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To Save the Euro, Germany Has To Quit the Eurozone

by ARGeezer Thu May 26th, 2011 at 09:27:59 PM EST

Marshall Auerback has a post in New Economic Perspectives with the above title. He makes an interesting case. I know that similar observations have been made on ET in the last year. At the very least, his article pushes a re-framing of the existing debate over debt in Euro-zone countries.

When the euro was launched, leading German politicians used to argue, with evident relish (and much to the chagrin of the British in particular), that monetary union would eventually require political union. The Greek crisis was precisely the sort of event that was expected to force the pace. But, faced with a defining crisis, Ms Merkel's government is avoiding airy talk of political union - preferring instead to force harsh economic medicine down the throats of the reluctant Greeks, Irish, Portuguese and Spanish electorates. This is becoming both economically and politically unsustainable. If the objective is to save the currency union, perhaps policy makers are looking at this the wrong way around. In the end, paradoxically, to save the European Monetary Union, the least disruptive way forward would be for the Germans, not the periphery countries, to leave.


One major reason why political, and social, unification is so important is that it provides conditions under which the adjustment mechanism, to being uncompetitive, is facilitated. Labour mobility is much greater within, than between, countries. Cross-regional fiscal transfers help to smooth the adjustment process. Social and national unity makes break-away policies almost unthinkable and hence provides the cement to keep the discipline of adjustment in place.

None of the above are, as yet, strongly anchored in the euro-zone. Nor are they likely to be in the current context in which any moves toward a broader supranational fiscal structure continue to be resisted by the Germans, who perceive this as a backdoor mechanism for yet more bailouts of their "profligate" Mediterranean European "partners".

I would note that resistance to further political and social union, and especially towards the steps necessary to make this feasible does not come from Germany alone. Finland, The Netherlands and other export surplus countries share popular German resistance to mechanisms that would help Greece, Ireland, Portugal, Spain and Italy make necessary steps toward full integration, particularly by their insistence on monetary policies that are only suitable for the export surplus countries. Auerbach notes:

From a standard Keynesian perspective, shrinking a fiscal deficit is virtually synonymous with shrinking economic growth. Keynesians emphasize the prevalence of multiplier effects. Cuts in government spending and hikes in taxes are expected to reduce incomes and spending in the private economy. If the fiscal consolidation is ambitious enough, it can deliver an outright recession.

Different countries have different needs regarding monetary policy. A cogent criticism of the attitude of Germany towards peripheral country debt crises is that when interest rates were held low to facilitate the assimilation of the former German Democratic Republic this helped inflate asset bubbles in peripheral countries, often facilitated by German banks and banks from other surplus countries, the very banks that are now threatened by the inability of their peripheral counter-parties to pay their debts.

Auerbach notes that there was a hopeful assumption that the introduction of a single currency would lead to political convergence, and:

The designers of the single currency were hoping for a third form of convergence, between elite and popular opinion. They knew that in certain crucial countries, in particular Germany, the public did not share the political elite's enthusiasm for the creation of the euro. But they hoped that, in time, ordinary people would embrace the new single European currency. This has clearly not been reflected by the reality. Crudely speaking, the markets today are calculating that governments lack the shared political commitment to underwrite the stability of the single currency.

Worse, policy in Germany and other surplus countries seems driven by the short term interests of personal political need, with leaders pandering to popular sentiment by scapegoating the victims of feckless lending by Euro-zone banks in peripheral countries. This does nothing towards actually solving any of the problems that are giving rise to the crises. By refusing to deal with the real issues leaders have allowed the problems to grow to a point where the banks and the ECB are at much greater risk. Nor are there many signs that this is changing. As Auerbach notes:
The main disadvantage of adopting a currency union in the absence of a fully fledged political union is that it limits the ability of the constituent regions (countries) to adjust to an (asymmetric) shock by using domestic fiscal policy to mitigate the deflationary impact of this shock, as well as eliminating the ability to deploy exchange rate adjustments to do so. The European Monetary Union doesn't work and without a federal fiscal redistribution mechanism it will never be able to deliver prosperity. Every time an asymmetric demand shock hits the Eurozone, the weaker nations will fail. Trying to impose fiscal rules and austerity onto the EMU monetary system just makes matters worse.

The fiscal austerity that accompanied the period of transition into the EMU as governments struggled to reach the entry criteria established under the SGP manifest now as persistently high unemployment and rising underemployment; vaporising social safety nets; decaying public infrastructure and rising political extremism.

Since the current approach under the existing system seems unlikely to change Auerbach proposes:

Perhaps we're looking at this the wrong way around: Given the continued German aversion to more broadly-based pan European style fiscal programs, which its populace continues to see as nothing but bailouts for lazy Mediterranean free-loaders, there is another way to solve the euro crisis.

Let Germany leave the euro zone.

Let's leave aside the politics for a moment as there are many who believe that a German exit from the euro zone in effect means the end of the euro because a number of other countries would leave.

So consider this exercise solely from an economic context: The likely result of a German exit would be a huge surge in the value of the newly reconstituted DM. In effect, then, everybody devalues against the economic powerhouse which is Germany and the onus for fiscal reflation is now placed on the most recalcitrant member of the European Union. Germany will likely have to bail out its banks, but this is more politically palatable than, say, bailing out the Greek banks (at least from the perspective of the German populace).

But what of the other countries in the EMU?

In the meantime, the rest of the euro zone gets a huge boost to competitiveness via a (likely) substantial fall in the euro against the newly reconstituted DM. Also, the resultant potential instability means that the ECB would likely have to stand ready to backstop all of the bonds to prevent this from becoming a fully-fledged crisis, but it would encounter less political resistance to doing so, given the absence of a restraining German voice in the European Monetary Union.

It seems like an odd way to consider the problem, but the paradox of the current situation suggests that an exit from the euro zone of its strongest member, rather than its weakest links, might well be the optimal means of saving the euro, in the absence of a fully fledged return to separate national currencies.

But, of course, it is not that clean. What would Finland, The Netherlands and other export surplus countries do? Remain in the EMU and be asked to bail out German banks that suffer defaults on peripheral country debt? And would there be mechanisms to quickly change the approach of the ECB to the current crises? I once suggested two monetary unions, one for the surplus countries and another for the deficit countries. But the most basic question is why Germany would ever leave a monetary union in which she has so many advantages. Unless a clear answer can be found to that question Auerbach's suggestion will never be a policy proposal. But I doubt it was ever intended as such.

Display:
A year earlier, Jörg Bibow wrote Germany Is Unfit For The Euro
...

Not for the first time in its history the German people have been irresponsibly misled by a political leadership that seems to have lost any sense of history, any sense of order and stability in Europe, and any sense of Germany's key contributing role to the current crisis. As ever, the mindset of lawyers frames the political debate among a political class that seems inhumanly uneducated in matters of economics. If economic voices are heard at all, it is usually the voice of the Bundesbank. It is a peculiar democracy that expects either its constitutional court or central bank to have the final word of wisdom.

...

Sadly enough, Germany has been central to [three stark economic policy blunders]. Germany is the biggest factor in Euroland's export dependence, growing on exports only while domestic demand, especially private consumption, is notoriously stagnant. Among the first countries to break the Maastricht deficit limit dreamed up by its own lawyers, Germany contributed most to the ECB's misses of its headline inflation mark by hiking indirect taxes. Worst of all, Germany reneged on the euro's cornerstone to abstain from beggar-thy-neighbor policies.

...

[Insane austerity in the periphery so that German can grow on out-of-EU exports] is neither what Europe needs nor what the world may reasonably expect from Europe. Sooner or later Europe may have to conclude that Germany is unfit for the euro. Let the Germans have their mark back if they are so keen. Let the new euro-mark rise to US dollars 2 or 2.50, so that the joys of stability are real. Euroland may then regroup around France. With Germany once again proving immature to provide constructive rather than destructive leadership, Europe's fate is in France's hands.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 27th, 2011 at 02:12:49 AM EST
I knew Migeru would remember the source of the previous mention on ET!

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 27th, 2011 at 08:30:12 AM EST
[ Parent ]
Cloud-sourcing your data?
by afew (afew(a in a circle)eurotrib_dot_com) on Fri May 27th, 2011 at 08:54:22 AM EST
[ Parent ]
Mig sourcing.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 27th, 2011 at 12:05:45 PM EST
[ Parent ]
It's not the same article, just the same gist, and by a German economist

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 27th, 2011 at 01:04:46 PM EST
[ Parent ]
  1. Germany's behavior is nothing new. Its policy of strong DM was just the same before the euro, and it generated the same tensions - even worse, one could argue. And, as ARG notes; it's not just Germany - several other countries are on the same line. This is a reality which is not going to change, and quite frankly, these countries have no real incentive to go for a soft currency regime, given how a strong currency has served them in the past 50 years. Strong exports of price-insensitive goods is what allows to pay high wages;

  2. Europe without either of France or Germany does not make sense, so either France joins the strong euro group (which I expect the country to want to do), and we are back to the peripherals dropping out, or Europe gets fundamentally broken up.

So far, most of the people who call for Germany to exist the eurozone are, unsurprisingly, people keen to break Europe.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Fri May 27th, 2011 at 04:02:35 AM EST
France's economic structure does not lend itself to be in the "strong euro" group. Sarkozy thinks he can be German, but he's in for a rude awakening.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 27th, 2011 at 04:15:10 AM EST
[ Parent ]
it's 30 years of French policies, and France has been "competitive" despite retaining more than a bit of its "socialist" habits.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Fri May 27th, 2011 at 08:07:16 AM EST
[ Parent ]
Right or wrong, long-standing Franco-German policy stupidity is going to kill us all.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 27th, 2011 at 08:16:27 AM EST
[ Parent ]
That, which cannot continue forever, will stop.

Eventually.

Right now we're measuring collateral damage.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Fri May 27th, 2011 at 08:20:31 AM EST
[ Parent ]
The sky's the limit.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 27th, 2011 at 08:21:44 AM EST
[ Parent ]
AS the head of the swedish central bank said when he jacked up interest rates to 500% in an attemtp to save the currency peg. (Turned out that actually 500% was the limit).

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Fri May 27th, 2011 at 08:33:19 AM EST
[ Parent ]
(Turned out that actually 500% was the limit).

Because that was as high as he needed to go? Or was there some other actual limit.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat May 28th, 2011 at 10:20:53 PM EST
[ Parent ]
The defense of the peg was given up a couple of months later after a re-newed attack.

To for a prolonged time have such an interest rate would have hurt the real economy badly and probably not helped anyway as Soros et al was way better at playing that game.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sun May 29th, 2011 at 09:02:38 AM EST
[ Parent ]
these countries have no real incentive to go for a soft currency regime, given how a strong currency has served them in the past 50 years. Strong exports of price-insensitive goods is what allows to pay high wages
If the price of this is turning "peripheral Europe" into an economic wasteland, is Europe worth it?

Estonia, Hungary, Greece, Ireland, Portugal...

Why is the IMF and not the ECB loaning Euros to European Union member states? It makes no sense other than as a political fig leaf.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Fri May 27th, 2011 at 04:19:04 AM EST
[ Parent ]
Germany did not want these countries in the euro to start with. One thing we can't say is that Germany has not been consistent.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Fri May 27th, 2011 at 08:08:20 AM EST
[ Parent ]
You can go back to your European Coal and Steel Community.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 27th, 2011 at 08:10:11 AM EST
[ Parent ]
The 6-member EU, or even the 9-member EU (or the 1995 expansion) could easily be justified on purely economic terms. Bringing in the more disparate non-core members always meant that it was more of a political project tan an economic one. The economic consequences of that political decision are apparent today: you can't have such a union of economically-different members without a(n apparent) price to be paid.

The core will have to decide if it's better off going it alone, which should make for an interesting debate...

Wind power

by Jerome a Paris (etg@eurotrib.com) on Fri May 27th, 2011 at 08:16:25 AM EST
[ Parent ]


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 27th, 2011 at 08:18:08 AM EST
[ Parent ]
Germany did not want these countries in the euro to start with.

And they got in despite Germany's steadfast opposition?! If Germany voted to let them in it is fundamentally dishonest to wreak havoc through economic manipulation in order to drive them out. In for a penny, in for a pound! Germany should bail out German banks that got in trouble with loans to peripheral nations and let other countries do the same for their banks, agree to an orderly restructuring of un-payable debt, or allow fiscal union and support EMU fiscal policies that would allow the peripheral economies to grow.

But I suspect you are right. Germany probably didn't want the countries in the EMU, but was put into a position where she had to approve. Yet powerful elements in Germany have never accepted that outcome and have been successfully working to sabotage the existing system. That is how things work too often. Just like the wealthy in the USA never accepted Social Security, let alone Medicare, and have been working ever since their passage to wreck the programs.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat May 28th, 2011 at 10:36:16 PM EST
[ Parent ]
Of course they did! The monetary union (and, before it, the convergence to it and the European Exchange Rate Mechanism) has always been a way to shift the burden of keeping an undervalued DM to sustain Germany's intra-EU trade surplus on the deficit countries.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon May 30th, 2011 at 06:44:02 AM EST
[ Parent ]
would do better relying on Bernanke.
by rootless2 on Fri May 27th, 2011 at 11:47:58 AM EST
[ Parent ]
Europe without either of France or Germany does not make sense, so either France joins the strong euro group (which I expect the country to want to do), and we are back to the peripherals droppingbeing kicked out, orand Europe gets fundamentally broken up.

Ahem.

Please attribute the agency and intent where it belongs. Thanks.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Fri May 27th, 2011 at 04:47:32 AM EST
[ Parent ]
I guess that debate will be decided on Spain - because it's the one country that was not an original member but which cannot easily be tossed out (Ireland speaks English, Greece should never have gotten in, and Portugal just rides along).

But I agree with you - at some point, Germany will have to decide whether Spain is part o the EU or not, with all the consequences that entails. I'm betting that they won't dare kick Spain out and will thus, finally, have to bear the price of that "cowardice" (so to speak).

Wind power

by Jerome a Paris (etg@eurotrib.com) on Fri May 27th, 2011 at 08:11:56 AM EST
[ Parent ]
I'm betting that they won't dare kick Spain out and will thus, finally, have to bear the price of that "cowardice" (so to speak).

I'll bet against you.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Fri May 27th, 2011 at 08:13:51 AM EST
[ Parent ]
Do we put a backstop date for that bet?

Wind power
by Jerome a Paris (etg@eurotrib.com) on Fri May 27th, 2011 at 08:18:51 AM EST
[ Parent ]
As for timing, I suspect the final crisis of the Euro will be within a couple of weeks of the publication of banking stress test results in June of 2011. If the results of the stress test are bad for the German banks, expect the speculative attack on Spain to be before the publication of the stress test results; if the results are favourable for German banks, the attack will come after. But it will come.


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 27th, 2011 at 08:20:49 AM EST
[ Parent ]
Bwah hah fucking hah

Irish Times: Stress test results may be delayed (25 may 2011)

The publication of pan-European bank stress tests, due in June, could face delay as national regulators debate how to implement and interpret the rules, three people familiar with the matter said.

...

The EBA will, within the next couple of days, set a date for publication of the stress test results, one source said.

...

The [methodological] questions emerged after national regulators submitted stress test results to the EBA. Methodology outlined by the EBA was not thorough enough and left too much room for interpretation, another source familiar with the tests said.

Given that my prediction was
if the results are favourable for German banks, the attack will come after
and that
German banks were on track to pass the test after two landesbanks recently changed their capital structrure, these sources also said today.
I guess my prediction is looking like "before end of July"...

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 27th, 2011 at 08:32:28 AM EST
[ Parent ]
But of course HeLaBa and NordLb are the healthy Landesbanken. The only reason they have trouble during the stress test is that the ECB in it's usual idiocy and anti public sector banks prejudice decided to treat silent capital suddenly no more as core capital. That is, silent capital in public banks; they treated Commerzbank differently.

But whatever; Lower Saxony now changed the silent capital to shares and so that sub-story is over.

by IM on Fri May 27th, 2011 at 09:46:29 AM EST
[ Parent ]
So, how are the unhealthy Landesbanken doing?

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 27th, 2011 at 11:05:28 AM EST
[ Parent ]
Or at least they look better, because they did get substantial capital injections from their states and WestLB profited from a Bad bank.

NordLb and HeLaBa did get nothing because until the new EBC rule on silent capital they didn't need anything.

by IM on Fri May 27th, 2011 at 11:14:24 AM EST
[ Parent ]
Is pushing Greece out of euro breaking Europe?

I guess it depends on the names we are using.. if by Europe we mean Benelux, yes your definition is right. But it not breaking "Europe" at all what they propose.. they want/propose to go back to Benelux if Europe is not back to the front (which is fine by me)... if by Europe we think about the Europe of Greece and Rome.. then, the German elites are the evil ones since it is their crazy economic policy the one who is destroying Europe.

So either Europe or the Benelux, one has to pick sides.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Fri May 27th, 2011 at 04:59:51 AM EST
[ Parent ]
By Benelux you don't mean Netherlands, Belgium and Luxemburg but rather the frankish empire - France, Germany, Austria, Benelux and (Northern) Italy. Right?

The six founding members or core europe.

by IM on Fri May 27th, 2011 at 07:36:32 AM EST
[ Parent ]
Austria? Founding member of what? Certainly not the EU.
by gk (gk (gk quattro due due sette @gmail.com)) on Fri May 27th, 2011 at 07:38:55 AM EST
[ Parent ]
I said six and that obviously mean sthensix of Rome.
Founding member of the carolingian empire, is true in case of Austria.

And I do know that Portugal, Spain , Greece and Ireland are all older EU-members then Austria.

by IM on Fri May 27th, 2011 at 07:58:18 AM EST
[ Parent ]
"all once part of the former Frankish empire"?

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 27th, 2011 at 07:58:59 AM EST
[ Parent ]
Approximation for the Holy Roman Empire plus the Frankish kingdom of France?
by afew (afew(a in a circle)eurotrib_dot_com) on Fri May 27th, 2011 at 08:21:11 AM EST
[ Parent ]
I suppose the Visigoths didn't count as Germanic...

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 27th, 2011 at 08:22:38 AM EST
[ Parent ]
As Franks.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri May 27th, 2011 at 08:25:26 AM EST
[ Parent ]
Really, Merowingians - Carolingians - Clodowech (Clovis) - Carolus magnus (Charlemagne) the frankish kingdom and then empire that is all quite important for the history of early medieval europe. And there the history of France, Germany, Benelux etc. in the middle age starts.

Perhaps I am too parochial, but I thought the comparison of the Europe of six to the empire of the Carolingians is pretty standard.

by IM on Fri May 27th, 2011 at 09:07:33 AM EST
[ Parent ]
They why not Switzerland and the Czech Republic?
by gk (gk (gk quattro due due sette @gmail.com)) on Fri May 27th, 2011 at 08:28:53 AM EST
[ Parent ]
is the ultimate Austerian wet dream. The Swiss franc is arguably the only currency stronger than the euro, and that pisses off the Germans to no end.

Of course, it helps that they are a small country with inflows of (not always clean) money from all over the world. But it grates.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Fri May 27th, 2011 at 08:41:14 AM EST
[ Parent ]
But the gnomes refine gold and how much cleaner can your money be than 99.999% pure gold? The ultimate in money laundering.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 27th, 2011 at 12:32:57 PM EST
[ Parent ]
The Holy Roman Empire sprang from the eastern parts of the Frankish empire of Charlemagne. Here is a map.

Main difference between that area and that of the original six members is that southern italy is in and the alpine countries are not.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri May 27th, 2011 at 08:30:31 AM EST
[ Parent ]
There are multiple maps of the HRE since it lasted nearly 1,000 years. See Wikipedia.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri May 27th, 2011 at 08:38:20 AM EST
[ Parent ]
Of course, but the map is of the empire of Charlemagne that preceeded that HRE sprang from and which I think IM meant.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Fri May 27th, 2011 at 08:44:30 AM EST
[ Parent ]
Yes. A reconstitution of the HRE would stretch further to the east - Czech Republic, Slovenia eastern Germany - but leave out most of France. So the Europe of six is closest to the empire of Charlemagne.

I thought that is a standard comparison. Sounds more romantic then core.

by IM on Fri May 27th, 2011 at 09:13:27 AM EST
[ Parent ]

Austrasia has always been at war with Neustria :)

Wind power

by Jerome a Paris (etg@eurotrib.com) on Fri May 27th, 2011 at 08:39:36 AM EST
[ Parent ]
by Jerome a Paris (etg@eurotrib.com) on Fri May 27th, 2011 at 08:44:39 AM EST
[ Parent ]
That is what I meant. Don't you young people learn history nowadays? Who is Charlemagne, chopped liver?

Now of course this empire did include Slovenia and Switzerland, but not eastern Germany and southern Italy.

But details aside, Charlemagne reign and the original EU cover the same territory.

by IM on Fri May 27th, 2011 at 08:59:55 AM EST
[ Parent ]
So you're actually not joking with your Carolingians'R'Us?

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 27th, 2011 at 10:45:27 AM EST
[ Parent ]
No, It was a clever plan to kick Spain except the Spanish marches outside the EU.

It just used frankish empire as a illustration of the core or Europe of six. And that was meant in the comment, rather then BeNeLux.

by IM on Fri May 27th, 2011 at 11:17:18 AM EST
[ Parent ]
It's a standard comparison among economic historians.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun May 29th, 2011 at 08:19:38 AM EST
[ Parent ]
Oh geee .. what a wonderful history thread I have created. I meant a BENELUX+Germany type of union.. which are the core countries.. France and Italy were not in my mind.. but I guess you can include parts of France and parts of Italy... but given that they are only parts..

Oh.. and you shoold also take Berlin away from Germany.. other than that... ei wait.. Berlin can live inside because there would be a transfer union and common debt.. what was I thinking!!!???

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Fri May 27th, 2011 at 09:06:34 AM EST
[ Parent ]
I will ask my question in the driest form possible, without any rhetorical flourish.
by IM on Fri May 27th, 2011 at 11:19:09 AM EST
[ Parent ]
You've been PN2ed, an old ET tradition.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 27th, 2011 at 12:40:17 PM EST
[ Parent ]
Or you could add "What americans does not seem to understand is that europeans..." before it, if you really want to see fireworks.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Fri May 27th, 2011 at 04:33:58 PM EST
[ Parent ]
kcurie:
I guess you can include parts of France and parts of Italy.

Italy's Lega Nord will love that...

"A fool with a tool is still a fool." - Abraham Verghese

by melo (melometa4(at)gmail.com) on Fri May 27th, 2011 at 12:09:45 PM EST
[ Parent ]
it's a devil's advocate position which serves to illustrate how Germany (and the other exporters) benefit from the Euro. It's vital to frame the debate in terms of these countries getting a free ride on the rest of us; it's the only possible way to break out of the TINA meme.

It's not easy to alert public opinion to this, because it's a sophisticated argument; but we can't leave it to the Serious People and the populists.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Fri May 27th, 2011 at 05:35:05 AM EST
[ Parent ]
The article makes reference to the following TINA argument by the Banque de France chairman: ECB's Noyer Rejects Greek Restructuring as `Horror:' Transcript
"And what are the consequences of a default? The banks with the most Greek bonds are Greek banks. The Greek banks themselves will be badly damaged. When the banking system is stricken, what do you have to do to prevent the financing of the economy from collapsing? You have to recapitalize the banks. Who will recapitalize the Greek banking system? The Greek state."
They could also restructure the Greek banks and burn their bondholders.
"If we make European states pay, the mechanism of European financing will stop immediately. The states will not continue putting their taxpayers' money on the line when their loans have just been cleaned out, when they're taking losses on the money they're lending. So that's the end of support from other European states."
We don't want no stinkin' fiscal union.
"And for the central banks, what happens? Greek debt will become debt that is no longer worth anything. It's no longer debt that can be considered as sufficiently safe for operations in the Euro System. That means by definition that to restructure is to become ineligible as collateral. If it's ineligible, then it means a large part of what the Greek banks bring as collateral for refinancing can no longer be used. That means the Greek banking system can no longer be financed."
Not true. After a restructuring, the Greek State becomes more able, not less, to service the restructure debt. If the debt is worth less but it is more likely to be repaid, the ECB could still accept it as collateral (on likelihood of repayment) but at a discount on the new reduced value. This doesn't mean it's worth zero. The ECB could well be already applying a substantial haircut to the debt as collateral. In fact, they should. In which case, after a restructuring, with a lower headline value but a smaller haircut it might well be worth the same as collateral. If the market is pricing a default into greek debt, why isn't the ECB?
"There is another possibility, which is to apply the program. To reduce the stock of debt, the only solution is ambitious privatization. There is no other solution."

"When we're in a monetary union and you need to restore your competitiveness, it is necessary to have the equivalent of an internal devaluation. Cut production costs. There is no other solution."

Get on with the program! Neoliberal shock doctrine!
"The budget adjustment that is being asked for -- they're difficult measures but they're doable. The IMF has been doing these programs for years. It knows what is doable."
Under what rock did Christian Noyer spend the Asian/Russian crisis and its aftermath?
"Don't think for a minute that we're against restructuring because French and German banks have Greek bonds. The problem is for Greece itself."
No, it might be about the issuers of CDS on Greek debt, who have been collecting premia of 10% or so for the past year or so, potentially without setting aside enough capital to actually honour their side of the "insurance" contract in case of an actual default.

The other alternative that is completely missing from Noyer's analysis is the possibility of a temporary suspension of free movement of capital out of Greece (best done through a tax on outflows rather than an outright ban).

TARA for Greece entails:

  1. a tariff of capital outflows from Greece
  2. issuing a Wörgl-type local currency backed by the country's hard currency and precious metal reserves held at the ECB.
  3. restructuring of public and private debt (see above about the effect on Greek banks)

Noyer either lacks imagination or political will.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 27th, 2011 at 05:52:33 AM EST
[ Parent ]
Noyer likely assumes that, in the eventuality of a default by Greece, the ECB wold seize any "hard currency and precious metel reserves held at the ECB". Could they? Would they?

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 27th, 2011 at 08:07:16 AM EST
[ Parent ]
If so, a caravan with lots of military escort leaving ECB with destination Greece would be an early sign of a pending default.

I do not know what "held at the ECB" means here, how much is electronic and how much is physical, but either way Greece would be stupid not to bring it home before a default. And if they can not do that, well then it is not Greece that is the owner, it is ECB.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri May 27th, 2011 at 08:21:32 AM EST
[ Parent ]
Which raises the interesting question of just where the physical gold is stored. The LME? They could return it to Athens or transfer it to Hong Kong and use the rumors about "fractional gold" at the LME as a reason, promising to keep quiet unless pressed.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 27th, 2011 at 12:47:06 PM EST
[ Parent ]
Errrr, do not mention Greece and gold reserves at a time like this. You'll never know how things are going to play out. As Greeks are asked to part with physical assets I have to believe that they are moments away from broaching this:

http://www.youtube.com/watch?v=4vszMkGmKC4

You gotta love how he characterizes Greeks taking loans from Germany as stealing.

by Upstate NY on Fri May 27th, 2011 at 02:31:57 PM EST
[ Parent ]
How many tons of gold did the Nazis loot from the BOG? I am certain that Germany would like to forget about it or pay Greece back at the equivalent of $35/oz.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 27th, 2011 at 04:41:43 PM EST
[ Parent ]
I've heard that it was something like 29 metric tons. I have no idea how much that is.
by Upstate NY on Fri May 27th, 2011 at 08:16:00 PM EST
[ Parent ]
Apparently, this is not that much. Maybe $300 million worth at today's rates.

100 metric tons = $1 billion

by Upstate NY on Fri May 27th, 2011 at 08:19:26 PM EST
[ Parent ]
At today's price = $1535/oz it would be more like $1.45 billion, but still...

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat May 28th, 2011 at 12:26:33 AM EST
[ Parent ]
(32,150 Troy oz. = 1 metric ton, presuming that the 29 tons are metric tons, not Troy tons.)

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat May 28th, 2011 at 12:29:04 AM EST
[ Parent ]
Jerome a Paris:
Germany's behavior is nothing new

No competitive deflation since the early '00s? No shift to mercantilism aka beggar-thy-neighbour?

Within a currency union, these policies have serious effects. Outside a currency union, they would have far less.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri May 27th, 2011 at 08:34:06 AM EST
[ Parent ]
Shift?

What was the Eastern Mark - DM parity if not competitive devaluation?

They have been playing this game for at least 20 years and the rest of Europe has been thanking them for it, too.

Like they say in Trainspotting: "yeah, the English are wankers, and we Scots have been colonised by wankers".

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Fri May 27th, 2011 at 10:44:23 AM EST
[ Parent ]
The PIGS could escape the clutches of the core. Portugal, Ireland, Greece and Spain, possibly joined by Italy and others, could negotiate amongst themselves a joint exit from existing arrangements to a new system. It would not be easy, but neither are prospects within the existing arrangements.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 27th, 2011 at 08:36:59 AM EST
[ Parent ]
Germany's behavior is nothing new. Its policy of strong DM was just the same before the euro,

But prior to the Euro, the fixed exchange rate policy was an optional stupid pissing contest for France and Spain. Post-Euro, the stupid pissing contest gained the weight of constitutional law.

Europe without either of France or Germany does not make sense, so either France joins the strong euro group (which I expect the country to want to do),

France does not, at this point in time, have the economic means to follow a high-wage export strategy against Germany, nor the political ability (fortunately) to follow a wage-suppression export strategy.

As a matter of economic and political reality, allying with Germany in this goes against French national interest.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun May 29th, 2011 at 08:12:20 AM EST
[ Parent ]
So far, most of the people who call for Germany to exist the eurozone are, unsurprisingly, people keen to break Europe.
So you continue to write off critiques of the Eurozone as anti-European. How about Yannis Varoufakis? Is he also "keen to break Europe"?

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon May 30th, 2011 at 06:47:51 AM EST
[ Parent ]
European Tribune - To Save the Euro, Germany Has To Quit the Eurozone
I once suggested two monetary unions, one for the surplus countries and another for the deficit countries

But within those you would have countries surpluses or deficits against the other members of the same group. Which would re-start the process. Re-iterate until you reach the groups with balanced trade against each others or a level which allows transfers to the deficit areas (in effect the member states).

Which is also why the euros problems will not be solved by Germany or Greece leaving, unless it allows for the construction of a european budget deficit of last resort, which it at present would not. It is the structure that is faulty and it produces the positions.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri May 27th, 2011 at 07:42:39 AM EST
Inherent it the assumption of a dual monetary union is that, at least, the deficit union would enact measures that allow transfers and pursues a political union that would allow budget deficits as needed. TARA would have to quickly soothe the anxieties of the populations of the member states, especially those in the relative surplus states, by commencing infrastructure projects and other state spending that benefit all members, by utilizing the financing ability of their (new) central bank and (new) central treasury.

The Euro could split into a Growth Euro - or Geuro - and a Stability Euro - or Seuro, and the surplus nations could have their own system or go back to their individual currencies. But, at the very least, the dialectic would move towards a new synthesis.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 27th, 2011 at 08:25:32 AM EST
[ Parent ]
 So, let's review:

    there's agreement on one and only one thing:  Europe, we have a problem.

   After that, there's no agreement; no agreement on how to define the problem and so, no agreement on how to best deal with it.

   If I was looking for an example which points up the fact that we live in times which suffer severely from a lack of basic agreement on anything, even the most fundamental of concepts, I don't know that I could find a better one.

   Since I don't know about economics, I tend to view things from a moralist's point of view.  So, in my view of it, in this matter--as in so very much about contemporary international politics--the European Union leaders, just like the national leaders of the states which compose it, mainly have an honesty problem.  They refuse to be honest with anyone, and that includes themselves as wells as with each other.

    Just yesterday, Ratko Mladic was finally arrested after sixteen years of hiding in plain view.  He's still regarded as a hero in some quarters.  First, the corrupt government protected him from arrest, then, according to radio summaries I heard today on France-Info and France Inter, he was protected by the army--which, right up to his formal retirement, kept him in official pay.  When retirement time came, in 2002 (seven years into his supposed hidden flight from justice, he came into the army offices and personally signed the separation papers.

   Now that Ratko Mladic is 69, the government, which wants to be granted entry to the E.U., has determined, in one of the most cynical governmental acts of this century--a century only eleven years old and already breaking new ground in cynicism--that it's safe to let him be arrested because it figures he'll never have to face an actual trial through to completion and, in this way, it can collect its good-conduct prize in being granted membership in the E.U.  Never mind that among the public of this nation that's somehow supposedly fit to join a union of liberal democracies there are lots who admire the Butcher of Srebrenica, Europe's best-protected "most-wanted" man.

    But the fiction that Serbia has by any stretch of the imagination the requisites for membership in the sort of union of civilized, respectable democratic states which the European Union pretends itself to be but is not, is just another of the wild fantasies which must be saluted and respected in the on-going game of don't ask, don't tell E.U.-style.  What's one more monumental piece of collective fakery when there are so many others on the shelf.

   There's the one in which a single-currency union can manage adequately without a centrally-devised common monetary policy or a central bank with the authority to direct it(thank you, Paul Krugman, for explaining this to me), so that shocks due to variances in wages and productivity can be softened and absorbed by a central bank which has the power to aid and lend to weaker members in times of crisis.  That part was skipped over--in yet another typically cynical manoeuver as the E.U. powerful reasoned that in adopting the single currency, they could put the Union's resistant members in a bind, place them before a fait-accompli that would leave no alternative to establishing the sort of central bank authority that they wanted but couldn't get everyone to agree on.

   In a way, E.U. administration reminds me of Enron--always looking for a novel way to cover up its most recent last-ditch effort to keep a game of fraud and fantasy from falling apart.  The very last thing anyone will think of is to face and tell the truth to the public.

    We're broke, we cheated, we're a bunch of frauds and phonies.  We have top-management credentials but, in fact, we don't know what the fuck we're doing, and, despite our being continually confronted with damning proof of that, we want nothing so much as to keep on running this show.  ( Oh, yes, "P.S.", one more thing: we want your rubber-stamp approval on our favorite to head the I.M.F., Christine Lagarde, who is eminently "one of our own".)

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Fri May 27th, 2011 at 09:33:44 AM EST
What if it was a fiction from the start? What do you expect of the Serbs? Was this man a hero to Serbs? I doubt it--look at their treatment of men like Milosevic who were not nearly as odious as Mladic. So why did they not comply with ICTY?

Maybe if the ICTY could have prevented its own head prosecutor from scourging the orgainzation as a highly politicized one, a court more rooted in politics than justice, maybe then one would put the onus on the Serbs. In Serbia, it's regarded as a kangaroo court, and it is. When war criminals go through a lengthy trial, have UN eyewitnesses testify to their misdeeds, and the war criminals are then convicted by the jury and judges, one feels heartened. In the next moment, a political chamber above the ranks of the jurists reverses the jurist's decision, and lets the war criminal free. The prosecutor then blasts the whole court itself as a fraud.

Do you think such an entity creates more of an incentive to turn Mladic in, or less? One wonders if Mladic would have been turned in a long time ago had the politicians allowed justice to do its work.

by Upstate NY on Fri May 27th, 2011 at 02:21:15 PM EST
[ Parent ]
I would add one more thing about how this plays out economically.

Isn't the creation of a unit of currency (by fiat) in itself a kind of fiction.

I can go onto my porch right now and loudly create a currency, for all my neighbors to hear.

We're entered into the domain of linguistic and literary theory here when we ask what is fraud, what is fiction?

When it comes right down to it, the wizard from Oz had it right: "Pay no  attention to the man behind the curtain."

by Upstate NY on Fri May 27th, 2011 at 02:23:54 PM EST
[ Parent ]
No, the rules of the system which ensure that it is useful to accept the currency are not fictions. If you your property taken away for failing to pay your taxes, that is a real change in your situation. If you are declared bankrupt, that is a real change in your situation.

The fiction is that there is some value to a money that is independent of the social system within which it is embedded.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat May 28th, 2011 at 01:33:19 PM EST
[ Parent ]
That is the difference between a fiction and a social construct.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat May 28th, 2011 at 03:21:10 PM EST
[ Parent ]
Bruce, I wrote that facetiously. Plus, I'm a fiction writer. My use of the word fiction is not derogatory. I meant it in the sense that a declaration of state is more less a performative speech-act.
by Upstate NY on Sun May 29th, 2011 at 12:28:24 AM EST
[ Parent ]
But its not the declaration that makes it a money, its the enforcement of the rules of how people use it.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sun May 29th, 2011 at 09:23:56 AM EST
[ Parent ]
Yes, indeed. Even "I pronounce you man and wife," needs some follow-up.
by Upstate NY on Sun May 29th, 2011 at 10:25:08 AM EST
[ Parent ]

   Just pretend to kick Greece out---

  Just pretend to kick Greece out; it'll all be fake but, if no one officially reveals the truth to "the (bond)  markets," they'll behave accordingly.

  If necessary, other member-states can be kept or jettisoned in a similarly fraudulent way.  If it's pretended that they're kicked out, they can still be kept in the know in secret and their preferences given account by other members without any actual votes being cast; conversely, if they're only apparently "In" but in fact kicked out, they can be allowed to go on going through the motions, attending meetings, making solemn pronouncements, etc., while the other real members understand among each other that all of that is merely for show purposes, to keep the markets in the dark.

  I mean, why should mega-hedge-fund managers and heads of state be the only ones allowed to practise gross fraud?  Like the World Bank, the I.M.F., the U.N. and other supra-national entities of importance, in a corrupt system, you can't have exceptions to dishonesty, everyone has to be a fake and a fraud or it just doesn't work.

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Fri May 27th, 2011 at 09:47:30 AM EST
Of course you also have to pretend to have a mechanism to expel countries from the Euros. For that you'll probably have to pretend to revise the treaties, and then Ireland will have to pretend to have a referendum. It starts getting complicated,,,,
by gk (gk (gk quattro due due sette @gmail.com)) on Fri May 27th, 2011 at 10:27:17 AM EST
[ Parent ]
And what of veto rights? Voting issues? Pandora's box?
by Upstate NY on Fri May 27th, 2011 at 02:15:27 PM EST
[ Parent ]
The serious point is that for all the talk about expelling Greece/Ireland/etc, there is no mechanism to do so, and changing the treaties will be almost impossible at this point.
by gk (gk (gk quattro due due sette @gmail.com)) on Fri May 27th, 2011 at 02:21:24 PM EST
[ Parent ]
Actually, I read last year that there is something about a nation that leaves the Euro signals that it is departing the EU. I wish I could remember where I read it, but somewhere it's implied that all members of the EU are harmonizing toward the eurozone even if they have not yet joined. To disavow the euro is to disavow the EU.
by Upstate NY on Fri May 27th, 2011 at 02:44:05 PM EST
[ Parent ]
So the only hope for the PIGS is to bolt from the EMU, or to jointly undercut the existing policies, by, for instance each instituting a Wörgl type currency. While there may be no mechanism for a member state to leave the EMU, a mechanism to stop them is even more unlikely.

They could blow up the banks that hold the debt by opening their books and this would end the current farcical  charade, but they might achieve as good or better results for their own countries by holding that move as a threat.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 27th, 2011 at 02:45:20 PM EST
[ Parent ]
Dear ARGeezer,

I'm mostly with you, but I have no time and my english is so-so.

Anyway, I suggest you to take in consideration to Rafael Poch, which brings lots of interesting things to Barcelona from Berlin:

http://www.lavanguardia.com/internacional/20110528/54162230237/quien-es-el-pagador-de-europa.html

Follow his page t la Vanguardia and blog.

THKs!

by kukute on Sat May 28th, 2011 at 08:24:49 PM EST
[ Parent ]
my english is so-so.

Es muy mas mejor que me Espannol!

Thanks for the link. Without frequent recourse to my Spanish-English dictionary, I gather that he is not impressed with Germany's self righteous attitude about the debts of its banks in other EMU countries. I will try to read some more tomorrow, perhaps with a machine translate feature as an aid.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun May 29th, 2011 at 12:43:43 AM EST
[ Parent ]
Es muy mas mejor que me Espannol!
Aha, a self-proving claim, no?

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sun May 29th, 2011 at 09:25:40 AM EST
[ Parent ]
I considered that possibility.  :-)

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun May 29th, 2011 at 09:54:06 AM EST
[ Parent ]
Since there's plenty of stuff to go around, someone must be stealing stuff for there to be a shortage. In the air, warplanes, on the ground tanks, in the hands, rifles, all making destruction of the stuff.

I don't find it surprising no one can see it.

We see what we can afford to see.

The world's full of crooks.

They're winning.

Align culture with our nature. Ot else!

by ormondotvos (ormond.otvosnospamgmialcon) on Thu Jun 2nd, 2011 at 03:30:51 AM EST


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