Saving the euro isn't the easiest of things: solving the current problems actually would be quite easy, if expensive, except for all the laws and regulations that rule out all of the easy ways. The basic problem is well explained here. Don't worry too much about what the Taylor Rule is: just accept that if you're going to have a …
Why should the Euro be any different?
What I have never understood is why people thing the Euro should be any different to the Pound of the Dollar?
There are parts of the UK for which 0.5% interest rates are too low (south, south east, etc) and parts for which it's about right (north west, scotland, etc). The same with parts of the US.
Why should the Euro area be any different?
Devaluation for one
Fair point, but once countries are in the Eurozone they can't do alot of things normal countries can. They can't devalue to boost their exports, and they can't inflate their way out of debt. Tim mentioned a few more, but they are the main ones.
It was a great idea for only 5-6 countries, but once the Euro-fanatics decided on "enlargement at any cost", and bent their own rules to get Greece in (its application had already been rejected once) it was bound to fail.
Currency union implies political union
The EU isn't truly one country with the same law, taxes etc everywhere.
If the Euro were a unitary state, it would be exactly the same.
However, it seems that the Eurozone has the tough bits of being a unitary state (ie you can't leave, and you can't treat different parts differently) but doesn't have the benefits that go along with it (ie you can't cross-subsidise areas that suffer from a single interest rate)
(and for history fans: the UK govt/BoE has been setting interest rates to suit the SE of England regardless of the effect elsewhere for decades. It's one of the economic drivers for Scottish independence)
EFSF/CDO guarantees put German on the hook
@Andy Pellew, Because you're talking about entire countries with completely different structural issues (e.g. banking, housing market, law, benefit systems), no possibility of regular fiscal transfers between countries, no real free movement of working labor (different languages for a start, education standards), there is linked monetary policy but not fiscal/government budget policy, etc.!
Back on topic:
Of the four solutions (Euro breakup, Fiscal Transfers, CDO, Euro debt monetization aka the "Fed" solution), this is likely the least painful *up-front* and buys the most time.
What the CDO solution ultimately relies on are its state-backed guarantees to pay out in the future. For the new expanded vehicle, if you do the sums (and Bernstein has) and include cover for Belgium and Italian sovereign debt, the fund would need Euro 1.5 *trillion* backed by 1.7 trillion in guarantees.
Since the vehicle includes the very states that are currently experiencing the biggest problems and whose guarantees are considered worthless by the market, this puts the core EU countries on the hook, in particular Germany. The German guarantee becomes worth Euro 790 billion or 32% of their GDP! If for any reason France is downgraded, Germany's pro-rata share of funding jumps to 1.385 trillion or 56% of GDP!!
Of course, what is the likelihood of any German government or population paying out that much money in order to keep funding Greece, its creditors and their population's lifestyle? As you can imagine, if the Fiscal Transfer/Political Union solution was unpalatable, this would be inconceivable! Bond vigilantes may decide to go straight for the jugular and start parking themselves at the German sovereign debt desk as well ...
However, as the author stated, the CDO solution does not change anything about the underlying Euro situation. While the inflationary Fed solution was not pursued, you still have an ECB which chooses not to concern itself with the state of periphery nations as well as huge structural imbalances between members of the EMU.
In short, watch this space ...!
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<i>once countries are in the Eurozone they can't do alot of things normal countries can</i>
But the same is true, except more so, for states in the USA or regions within the UK or Germany.
You'll note that East Germany can't devalue relative to West Germany, for instance, nor set a different interest rate.
It's a classic functionalist tactic - create a situation where more integration (massive subsidies from rich countries to poor ones in this case) is the solution to a problem created by the previous bout of integration.
Functionalists see the job of the EU as solving economic problems, and, to them, this crisis just highlights how much the EU is needed.
Democracy? Gets in the way of the brilliance of the Enarques running everything.
The annoying thing is that when the federalists try to do things that shift power away from the Enarques to people who are actually democratically elected, like the constitution, they get rejected for being too centralising. All the centralising stuff in the constitution went through in Lisbon anyway - but the democratising stuff got thrown out. Greatest victory for the functionalists over the federalists since the Treaty of Rome, and the bloody Eurosceptics helped the functionalists.
Why should Euro be any different (P.94)
Good point @Andy Pellew, and even transfers within national currency areas deemed necessary to overcome different economic circumstances are becoming controversial eg England to Wales/Scotland and within Belgium, from richer Dutch-speaking Flanders to French-speaking wallonia.
Re subsequent posts, some transfers between EU countries already happen through the EU Regional Fund. This could be expanded or provide a template for another instrument. The problem is not technical, but political. On what basis can northern countries impose their style of social contract on southern ones? The limit of the EU is that it's still a club of countries and suffers from a democratic deficit. Given low voter turnout, the European Parliament has not solved this.
It is very simple really, and the author dealt with it in his article.
If we look at the 2 largest currency unions in the world (excluding the Euro).
The Dollar works because of federal intervention. The successful states are forced to send vast amounts of money, via the federal government, to the unsuccessful states. For example, despite New York having 3 of the largest 5 non-federal debts in the US (New York City, New York State and the Metropolitan Transport Authority are all in the top 5 borrowers list), New York still has a massive economy, so it is forced to send money to poor states in the Mid-West or South in order to flatten out the economy. This is no different to the South East of the UK massively subsidising the rest of the country.
The African French Franc works simply by being tied to a much larger economy (the Eurozone now, and the French Franc before that). For this to work though you need orders of magnitude difference.
The Euro has none of these mechanisms. To a certain extent it started working for the periphery economies simply because they were tied to a much bigger economy (franco-german centre). Unfortunately, as they got access to huge euro lending markets at very low interest rates, the economies became much bigger, without the substance behind them to support them. They are now no longer small compared to France or Germany (especially when you look at Portugal, Ireland, or even Spain, Italy. They could mirror the USD by Germany, France and the other northern economies flooding money south, but that won't wash politically. We are stuck with some pretty miserable other options. Even the writing off 50-70% of the debt of Greece option that the author talks about won't really help because Greece is in Primary Deficit - it cannot pay its way even if it defaults. The usual way countries deal with this is the combination of 3 things. Austerity, default and devaluation. The Eurozone is trying to force Greece to deal with it using only austerity. That is doomed to failure, and to be honest, even if we let them deal with it using default as well, it is probably too late. The only way to devalue though is to leave the Eurozone.
If I were a betting man I would say there is as much as a 50% chance that Greece falls out of the Eurozone. This is not dissimilar to the UK falling out of the ERM, and the funny thing is economically, that was really good for Britain!
Your point about the productive states in the US subsidizing the unproductive is quite topical here, given that the unproductive states are mostly governed by strident ideologues screaming about reducing the Federal budget. We should make a start with these states' welfare. But it will be interesting to see how it plays out in the EU. There's an alternative to leaving the Eurozone, which is to run the productive economy on an unofficial parallel currency and to hell with the central banks. That's what will happen anyway, in the event the austerity measures get too harsh, whether the alternative is drachma, dollars, gold, bitcoins or bottle caps. Of course that will also be illegal, but unlike the other illegal options, it will be popular.
"The EU isn't truly one country with the same law, taxes etc everywhere."
True, but the UK, US and (I'd guess) most federal countries don't have the same law and taxes everywhere either. IIRC, Scottish Parliament can vary income tax by +/- 3%; variation in laws and taxes between US states is obviously much more significant.
What did they expect...
It would be a good idea for a few like minded countries - but once you let the lazy and the feckless join (the ones with corruption as a way of life), then it's pretty much game over before it's even started.
@ PT - and unlike the other illegal options
It will be run mostly by bona fide criminals
But hey - thats what politicians do best - ignore reality until it threatens to swamp them and then declare war on it.
(This dull comment therefore being required by Hunter's interpretation of compound interest.)
Hmmmmm, 4 other illegal ways could be used
1) The mass killing of everyone of pensionable age.
2) The mass killing of anyone ill.
3) Tthe mass killing of the unemployed
4) Ethnic cleansing of the USA by anyone who feels like it. (won't save the euro, but it will take all the press attention away from the problem)
RE: Hmmmmm, 4 other illegal ways could be used
"1) The mass killing of everyone of pensionable age....." On a State pension, you mean? Surely the ones on private pensions are actually going to be needed to keep the banks solvent?
".......2) The mass killing of anyone ill....." The NHS already have that one covered. Private healthcare would seem a good idea, then?
".......3) The mass killing of the unemployed......" Bring back National Service for the unemployed, start more foreign wars = job done!
"......4) Ethnic cleansing of the USA by anyone who feels like it. (won't save the euro, but it will take all the press attention away from the problem)" Yeah, but the US is actually a big consumer market we would be targetting if Labour and the unions hadn't spent years destroying our industrial base, so why don't we just leave the EU, send anyone vaguely leftwing to live on the Continent with their socilaist bretheren, and let them f*ck up someone else's country for a change?
Mass killing of the unemployed.
I thought that was often the whole point of 19th century armies; put your surplus odds and sods in the army/ navy and send them off to fight a foreign war, and reward the (very) few who came back, preferably using your newly conquered territory as the reward.
Hmm, sounds like a plan; if we could get all the unemployed youth and over 60s into the Territorial Army and send them to Afghanistan maybe we would be on to something here...
Afghanistan WTF? Let's reclaim the colonies - send them to 'merica!
a much better way
The mass killing of politicians and economist
"4) Ethnic cleansing of the USA by anyone who feels like it. (won't save the euro, but it will take all the press attention away from the problem)"
This used to be handled by ex members of the US Postal Service.
Currently it seems to being conducted by various disaffected high school students.
"The mass killing of politicians and economist"
Robert Heinlein said it a long time ago......
Ref: The Day They Hung All The Lawyers.... makes sense, kill two or more birds with one stone since 99% of politicians are lawyers and make the world a happier place once the leeches are gone.
Ever notice that even though lawyers never produce anything, they win whether YOU win or lose and are worth millions?
I had a bizaaro moment when I mis read merica as Mercia. What makes it worse is that I now live temporarily in ancient Mercia. (I Yield, theres a joke there, but its obscure!)
"Ever notice that even though lawyers never produce anything, they win whether YOU win or lose and are worth millions?"
As do book makers, casino operators, accountants and banks.
@John Smith 11:50GMT
Ah, but you're not forced to interact with book makers, casino operators, accountants, and banks. You need a damn lawyer to cross the street without being sued by some other fucking lawyer... I'm STILL trying to get 527 hours of overtime out of some bastards who screwed me from almost a year ago. Federal labor laws be damned, they have copious amounts of cash with lawyers on staff, I don't. Guess who is broke and just lost his truck to the bank? It's not them.
"if Labour and the unions hadn't spent years destroying our industrial base"
You STILL haven't opened that history book, have you? You appear to be completely ignorant of events both before and during your own lifetime. We have seen the failure of Right wing fantasy economics (Thatcherite, New Labour, Orange Book, US Republican) in the shape of social decline in the affected countries and a massive recession whose arrival surprised NOBODY with any wit, judgement or understanding.
RE: @Matt Bryant
"You STILL haven't opened that history book, have you?....." Some of us have direct knowledge, rather than what we read secondhand, through rose-tited glasses, in Socialist Weekly. Studies in the UK showed British bosses in the '60s and '70s spent four times as much time dealing with union issues than any other country (including the US and their infamous Teamsters). All that time and energy wasted playing shopfloor politics meant less on R&D, marketting, and just simple production planning. Why do you think the Japanese (Honda in 1985 and Nissan in 1986) didn't bring production to the UK until after the power of the unions had been broken by Thatcher? If all they wanted was unencumbered access to the European market, why didn't they pick a country like Spain or Greece? The answer is because they planned a lot further ahead than the idiotic unions ever managed. The unions have been in decline both here and in the US for decades because the workers have realised they were largely a complete waste of time and did nothing to save jobs, quite the opposite.
The Greek economic mess is the perfect example of popularist socialist policies running beyond the means of a country. We have almost as dire a case here in the UK, thanks to Broooooon and NuLabour. I can predict with absolute certainty you next response will be the same as always from the socialist camp - "tax the rich more" - which ignores the fact that the rich will simply move their money and businesses to less-taxed countries, which will mean less local investment and less jobs. Sucks to be a socialist in a globalised economy, eh? I'm told by people in the City that the smart and rich Greeks have already ensured their money is safely out of Greece.
You can't blame the unions for the lack of money spent on R&D, new plant, decent design or market research. The lack of productivity (in the low tax, low wage UK!) was a result of poor, lazy and complacent management. Strange that Germany with board level employee representation has so consistently outperformed the UK throughout the period from the 1970s to the present day.
Suck up to the rich all you like; they won't thank you for it, I can assure you! True, the unions were a nuisance and democracy is not always comfortable to watch or take part in, but you really do need to wake up and see that the alternative is likely to be much, much worse.
"You can't blame the unions for the lack of money spent on R&D, new plant, decent design or market research....." You can if you think about the time and money wasted on just dealing with the unions. If you think the unions were so great, please point out just one of the millitant union morons that didn't completely kill off the industry they championed "for the workers"? Steel? Yeah, go ask people in Sheffield how that worked out. Cars? Mining? Shipbuilding? All just about completely dead. Nationalisation policies brought in by Labour and the completely illogical demands of the unions made any chance of competition unlikely.
Comparing to Germany is hilarious - the Germans saw early on the effects of socialism, both when they faced an attempted Communist-backed "revolution" in the post-WW1 years and then during Hitler's reign (remember, Nazi = National Socialist? - how quickly you lot conveniently forget that). Post-WW2 German so-called worker representation was just a sop to keep the socialists in line - please try and show a single example where the workers' rep was anything other than window dressing? Please provide an example, say from Mercedes or BMW, where the workers' rep actually had a comcrete say in planning rather than just rubber-stamping it? If so, please explain why BMW and Mercedes have been happilly moving their manufacturing abroad for years if the German workers' reps are so all-powerful? You also forgot to admit that German workers didn't make the same stupid demands the unions did in the UK, but that's because the Germans were generally a lot less tolerant of the same type of extreme socialism.
".....democracy is not always comfortable to watch or take part in ...." The unions were nothing to do with democracy, in fact they were the exact opposite of democracy. Scargill is the perfect example - his stated aim was to force the majority-elected government to fail through the actions of his minority rabble. The mechanisms the unions used to control and direct their members were also totally undemocratic - secret ballots, bussing in pickets from other industries and areas to hide the low representation they had in certain businesses, and the complete joke of how they "elected" their officials with closed lists. "Democracy" - you haven't a clue.
PS: Forgot to laugh at your prime bit of living-in-the-past class war idiocy; "......Suck up to the rich all you like; they won't thank you for it...." No, they PAY me a wage to work for them. That allows me to live a lot better than those stuck in the "socialist wonderlands" of places like North Korea. If I don't like the wages or conditions under which they employ me, I leave to find another job. No sucking up required, just some common sense and application, rather than an illogical belief that everything should be given to me on a plate because I somehow "deserve it". Which seems to be the core of the Greek problem.
Too much debt?
This may be too simplistic (and since they haven't done it is almost certainly the case):
Part of the PIGS (and others) mountain of debt is intra-EU debt. Why not net off all the intra-EU debts for a start? This wouldn't make any practical difference to their debt servicing costs, but would reduce the headline numbers (and might just be enough to bring some of the ratios back into "sustainable" territory).
You cant do that.
We need the interest payments on the books in order to stop it looking like we are about to default.
It won't pass
This "EMF" now has to be ratified by 27 countries, and the German voters have to agree to make their grandchildren poorer for the next few generations so they can bail out the lazy Greeks, etc, with money they worked very hard to earn.
They've had enough.
Leave the useless economies to it. This view harsh but probably fair:
Cause and effect
If they want German standards of living, they'll have to get a Germanic level of work ethic!
Doing things properly is a fairly obvious strategy
I'm not sure the Germans see that as a work ethic. They might just say, "But, why wouldn't you?"
The whole "marks for effort" thing is, perhaps, more of an Anglo-Saxon speciality. Or as George Bernard Shaw said, "An Englishman thinks he is moral when he is only uncomfortable."
Re: Cause and effect
"If they want German standards of living, they'll have to get a Germanic level of work ethic!"
Or alternatively elect a madman, start a massive global conflict. Kill the weak and infirm, and have all your healthy young people blown to bits. Have a couple of your biggest cities torn to shreds by firebombs, wiping out thousands of all ages. Then have half your country turned into a pseudo-communist police state.
All this will result in a low population and in particular a very low welfare bill. If you do the warfare thing well, it will result in development in the industrial engineering sector, as your gun factories become pipeworks, your tank factories produce luxury cars and your aeroplane factories service the burgeoning tourist sector.
Personally, I think that Germany paid a pretty high cost to get where it is today, and I wouldn't wish Germany's success on my worst enemy!
What I really don't understand is,
Who do Greece actually owe this money *to*?
That's the $64 000 question. Or even the €100 000 000 000 question.
Bonus question, why don't they just do what everyone who owes me money seems to do, and fob them off with excuses and sob stories?
Re fob them off
That's what they did for years! Problem is, it doesn't work forever.
Bonds or the owners of bonds anyway
The Greek people owe the money to owners of Greek Government bonds. National governments generally borrow money by selling bonds to pretty well anybody. A bond is typically a contract to pay a fixed rate of interest for a defined period of time and repay the capital at the end of the fixed period of time.
Buyers of bonds include for example the general public, banks, pension funds and other countries. These are the same bonds that your granny may have bought you when you were born, and also in the UK have a special case of premium bonds (don’t pay interest as such but are entered in a lottery instead).
It is the answer to the second question that is perhaps the real crux of the crisis. If the Greek Government don’t honour their bonds, and as you say ‘fob them off with excuses and sob stories’ this causes a reduction in confidence in Greek Bonds (*). The long and the short of this is that new Greek Bonds are harder to sell, and attract a much higher rate of interest.
But unlike your debtors who could probably survive without borrowing national governments struggle at this point. This also knocks onto the other owners of the bonds they have to all intents lost the money represented by the bond. Banks start to go bankrupt, more people lose money, other countries bonds devalue and so on.
(*) This is perhaps what is happening on a smaller scale anyway.
@A J Stiles
"Bonus question, why don't they just do what everyone who owes me money seems to do, and fob them off with excuses and sob stories?"
Because that's what they have *been* doing for the last few decades?
Greece owes most of this money to banks and other financial institutions who yet again made huge loans with apparently few checks(*). The large majority of the European creditor banks etc are based in France and Germany (in that order), hence their politicians are particularly insistent on a fix that does not involve a large scale default - at least not on their watch. So the bottom line is that money will continue to flow from tax payers to banks to cover their losses, plus ca change.
(*) ironically other financial institutions, or even different parts of the same institutions, were paid to obfuscate less helpful details to ensure the loans went through - I guess following the example of our old friends at Goldman who were charged with getting Greece into the Euro in the first place.
...and, for that matter,
what on earth did they spend it all on?
Is this what it it costs for an entire country to replace all its plates after smashing them at the end of every meal? They should just stop doing that.
What they spent it on
Presumably all those plates were broken in celebration at retirement parties for 50-year olds who'd never paid any tax all their working life.
@The elephant in the room
"what on earth did they spend it all on?"
Well it seems it was a mix of living expenses (living on your credit card for years) and property speculation (getting a mortgage and relying on the rise of value of the property and your job to handle it).
After all it was all *easy* money.
"Is this what it it costs for an entire country to replace all its plates after smashing them at the end of every meal? They should just stop doing that."
Careful now you wouldn't want to be accuses of ethnic profiling, would you ?
Oh, the familiar excuse of the socilaist politician (as typified by our Ed The Puppet) - "It's all those nasty bankers' fault!" Despite the banks only operating to the rules set by the socialist politicians, and depsite it being those same politicians that spent all the money in the first place.
1) Most of the deficit is accounted for by the cost of the recession caused by inept banks, an idiotic belief in infallible markets, oh, and corrupt ratings agencies.
2) Destroying a large financial organistion, eg: a bank, just because 'the rules allow you to' is NOT somebody else's fault.
3) The overlap between the rich and the clever is nothing like as large as your fond imaginings would presume it to be.
RE: Mr Bryant
"......inept banks....." So, that would be largely the Fwench banks in the Greek case then? Strange, but I don't see many Fwench or even British bankers wandering round homeless, but I see plenty of poor people here in the UK and US struggling to pay their mortgages.
If you're referring to the UK recession, that was the fault of Dummicrat politicians in the US that allowed the sham of sub-prime mortgages to continue even after the warnings signs had become so clear (Dubyah Bush warned as far back as 2003). The Dummicrats saw the sub-prime mortgage market as a vote-winner with lower-paid voters, but all it did was sell them into massive debts they had no chance of repaying. Due to the massive size of the US mortgage market, the risk was spread globally, so when the US caught a cold it was UK banks that sneezed. Just to make that clear for you in a language you may understand - nasty capitlaist rich people warned the Chamipions of The Poor that their socialist agenda was putting the nation's economy at risk (true, the US warnings were pretty US-centric), and the socilaists ignored them, the problems came home to roost, and it was the poor people that suffered most. Nothing to do with inept bankers, a lot of them made plenty of money, quite legally, from the mess created by socialist economic meddling. The fun bit was the reaction by the socialists to the mess they created - blame it ont he bankers, spend more money in bailouts, and ensure that our grandchildren will be saddled with massive debts too!
".....Destroying a large financial organistion, eg: a bank, just because 'the rules allow you to' is NOT somebody else's fault...." Que? Who's talking about destroying banks? Personally, I'm not too against the idea of a bank or two failling. Banks have failed before. In fact, it might be a good thing, as at the moment the bankers are doing the sums and thinking they can make risky bond buys with the virtual guarantee that the Germans will provide a backstop. All legal.
"......The overlap between the rich and the clever is nothing like as large as your fond imaginings would presume it to be....." I always measure cleverness by application rather than just intelligence. I know a lot of very intelligent people form "good" backgrounds that work in relatively low-paid work. But I also know another guy in a financial institution that left school with no formal qualifications, started in the mailroom, and ended up a CEO. On paper, he is less "clever", but he's the one with the private jet, yatch and holiday home in Barbados. From what I heard, he didn't have an easy time during his climb, and he didn't get there without treading on some people, but do I resent him for working very hard to get what he's got? Nope. He applied what he had and made his fortune. Mind you, I also know a dealer that gave it all up after five hard years on the trading floor and bought out a diving school in Antigua. He is happier now even though he lives in a beach shack, but who's to say which one is the "cleverer"? Maybe if you stopped following the politics of envy you might see mroe "cleverness" too.
Why the Europ is different
@Andy Pellew - the Euro is different because in the UK the SE can funnel money to the NE (and does so, a lot). This cannot happen across different countries because of European law. See Option 2 in the article.
@Why should the Euro be any different?
Think the difference is that while 0.5% is the right/wrong rate in different parts of the UK its all still the same economy so other fiscal measures can be taken to address this and spending can be directed to where its needed. In the Eurozone the situation is different as there's a collection of seperate economies all on the same currency ... when Greece is finding it tough with a higher interest rate its more contentious to say that taxes raised in Germany where things are going better will be used to pay the bills than in the UK to say taxes raised in the more prosperous SE will be used to pay the bills in the NW.
All one economy?
"while 0.5% is the right/wrong rate in different parts of the UK its all still the same economy"
Umm no. So very much no.
The SE of England is nearly always at a different point of the cycle to Scotland, so when the MPC (and previously the Chancellor) set rates to cool 'the overheating economy' it was only thinking of the SE of England economy. Usually at that point, the Scottish economy is only just emerging from the freezer, with disastrous results.
It is a case of being between a rock and a hard place for the MPC. Given the SE of the UK and London, in general, subsidise the rest of the economy of the UK and contain the largest part of the economy it makes sense to target rates for that area.
Would you rather they kept rates low to support Scotland and, at the same time, allow the SE to go absolutely batshit crazy on easy credit? I doubt you would so we arrive at the unfortunate situation whereby the bit that makes the most money gets pandered to whilst the bit in shit-street cops a kicking. I doubt the NE of England is any different in this regard.
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