Short answers to long questions

At this perilous juncture, there\’s not much to be gained from saying that monetary union was always a daft idea. Nor is it helpful to bemoan the fact that the architects of the single currency left the edifice half-finished when they provided Europe with a central bank but not a finance ministry. The question is whether Europe\’s policymakers can cope with the powers and institutions they currently have.

No.

And to go on to provide a long answer.

Within the current rules there is no way out.

The ECB is not allowed to mop up bonds in the market at a discount (it can purchase new bonds, can take old as collateral) then cancel them. Countries are not allowed, under the current rules, to default. They can\’t leave the euro. There is no currently legal method for shipping a few hundred billion € from Germany to the periphery.

Finally, the ECB is not allowed to monetise the debt: print money until inflation makes it all go away.

There is no way out under the current rules: which means that at least one of the current rules will have to be broken.

The sensible way is default and exit from the euro for those who cannot deal with being in the euro. An attractive option is for Germany, Austria, Holland and perhaps bizarrely, Finland, to leave the euro themselves (although I have a feeling that the \”southern\” euro left would pretty quickly break up).

The not sensible way is to try and create that fiscal union that is necessary in such a single currency area. No, not just bewcause I\’m against there being a fiscal union: but because I doubt very much that there\’s actually time for this to happen in.

Similarly, monetising the debt would help but then we all know that this takes 12-18 months to work through the system: too long.

Starting from here, with the current legal structure, no, there is no way out.

17 thoughts on “Short answers to long questions”

  1. “there’s not much to be gained from saying that monetary union was always a daft idea”

    Not for the writer there isn’t. Nor for a paper that always supported the euro project and wanted the UK to be part of it.

    But for those of us who always said it was a daft idea, there’s plenty of reason for saying so as loudly as possible now.

  2. Even if the Federal Constitutional Court (supreme court in US terms) allowed Angela to sign up to fiscal union it would be political suicide.

  3. “The sensible way is default and exit from the euro for those who cannot deal with being in the euro.”

    That may be sensible – but is it practical? I worked on changing systems ahead of the possible UK entry into the Euro – there was an 18 month lead-time and that was way too short. Think bank accounts, ATMs, vending machines, petrol pumps al to be converted … and that’s just the technical side.
    Tell me the Euro I’m currently getting paid in will be replaced next Monday by a volatile drachma and what am I going to do? If I’m selling into your country what currency am I going to want paying in? If I’m a currency speculator – how am I going to bet with your new currency? If I’m a shop-keeper will I have one price for my goods or two?

    Pulling out of the Euro even at long notice doesn’t seem practical – still less at the timescales we’re presumably thinking about here.

    Pete

  4. It might be hard for countries to pull out of the Euro but this just demonstrates the risk of enabling politicians to indulge in such policies rashly or on theoretical grounds. Any policy that from the outset is obviously going to be practically difficult to reverse should be subject to the most detailed scrutiny. Almost all EU law is immensely difficult to reverse which in itself is a warning about being in the EU, particularly as EU laws are easy to make (going in one direction of ever closer union was perhaps defensible when it took unanimity to progress that – when even large minorities have no veto and no ability to reverse measures in the future it’s terrifying).

  5. There is a further option – actually have and enforce rules on government debts. Of course it’s too late this time around, so one of the rules will get broken.

    As for Greece leaving the euro, I suspect political pressure might force them out somehow, but then there will be advance warning (or at least advance strong suspicion) rather than an overnight conversion and closure of all banks for at least several days. I doubt Greece would leave voluntarily as they would be in not much better a position to borrow in redenominated drachmas than in euros. To maintain things they would need interest rates that would kill their economy, let alone prove hard for the government to swallow, and they would be cut off from the ECB and others currently manipulating their rates downwards. This is not to mention the problem of cross-border contracts. What would happen to Greek-owned money in other eurozone banks? What about Greeks with mortgages from other banks?

    I think blaming the situation on the euro is only to see about a third of the picture. Without the euro, a mass of competitive devaluations, defaults of all sorts (sovereign and otherwise) would already have played merry hell with the European banking system for the last 3 years. We have to go through hell one way or another, the euro just means we will find a different way through.

    If politicians are capable of learning lessons from this, it should be that deficit spending does not work to revive an economy. It tends to tie up resources that would be better doing something else. Probably better doing nothing than destroying wealth which is what they have been doing. Governments have to work counter-cyclically anyway, there is no point compounding the problem.

  6. —–Tell me the Euro I’m currently getting paid in will be replaced next Monday by a volatile drachma and what am I going to do? If I’m selling into your country what currency am I going to want paying in? If I’m a currency speculator – how am I going to bet with your new currency? If I’m a shop-keeper will I have one price for my goods or two?—-

    PeteB

    The ship is burning, and the sea is cold. Jump or don’t jump?

    The problem is that all choices are bad. Jumping into the cold sea will at least offer the hope of living, whereas staying on the burning ship is sure death.

    Our Greek friends need to jump.

  7. Piss on the Euro.

    Fiscal union=political union=the hermans support the rest. They may follow most orders but that is a bridge too far for most of them. I want the Euro destroyed followed by the EU.

  8. Don’t forget that the German people didn’t want to give up their precious Deutche Mark and replace it with the Euro.

    This was the EU price (mainly the French) for allowing reunification of East and West Germany and in the heady days after the fall of the Berlin Wall, Chancellor Kohl managed to push it through.

    However, Chancellor Merkel is a different matter entirely, coming from East Germany and having a deep (but not fundamental) cynicism towards the collectivists.

    I doubt that she will actually move against the Euro, but when we reach the ‘crunch point’ of either continued support for one or more of the PIIGS or allow default / exit, I suspect that Frau Merkel will just shrug and say “Sorry, under the terms of the German Basic Law, my hands are tied”.

    In this sense I suspect that the refusal of Germany to provide continuing support to the PIIGS will inevitable result in either default or withdrawal from the Euro, probably both.

    The new financial stability mechanism is too weak and too far off (2013), perhaps purposefully so as it seems to me that despite the huge numbers involved this is about being seen to be doing something so that they don’t actually have to do anything.

    Greece will fall and as the domino’s collapse, so will Ireland, Portugal, Spain and perhaps Italy.

    Just like after 1945, we will have a redrawing of the map as the Eurozone contracts. This is not a question of if, but a question of when.

    People talk about the creation of a Euro Nord and Euro Süd, but this is just a pure fantasy (although no more fantastic than the Eurozones current boundaries), but it is unlikely to happen as it requires positive, drastic and cruel action on the part of France, Germany, Netherlands and Austria who would be the main participants.

    Germany has not gone through 60-years of national rehabilitation to stick a knife into the PIIGS.

    Germany is trying to find a middle ground so that they can be seen as being both ‘Good Europeans’, but not at the risk of economic and political suicide.

    They will Karlsruhe and the German Basic Law to avoid further significant interventions, in the hope that they can build up the pieces after the current crisis has peaked.

    Overall, I think the Germans like the idea of the Euro as it acts as a counter-balance to their balance of trade and provides a necessary downward momentum on the Euro.

    However, any new Eurozone settlement will have to be along German lines if they are expected to fund it.

  9. “there’s not much to be gained from saying that monetary union was always a daft idea.” Yes there is: I can crow “I told you so, you fucking fools” again and again and again.

  10. “there’s not much to be gained from saying that monetary union was always a daft idea.” Yes there is: I can crow “I told you so, you fucking fools” again and again and again.

    Personally, I’m thinking about having t-shirts printed.

    :O)

    Tim adds: If so, get the quote right. It’s “I fucking told you so, you fucking fools”.

  11. P.P.S. I’ll just pop this here so that Google can find it more easily next time.

    According to Martin Amis, Conquest had a tart answer for his publishers
    when it came to picking a title for an updated version of his classic work: I
    Told You So, You Fucking Fools. (“I may have said that,” the historian
    concedes, “but I didn’t say that to my publisher.”)

  12. Does anyone think there wouldn’t be some form of bailout euro or not?
    Greece not paying the banks it owes money to is one issue. The prospect of some month coming along when it doesn’t pay its police, teachers, and tax collectors is another. I don’t believe for a minute, even if Greece wasn’t in the Euro, or even in the EU for that matter, that they would let the place collapse into civil chaos and shortly thereafter military rule.

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