The Euro, What's the solution? Options

[up4fun]

Hating to give my age away. My dad was a chief economist with the US State Dept. in Germany after WW2 during the Marshall Plan era. The concept of a "United States of Europe" never envisioned Germany as the leading nation/state. The original Marshall Plan proposal, although not accepted at the time, ultimately has come to fruition. However, the UK and France were to have been the leading entities. I guess Europe has gotten what it's paid for.

[Parsifal]

Hating to give my age away. My dad was a chief economist with the US State Dept. in Germany after WW2 during the Marshall Plan era. The concept of a "United States of Europe" never envisioned Germany as the leading nation/state. The original Marshall Plan proposal, although not accepted at the time, ultimately has come to fruition. However, the UK and France were to have been the leading entities. I guess Europe has gotten what it's paid for.

One has to wonder who won WW2.

[sanitynotincluded]

Hating to give my age away. My dad was a chief economist with the US State Dept. in Germany after WW2 during the Marshall Plan era. The concept of a "United States of Europe" never envisioned Germany as the leading nation/state. The original Marshall Plan proposal, although not accepted at the time, ultimately has come to fruition. However, the UK and France were to have been the leading entities. I guess Europe has gotten what it's paid for.

The French aim for what has become the EU was always for Germany to be their bitches. Money talks though.

[poland74]

I cannot understand how supposedly intelligent people in governments thought a single currency between what is now 17 countries could work. If all 17 countries were of similar economic status and had similar domestic laws on retirement, public sector pay/conditions etc then it might have had a chance, as it is a mish mash of economies have been thrown together by their governments as I believe very few countries have had referrendums on joining and now they wonder why it isn't working.

The goal of the EU has always been a federal state, now they have sound reasons to persuade the people it is necessary (to save the economy) where as previously the people wouldn't have heard a word of it as all "Europeans" are still very patriotic. I still believe most people would reject further major integration for this very reason. People would rather believe and maybe it is true that other weaker nations should just leave the euro to save it regardless of what it does to the said nation.

I find the lengths the EU will go to to save the euro quite sad. Nobody will admit it is broken beyond repair in its current state and nobody wants to leave because they are scared of being held back and no EU government, I.E Germany wants to ask someone to leave because it makes the whole project look weak/failed. They want more countries in, not less.

I also cannot believe the majority of Germans are happy with their country continuously bailing out other countries and now banks, no questions asked. Germany might be the strongest financial EU economy but I'd be very surprised if they were doing much better than average in the world themselves so how can they keep affording to do this? There will come a time when Germany has to stop and say no more, whether their government reaches this conclusion before the people do, I'm not sure.

[colonelsmut]

Don't waste a good crisis as they say.I think banking union is now inevitable and some countries ,the UK included, face an in or out moment over the next ten years.A two speed EU seems unlikely.The periphery are now tethered to Germany who will act as payment collector for the ECB.
That being said there have been much vaunted inflection points before in this crisis, the summit in December being a good example.It may just end up being another can kicking exercise to get past the summer and the US election.The German constitutional court is becoming increasingly activist in opposing the demands being placed on German citizens not to mention the growing hostility to bailouts in places like Holland. Things may get very interesting if French and especially German borrowing costs start to spike over the next year as the core bears increasing financial burdens.

[ATD]

Slightly off topic...

I cannot understand how supposedly intelligent people in governments thought a single currency between what is now 17 countries could work.

Maybe they weren't quite as dumb as they'd like us to think there were... means to an end?

The goal of the EU has always been a federal state, now they have sound reasons to persuade the people it is necessary (to save the economy) where as previously the people wouldn't have heard a word of it as all "Europeans" are still very patriotic.

Or maybe I'm just really jaded and cynical.

[poland74]

Slightly off topic...

I cannot understand how supposedly intelligent people in governments thought a single currency between what is now 17 countries could work.

Maybe they weren't quite as dumb as they'd like us to think there were... means to an end?

The goal of the EU has always been a federal state, now they have sound reasons to persuade the people it is necessary (to save the economy) where as previously the people wouldn't have heard a word of it as all "Europeans" are still very patriotic.

Or maybe I'm just really jaded and cynical.

I get your first point, I never thought of it like that. I don't quite understand your second point though ATD.

[ATD]

I get your first point, I never thought of it like that. I don't quite understand your second point though ATD.

It was just the one point, I just didn't quote your two statements very well... The second quote was supposed to be an example of the "means to and end". Oh well!

[Parsifal]

I cannot understand how supposedly intelligent people in governments thought a single currency between what is now 17 countries could work.

One theory is that things are playing out exactly how the Germans planned it from the start (i.e. that the euro would become a thinly veiled DM with the Deutsche Bundesbank calling the shots at the ECB).
So far. Things may now start to spin out of control (which was not planned).

This post has been edited by Parsifal: Jun 30 2012, 22:29

[Roger Mellie]

Europe does not have a history of harmony and stability. sad.gif (and I think the folks in Brussels tomorrow and Friday know this

If the folks in Brussels know this, they wouldn't be trying to impose a United States of Europe by stealth (fiscal union is boiling frog material!): The reason for the lack harmony and stablity in Europe's history, is precisely because of repeated attempts to bind nations of Europe into superstate-- as of Caesar, Napoleon et al.

I think this speech sums it up quite well; the explanation towards the end of how the bailout scheme will work in layperson's terms, is quite insightful..

http://youtu.be/2-Hz-mrplKU

As a matter of fact, one could argue that Germany is indeed trying to re-create the DM with the €

As the witticism goes: The Euro is the Deutschmark with fleas

This post has been edited by Roger Mellie: Jul 1 2012, 09:54

[Enigmatic Paragon]

I cannot understand how supposedly intelligent people in governments thought a single currency between what is now 17 countries could work. If all 17 countries were of similar economic status and had similar domestic laws on retirement, public sector pay/conditions etc then it might have had a chance, as it is a mish mash of economies have been thrown together by their governments as I believe very few countries have had referrendums on joining and now they wonder why it isn't working.

Actually, I think its always been the long term plan that monetary union would be the prelude to a fiscal, and eventually political union (ie greater European integration). Its an odd way to go about it, but then I believe its always been pushed more by the technocrats (who see long term benefits) than by the voters (who focus on short term costs, collective action problems). Traditionally the process for integration follows the reverse (political union, followed by the rest).

Obviously, doing things backwards has inherent flaws which this current crisis has exposed - read the commentary by economists / technical analysis to get an idea of whats going on (I'd avoid the generic commentary you get from the daily papers - by and large they display a horribly flawed understanding of what is going on).

I think there is actually a reasonable consensus what the solution is, but not what a politically feasible solution is.

The technical solution would be to move immediately and rapidly toward greater integration / fiscal and political union, and fully integrate the banking system. Give the ECB a free hand to act like a proper central bank, and then start implementing reforms in the weaker economies, and cut the focus on austerity at least in the short term - its counter productive.

Collectively, Europe is actually in a better position than the US. However, the lack of a fiscal union accompanying the monetary union is causing problems which can normally be hidden away to surface in a very noticeable manner. For instance, a badly managed country which becomes unproductive normally manages to cruise along because its central bank can adjust interest rates to accommodate and the exchange rate will become unfavourable (ie higher prices). Its not pleasant, but people are less likely to have a whinge. Or if you accumulate too much debt, you can inflate your way out of the debt. The monetary union means you don't have those options to compensate for bad management, and you end up going through the (much more painful) path of internal dxxxxuation (ie: if prices don't go up relative to your pay, the alternative must be that you take a pay cut relative to the price of things).

Anyhow, you can say a lot about what should happen, but I think even now nobody believes that there is the political will to do what is economically/technically necessary, so we all fumble around finding the best compromise between what is politically possible, and what is economically/technically desirable. And, as we've discovered quite a few times already, the compromise between what is possible and the ideal course of action is not necessarily adequate medicine.

[colonelsmut]

Moody's changes Germany, Netherlands outlooks to negative
NEW YORK | Mon Jul 23, 2012 5:51pm EDT
(Reuters) - Moody's Investors Service on Monday changed its outlook for top-rated Germany, the Netherlands and Luxembourg to negative from stable, warning that they may have to increase support for indebted euro zone states such as Spain and Italy.
Moody's also cited an increased chance of Greece leaving the euro zone, which "would set off a chain of financial sector shocks ... that policymakers could only contain at a very high cost."
The agency affirmed Finland's 'Aaa' rating and stable outlook, but it said all four countries were adversely affected by rising uncertainty about the outcome of the euro area debt crisis and the increasing likelihood that greater support would be needed by other euro area countries, most notably Spain and Italy.
Moody's said the burden of that support would fall most heavily on the euro zone's top-rated states. It said its actions on Germany, the Netherlands and Luxembourg mean it now has negative outlooks on all the countries "whose balance sheets are expected to bear the main financial burden of support."
The agency put France and Austria on negative outlook in February.
Finland escaped a negative outlook partly because of its small and domestically oriented banking system and its limited trade links with the rest of the euro area, Moody's said.
Ratings agency Standard & Poor's has a stable outlook for Germany but negative outlooks for Luxembourg, the Netherlands and Finland. All are rated 'AAA'.

Fitch gives all four the top rating and stable outlooks.Moody's ratings

Spanish bond prices are surging and it's costing 7.5% to borrow for ten years and 7.4% to borrow for five years and more than 6.5% when borrowing for two years.In short Spain is now paying more to service its debt over six months than Slovakia and the Czech Republic pay for ten year debt!
Meanwhile the euro zone's private sector shrank for a sixth month in July as manufacturing output nosedived, adding to the likelihood that the region will slump back into recession,according to the Eurozone Composite Purchasing Managers' Index.
A full Spanish bailout is inevitable.It could cost 400-500 billion, hence the threat to the ratings of core countries.The ECB might be forced to get back into the bond market if only to try to protect Italy for a few weeks and delay the need for crisis moves until September.Those VIP seats at the Olympics won't fill themselves.

[colonelsmut]

And they say Mitt Romney has a tin ear. From the FT's man in Madrid:

"When the government rammed through by decree last month’s €65bn austerity package, Mr Rajoy (prime minister) was absent from parliament. When he announced the measures earlier, each cut was rapturously applauded by government MPs, one of whom greeted benefit cuts for Spain’s legions of unemployed by saying que se jodan (let them screw themselves).

While few question the democratic legitimacy of a government with a majority in parliament, many do question its democratic sensibility – and it surprised no one, except perhaps the PP, that within hours this contemptuous epithet turned into a slogan rallying protesters against the cuts all over the country.

Mr Rajoy’s style of government is another problem. Despite his absolute majority in parliament, he prefers to rule by decree. Oddly, for someone who favours centralised and secretive control, he has three competing voices on the economy: Mr Montoro at the treasury, former Lehman’s banker Luis de Guindos at the economy ministry and Alvaro Nadal, his German-speaking adviser."

[Kev]

So which side do you fall on?

[colonelsmut]

Politically it looks toxic at the moment but despite the Spanish unemployment rate and a 78% disapproval rate Rajoy will push through just about any reform he can think of over the next five years. The Spanish want to remain in the Euro and Rajoy has the support in parliament of the previous Socialist government to ensure the country jumps through the hoops.Sadly for Spain and its people this requires cutting with a chainsaw where a scalpel would be more appropriate.
Can't see that working in Italy with Silvio waiting in the wings.For all the talk of Greece being thrown out, Spain,Ireland and Portugal following them or Finland giving up on bailouts it's Italy that will force a real solution.They have huge amounts of debt to rollover starting in late 2013.The ECB will have to start buying Italian bonds by the mountain and defer payment for 30-50 years. How this debt will ever be tackled given the poor demographic outlook for Italy and much of Europe in general is unclear.
Once that rubicon is crossed there will be no going back and the Euro will muddle on with low growth + high debt and the 2010s will look like the 1970s.The Euro is the new OPEC.It has Western economic growth by the balls.

This post has been edited by colonelsmut: Aug 7 2012, 09:34

[Parsifal]

It sounds like it might be getting close.

U.S. Companies Brace for an Exit From the Euro by Greece