The future of the Euro

[Aberlour10]

The G20 bosses made Toronto to a real Potemkin village. Their ( not mandatory! ) agreement about reducing of the budget deficits is the same worth as their announcements about financial help for Africa a few years ago = ZERO!

No even smallest signs for the worldwide financial market regulations, that was another bizzare show, which is "sold" to the media as a big success.

[y66]

From an op-ed by Gavin Barrett in today's Irish Times

 

Opinion: Imagine the following conversation between an Irish and a German taxpayer on a bus . . .

 

Irish Taxpayer (Séan): I am really furious right now, Helmut. You are simply not being fair. Why don’t you help us out when we need it?

 

German Taxpayer (Helmut): Help you out, Seán? I’m not sure I understand. Why should we help you? You got yourselves into this.

 

Seán: No. You did, Helmut. Your investors – and those from all over Europe – lent to the Irish banks, financing their property market gambling by buying their bonds. The Irish banks are now insolvent, and those investors’ bonds should be worthless. But, despite all Angela Merkel’s talk about haircuts for bondholders, you won’t allow your own investors to take the hit that they should be taking, to get “burned” the way they should! Do you know how much senior bank debt there is in Ireland? €42 billion! Our total national debit is only €90 billion.

 

Helmut: Wait a minute, Seán. You want me as a German taxpayer to bail out your insolvent State – in exchange for which you will restore budgetary order to Ireland, but inflict losses on German – and other – investors which could trigger pandemonium in the banking sector in Germany and elsewhere across Europe and cause a currency crisis? Well, thanks, but no thanks, Seán. We had enough of currency crises in Germany in the 1920s. Why on earth should we give you our money so that you can use it to present us with another set of gift-wrapped crises?

 

It is true that Ireland and its banks going bankrupt doesn’t help anyone. So if you want our money to get you out of your problem, it seems fair enough to organise a loan for you. But – let’s be fair – this should not be at our expense. We and our friends will use our good names to get you a loan of, say, €67.5 billion. But you can pay the usual market rate – and throw in €17.5 billion yourselves. Self-preservation dictates we simply have to impose a condition on this help, though, you are not to wreck our banking system by “burning” senior bondholders.

 

Seán: So, you mean the money the banks owe the senior bondholders to whom our Government issued the guarantee will just have to be paid?

 

Helmut: No. I mean all the senior bondholders will have to be paid, Seán, even the ones holding the €19 billion worth of senior bank debt you never guaranteed. This is not about guarantees.This is about you not wrecking our banks and investors.

 

Seán: But that’s not fair! Look, €67.5 billion just isn’t enough to recapitalise our banks and allow us any spare cash to stimulate economic growth. Plus, you’re charging us too high an interest rate. It’s not clear we will even be able to pay this. And on top of that you are now making us take on bank debts that our Government never said we’d pay!

 

Helmut: Calm down. I know it will be tough, but there’s at least a reasonable chance you will be able to pay. . Here’s a copy of the EU treaties. Show me where it says in there that we would bail you out if you bankrupted your own economy. That’s right . . . nowhere. It’s maybe not the right moment to say this to you, but the reality is you should actually be grateful that I am giving you any help at all. We don’t have to. Look, tell you what, we’ll think about keeping low-interest ECB funding for your banks going for just a bit longer, and maybe when things calm down in a few years we might lend you more if you need it.

 

Like I said, it’s in nobody’s interest to see Ireland bankrupted – although it is fair that you feel quite a bit of economic pain for your really irresponsible behaviour. You can’t seriously expect us to lend you money while you instigate a panic with your “bondholder- burning” that would wreck our banking system and our currency.

 

Seán: We won’t pay this. We can’t pay it. It’s too much.

 

Helmut: I am afraid you will have to, Seán. If you don’t accept the terms on offer you have absolutely no way of financing your ongoing budget deficit. Plus your banks will collapse because, well, you’ll have nothing to finance them with.

 

Seán: We could just refuse the loan and bring you down too.

 

Helmut: I don’t think you would dare. For a start, another major crisis in the euro zone is in nobody’s interest – least of all Ireland’s. Secondly, Ireland would collapse financially first, not anyone else. Your problem, Seán, is that you are looking at things the wrong way. You are supposing a moral duty on other countries to help Ireland out to an extraordinary degree. I don’t accept the existence of any such duty. The reality is that every state in the euro zone, and indeed in the EU, is there, for the most part, for its own benefit: out of enlightened self-interest.

[Aberlour10]

Helmut continues : Hey Sean, why should I guarantee your debts with my tax money if you even dont want to increase your so low 12,5% corporate tax rate? Maybe. I will loose my job because the boss will move to Ireland due to these wonderful low tax rates?

[kenberg]

If I may offer a cautionary note, partly inspired by Helmut's reference to the 1920s. Growing up in America, where of course we don't understand nothin, I was taught that a large part of the economic problems of Germany in the 20s, and eventually the political catastrophe of the 30s, stemmed from unwise and unaffordable debts that were imposed after WWI. No doubt France and England could make fine logical arguments, the victors always can, as to why Germany must be required to pay up for all of the trouble it caused. Regardless of the logic, the results were not so great.

 

Back to the present:

It seems that Helmut has the winning argument here. Totally. That makes it a good time to pause and think about the extent to which he wants to shove the winning argument down Sean's throat.

 

I grant that it is not Germany's job to rescue the world. Nor is it ours. Still.

 

So good luck to Sean, Helmut, and the rest of the team. I hope you find the best line of play.

[mike777]

INdeed any country needs a working banking system. Ireland needed to save the system somehow. Guaranteeing the deposits seems a good first step.

Not sure guaranteeing all the bondholders and saving the shareholders was best. Perhaps wipe out the shareholders and let the bondholders take ownership. I think this discussion is really about 2 maybe 3 banks in Ireland.

[y66]

=2926&tx_ttnews[backPid]=901&cHash=9ce00a6762"]Is Belgium Next? By: Susanne Mundschenk and Raphael Cottin

 

Excerpt:

 

For four months Belgium has been without a government, its public debt is approaching 100% of GDP and the spread of Belgian 10-year bonds over the German benchmark is today three times as high as at the beginning of this year. Is Belgium the next country with a sovereign debt crisis?

 

So far the country has managed to stay off the radar screens of most international investors, who focus on Greece, Ireland, Spain and Portugal. But that may change if the political crisis – which has been going on for more than two years - is not resolved soon. At the June general elections, the separatist NVA emerged as the strongest party in Flanders, while in French-speaking Wallonia, the Socialists came out first. In the ensuing coalition negotiations, the N-VA has chosen to get a federal reform agreed first before building a government, in a complex bargaining process between the seven parties that currently participate in the negotiation talks. The result is a political stalemate that risks paralysing the political system for months.

[y66]

Kevin O'Rourke's =2973&tx_ttnews[backPid]=901&cHash=484db55c3a"]Letter From Dublin from earlier this week, in case you missed it.

 

Excerpt:

 

The week started on an optimistic note. The general reaction was one of relief – at last, the Indians had come to sort out the cowboys. (The Indian in question was Ajai Chopra, head of the IMF mission to Dublin; there are no prizes for guessing who were the cowboys.) But the atmosphere soon changed, as it became clear that a substantial portion of the bailout funds would be earmarked, not for vital public services, but for the black hole that is the Irish banking system. At one stage there seemed to be the prospect of some relief for Irish families: the Irish Times was reporting that the EU-IMF team would deliver the loss-sharing with bondholders that our own government had been too craven to insist on. This would have been a good-news story that could have transformed the mood of ordinary people, and proved that the European Union was on their side. That hope was dashed over the weekend.

 

The finger of blame was clearly pointed by the Minister of Finance, Brian Lenihan, and several of his colleagues: it was the European Central Bank and the Commission who had vetoed the proposal to force some of the bank losses back onto the bondholders. This interpretation is generally accepted in Dublin, although many observers also blame the Irish negotiating team for caving much too easily into pressure from Brussels and Frankfurt. The implication is that the IMF were the good guys: an unusual position for them to find themselves in, perhaps, and one with political implications in a country whose relationship with the European Union has been uneasy in recent years, and which has conserved close ties with the United States. On Monday night, an opposition spokesman made it clear that he would be much happier negotiating with the IMF, who are reasonable people, than with our European partners. The fallout from this will be toxic.

 

...

 

Irish citizens may bring down the bailout of foreign bank creditors by voting at the ballot box, but if they do not, they will bring about a default of some kind by voting with their feet. We now face a negative spiral in which austerity causes emigration, which increases the burden of the debt, which ultimately leads to more austerity. We need a game-changer to break the cycle, but what might it be? Since the fundamental problem is that Ireland is insolvent, the smart thing to do is to tackle our debt burden head-on, but the Europeans have vetoed this.

 

Changing our politics might help, by creating a shared sense of national purpose that people can buy into. Unfortunately, it is hard to see the prospect of a Fine Gael-Labour government encouraging young people to tighten their belts and stay home for the good of the country: at this stage, the country needs radical change that can give people a sense of hope. There is a huge desire for such change, but no coherent vehicle to translate that desire into action. One immediate focus should be constitutional reform that everyone can buy into, since people inevitably differ about the policies needed to bring about a recovery.

 

Iceland is an obvious model for us. In a referendum, her voters have already rejected a proposal to pay back their banks’ creditors, who will take major losses. Now they have elected a constitutional assembly charged with drafting a new constitution. Ireland probably needs this more than does Iceland; I wish I were more confident that we will follow the latter’s example.

[hrothgar]

My understanding is that a very significant part of Ireland's problem came about because various forms of property tax were substituted for income taxes.

 

During the property bubble, the government was raking in enormous amounts of money due to transaction fees and property taxes. Rather than saving the money, the government assumed that this situation would continue in perpetuity and slashed income taxes.

 

As a result, when the property bubble popped, the government lost enormous amounts of tax revenue at a time when government spending needs to dramatically increase since

 

1. Unemployment is spiking

2. The banks need to be recapitalized

 

From my perspective, one of the big common threads during this crisis is that government seem unduly focused on cutting taxes during temporary upswings in the economy rather than using the money to pay down long term debt / establish rainy day funds.

[Winstonm]

Obama tries to persuade Europeans not to fight against the budget deficits and go out of the crisis through the "inflation gate" He talked about it with Merkel yesterday. He seems not to know how much the Germans hate the word "inflation".

If any political party in Germany would act frankly in this direction, that would bring them politcal suicide on the next elections.

 

The problem with the inflation answer is that inflation cannot be targeted simply at debt. The same inflation that lowers debt cost will increase real costs of entitlements and defense spending, while having devastating consequences on fixed incomes and savings.

 

There must be something in the water of the current generation-in-charge that leads them to have fairy-tale-like hope that a relatively easy fix of manipulating money supply can correct structural problems in society.

 

Growth of GNP is the only genuine way out of debt.

[PassedOut]

From my perspective, one of the big common threads during this crisis is that governments seem unduly focused on cutting taxes during temporary upswings in the economy rather than using the money to pay down long term debt / establish rainy day funds.

Yes. It appears that the tax cut foolishness is irresistable to politicians generally.

[Aberlour10]

The fathers of the Euro ignored completely the fact that the southeuropean countries have used the currency devaluation xx times as a main mean of endeavourning to restore marginal competitiveness since the end of the II WW. These ways were unthinkable in countries like Germany, Netherlands, Austria etc..

To bring these two groups together in one currency zone with the Maastricht Treaty was 100% a political decision, and this is always bad for the economy. The consequenses in this way made decisions we can see since 2 years.

I cant really imagine that in 10 years Euro will exist in exactly the same form as today.

[hrothgar]

As I understand matters, its infeasible for any country but Germany to leave the Euro zone with defaulting on their foreign debt.

 

Consider a nation like Greece or, for that matter Ireland.

Their debts are denoted in Euro's.

 

If they leave the Euro zone in order to regain control over their monetary policy

 

1. Their currency will sink like a rock

2. Their foreign debt suddenly becomes many times more difficult to repay

 

The only way out of this bind is either crippling austerity measures or defaulting on the foreign debts. (With crippling impacts on interest and exchange rates)

 

I don't think any of the European economies are willing to deal with this:

 

The strong economies don't want their debts defaulted on

The weak economies don't want to be completely cut off from trade and capital flows

 

In retrospect, it looks as if the Europeans were much too ambitious in expanding the Euro Zone. It would have probably been much better to insist that counties like Greece, Spain, and Italy peg their currencies to the Euro for a few business cycles (say 15 years). If Greece were able to pin the the drachma to Euro exchange rate for 20 years, there is probably little risk to letting them join the Euro Zone.

 

Oh well, live and learn.

[Oof Arted]

There hve been more problems since the 'Idiots' running the State of Europe decided on one curency

 

Europe has always and will always be a Disaster :ph34r:

[helene_t]

From my perspective, one of the big common threads during this crisis is that government seem unduly focused on cutting taxes during temporary upswings in the economy rather than using the money to pay down long term debt / establish rainy day funds.

The problem is that we don´t know who will be in office during the rainy days. Why save up to prevent a disaster for which the other political block may be "responsible"? It's better to burn off the money while we know that it's the good guys who get the credit for the tax breaks and/or improvements of public services.

[hrothgar]

Europe has always and will always be a Disaster :ph34r:

 

Compared to what?

 

Assume for the moment that you were about to be born. You get to chose where you're going to come into existence, however, other than that you're rolling the dice. (your "position" in life would be determined by prevailing population statistics, meaning that you'd be most likely to be born in Nigeria, followed by Ethiopia and Egypt...)

 

I'm hard pressed to think of a better (large) area to be born in...

You could certainly do better by specifying one of a small number of very rich states (Monte Carlo or some such).

 

Arguably, Australia, or Japan might be as good...

 

However, if I had a choice, I'd go with the EU

[mgoetze]

I'm hard pressed to think of a better (large) area to be born in...

You could certainly do better by specifying one of a small number of very rich states (Monte Carlo or some such).

 

Norway or Switzerland sounds good. Canada might be OK if it weren't in the ACBL and otherwise beleaguered by USian culture...

[fromageGB]

It always seemed a crazy idea to me, without central economic/taxation control. Good for us tourists!

I think the answer to the problems can only be countries leaving the euro. As someone has pointed out, "poorer" countries can't leave the euro, so what I think will happen is that Germany and France, maybe a few others, will leave, set up a "united states" type government, and create a new currency.

 

The alternative, counties ceding their sovereign powers to a European parliment, just won't happen. It's far too big.

[mike777]

It always seemed a crazy idea to me, without central economic/taxation control. Good for us tourists!

I think the answer to the problems can only be countries leaving the euro. As someone has pointed out, "poorer" countries can't leave the euro, so what I think will happen is that Germany and France, maybe a few others, will leave, set up a "united states" type government, and create a new currency.

 

The alternative, counties ceding their sovereign powers to a European parliment, just won't happen. It's far too big.

 

 

 

That is a big prediction. :)

 

France and GErmany and maybe a few others having their own currency and usa type government.

[Aberlour10]

That is a big prediction. :)

 

France and GErmany and maybe a few others having their own currency and usa type government.

 

Sure, with Sarah Palin at the top we would be out of all problems within' a few months ;-)

 

But seriously, in my opinion we are in the process of the European integration already 2 or 3 steps too far. The politicans introduced all what is in EU theoretical makeable, but they did not care much about if it really would stable work in the future.

 

What stable works IMO: Europe as a big common market, free trade zone, duty free zone, free movement for the people ( Schengen Treaty )

 

What dont work IMO: Eurozone, common foreign and defence policy, >>> these exist only in EU speaches and "on the paper" No way to get all 27 countries to the real agreements in this case, nor today, neither in the future. No difference, the people on the streets of Berlin or Warsaw think the same >>> Brussel's bureaucracy overhelming slowly but continuously all life areas in the EU countries etc with its neverending "regulationsmania"

[y66]

"... the real story behind the euromess lies not in the profligacy of politicians but in the arrogance of elites specifically, the policy elites who pushed Europe into adopting a single currency well before the continent was ready for such an experiment." Krugman, February 2010

 

This January 2010 post by the same guy sheds some light on optimal currency area theory, in case you aren't up on this.

 

Some commenters on my Europe/euro post offer a reductio ad absurdum: if Spain should have its own currency, why not every state/town/family in America?

 

Strange to say, economists have thought about that — a lot. It’s called optimal currency area theory. (Optimal? Optimum? Nobody seems to know — or care).

 

The basic idea is that there’s a tradeoff. Having your own currency makes it easier to make necessary adjustments in prices and wages, an argument that goes back to none other than Milton Friedman. As opposed to this, having multiple currencies raises the costs of doing business across national borders.

 

What determines which side of this tradeoff you should take? Clearly, countries that do a lot of trade with each other have more incentive to adopt a common currency: the euro makes more sense than a currency union between, say, Malaysia and Ecuador. Beyond that, the literature suggests several other things that might matter. High labor mobility makes it easier to adjust to asymmetric shocks; so does fiscal integration.

 

When EMU began as a project, there were a number of studies comparing the EU with the United States. What all of them suggested was that Europe was less suitable as a currency area, basically because of lower labor mobility and lack of fiscal union. That didn’t settle the question of whether the euro was a good idea, but it did suggest that appealing to the success of the United States with a single currency didn’t tell you much.

 

What I’ve always found interesting is the way many Europeans now insist that a single currency is absolutely essential, when the example of Canada — which is closer to the United States than it is to itself — provides an obvious counterexample. But people tend to forget that Canada exists …

[Aberlour10]

Who is the next?

[kenberg]

An observation, related to the title of the thread: I see today that the Euro trades for a little over $1.30. The Last Time I Saw Paris, about five or six years ago, the Euro was trading for something like $1.30. Hang in there, baby.

 

Krugman's reference to Canada brings up this thought: Here ion the U.S. most of us spend little time thinking of exchange rates. But book covers usually display price in both U.S. dollars and in Canadian dollars. With exchange rates fluctuating, obviously it is sometimes a better deal to buy the book here or there. Of course no one cares. But maybe book publishers do. I suppose a common currency could be useful to them and to others who do a lot of Canadian-U.S. trade.

 

I think that the experience of most Americans with exchange rates is so limited that we, or at least I, have no great feeling for the issue. I won't be hoarding Euros, I won't be selling them short. And not just because it is probably illegal.

[hotShot]

The € started with about 1,20$ for 1€.

The historical minimum (4th quarter 2000) was 0,8225 $ for 1€.

It took about 6 years to reach 1,30$ for 1€. .

The historical maximum was 1,6038$ for 1€..

 

None of these exchange rates caused a collapse in European economics

This is because most of the trading happens between countries of the Euro-zone, where the exchange rates are irrelevant.

 

Germany is the country that had and still has the biggest benefit from the Euro, because it sells most of the produced good to other European counties.

 

GB decided not to join the Euro-zone, they thought they are better of without it.

Until the beginning of 2007 the numbers seemed ok the exchange rate was 0,6548 for 1€., When the crisis hit the exchange rate changed to 0,9786 in the end of 2008.

It is now around 0,85.

So anybody who thinks that his country would have done better without the Euro, should consider that carefully.

 

Did you read that Norway, who is not part of the Euro-zone, offered to help to defend the Euro?

 

Don't worry the Euro will survive.

[Aberlour10]

Don't worry the Euro will survive.

 

The only questions are, how much will it cost in next years, who will pay it, and where is the limit of people(voters) patient?

[phil_20686]

I am not totally clear on my exchange rate history, but for many years up until the 1970's many countries pegged their exchange rates to each other. This seemed to work ok for a large number of years, but perhaps this was because the trade imbalance was simply not so big.

 

Flexible exchange rates are often touted as a way to improve the competitive-ness of a country on the world market, but I have always been a little unclear on the details. On the one hand, a sinking exchange rates effectively lowers wages compared to your market outside your country, but on the other hand, any imported goods will rise in price compared to the average wage. So you can become better off only if most of what your country buys is made locally. It must be particularly bad for large importers of food, like the UK.

 

In Greece people will simply have to accept real wage decreases. This will have a negative affect on prices, and will have an equivalent effect to a weakening exchange rates. It is just politically and socially more difficult, as one cannot blame your government for the behaviour of the exchange rate. This will restore competitive-ness, and increase investment in their country. However, its unclear how one can bring this about, particularly given the large social security entitlements given to public sector workers in greece.