Willy Twatton again

In fact, the existence of the euro has, until now, been a bulwark against disaster. Suppose it had not been created and that the financial crisis in 2008 had broken over a Europe with multiple floating exchange rates and no European central bank – the eurosceptic utopia. The Irish, Portuguese, Greek, Spanish, Italian and French banking systems would have stood alone and they would have collapsed in a domino effect, interacting with the mega-crisis in Britain and the US. Even some German banks would not have been immune. There would have been a 1930s-scale slump, the break up of the EU and a rise in beggar-my-neighbour devaluations and trade protection.

Err, no Willy, no.

Leave aside, if you like, that if the euro hadn\’t happened we wouldn\’t have had the Irish and Spanish property booms, the Greek drunken sailor impersonation with the borrowed money. Just forget that we wouldn\’t be in this situation at all.

So, what would have happened if we had had all that without the ECB, with all those independent central banks and currencies? Well, each central bank could print as much money as they needed to backstop their banks and there wouldn\’t be a crisis would there? A lot of inflation, yes, but not this crisis.

You know, everyone could have done what the US and the UK have done: printed their own currency because they still had their own central bank.

I don\’t say it would have been pretty or even enjoyable but it would have been vastly better than what we\’re about to get.

9 thoughts on “Willy Twatton again”

  1. So in summary, the less integration between the banking systems the more interaction there is supposed to be in a crisis?

    Up is down and right is left

  2. Not only that, but each country could devalue their currency as much as they want, reduce interest rates as much as they want and generally take whatever monetary measures they need to take to sort out their economies. As the UK does, of course. Without that capability, all the EZ countries have to manage economic problems is fiscal policy, which is well-nigh useless when their monetary policy is being externally controlled and heading in the wrong direction. The Euro has been an unmitigated disaster, the ECB’s inept handling of monetary policy has made matters worse, and the total lack of any sort of credible political leadership in the EZ makes it impossible to sort out any of the mess. Hutton is utterly clueless.

  3. I think it’s extremely naive to assume that with no euro the German and French commercial banks would have not had considerable exposure to Greek public sector debt. And since I assume these banks are still marking to market, they are booking their losses at a similar rate to that which they would be doing under the alternative scenario of monetization and drachma devaluation.

    The main difference the euro makes is – now the ECB is buying up this junk paper, to stop the commercial banks falling over and all hell breaking loose. I don’t believe for one millisecond that the Bundesbank would not be doing the same for a 2011-no-euro scenario.

    Creditanstalt was brought down partly by a run from foreign creditors – no euro was needed to have an international banking crisis then, and none would be needed today either.

    Interest rates schminterest rates. It was too low rates for too long that gave us this shit property bubble in the first place. Everyone had to follow the fed (yes, Ireland and Portugal in a 2011-no-euro scenario would have had to do that as well). And if 1.5% is a drag on the economy and desperately has to be cut, then we are well and truly fucked and it hardly matters which way we go down.

  4. Hell, even the Swiss National Bank is now effectively monetising Greek and other eurozone bonds. So they’ve worked out it is in their interests to effectively donate several billion francs to overindebted foreign governments. They’ve effectively joined the euro until further notice.

    This demonstrates that national sovereignty is always ultimately limited by reality. A currency union doesn’t change that fact.

  5. Must be playing merry hell with the Swiss Franc’s 40% gold backing. Means they have to unwind very fast when the gold price falls.

  6. JamesV – I’m not saying there couldn’t be a major banking failure without the euro. I’m taking issue with Hutton’s suggestion that the Euro PREVENTS banking failure. It doesn’t. And it’s quite possibly caused the one that’s facing us now.

  7. It neither prevents nor causes. The cause of any banking collapse would be (aside from the primary cause of too much debt on one side and too much investing in the wrong thing on the other) the short-sighted setup of the ECB, which is even now exceeding its powers by acting as lender of last resort to commercial banks. That should be its primary, indeed possibly its only, function.

    If Greece (or anyone) falls over, the ECB has to provide unlimited liquidity to any bank that needs it, or the financial system will sieze up and you could, quite literally, have 90% unemployment overnight, people starving while food rots in the fields. That needs to not ever happen, and for that the ECB needs to be able to make a decision within 10 minutes of receiving a call from a bank saying they are 11 minutes from running out of operating funds.

    You can then, having ensured a liquidity crisis doesn’t actually usher in the collapse of civilization, sort out who pays for the mess at your leisure. For a big sovereign default, this would have to be a mix of creditors, other sovereigns, and the ECB (printing money). A bust sovereign is bust and can’t pay. Being shut out of credit markets indefinitely provides adequate moral hazard, I don’t see the point in imposing Versailles on anyone.

    For the record, I’m wrong about the CHF being gold backed – they canned that some years ago.

  8. There are several stories running here and it is important not to confuse them. Iceland, Ireland and Scotland all presided over bad banking practices such that the state ultimatley had to step in. Their banks all had access to cheap wholesale market capital facillitated by the savings glut in Northern Europe that led German Banks in particular to transmit a “too low” cost of capital across the euro zone. Greece is a state problem. It is insolvent and needs to impose the haircut currently priced-in onto bondholders and (maybe) leave the euro. Italy and Spain are not insolvent, but have liqiudty issues refelcting the fear and paranoia that has emerged due to the dreadful handling of the other issues. The fear is of an unravelling of the licence to print money post the creation of the Euro. The existence of the euro removed the currency risk in owning higher yielding greek, Italy, Portuguese and spanish bonds, with the twist that as a German saver you got peripheral high nominal yields but only faced domestic inflation rates. For over a decade northern european savers played this trade, picking up a high yield and ultimately a handsome capital gain as the yields converged downwards. This could not have happened without the euro. It is fear of this unwinding that has led the Germans to switch back into their “domestic” bond market. So no Willy, the Euro created an illusion of stability while actually generating a massive mis-allocation of capital.

  9. The Swiss franc doesn’t have a gold backing of 40% anymore. I agree with the rest of James’s comment though.

    I’d note (for the hundreth time) that the Tim prescription of print money and print money again is not the pain-free remedy he seems to think. But statism does have its benefits.

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