I always said it would end in tears

There is only one conclusion to be drawn from all this; though the short-term costs would be profound, Spain must leave the single currency.

Spain is damned if it leaves, but damned for eternity if it stays. Eurozone policy as it stands offers no plausible way back to prosperity.

16 comments on “I always said it would end in tears

  1. Let Germany leave. She has benefited most from having low interest rates in 2001-2006 and a weaker currency which has done wonders for he exports.

    Also, it’s easier also to leave a currency union from a position of strength rather than a position of weakness, i.e. you avoid a run on your own banks and with German efficiency, the Germans would probably be better at organising the switch over to a new currency than the Spanish.

  2. I’m guessing that we have at least 2 more years of the Euro crisis to go. The Euro was always a political project and is still supported by all of the political elites. It is going to take a politician to break away from that consensus in order to get to the other side of this crisis. Personally I think that break will happen in Italy, but not for a couple of years.

    Mario Monti has to call an election in 2013 and has already said that he has no intention of putting himself to the voters. Give the anybody but Bellesconni coalition that emerges a year or two to fall apart. After that Silvio will be back, and he will be pissed off with the Euro elites. He’s mainly going to pissed off with them because they forced him from office, and therefore his taxpayer subsidised bunga bunga parties, but he is going to be pissed off. They are therefore going to find getting him to screw his voters in order to protect their project much less easy. Especially since Italy does have an escape route of doing the Full Argentina by defaulting and going back to the Lira. Italy has a primary surplus so being locked out of the debt markets after the default does not really matter so much, and the Lira would loose a shed load of value making their exporters competitive again. It would also mean that anybody who was in on it before it was announced (for example a certain billionaire media tycoon) would have an opportunity to shift their money around and pick up some really good assets on the cheap.

  3. That primary surplus is why Italy isn’t a problem and has no interest in leaving.

    As for Spain, Greece et al, I have been asking for years for an explanation of how everything gets better after default and exit, rather than just default, and still haven’t heard one. There seems to be some belief that devaluation will give such a boost to the Feta export market that they will be able to continue borrowing in their new currency (which they have printing presses for) and continue living the lifestyle of the first 10 years of the euro era – i.e. consuming in excess of production.

    This is not the case. Both countries will run something approximating to a balanced budget within the next 5 years. Either the government will achieve it, or the markets will achieve it with the countries staying in the euro, or the markets will achieve it with the countries leaving the euro. That there is much difference between the latter two options is reminiscent of the fallacy that austerity is bad because it reduces GDP. True, but it reduces unwanted and unaffordable production, which is good. Devaluation makes you temporarily and partially cheaper, it’s an overblown benefit, and arguably no benefit as it puts off indefinitely the economic reforms these countries desperately need if they want to become richer.

    Be clear, neither country has Japan’s creditworthiness so this has to end, voluntarily or otherwise, before too long.

  4. @JamesV

    There are no winners in austerity. Devaluation creates winners and losers. The winners are those who make/grow and export. The losers are those who are affected by inflation that will result because Greece cannot make all it needs internally. That is another reason why Germany leaving would be better – the rest of europe will see a devaluation but inflation may be suppressed since together, France, Spain and Italy can probably make and grow most of what their inhabitants need to live.

  5. @JamesV

    Italy is on the wrong side of 120% debt to GDP, and that number is getting worse. The Italian state has a primary surplus, but a deficit once debt repayments are factored in. They are having to borrow increasingly large amounts simply to keep up the payments on the debit they already have. The fact that it is in a compound debt spiral is why it needs to default, the primary surplus only means that it can.

    Italy has also been loosing competitiveness ever since it joined the Euro. This is one of the main reasons why they have had barely any growth since joining the Euro, and so why it has accumulated so much debt in the first place. Devaluation would end that at a stroke, and moving to a floating exchange rate relative to their main trade partners would mean that they would not end up back into the same position that they are now. Hence why it needs to leave the Euro.

    As for Greece: devaluation would attract more tourists, because it would make holidaying there cheaper. More tourists bringing their money in is identical to more things going out. In both cases somebody resident in an external country is giving their money for a good or service from the country in question.

  6. @Chris, sure Italy has to default, but they don’t have to leave the euro to do so. Greece doesn’t either (indeed it notably didn’t leave the euro last time it defaulted) but there is, I concede, an argument that leaving would make things easier for them.

    @Freddy, the winners in austerity are the people who no longer have to pick up either the tab, or the pieces, in future.

  7. As someone who lives in Italy since 10 years now I do have to take odds with the notion that Italy’s lack of growth is entirely due to the euro (although it may have contributed). Italy’s real problems are:
    - widespread marxist romanticism
    - the belief that people have the right to work
    - labour regulations making it impossible to fire unproductive or not needed workers
    - bureaucracy which mainly exists for its own sake
    - high cost of labour
    - a slow and politicised legal system
    - a large internal divide in productivity between the north and the south
    - a political system making any kind of reforms almost impossible
    - powerful unions
    - powerful professional associations (e.g. journalists, lawyers, judges, etc)
    - politicised schools
    - too many laws

  8. As someone who lived in Italy for several years I concur entirely with Emil. Sure the euro causes problems, just like being tied into the pound creates problems for the north of England. But there is a tendency to blame the euro for all things going wrong in euroland and to prescribe its breaking up into national units as some kind of panacea. In reality that would mainly replace some current problems with a different set of problems.

  9. What worries me is that political elite of both centre left and right have tied themselves to the Euro.

    If it fails and especially if it fails catastrophically, we can expect the nutters of left and right to get in. I fully expect an insane proto Communist government in Greece when this is over – battling it out with Golden Dawn.

    I’m worried about a total collapse in credibility of the centre just as economic circumstances make really hard choices inevitable. The last time this happened was back in the 1920s. That was really not very pleasant.

  10. “replace some current problems with a different set of problems”

    Indeed, but those would be problems the Italians etc themselves would have to deal with, rather than (as they see it now) being dictated to by the Germans.

    There’s pride and identity involved in this as well as cold economics.

  11. “Eurozone policy as it stands offers no plausible way back to prosperity.”

    Need I point out that this is merely another variation on the unvoiced truth: this is a political crisis, not an economic one.

    It’s easy enough to put forwards a variety of simple solutions to the economic problems of the Eurozone, but the question is whether there is the political will to do so.

    It’s already obvious that if Germany had simply stumped up the cash for a proper bail-out a couple of years ago (and also put in place proper structural reforms), they’d be better off by now than they are.

  12. @Emil, above you describe the problem with modern western democracy, where people have the ability to vote themselves ever more pork.

    Where it will all end, no-one knows; it’s our misfortune to be of the generation(s) which will find out.

    That said, we’ve been – and are still – incredibly fortunate compared to just about egvery human being who has ever lived. If only we knew it.

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