The Euro, What's the solution? Options

[Parsifal]

For some time now I've felt that the elephant in the room here in politics gossip is the euro crisis. The subject dominates the news (well, at least The New York Times ) and there is no discussion here about it except tangentially in one of the other threads. It seems like every other day I see a great article suitable for kickstarting the subject.

When the Greek crisis first erupted a few years ago my own thinking was that there were two solutions: 1) that Greece leaves the euro, 2) that Germany leaves the euro. I don't remember if I posted this "solution" here on fmf or if I just discussed it with friends here in NYC. But given the contagion that has occurred since then 1) is obviously no longer a solution. But 2) is. As a matter of fact on today's op-ed page of the print edition of The New York Times is an opinion article that makes exactly that case.

Of course, Germany has no interest in leaving the euro because it is the main beneficiary of the currency union. As a matter of fact, one could argue that Germany is indeed trying to re-create the DM with the €. Leaving the € and bringing back the DM would be hugely popular with ordinary Germans (they never wanted the euro in the first place), but resisted by German industry which depends on a viable export market.

I don't follow all of the authors' reasoning, but the main point is consistent with what I've been thinking for some time. Interesting article.

Op-Ed Contributors
To Save the Euro, Leave It
By KENNETH C. GRIFFIN and ANIL K. KASHYAP
Published: June 26, 2012

Chicago

AS the European economic crisis continues to intensify, policy makers are faced with the need to take ever more extreme measures to prevent a financial cataclysm. Tomorrow, European Union leaders will meet in Brussels to discuss the latest proposals: centralizing banking regulation and putting limits on national spending and borrowing.

A better, bolder and, until now, almost inconceivable solution is for Germany to reintroduce the mark, which would cause the euro to immediately decline in value. Such a dxxxxuation [de-valuation] would give troubled economies, especially those of Greece, Italy and Spain, the financial flexibility they need to stabilize themselves.

Although repeated currency dxxxxuations [de-valuations] are not the path to prosperity, a weaker euro would give a boost in competitiveness to all members of the monetary union, including France and the Netherlands, which is why they might very well choose to remain in it even if Germany were to gradually leave. A resurgence of manufacturing would also allow the vast unemployment rolls of Spain, Portugal, Greece and other countries to begin to decline. The tremendous loss of human capital and human dignity we are witnessing would ease.

Reintroducing the mark would not solve the debt burdens of southern European countries, but it would give them needed breathing room to restructure their economies, reform labor markets, collect more taxes and reassure investors. The ability of the southern European countries to service their sovereign debt would immediately improve, helping to end the slow-burning debt and banking crises that have engulfed the Continent since 2008.

A weaker euro would also encourage greater foreign investment. For example, Spain’s distressed real estate market would become far more attractive. Rising capital flows would also assuage investors worried about the unrealized losses on property loans held by Spanish banks.

Unlike Greece — whose exit from the euro would require either a redenomination or outright repudiation of its euro-denominated debts (with potentially catastrophic financial consequences) — Germany would be able to reintroduce the mark without altering the form of any current asset, liability or contract. For example, euros deposited in German banks would remain euro-denominated. So would outstanding German sovereign and corporate debt now denominated in euros.

A German phaseout of the euro could occur gradually, by first issuing government bonds denominated in marks, followed by corporate securities. Germany could establish a transition period before the mark would be used on a daily basis.

Germany’s industrial base would unquestionably endure hardship in the transition to a stronger currency. In the early years, Germany could use a variety of measures to manage the rate of appreciation of the mark, much as China or Switzerland do today. Over time, the industrial base of Germany would adapt and move forward.

Critics will say our plan invites financial chaos. To the contrary: capital would flow from “safe haven” assets toward more productive investments, boosting global growth prospects. Resources now dedicated to the alphabet soup of bailout programs and financial guarantees could be redirected. Besides, the current situation is hardly a model of stability.

While most observers, including German policy makers, believe Germany will do what is necessary to save the euro, it is more important to save the European Union, which is older, larger and more significant than the euro zone. Continuing on the current trajectory will most likely entail more bailouts, more guarantees and ultimately dramatic sovereign defaults or enormous fiscal transfers. That would mean a continued loss of human capital and dignity for southern Europe and a nightmare of an open-ended commitment of trillions of euros on the part of Germany.

Germany’s historic responsibility is at odds with present-day reality. The only way for the euro to survive is for Germany to put every bit of its financial strength at the service of the euro — an outcome that would be deeply unfair to ordinary Germans — and even then it’s not clear the euro zone could be salvaged in its current form. Given what has played out in Greece, for German leaders to provide further financial assurances to the periphery would be unconscionable.

Like Britain, Germany can be part of the European Union without being part of the euro. What is essential is the preservation of the European Union’s greatest accomplishment: the free movement of labor, goods and services. Germany alone has the ability to end a dysfunctional monetary union and to bring prosperity back to Europe.

Kenneth C. Griffin is the founder and chief executive of Citadel, an investment company. Anil K. Kashyap is a professor of economics and finance at the University of Chicago Booth School of Business.

The New York Times

Link

This post has been edited by Parsifal: Jun 27 2012, 15:10

[CyanIsland]

Even though I think it would be a good idea I just can't see the Germans ever going for that. Other than the odd article I don't see anyone giving this idea serious thought - although behind the scenes who knows what's going on?

[Astron]

I do.

[Parsifal]

Even though I think it would be a good idea I just can't see the Germans ever going for that. Other than the odd article I don't see anyone giving this idea serious thought - although behind the scenes who knows what's going on?

Germany will never willingly leave the euro. It benefits far too much from it as long as it lasts. But if it should come to it that catastrophe is around the corner and the writing is on the wall then they just may jump ship before it goes down.

Tomorrow's meeting in Brussels should be revealing. But who knows what they'll make public and what they won't?

[Parsifal]

Greek President to Fly Economy Class to Brussels


He's filling in for Prime Minister Antonis Samaras who is recovering from eye surgery.

[John84]

The euro will only work in the long term when member states give up their fiscal sovereignty virtually in full to the ECB (or equivalent). That EU representatives are only now starting to openly suggest this is worrying, not just for the fact that they should have known it all along, but that it suggests that this crisis is being seen as a backdoor way of increasing integration virtually past a point of no return.

In the end it's going to come down to different countries' priorities and views on what Europe should be, IMO. To the UK, and arguably the Scandinavians, I would say that Europe as a concept has primarily always been an economic one, not a political one involving monetary union. For central and southern Europeans, some sort of political integration seems more palatable, if only on their terms (this would particularly apply to the French). For the others - the 2004 group, say - it's probably a mixed bag. The problem is, that for those already in the euro who don't want increased integration, I would imagine we're going to reach a point where it's: turn over elements of fiscal control (and accept the resulting loss of fiscal sovereignty), or leave the euro. Not pretty for them.

Luckily we're in a more flexible position, but we may find ourselves having to sit in the 'second speed' Europe. And if that keeps us out of political integration on someone else's terms, then so be it

[Parsifal]

Luckily we're in a more flexible position, but we may find ourselves having to sit in the 'second speed' Europe. And if that keeps us out of political integration on someone else's terms, then so be it

If the UK does find itself in the 'second speed' Europe I doubt that it will be permanent. As the cracks in the euro become more and more apparent the whole thing starts to look more and more "unnatural" (i.e. against nature). If the whole thing breaks then the mess could be quite far reaching (beyond the Eurozone and the EU). Europe does not have a history of harmony and stability. (and I think the folks in Brussels tomorrow and Friday know this )

[John84]

Oh I don't think anyone's going to be reaching for the guns. We'll just need a couple of scapegoats to whinge about in the press. Greece, Portugal, Spain and Ireland are doing fine in that role for now.

As for the euro being unnatural, in an economic sphere with a single central bank (with some, or total control over member's budgets), it would be quite natural and could conceivably work well. However whether that sort of world would work politically is quite a different question. Germany and France are probably more pro-integration than they might admit, they just have wildly differing views on what a (partially) politically integrated Europe would do, and how it would work. Which is exactly why it won't

[Parsifal]

Germany is not just "probably" more pro-integration. I think that Germany envisions a politically, fiscally and monetarily integrated Europe as having the shots called from Berlin and the ECB as being a thinly veiled Deutsche Bundesbank.

As for no one going to be reaching for the guns, sure, the political leaders in Europe aren't stupid. But don't forget that France was largely in favor of creating the euro after Germany's reunification because it viewed the common currency as putting the brakes on the newly more powerful Germany steamrolling the rest of Europe. (At the time nobody knew that after Bonn/Berlin pumped $2 trillion into the former DDR that the eastern part would still be languishing economically.) Both German reunification and the euro didn't play out as planned.

The EU, and with it the euro, and the EU's pedecessor the ECC, has brought peace and stability to Europe after a torturous history, the fears and distrusts of which still exist. It will be a matter of time only.

I think that the euro was poorly thought out (or maybe a well thought out euro was not politically feasible). But now that it's here there is a big incentive to get it to work, longterm. Will Germany and everyone else step up to the plate? The predictions that I've been reading are that Germany will, but the others are highly dubious.

This post has been edited by Parsifal: Jun 27 2012, 20:19

[CyanIsland]

Tomorrow's meeting in Brussels should be revealing. But who knows what they'll make public and what they won't?

They have lots of these meetings, though, don't they? And all they ever seem to do is agree that yes, something should be done. What needs to be done is, as John has said, really major and it'll be difficult to pull off. I don't believe they can do it, but I'd be happy to be proved wrong.

[Parsifal]

Tomorrow's meeting in Brussels should be revealing. But who knows what they'll make public and what they won't?

They have lots of these meetings, though, don't they? And all they ever seem to do is agree that yes, something should be done. What needs to be done is, as John has said, really major and it'll be difficult to pull off. I don't believe they can do it, but I'd be happy to be proved wrong.

A few days ago George Soros said that this week's summit meeting in Brussels is their last chance.
When it comes to currency predictions I think that Soros is someone to listen to. Back in 1991(?) when he spotted a weakness in the British pound, he shorted it, made a multi-billion dollar profit and forced a dxxxxuation [de-valuation] of the pound. Listen to the man!

[KernowKid]

The very sad reality that despite the Euro difficulties, Sterling is STILL way below what would have been it's entry point had it joined the Single Currency at it's start is an appalling criticism of the UK. That fact alone should preclude any UK celebration at the Euro's position at present.

The first stage towards resolution has to be a move to balanced budgets across the zone. Individual country budgets and deficits being resolved next. It's clear that some economies (as with the UK) simply don't understand the concept of deficits and their punitious effects on the economies that generate them.

[ATD]

A few days ago George Soros said that this week's summit meeting in Brussels is their last chance.
When it comes to currency predictions I think that Soros is someone to listen to. Back in 1991(?) when he spotted a weakness in the British pound, he shorted it, made a multi-billion dollar profit and forced a dxxxxuation [de-valuation] of the pound. Listen to the man!

1992, or Black Wednesday.

Yes, Soros speculated, but the real damage was done due to the "limitations" of the ERM; the precursor to the Euro.

I doubt that Europeans will ever accept the level of federalism that would be needed to actually make a stable single currency viable, the cultural differences still outweigh the similarities.

Should Germany withdraw... That's probably the most viable solution at this point, and something I'm certain the German people would welcome.

[Mange81]

not being very old at the time I wonder if this was the same man speculating in the SEK in the early nineties. Some say that crisis and the things learnt from that is why we (this far) has managed to stand compareably strong in this crisis.

I have yet to hear any of the politicans who in the 2003 euro vote told us to vote YES, Say that we would had been better of in the monetary union then outside.

About the latest idea of the European parliament getting a bigger say in the member countrys . it doesnt seem to be very pleasing i the eyes of our PM, Hardly surprising given the high in % fee´s we pay, and the laughably small paybacks we get, usually for farming.

I dont think anyone here are interested to see even more money go out, specially not if the aim is to fill cracks in the economy of countrys with no taxes and retirement ages of 55.

[Parsifal]

The first stage towards resolution has to be a move to balanced budgets across the zone. Individual country budgets and deficits being resolved next. It's clear that some economies (as with the UK) simply don't understand the concept of deficits and their punitious effects on the economies that generate them.

There is no doubt that balanced budgets and deficit control are essential to longterm economic health and stability. Solving the problem with a crowbar and and sledgehammer doesn't work. Look at what's happening in Greece. You have to start with the fundamentals and work up from there. First and foremost is full employment for everyone who wants a job. This not only greases the wheels of economic activity, it also restores human dignity and with it the spirit of the nation. Put people to work and they will pay taxes and thus increase government revenue. Shrinking the economy during a deep recession and waiting for the confidence fairy to emerge is not a good idea.

[sanitynotincluded]

Oh I don't think anyone's going to be reaching for the guns. We'll just need a couple of scapegoats to whinge about in the press. Greece, Portugal, Spain and Ireland are doing fine in that role for now.

As for the euro being unnatural, in an economic sphere with a single central bank (with some, or total control over member's budgets), it would be quite natural and could conceivably work well. However whether that sort of world would work politically is quite a different question. Germany and France are probably more pro-integration than they might admit, they just have wildly differing views on what a (partially) politically integrated Europe would do, and how it would work. Which is exactly why it won't

It is an iffy proposition as there is no common european people. This works in England because we've had a thousand years to get used to it, but the kings of wessex would never have been able to unify England ad it not been for the culture shock of the danes occupying three quarters of the place. Greeks and Germans are just too different in their outlook for it to hold together. The EU is a vanity project for the ruling classes, and like most such projects it cares little for the realities of the little people. I'm just waiting for them to trot out the fatuous line about the EU keeping peace in europe.

[sanitynotincluded]

Should Germany withdraw... That's probably the most viable solution at this point, and something I'm certain the German people would welcome.

The problem with this one is that the system having reached crisis, a German withdrawal would see an immediate and massive de-valuation of the remaining euro. This would cause a hefty shock to the German economy which might put them in trouble.

I think the solution such as it is lies in either the north/south split which has been mooted, or a top/bottom shedding, with Germany leaving simultaneously with Spain, Greece, Italy... The rump Euro would de-value a bit, with the other departing countries even more so. It would place less of a shock to the German economy, while giving the most troubled countries more breathing space than just a german departure would.

In either case, any breathing space achieved should be used to prepare for an orderly dismantling of the euro as quickly as possible.

A single currency is not an impossibility, but it should only be adopted by countries where the people have given their consent, aware of the fact that they need to at least approximate german levels of discipline and productivity to make it work.

That fact alone should preclude any UK celebration at the Euro's position at present.

The only grounds for celebration are that the scale of the disaster is so vast that it provides a small window of opportunity that in the future those who question some aspect of "the project" might in the future be granted a hearing on the merits of their argument, rather than being dismissed as ignorant "little englanders", completely ignoring the fact that their warnings have consistently proven prescient. I won't hold my breath though. The "ever closer union" mob have great form for ignoring such things and brushing them under the carpet.

Only the other day, Vine prefaced a comment with "nobody predicted..." Actually Jeremy, lots of us predicted, you and your like just chose to pretend that we were swivel-eyed loons who should be ignored in polite company.

[ATD]

I think the solution such as it is lies in either the north/south split which has been mooted, or a top/bottom shedding, with Germany leaving simultaneously with Spain, Greece, Italy... The rump Euro would de-value a bit, with the other departing countries even more so. It would place less of a shock to the German economy, while giving the most troubled countries more breathing space than just a german departure would.

That sounds eminently sensible, I just can't see Spain, Italy and Greece going for it; whereas the pressure that is bound to build on Merkel may just be enough to force a drastic/unilateral action on the part of Germany.

[colonelsmut]

Italy and Spain will be enemies on the football field come Sunday evening but overnight managed to get Merkel to agree to allow the ESM to recapitalise banks directly.This should in theory break the link between soaring borrowing costs and demands for further austerity.
Euro zone leaders will return later today to discuss longer-term plans to build a much closer fiscal and banking union, on which they asked Mr Van Rompuy and the heads of the European Commission, ECB and Eurogroup finance ministers to present detailed proposals by October.
As the leaders argued, Italy beat Germany 2-1 in the Euro 2012 soccer semi-final, the underdog knocking the favourite out of the contest.
Asked whether he expected Italy to go on to beat Spain in Sunday's final, Mr Monti deadpanned: "I never speculate about financial markets or football."

Taoiseach says EU deal will ease Ireland's debt burden

[sanitynotincluded]

I think the solution such as it is lies in either the north/south split which has been mooted, or a top/bottom shedding, with Germany leaving simultaneously with Spain, Greece, Italy... The rump Euro would de-value a bit, with the other departing countries even more so. It would place less of a shock to the German economy, while giving the most troubled countries more breathing space than just a german departure would.

That sounds eminently sensible, I just can't see Spain, Italy and Greece going for it; whereas the pressure that is bound to build on Merkel may just be enough to force a drastic/unilateral action on the part of Germany.

If the rump Euro doesn't have a release of pressure at the bottom to partially offset the departure of Germany, the resulting de-valuation of the Euro in relation to the replacement German currency would most likely be so massive that it could stop the German economy in its tracks, which would be catastrophic for all concerned.

This should in theory break the link between soaring borrowing costs and demands for further austerity.

It is however unlikely to break the link between rash spending and soaring borrowing costs.