stupid government will devalue its currency out of existence. But the responsibility for ensuring fiscal rectitude rests with government, not with international markets.

I don’t think you can ignore the role of currency markets in the demise of the ERM. The UK’s exit followed a period of sustained attack on its currency with the clear intention of forcing exit from the ERM and devaluation. This was driven at least partly by markets’ view of the ERM as unstable and doomed to failure. Currency markets are by no means passive agents and their intervention can force governments to behave in a way that is incompatible with the best interests of their economies and their people.

In relation to the Euro, the same phenomenon is occurring but in bond markets instead of currency markets. Yes, the countries under attack are the weaker ones – to start with. But eventually even quite strong economies find their bonds depreciating and yields rising. The reason is ostensibly perceived weaknesses in their economies – but the underlying cause is suspicion of the Euro as a construct. You could say that markets are testing the resolve of politicians to hold the whole thing together.

I’m not denying the existence of structural problems in countries like Greece, and the need for reform. But Greece joined the Euro in order to avoid dealing with its structural problems – and the other countries connived at that for ten years. Now the whole thing is under pressure from a suspicious market, we suddenly hear demands for “fiscal reform” from countries whose own fiscal discipline has been decidedly ropy for a lot of the last decade. Hypocritical, and much too late. No way has Euro membership encouraged fiscal discipline.

If Greece wants to go to hell by repeated devaluation of its currency, it should be able to. At the moment, it needs currency devaluation because there is no way it can implement the reforms you mention in any kind of sensible timeframe. Yes, it would have been better if it had never got into this mess. But it was already in a mess when it joined the Euro, and membership of the Euro allowed it to conceal its problems and end up in an even worse mess. Euro membership absolutely has not encouraged it to enforce fiscal discipline. If anything it has helped it to be even more profligate. Had it not been a Euro member, the banks wouldn’t have lent it so much money.

You don’t get leopards to change their spots by sticking them in a cage with other leopards with similar spots and telling the outside world that if they are starved enough they will turn into lions…..

.@ So Much For Subtlety

Of course they need to reform their whole economy. However, currently they can’t even get their public sector tax collectors to do their job and collect taxes. They are just not going to get the type of support for reform in the current environment. Reforms need to be a two way process with government and the people or they will lack legitimacy. The pressure to reform and eliminate rigidities may well disappear if they left the euro and as a result no reform would occur. In that case their real wages would fall through higher inflation and a weaker currency. That would be their problem. The problem is there is no prospect of their economy converging to near the core in the current economic environment. Greece et al were too divergent in the first place to be in the same monetary union as Germany.

A monetary union is fine if the various economies are not too diverse. However, if you peg your currency to some other country you will import their monetary policy. You are quite right to say that it was up to those governments to follow better policies. However, the end result is that their prices and wages have ended up far too high. That would not have happened if they had been floating as their real effective exchange rates would have adjusted. In the end, they were just too different to converge to a one-size-fits-all monetary union.

62. Frances Coppola

@59 Leon Wolfson

I’m perfectly happy to accept reasoned, well-founded and evidenced criticism. Sadly you haven’t produced any.

No, you didn’t mention UKIP, but others did in relation to your remarks. I do read other comments too, you know.

The rest of your ridiculous comments are simply laughable.

63. So Much For Subtlety

57. XXX

The Second World War might have had some effect there, so I’m not sure how helpful that argument really is.

That is true, but even if we ignore the effects of WW2. If we look at post-1945 economic growth. Who did better? I am not sure how we can factor out the effects of WW2 but I am pretty sure too many people use it as an excuse.

59. Frances Coppola

Hmm. It seems to me that you need to define “the long run” before you start asking whether US or British economy fared better in the Great Depression.

Over the next century?

I don’t accept the use of currency pegs to force fiscal discipline. Fiscal discipline is necessary even under a floating rate system. Yes, there is always the risk that a stupid government will devalue its currency out of existence. But the responsibility for ensuring fiscal rectitude rests with government, not with international markets.

Why don’t you accept it? The Gold Standard did in fact do that. So would the ERM if we had been serious. So is the Euro, or so it was intended. Fiscal discipline is necessary in the sense it is a good thing and is handy if you want things like economic growth. But it is not immediately mandatory – the markets will just slowly devalue your currency instead. All governments devalue their own currencies out of existence in the long run. Not even the long run, in the short run. As Britain has slowly been doing. The only exception I can think of off hand has been Switzerland and perhaps Germany since 1945. Some counties do it faster than others, but they all do it.

I don’t think you can ignore the role of currency markets in the demise of the ERM.

So we are agreed it is not so much a responsibility as an inevitable result? The markets will enforce fiscal rectitude if you have a peg?

The UK’s exit followed a period of sustained attack on its currency with the clear intention of forcing exit from the ERM and devaluation. This was driven at least partly by markets’ view of the ERM as unstable and doomed to failure. Currency markets are by no means passive agents and their intervention can force governments to behave in a way that is incompatible with the best interests of their economies and their people.

I agree that the UK left after a sustained attack. But why did that attack succeed? It was because Britain was trying to maintain a peg while refusing to pursue the necessary fiscal policies to keep that exchange rate. The markets may have thought the ERM was doomed, but more to the point, they recognised that economic reality was something other than the European governments were pretending. It would not matter what some traders thought if Britain was not suffering high inflation, even higher interest rates than Germany and so on. All choices of the British government. When the economic reality shifted, the ERM became a fantasy.

Ignoring reality is not in the interests of anyone or their economies. Traders don’t make it rain, they simply forecast the weather. Governments make it rain. The ERM is a good example of a system that could have worked – if those involved had some level of fiscal discipline. They did not. That was the problem.

The reason is ostensibly perceived weaknesses in their economies – but the underlying cause is suspicion of the Euro as a construct. You could say that markets are testing the resolve of politicians to hold the whole thing together.

You continue to ignore the underlying reality – Greece has not behaved in a sensible manner. It cannot maintain the peg. The markets have been saying all along that the Euro was doomed – like every other sane person. But they have given the Europeans the benefit of the doubt to see if they could make it work. It is only when it is clear that it cannot and will not work do they start to think about how they are going to get their money out of places like Greece. This is not a struggle between European governments and bond traders. It is a struggle between European governments and reality.

I’m not denying the existence of structural problems in countries like Greece, and the need for reform. But Greece joined the Euro in order to avoid dealing with its structural problems – and the other countries connived at that for ten years.

That is also true – rather than take the tough decisions, they took German cash. But it just deferred the need. Devaluation is not going to help either though.

Now the whole thing is under pressure from a suspicious market, we suddenly hear demands for “fiscal reform” from countries whose own fiscal discipline has been decidedly ropy for a lot of the last decade. Hypocritical, and much too late. No way has Euro membership encouraged fiscal discipline.

Indeed. The Euro did not have the automatic mechanisms that the Gold Standard did to enforce fiscal discipline. Now we have the one eyed called on the blind to move towards full sight. It is ridiculous. But it is inevitable.

If Greece wants to go to hell by repeated devaluation of its currency, it should be able to.

By all means. If it wants.

At the moment, it needs currency devaluation because there is no way it can implement the reforms you mention in any kind of sensible timeframe.

I agree that now Greece has no choice but to leave, default and devalue. At least leave and default. It should not have been allowed to join. All foreseen. All foreseeable. Such an immense destruction of value for an ideological wankfest. But in the end, that is not going to save Greece. They need those reforms.

Euro membership absolutely has not encouraged it to enforce fiscal discipline. If anything it has helped it to be even more profligate. Had it not been a Euro member, the banks wouldn’t have lent it so much money.

The French being only marginally better than the Greeks as far as I am concerned. Yes, this is worse. But then the Euro was always going to be worse as it was always intended as a struggle against the “Anglo-Saxon model”. Or as I would put it, reality.

You don’t get leopards to change their spots by sticking them in a cage with other leopards with similar spots and telling the outside world that if they are starved enough they will turn into lions…..

Well perhaps the stronger leopards could eat the weaker ones …… Not these days perhaps. I agree. Culture does matter. The Greeks do not have a culture of fiscal rectitude. The Euro was a bad idea. But they should have such a culture. They need to work on getting such a culture. A pity really.

The article on Jamaica and Barbados is here:

http://gsbapps.stanford.edu/researchpapers/library/RP2012.pdf

Devaluation is not a long term solution.

64. So Much For Subtlety

61. Richard W

Of course they need to reform their whole economy. However, currently they can’t even get their public sector tax collectors to do their job and collect taxes. They are just not going to get the type of support for reform in the current environment. Reforms need to be a two way process with government and the people or they will lack legitimacy.

I agree with this. Certainly Greece has few options now. But in the general, wider, sense, devaluations are not a good solution.

The pressure to reform and eliminate rigidities may well disappear if they left the euro and as a result no reform would occur. In that case their real wages would fall through higher inflation and a weaker currency. That would be their problem.

Indeed. That is the choice that Peron’s Argentina made as it slid from the richest country in the world, or near to it, to a Third World Basket case. Greece can opt to do the same too. And probably will.

The problem is there is no prospect of their economy converging to near the core in the current economic environment. Greece et al were too divergent in the first place to be in the same monetary union as Germany.

I am not sure I agree with that last bit. Yes, there is no chance of their economy converging to the core. But does it have to? Disparate regions can have a single currency, in effect, as long as they have some degree of flexibility in, for example, their interest rates. The Gold Standard did unite most economies in what was a de facto monetary union. It seemed to work.

A monetary union is fine if the various economies are not too diverse. However, if you peg your currency to some other country you will import their monetary policy. You are quite right to say that it was up to those governments to follow better policies. However, the end result is that their prices and wages have ended up far too high. That would not have happened if they had been floating as their real effective exchange rates would have adjusted. In the end, they were just too different to converge to a one-size-fits-all monetary union.

Too different – and not willing to pay the price. You can see that even the US and the UK are probably a little too diverse for currency union. Arguably Scotland and the North would be better off with their own currency or at least their own interest rate. But Britain and Ireland shared a currency for many years. It worked because the Irish were willing to follow the necessary economic policies to make it work. On the other hand, the Bretton Woods system broke down because in the end America was not willing to do so. Hong Kong, China and the US in effect share a currency even though they have three very different economies.

If Greece had not been running a massive budgetary deficit, if it had not been running a current account deficit, if it had followed a more sensible fiscal policy, do you really think that it would have been forced out of the Euro?

65. Leon Wolfson

@62 – Take your lies elsewhere. I’m not interested in being lectured to by a 1% Tory.

It’s no coincidence that you’re having a conversation only with the two most notable Tories on the site. Little Englander UKIP for sure.

66. Frances Coppola

@63 So Much For Subtlety

I don’t think I would ever argue that devaluation is a good long-term policy. But it is sometimes a necessary short-run policy. It must be accompanied by reform, though – otherwise further devaluation follows as the night the day.

My argument about the Euro has always been that it was fundamentally flawed because the commitment to fiscal convergence was not built in – it was optional, and mostly ignored from the start. If all the countries of the Eurozone were committed to fiscal discipline and maintaining their economies within the limits set in the Stability and Growth pact we wouldn’t be in this mess. As they aren’t remotely committed to such discipline and never have been, it hasn’t a hope of working. As you say, culture does matter, and some countries simply don’t “get” fiscal discipline. Greece has defaulted more than once before.

@Leon Wolfson

You do realise there is a notable anti-EU/Euro tendancy amongst the far-left*, don’t you? Or are you so ignorant to ignore the arguments that the EU is a capitalist’s club? (I don’t agree with that analysis myself but it’s a valid argument).

Read some history/do some research before slandering writers on this site – otherwise you are simply trolling.

*Not even *that* far-left. Tony Benn, lest we forget, shared a platform with Enoch Powell. And I’m pretty sure Bob Crow is also anti-EU… but no, they must be Tories!

@ SMFS

The problem with the ERM and why it failed was not caused by fiscal problems with those who had pegged to the mark within fluctuation bands of a managed float. The catalyst was German reunification. When you peg your currency you import the monetary policy of the other country. That was the point of the ERM system that 11 EU nations would import German monetary policy. However, German reunification ended up being such a huge event that they effectively ended up also importing German fiscal policy.

West Germany had to spend an enormous amount of money to assimilate the communists to civilised society. Almost half of all West German savings were transferred to the East, and the government deficit rose to 13.2%. They made a crucial mistake of agreeing to convert the East German Mark for DM at 1.8:1. This exchange rate collapsed what there was of East German businesses.

The huge sums of transfers that were flowing into EG meant the population put down their socialist theology tomes and spent the money on consumption. Since the workers paradise had nothing much worth buying beyond the odd turnip, the money flowed back to West Germany and increased the demand for West German made goods and raised inflationary pressures in West Germany. Moreover, the central bank had to issue more DM to exchange for East German Marks. That combination makes German bankers very nervous and they started to follow contractionary monetary policy through the Bundesbank raising interest rates by almost 3% in the years 1991 and 1992.

Expansionary fiscal and contractionary monetary policy is a sure fire way to raise the real interest rate, which caused an inflow of money into the German economy including from the other ERM members. This inflow causes the DM to appreciate and net exports to fall and the higher real interest rates caused German output to fall.

At the time, the UK was in a severe recession with high unemployment. Yet, the fixed exchange rate meant that they could not resort to expansionary monetary policy. Moreover, in a fixed exchange rate system, an outflow of money leads to a
monetary contraction as the central bank exchanges foreign currency for domestic currency. Under a flexible exchange rate system, the outflow of money would have led to an exchange rate depreciation. The fall in German output also led to a fall in UK net exports to Germany, which lowered UK output and raise the pressure on sterling to depreciate. Furthermore, the German monetary tightening also led to the DM appreciating vis-a-vis non ERM currencies, which implicitly appreciated sterling against those currencies as well. More fall in UK output. So the UK was in the position of importing the consequences of German fiscal policies dealing with reunification and their later monetary tightening.

At this point betting against sterling could not lose because the outflow of money meant that the Bank of England would eventually run out of foreign currency to defend the exchange rate. Nothing that the UK could have done would have prevented the inexorable logic that the currency speculators were going to win. Only a change in German monetary policy would have changed anything and the speculators were effectively betting that German policy would not change.

All the familiar problems of the ERM are alive and kicking in the current eurozone. The pressure now does not come through the exchange rate, but through the sovereign debt yields and local banking system. Plus ça change.

69. Frances Coppola

@RichardW

Fascinating history. And I can see the parallels.

The lesson for me is that fixed exchange rate regimes (including the Euro) work in normal times but don’t cope with major economic shocks that amplify differences between members. Countries will always pursue their own interests first.

70. Frances Coppola

@65 Leon Wolfson

I’m replying to reasoned, well-argued and evidenced comments. What the politics of the people who make those comments are does not interest me, frankly.

If you produced reasoned, well-argued and evidenced comments I would be very happy to debate with you, too. But you don’t. You’re just a troll.

71. Frances Coppola

@65 Leon Wolfson

I’m replying to reasoned, well-argued and evidenced comments. The politics of those people doesn’t interest me. Their arguments do. I don’t necessarily agree with them, but that’s the point of debate, isn’t it?

If you produced reasoned, well-argue and evidenced comments I would be very happy to debate with you, too. But you don’t. You’re just a troll.

Frances,

I’m replying to reasoned, well-argued and evidenced comments. The politics of those people doesn’t interest me. Their arguments do. I don’t necessarily agree with them, but that’s the point of debate, isn’t it?

If you produced reasoned, well-argue and evidenced comments I would be very happy to debate with you, too. But you don’t. You’re just a troll.

Not a troll – just territorial. He sees this as a site for his sort of person and gets upset when it allows views he does not like. He seems to ignore the fact that the world is not settled – and to learn we have to engage.

It’s kind of sad – nothing you have said marks you out as anything other than what you say, but in Leon’s head disagreement makes you one of the enemy – a 1% Tory Eurosceptic Banker (I’d give you good odds that given long enough you’ll get big-oil funded climate sceptic in there to). The problem for the Euro is that too many of those involved perhaps think like Leon.

Thanks for excellent engagement anyway.

Thanks to Frances Coppola -for having written the piece and to Liberal Conspiracy’s open-mindedness (that’s what liberalism stands for, doesn’t it?) for having carried it to its readers.
The very interesting and sometimes heated discussion it is generating should reassure us about the vitality of a healthy democratic debate.
What strikes me is that, besides economic and financial aspects, much of today’s situation is due to the hubris of Europe’s political (and other) elites.
On the continent, EU and then the euro have been presented as the be-all and end-all.

The ongoing crisis is a rude awakening for many, even among former europhiles. Which is my case and, as I can read here, the case of a few others, even in Great Brirtain or (less) in Little England (pun but no disrespect intended).
Not that everything that the EU does should be questioned, but many things must be. Why should it be a Tory “privilege” to say that?

74. Mike Killingworth

[73]

Not that everything that the EU does should be questioned, but many things must be. Why should it be a Tory “privilege” to say that?

It never has been: the “hard left” has always seen the EU, and before that the EEC, as a capitalist con-trick to abuse the working class. The fact that you even ask the question is a measure of how far the centre of political gravity has shifted and continues to shift.

75. Frances Coppola

It has indeed been an excellent debate, and I have learned a lot from it. Thank you everyone.

76. Leon Wolfson

@71 – You’re a Tory having a conversation with Tories on your site, and responding in a very Tory fashion to criticism of your snide, anti-European article from the left. Your article is trolling this SITE.

That’s all there is to is as far as I’m concerned, and your attitude just confirms this for me. What’s laughable is your contempt for anyone beneath you because they don’t sign on your corporatist dotted line.

@72 – Strangely enough, yes, there are plenty of right wing sites for you to post on, where no left wingers are allowed. The left wing sites are then clogged by right wingers, and we’re supposed to take this lying down. Typical Tory attitude, once more.

(Don’t want to be called one? Don’t act like it)

@67 – Yes, but the arguments are *considerably* different to the bankers club discussion between Tories here. I can and have debated quite politely with them.

77. Frances Coppola

@76 Leon Wolfson

I was invited by Sunny to publish an edited version of my post on this site. If you object to the decisions he makes regarding articles for publication you should address your concerns to him.

You can of course choose not to read an article you consider unsuitable and not to engage in the debate.

As I’ve said already, I’m happy to debate with anyone who produces reasoned, evidenced argument, whatever their politics.

I’m disappointed that instead of accepting my invitation to demolish my argument through rational discussion supported by facts, you have resorted to name-calling. All you’ve done is made yourself look silly.

I won’t reply to any more comments from you now as it is time this fruitless exchange was closed.

78. Leon Wolfson

@77 – Well, yes, this has seriously dented my view of Sunny as well, come to that.

And right, closed. The same wording as the Tory fat-cat dismissing a poor lady looking for advice, recently, which some people may remember. This isn’t coincidence, of course.

I am not going to be told by an arrogant, dismissive and sarcastic Tory that I can’t comment here. If Sunny wants to do it, and to make plain that the left don’t have a place in the future, he can do so. You can’t.

@78

“If Sunny wants to do it, and to make plain that the left don’t have a place in the future, he can do so. ”

Debate fans – this is what’s known as “poisoning the well“. Sunny is well within his rights to ban posters who slander writers on this site IMO – in no way shape or form does it mean “the left don’t have a place in the future” – as far as I can tell the OP is of “the left” – except in the tiny, sectarian, mindset of certain commentators.

Seriously, Leon, you’re being an utter fool. You probably know it and now you’re in a hole you’re lashing out. Just stop posting on this thread – you do yourself no favours whatsoever.

*waits to be called a Tory*

80. Leon Wolfson

@79 – If you consider the truth slander, then it’s evident I accidentally mistook you for someone who was left wing, and I apologise to you for slandering you by doing so.

And why would I let a right wing screed with no redeeming features pass? When I pointed out the major issues with it’s snarkyness and tone, I basically got told I was lower class and to shut up – in distinctly Little Englander terms – while the poster debates ConDemNomics with two Tories.

To switch the discussion back to issues closer to the original thread header, Angela Merkel is reported in the press on Wednesday night as saying: Collapse of euro could pose threat to peace

Curiously, that is just what Martin Feldstein was predicting in a paper for Foreign Affairs, June 1997: EMU and International Conflict

“If EMU does come into existence, as now seems increasingly likely, it will change the political character of Europe in ways that could lead to conflicts in Europe and confrontations with the United States.”
http://www.foreignaffairs.com/articles/53576/martin-feldstein/emu-and-international-conflict

Feldstein is a professor of economics at Harvard. He served as the chair of President Reagan’s council of economic advisers 1982/84.

82. Frances Coppola

@81 Bob B

In my view the longer the Eurozone expends time, effort and money holding the Euro together at the expense of ordinary people, the more likelihood there is of conflict. People I talk to in Greece describe it as being like a powder keg which could blow up at any moment. There is a real risk of violent revolt, which if Greece is true to its history would be likely to be forcefully suppressed, possibly using military resources. If other countries go down the same disastrous economic path as Greece, which seems likely given the Eurozone’s commitment to idiotic austerity measures everywhere, violent protest may spread across Europe.

More worryingly, we are also seeing growing support for nationalistic parties in several countries. I really, really don’t want to see that trend increase. Europe’s history is bloody enough already.

83. Frances Coppola

Update 26/10/11

On BBC Newsnight this evening two of three panellists – the economist Megan Greene and the CEO of Tullett Prebon, Terry Smith – both expressed serious dissatisfaction with the deal proposed by the Eurozone leadership today and stated that in their view the Euro was still not viable.

Megan said that the game appeared to be to maintain Italy and Spain for 12 months until the ESM could take over from the EFSF. But at the end of the 12 months there will still be insufficient money to sort out the debt problems.

Terry Smith asserted that in his view markets will not be remotely impressed with this deal. If he is correct then I would expect to see yields continue to rise on Eurozone countries’ debt, not just the countries currently under attack but others too, which will make their debt burdens ever more difficult and expensive to finance. The Eurozone financial situation is therefore likely to be much weaker in 12 months time and I think it will be in recession by then as well.

The third panellist (whose name escapes me) did express more confidence in the future of the Euro, although even she accepted that Greece’s exit looks increasingly likely.

Correct me if I’m wrong but won’t Greece default regardless of whether it stays in or out? The debts remain denominated in Euros, even if Greece moves back to the Drachma?

Also, weren’t the Greeks, and indeed many other countries, being a little irresponsible borrowing all that money if they couldn’t pay it back?

85. So Much For Subtlety

66. Frances Coppola

I don’t think I would ever argue that devaluation is a good long-term policy. But it is sometimes a necessary short-run policy. It must be accompanied by reform, though – otherwise further devaluation follows as the night the day.

I think we are in basic agreement then. Although I would point out, again, the importance of culture. It does not matter what sort of currency Greece has had. It has always defaulted and it has always devalued. The only exception being the comparatively good (in a strict fiscal and economic sense I stress) period under the Colonels. Greece has probably reached the point where it has no choice but to default, leave and devalue. But what will it do then?

My argument about the Euro has always been that it was fundamentally flawed because the commitment to fiscal convergence was not built in – it was optional, and mostly ignored from the start.

Absolutely. As many people pointed out at the time. Not all of them Tories.

If all the countries of the Eurozone were committed to fiscal discipline and maintaining their economies within the limits set in the Stability and Growth pact we wouldn’t be in this mess. As they aren’t remotely committed to such discipline and never have been, it hasn’t a hope of working. As you say, culture does matter, and some countries simply don’t “get” fiscal discipline. Greece has defaulted more than once before.

Half the time since independence from the Ottomans it has been in default. There is probably a case in Greece for using someone else’s currency as they don’t seem able to manage it. But not the Euro. I think we are even more agreement. If people had followed tougher fiscal discipline, this would not have arisen. At least not now and in this way. But it was bound to happen given those differences in culture.

Richard W

At the time, the UK was in a severe recession with high unemployment. Yet, the fixed exchange rate meant that they could not resort to expansionary monetary policy.

Which was a bonus really. Kind of the point.

At this point betting against sterling could not lose because the outflow of money meant that the Bank of England would eventually run out of foreign currency to defend the exchange rate. Nothing that the UK could have done would have prevented the inexorable logic that the currency speculators were going to win.

I agree with what you say up to this point – Britain could have followed Germany and jacked up interest rates. It was importing German monetary policy at a time when Germany was going through a unique period – and their monetary policies were unusually bad. But they could have stuck with it. It just would have been really bad for the economy in the short term to raise interest rates when people are in trouble already. They chose not to. This is really a plus for the Gold Standard as Germany could not have run that policy if it was on gold.

86. Leon Wolfson

@82 – The risk isn’t civil disorder, where there is about as much risk as in, oh, Israel of violent suppression of mass civilians on the street, despite it’s far-right government, but a breakdown of the EU and a resource war.

The violent suppression of peaceful protesters which has been seen lately is in this country called England, specifically in London…

87. Frances Coppola

@84 Other Ed

It’s certainly looking that way. The sort of “haircut” now being discussed for private bondholders will amount to default if it goes ahead.

The reasons why Greece and others borrowed so much are complex, and different for each country. I think most people would agree that Greece has indeed been irresponsible, but it wouldn’t really be fair to say that of all the others. Greece has been borrowing too much for a long time: it was already deeply in debt when it joined the Euro. It concealed its debts (with assistance from Goldman Sachs) using derivative financial instruments to enable it to meet the criteria for joining. And it has ignored the debt and deficit constraints for Euro membership ever since. It has made no real attempt to deal with widespread tax avoidance and corruption, which was necessary to improve its tax income, or with its massive bureacracy that stifles private enterprise. Having said that, its economy was crippled by the 2008 recession because of its dependence on tourism.

Frances

Mervyn King has (correctly IMO) warned that: Even if the eurozone crisis is solved, a bigger challenge lies ahead. The analysis here is worth reading:
http://www.guardian.co.uk/world/2011/oct/26/eurozone-crisis-bigger-challenge-ahead?newsfeed=true

The key point is that settling the issues currently on the negotiating table in Brussels doesn’t nearly address the fundamental causes of the imbalances and indebtedness in the Eurozone economies, in particular the divergent competitiveness which countries with large trading deficits cannot remedy by devaluing their national currencies. Constructing a fiscal union will create a huge scope for both initial and continuing conflicts between national interests so no light is in sight at the end of the tunnel.

There’s a standard pattern in these EU crises: ferocious negotiations leading up to last minute settlements but on terms which are soon found to be unsatisfactory and which tend to be honoured more in the breach than by observance. This is often celebrated as demonstrating a wonderful European capacity for pragmatic flexibility until another crises emerges as a result. The Eurozone Growth and Stability Pact of 1997 was intended to ensure fiscal disciplines are maintained but both France and Germany have breached that at times.

89. Frances Coppola

@86

Examples of protests in Greece involving violence from protestors and police:

From 2010: http://news.bbc.co.uk/1/hi/8661385.stm http://news.bbc.co.uk/1/hi/8661385.stm

May, June 2011: http://en.wikipedia.org/wiki/2010%E2%80%932011_Greek_protests (three people died in the May 5 strike)

October 20th 2011: http://online.wsj.com/article/BT-CO-20111020-709064.html

Protests in Spain and Portugal not so violent at the moment:

http://en.wikipedia.org/wiki/2011_Spanish_Protests
http://en.wikipedia.org/wiki/2011_Portuguese_protests

90. Frances Coppola

@88 Bob B

Thanks for the link. Really that is the substance of my issue with the Euro – IMO it is fundamentally flawed because of the massive economic and cultural differences between the member states and the lack of any real political will to resolve them. But I fear the EU leadership will carry on propping it up for quite a while yet, and in so doing cause immense damage to the economies not only of the Eurozone members but their trading partners including the UK and US.

91. Leon Wolfson

@88 – So we should abandon treaties and go back to various forms of warfare?

Europe has a violent, bloody history. And yet there’s been a long period of peace here, since WWII. Even most violent nationalist movements have now laid down their arms.

@89 Frances

Part – perhaps most – of the political problem in Europe is the persistent belief among Europhiles that “politics trumps economics”, which means that they can avoid reading all that boring, head-banging economic analysis.

There was no shortage of warnings about the hazards ahead from the economics of monetary union from the likes of Rudi Dornbusch, Paul Krugman, Martin Feldstein, Walter Eltis . . but all was disregarded for the beguiling visions of European Union.

93. Frances Coppola

@91

I know I said I wouldn’t reply to your comments, but I meant the name-calling and insults. This was a valid point to which I feel I should respond.

We often hear about “European peace since WWII” but sadly as far as the EU goes it’s not really true. Europe now includes:

1) the countries that made up Yugoslavia, which fractured violently after the fall of the dictator Tito in 1980. The ensuing wars lasted for well over a decade
2) the Baltic states of the former USSR
3) the separated states of Slovakia and the Czech Republic, formerly Czechoslovakia
4) Hungary
5) Bulgaria
6) Romania

Some of these already are Euro members and all are EU members. All have experienced civil war and/or actual (external) war within the last thirty years.

I presume therefore that by “Europe” you mean Western Europe, and it is indeed correct to say that there have been no actual wars in Western Europe since WWII – although I think Irish nationalists might disagree with you about that. But the EU is much larger than that now.

My concerns about the Euro don’t extend to the EU itself, which I fully support – not least because of the prospect it holds out for lasting peace. I don’t accept Merkel’s argument that preserving the Euro is necessary for European peace: on the contrary, I think it is becoming a threat to peace. But I do think that preserving the EU is necessary.

94. Leon Wolfson

@92 – And yet nations to the East have moved slowly into convergence with the EU. Peace has spread across those states as they’ve done so. Even Serbia has cleaned up it’s act, because it sees the advantages of EU membership.

UNUSUR, to pick one example, is not a coincidence either; afaik in future, it’s going to be only the most powerful nations who can compete without membership of a Supranational trade block. America (who have NAFTA anyway), India, China…

As I said, though, I can’t see the EU surviving a failure of the Euro.

95. Frances Coppola

@92

Bob,

Oh, tell me about it. The number of discussions I’ve had with Europhiles whose eyes glaze over the moment we start to talk real economics!

And some people who should know better, too. When I was doing my MBA, my macroeconomics lecturer was a fervent supporter of what was then the ERM, and very keen on fast progression to a single currency. I wrote an essay in which I produced loads of economic evidence that it wouldn’t work. His comment was “excellent analysis, unfortunate conclusions”. When I asked him what “unfortunate” meant he said “It means I don’t agree with you”. Fair enough, but he docked me a few marks and it cost me a distinction. This was in 1991. The ERM collapsed in November 1992…

RichardW’s analysis in comment @68 of the reasons for the ERM’s collapse is excellent, by the way. The only thing he missed was the UK’s shadowing of the DM at too high a rate for a couple of years before it actually joined, by which time the economy was in recession and not able to cope with the high interest rates required to keep sterling within the currency bands.

96. Frances Coppola

@94

There’s no doubt the incentive of EU membership has been of immense value in helping the former Iron Curtain countries to adjust to life without the USSR calling the shots (and beating them up if they resist), and it has undoubtedly been a major cause of the peace that now generally persists in Eastern Europe.

I do agree with you that there would be a huge risk to the EU if the Euro were to fail. I’ve never said Euro failure would be an easy option. There are no easy options.

I really am not “promoting” Euro failure. I just think it’s inevitable. But on that I think you and I will have to agree to differ.

Well Asia and the futures are giving an ‘ up twinkles ‘ to what has been agreed. However, we see this after every summit and when people have time to go over the details things are rather less impressive. Greece is really an afterthought now with the 50% haircut has already been priced in for some time. Italy remains the big one.

The central problem remains no matter what they agree is how can they sanction a member who breaks the rules? The Stability & Growth Pact was a joke when Germany and France were the first ones to break the terms of the pact. Only an Eurocrat could come up with the idea that an appropriate sanction for a government with too high a deficit was to, er, fine them. Nothing is going to work in the long-term unless there are some built in real sanction available against governments breaking the rules.

The natural discipline on governments is the FX and bond market. They removed the FX from the equation and the discipline moved to the bond market. It is not on the table as yet but a common euro-bond would remove the discipline from the bond market and governments would be quickly unrestrained. Therefore, one can see how some sanctions with teeth would be needed to restrain the miscreants. Yet, that situation currently exists without a common euro-bond when the EFSF is going to buy their debt when market rates are too high. Therefore, the market will work out that governments will not comply with what they agree to comply with at summits.

“Fair enough, but he docked me a few marks and it cost me a distinction”

He should have got fired for that. I was lucky enough to have lecturers more mature than that who actively encouraged students to disagree with them – provided you made the argument logically and offered supporting evidence you’d be marked up.

The author should have waited two days. All wrong.
Fifty per cent haircut, 1 billion € reserves, unity of France and Germany, Greece saved, Euro saved. End of World capitalism postponed.

I am reminded of Mr Camping: “In an hour and a half broadcast, Camping walked listeners through his numerological timeline, insisting that his teaching has not changed and that the world will still end on October 21, 2011. “

That was one German Billion €. Should read one Trillion €, of course in English parlance.

That was one German “Billion €”. That should read one Trillion € in English parlance, of course.

@99, 100 & 101
You wrote: “All wrong. Fifty per cent haircut, 1 billion € reserves, unity of France and Germany, Greece saved, Euro saved. End of World capitalism postponed.”

The 50 per cent haircut will bring Greece’s debt down to 120% from 180%. Can Greece stil manage with a decreasing GDP, growing poverty and virtually nothing significant to export? The answer is a straight no.

Where have you seen one billion reserves? You should read twhice. This is no reserve at all but a sort of firepower guarantee… also depending on the goodwill of China, Russia and other “emerging” economies! Honourable to be rescued by these, isn’t it?

French-German union or bond (I suppose your “unity” word is a typo that wouldn’t have been used, even in 1941!) saved? Really, all the decisions were prepared in Berlin, and the arrogant Mr Sarkozy just followed suit. Read the news!

Euro saved? Wait for more than two days to say so. Just one word about the banking institutions, for which an estimated Euro 100 billion in new capital would be required. Today’s FT site already mentions that Spanish banks are hunting for the equivalent of minimum one quarter of that amount. What next?

As to the end of capitalism, as long as bankers are bailed out by governments before returning to their business as usual, you’re right, it’s not in sight!

103. Bill Payer

The article stated “Germany, whose taxpayers stand to take the biggest hit if Greece defaults, wants a 60% haircut. France, whose taxpayers will have to bail out its under-capitalised banks, can’t afford won’t accept anything more than 40%. ”
In fact 50% has been agreed. So the article was wrong. Whether Greece can cope with even a reduced debt is a different question.

One trillion reserves is what countries in trouble will be able to call upon. That has just been agreed. It was in all the papers. Whether it is enough is a different question. Why the anti-China jibe?

Ah hah, a snide reference to The War. I was wondering how long that would take. Join with the Daily Express which is banging the same drum.
Clearly Merkel and Sarkosy have compromised or the agreements would not have been reached. That is unity, isn’t it, whoever conceded more.

Euro saved? Well the article said it is was finished. But it looks like a new lease of life.

So, all in all, lots of premature claims which have been falsified by events.

Capitalism will end. But clearly not this week.

Be try to calm yourself, Mike G. You don’t have be right all the time.

@Bill Payer

Read not the Daily Express -which I don’t read- but The Guardian Economics blog: http://www.guardian.co.uk/business/economics-blog/2011/oct/27/eu-bailout-deal-scrutiny-critics.
Excerpts:
“Nicolas Sarkozy will spend this afternoon on the phone to Beijing, trying to persuade China’s president Hu Jintao to stump up some cash for the euro-bailout.”

“Even assuming the participation of China and any other investors who can be persuaded to join in, and a whizzy NEW INSURANCE SCHEME for sovereign debts, the über-EFSF will be worth €1tn (£875bn).”

But two wrongs don’t make one right…

And most serious commentators agree that Germany’s views have prevailed.

@95 Frances

Sad to learn about your MBA down marking but not really surprised.

By the late 1990s, a substantial sceptical academic literature on EMU was building up. Even Mundell’s famous paper on optimium currency areas (AER 1961) [*] is clear about “convergence” being a necessary condition for maintaining internal stability with loss of national monetary autonomy in a monetary union. Mundell explicitly refers to Nobel laureate James Meade considering and opposing a currency union in western Europe because he did not consider the prevailing conditions suitable.

Walter Eltis in: Britain, Europe and EMU (Palgrave 2000) is clear that the dynamics of the British economy don’t converge with most of the EU – the predominance of variable interest mortgages for house purchase in Britain; the market for business finance is not “bank-based”, as with the leading mainland EU economies; and the British economy is far more sensitive to interest rate changes than the leading mainland EU economies. Curiously, Walter Eltis was Michael Heseltine’s personal economic adviser when he was DTI minister.

Till 1998 when I retired, I worked in a government department which was officially committed to joining the Euro asap. It was impossible to have rational discussions about the Euro with some – though not all – colleagues. In retirement, I last spoke on the phone with some ex-colleagues about a year or so before Gordon Brown announced in June 2003 that it wasn’t in Britain’s best interests to join the Eurozone, at least in prevailing circumstances. One ex-colleague sneeringly said: Oh, you’re one of those who thinks we shouldn’t join the Euro, are you? and hung up. The views of the other and myself converged.

We need to be very suspicious about issues where it becomes verging on impossible to have rational professional discussions.

[*] Mundell: Theory of optimum currency areas: http://www.sonoma.edu/users/e/eyler/426/mundell1.pdf

106. Frances Coppola

Mike Guillaume and Bill Payer

The devil will be in the detail, of course. I’d recommend reading Gavyn Davies’ excellent analysis in the FT today: http://blogs.ft.com/gavyndavies/2011/10/27/emu-summit-leaves-e1000-billion-to-be-raised/#axzz1c0O09WgN

I’m currently looking through the EU statement and will write a blog analysing it shortly. Here are my thoughts so far though.

1) The EFSF will be leveraged, not funded. Exactly how that will work is yet to be disclosed, but the idea seems to be that there will be some combination of taxpayer guarantees from member states to insure bondholders against default (sort of CDS insurance, I suppose), plus hopefully some actual funds from external sources such as the IMF and China.

2) It remains to be seen whether banks can raise the necessary capital from private sources. If not, then it seems the EFSF can be tapped for this as well. How far is 1 trillion euros expected to stretch?

3) Greece is now in partial default and it remains to be seen whether ISDA will declare a credit event. So far it seems they won’t because banks did actually agree to the 50% haircut.

4) There are no measures whatsoever to promote economic growth in the debt distressed countries. Instead, the Eurozone is still adhering to its ridiculous austerity agenda, which will only serve to drive those countries further into recession and eventually drag the rest of the Eurozone down too – as I said in my article. Concerns have now been expressed about this from around the world.

5) In the light of 4) above Greek debt reduction to 120% by 2020 looks extremely unlikely and further default and restructuring seems inevitable.

6) Economic supervision of Greece by the EU and IMF is not accepted by its population and is likely to be fiercely resisted, especially as it is certain to involve even harsher cuts and austerity. There is no democratic mandate for this provision in the EU statement as far as I can see.

Believe me, Bill Payer, I would be only too delighted to be proved wrong. But I don’t think I have been. Yes, France accepted a 50% writedown. If their banks can’t raise enough capital their taxpayers will be on the hook for that. Just watch French bond yields rise in the next few months.

As far as I can see all this latest package does is delay the inevitable for a bit longer.

@ Frances Coppola

It is difficult to get away from thinking that there is a great deal of typical European smoke and mirrors about the proposals.

It is clearly an abuse of language to say that the haircut is voluntary to avoid a credit event and thereby triggering the CDS. Why no debt writedown for official sector holders? The ECB should take losses the same as the commercial banks. Only the IMF should have privileged creditor status senior to everyone else.

How will the EFSF retain triple A status if France are downgraded? They can’t and a downgrade for France is overdue.

There really is not much new money in the EFSF. Talk about China investing in SPVs looks at this stage to be wishful thinking. On the bank recapitalisation. For banks who can’t raise the capital from markets and tap their government. The EU competition commissioner needs to be as strict with those banks as they were with the UK banks receiving state-aid. That means large disposals of assets. I bet the EU do not interpret state-aid as strictly with eurozone banks as they did with UK banks.

I suppose the summit was really about financing rather than solvency and sustainability and things may calm down for a while. However, the real problems remain and I am sceptical that those governments can solve the fundamental problems.

Try Paul Krugman: Europe Better Off if Euro Collapses Now [24 October 2011]
http://www.newsmax.com/StreetTalk/Krugman-Europe-Euro/2011/10/24/id/415535

109. Frances Coppola

Richard W

Good summary. I wouldn’t invest in those SPIVs if I was the Chinese govt (SPIV, because they can’t decide whether it’s an SPV or an SIV). The acronym says it all.

Financially, all this proposal does is kick the can down the road for a bit longer. But I’m very concerned by the authoritarian tone of many of the pronouncements in the report, which to my mind add up to a serious attack on democracy in the debt-distressed Eurocountries. And why is there no discussion of the serious trade imbalances between the Eurocountries, which in effect mean that Germany obtains its fiscal surplus from the very deficits it is trying to cut in other Eurocountries?

Actually it’s already falling apart anyway, if this Telegraph report today is to be believed: http://www.telegraph.co.uk/news/worldnews/europe/eu/8854382/Eurozone-bail-out-holes-emerge-in-the-grand-solution-to-solve-EU-debt-crisis.html

Bob B

Thanks. I’ve read Krugman’s original post too. He doesn’t mince his words. It’s nice to know I’m on the same page as a Nobel laureate!

@109 Frances

A huge problem with finally terminating or restructuring the Eurozone experiment in monetary union is unpicking who owes what to whom. Just who or what is going to underwrite the debt of the deeply indebted countries to satisfy creditors? It’s nightmarish. A Eurozone with just the northern members is probably sustainable.

Years ago in an unrelated context, a successful European businessman on the eve of his retirement was asked by some journo about advice for a successful business career based on his personal experience. Never do business, he said, in countries where you don’t need to wear an overcoat in winter.

There are interesting insights from the chapter on the Netherlands in Crafts + Toniolo (eds): Economic Growth in Europe Since 1945 (Cambridge UP 1995). The Dutch Guilder had appreciated in the 1960s and 1970s as the result of gas discoveries in the North Sea off the Dutch coast. With a strong Guilder, swathes of the Dutch economy unrelated to the oil industry became uncompetitive.

To address this “competitiveness” issue, Dutch governments in the 1980s successfully created a national consensus to limit wage increases through the decade to 1 percent a year in real terms. It’s doubtful how many other west European countries could have achieved that. The population of the Netherlands is relatively small at c. 14 million and there is a national tradition of economic planning and interventions.

Germany entered the Euro in December 1999 at an uncompetitive exchange rate but set about addressing that through fiscal stringency to dampen growth and so suppress wage increases and by major reform of its benefits system to improve work incentives – because unemployment and sickness benefits were tied to previous average earnings, including past bonuses and overtime, it was possible to be better off by not returning to work after a period of sickness or unemployment. The previous Social Democrat government made prostitution a legal occupation. The outcome has been a huge surplus in Germany’s current balance of payments:
http://www.economist.com/node/21534855

As the result of that experience, German citizens and the government have become very unsympathetic towards other countries with competitiveness issues.

111. Frances Coppola

Bob B

They do very well out of the uncompetitiveness of other Eurocountries though. Germany’s main trading partners are other Eurocountries. That massive trade surplus is therefore balanced to a considerable extent by trade deficits in the Eurocountries to whom it exports, and those trade deficits are funded by debt (private and public sector).

I still want to know why there was no discussion of this matter in the Eurozone statement. There is absolutely no way the other Eurocountries can achieve the balanced budget that they have all agreed to without a significant reduction in Germany’s surplus. To do that, either the smaller Eurocountries have to outcompete Germany or Germany has to encourage more domestic spending, which it has shown absolutely no inclination to do. How on earth can the smaller countries outcompete Germany when they are making public spending cuts deep enough to drive them into recession and all external investment is running for the hills?

112. Frances Coppola

Bob B

Sorry, just realised some of what I said in previous comment wasn’t clear. I”m clarifying it here – although I should say this is a very personal view of Eurozone economics.

If a country with a trade deficit cuts its fiscal deficit, then unless the private sector is willing and able to take on more debt its trade deficit must reduce as well. This reduction is not due to increasing competitiveness improving exports but due to reduction in imports as net spending falls. Hardly encouraging for economic growth prospects! If trade deficits fall due to reduced imports in all Germany’s Eurozone trading partners then its trade surplus can’t possibly be sustained. Germany’s economy is heavily reliant on exports to the Eurozone. Balanced budget measures in other Eurocountries will therefore force the German economy to shrink. The result will inevitably be a Europe-wide recession.

What is actually needed is for Germany to invest its trade surplus in the economies of its weaker trading partners to stimulate the supply side of their economies and generate exports. And it must import what they produce, which means stimulating domestic spending. It’s very happy to sell them luxury cars and armaments, and lend them the money to pay for these, but investing in their businesses and buying their goods….I don’t know if it has any inclination to do that.

That’s why I’m so concerned that the issue of trade imbalances is being ignored by the Eurozone leadership, and the insistance on fiscal austerity in deficit countries is not balanced by a requirement for fiscal loosening in surplus countries. They still don’t seem to understand that as they can’t use the usual monetary tools such as interest rates and exchange rates to control trade flows, fiscal policy must substitute for these ON BOTH SIDES.

Frances,

“They do very well out of the uncompetitiveness of other Eurocountries though.”

Which is why Germany is so keen now to preserve the Euro with the rigid fix on exchange rates that entails.

“If a country with a trade deficit cuts its fiscal deficit, then unless the private sector is willing and able to take on more debt its trade deficit must reduce as well. This reduction is not due to increasing competitiveness improving exports but due to reduction in imports as net spending falls.”

Right – we can only properly judge improvements in trade competitiveness when “internal stability” is maintained – meaning fullish employment and a tolerable rate of inflation. But note the (amazing) success the Dutch had in restraining wage increases during the 1980s and in Germany, after entry into the Eurozone, fiscal stringency to constrain growth in aggregate monetary demand had the effect of dampening wage increases – as well as growth of real GDP. Welfare reforms improved work incentives. Check out productivity *per hour worked* in Germany compared with Britain. Britain comes out of such comparisons with other peer-group countries relatively badly and we need to reflect on that.

The challenges of entry into the Euro at end 1999 with an overvalued exchange rate for the DM were foreseen by many German economists, hence this report in the FT in 1998:

“More than 150 German economics professors have called for an ‘orderly postponement’ of economic and monetary union because economic conditions in Europe are ‘most unsuitable’ for the project to start.

“The call to delay Emu ‘for a couple of years’ is made in a declaration signed by 155 university professors and sent to the Financial Times and the Frankfurter Allgemeine Zeitung newspaper in Germany. It signals intensified opposition to the government’s euro policy.

“The declaration was organised by Manfred Neumann, professor of economic policy at Bonn university and chairman of the Bonn economics ministry’s council of expert advisers. It signals concern among professional economists about Bonn’s determination to begin the single currency on January 1 1999. . .”
http://www.internetional.se/9802brdpr.htm

Despite that, the German government of the time still went ahead and joined the Eurozone at it’s launch. Having made the sacrifices to improve trade competitiveness, Germany wants to preserve the ensuing benefits. I’m sure the Greeks appreciate that and will try to exact the maxiumum they can in return – by haircuts and bailouts.

Frances,

Check out this report:

Yet on 24 February 2011 no fewer than 189 German economists signed a letter, published in Frankfurter Allgemeine Zeitung, in which they expressed an exceptional degree of consensus. They “called on the German government to refuse any extension of the EFSF [European Financial Stability Facility], and to force highly indebted countries into an insolvency procedure. They include some of the best known German economists – Hans Werner Sinn, Jürgen von Hagen, Manfred Neumann, Michael Burda and Volker Wieland.” (Eurointelligence.com, 25 February).
http://dmarionuti.blogspot.com/2011/03/189-german-economists.html


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    The cold, hard truth: the Euro is finished http://t.co/EHqq4nZn

  2. sunny hundal

    Excellent analysis and painfully spot on – "the Euro is doomed" http://t.co/93Ar9MwN – says @frances_coppola

  3. Alex Braithwaite

    The cold, hard truth: the Euro is finished | Liberal Conspiracy http://t.co/KIX8mX3H via @libcon

  4. CharmaineAKAgwtbv

    Excellent analysis and painfully spot on – "the Euro is doomed" http://t.co/93Ar9MwN – says @frances_coppola

  5. Joan Lawson

    The cold, hard truth: the Euro is finished http://t.co/EHqq4nZn

  6. Oxford Kevin

    The cold, hard truth: the Euro is finished | Liberal Conspiracy http://t.co/vjJQpvQ3 via @libcon

  7. pam lorenz

    RT @sunny_hundal: Excellent analysis and painfully spot on – "the Euro is doomed" http://t.co/DS6EkvC8 – says @frances_coppola #vinb

  8. DTosunDilek

    Excellent analysis and painfully spot on – "the Euro is doomed" http://t.co/93Ar9MwN – says @frances_coppola

  9. Rich Clare

    “@libcon: The cold, hard truth: the Euro is finished http://t.co/JAau1OE9” think it's too early to announce the end of the euro

  10. pamdawson

    Excellent analysis and painfully spot on – "the Euro is doomed" http://t.co/93Ar9MwN – says @frances_coppola

  11. James Hargrave

    Excellent analysis and painfully spot on – "the Euro is doomed" http://t.co/93Ar9MwN – says @frances_coppola

  12. Owen Blacker

    The cold, hard truth: the Euro is finished http://t.co/EHqq4nZn

  13. bill bold

    Every cent that has gone to “bail out” Greece has been paid straight to banks. Greece has not been “bailed out” at all: http://t.co/j58RHT6H

  14. Barry Keating

    The cold, hard truth: the Euro is finished http://t.co/EHqq4nZn

  15. mrsavp

    Excellent analysis and painfully spot on – "the Euro is doomed" http://t.co/93Ar9MwN – says @frances_coppola

  16. lyndaconstable

    Excellent analysis and painfully spot on – "the Euro is doomed" http://t.co/93Ar9MwN – says @frances_coppola

  17. Chris Roberts

    "Greece has not been “bailed out” at all… it has been asset-stripped and its people impoverished" @Frances_Coppola http://t.co/n1G34stu

  18. Joluni

    RT @libcon: The cold, hard truth: the Euro is finished http://t.co/lr4I46DY

  19. Andy Bean

    "Greece has not been “bailed out” at all… it has been asset-stripped and its people impoverished" @Frances_Coppola http://t.co/n1G34stu

  20. Frances Coppola

    Shorter version of that post (w/ gd comments) at Lib Con http://t.co/KfaACBNt

  21. Pat Cox

    RT @Frances_Coppola: Shorter version of that post (w/ gd comments) at Lib Con http://t.co/I8STOxEO

  22. TheCreativeCrip

    Shorter version of that post (w/ gd comments) at Lib Con http://t.co/KfaACBNt

  23. 2wolves

    Shorter version of that post (w/ gd comments) at Lib Con http://t.co/KfaACBNt

  24. Frances Coppola

    Shortened version of my post "The Cold Hard Truth" at Liberal Conspiracy has some brilliant comments – do read! http://t.co/uWctqHc1 #gfc2

  25. Beate Reszat

    Shortened version of my post "The Cold Hard Truth" at Liberal Conspiracy has some brilliant comments – do read! http://t.co/uWctqHc1 #gfc2

  26. Frances Coppola

    re that LibCon article on the Euro: excellent debates in the comments, well worth reading if you're interested http://t.co/uWctqHc1 #gfc2

  27. t.j greene

    The cold, hard truth: the Euro is finished : Frances Coppola http://t.co/YsxFHoAR

  28. Frances Coppola

    Recommend reading second to last comment on this article: http://t.co/uWctqHc1. Brilliant analysis of cause of ERM failure in 1992.

  29. Tim Coldwell

    The cold, hard truth: the Euro is finished | Liberal Conspiracy | Frances Coppola http://t.co/I6QtwrxA via @libcon #browsings

  30. Tony Thomas

    The cold, hard truth: the Euro is finished | Liberal Conspiracy | Frances Coppola http://t.co/I6QtwrxA via @libcon #browsings

  31. Occupy the European bailout « Better Nation

    [...] I agree with Frances Coppola on Liberal Conspiracy yesterday – the Euro is finished. Why any responsible First Minister would tell us so confidently that [...]

  32. Frances Coppola

    Euro: following last night's events, the debate continues on my LibCon blogpost…. http://t.co/uWctqHc1 #gfc2 #eurocrisis

  33. Clare Jordan

    Euro: following last night's events, the debate continues on my LibCon blogpost…. http://t.co/uWctqHc1 #gfc2 #eurocrisis

  34. Why Greece should default on its debts and leave the Euro | Liberal Conspiracy

    [...] As Frances Coppola has already pointed out, the Eurozone pursued monetary policies that was biased in favour of larger, richer nations such as France and Germany, while smaller countries like Greece suffered. [...]

  35. Is Greece about to bring down the whole European project? | Catch21 Productions

    [...] debts and leaving the Euro, leading to more defaults by other Eurozone countries, and possibly the collapse of the Euro itself.  If the Euro was dismantled in a careful and organised way, there could be a lot of beneficial [...]

  36. hbenroe

    The cold, hard truth: the Euro is finished | Liberal Conspiracy http://t.co/PjAOS44Y via @libcon





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