By Gonzalo Lira, a novelist and filmmaker (and economist) currently living in Chile
Critics of free-market capitalism, especially of the Marxist persuasion, love talking about its “systemic contradictions”. Especially European critics—they adore using that steam-roller phrase: “systemic contradictions”. It sounds so thrillingly lapidary, so discussion-ending, so terminal. Nothing can escape its grasp, or the base indignity of it. “They will fail because of Systemic Contradictions!!”—like a cross between a nasty form of cancer, and some unmentionable venereal disease. And of course 100% fatal.
It’s ironic that European critics of free-market capitalism love that phrase—because it aptly describes the Europe of today, and the European monetary union that was hailed as the way of the future.
I would argue that, with the way things are going, it’s Europeans and their Eurozone which will soon be relegated to the dustbin of the past. Precisely because of its “systemic contradictions”.
The end of the Eurozone will be a tragedy—and I would argue, we are currently witnessing it.
Let’s review:
The Eurozone was born out of the Common Market, formed back in 1958, to the west of the Iron Curtain. In 1990, the Berlin Wall collapsed, so by 1992, a reunified Germany was effectively married to France and Club Med. The rationale was, economic union would beget political union, or at least political peace. In 1999, the Euro was born—a common currency for the members of the Union. Another step in European integration.
So far, so good.
However, though a series of complicated methods were used to control the debt, deficit and inflation levels of the various Euro-economies, one fact remained: Every country of the Euro had the same currency, while every country kept the right to float its own debt.
And of course—as we now all know—each country’s debt was assumed to be backed by the rest of the Union, when in point of fact, it was not.
So what does this mean?
Well, the shadow of the Euro makes it hard to realize what we are talking about. The Euro makes it appear as if we are dealing with one very large economy—Europe—while each member state’s fiscal problems could be thought of much as we think of, say, Mississippi’s fiscal problems in relation to the United States in its entirety.
From this way of looking at the Eurozone, the natural inference is to think of Greece as a small part of a larger, healthier whole. A part that is going down the drains, true, but it won’t bring the larger whole down with it.
But this is a false inference. It’s an easy logic trap to fall into, because the Euro as a currency papers-over the differences within the Eurozone. The Euro makes the Eurozone look like one big happy family, but with a black sheep named “Greece” that has to be sorted out.
However, this is not the case. The Eurozone and the European monetary union is actually several different economies at vastly different levels of development, which so happen to have a common currency—but they have nothing else in common. Because—unlike in the US—in the Eurozone, each member state can issue its own debt. Therefore, each member state can borrow its way to equality of wealth, instead of earning it.
Looked at this way, it becomes obvious that the Euro isn’t a common currency—rather, it is a very complex fixed rate exchange system.
In other words, a currency peg.
So instead of thinking of the Euro as €, common to all Eurozone countries, it would be smarter to think of the Euro as GR-€, or FR-€, or IT-€, or SP-€, and so on—a different Euro for each member economy, all of which happen to be fixed at a one-to-one parity.
Now it becomes obvious what we’re looking at—when we look at Europe today, what we’re really seeing is Latin America circa 1980.
Thinkit: A bunch of countries in Latin America fixed their exchange rates to the US dollar; at different times and for vastly different reasons, but for the present discussion those issues don’t matter.
At first, this dollar-peg worked like a charm. The Latin American countries found themselves with a false sense of prosperity, bought and paid for with cheap dollar-denominated debt—until the inevitable crash of ’82. (In Argentina, it happened again in 2001—those gauchos never learn.)
The dollar didn’t suffer because of the fixed exchange rates—it was all the poor saps south of the border who suffered, and greatly at that. Latin American debt suddenly had no buyers, and all the previous debt had to be paid off. With no incoming dollars, that dollar-denominated debt broke the Latin American economies.
If we look at Europe with Latin American lenses, we realize that the Eurozone is in exactly the same position—it’s a bunch of over-indebted countries with their currency pegged to, of all the economies of the world, Germany. Because the role of the US dollar in this fixed-exchange rate system is today being played by the German Euro—the GR-€. And it’s the deflation of the GR-€ which is absolutely killing the Eurozone.
Going back to the Latin American example, at least those countries had the option of ending their dollar-peg and floating their currencies, once their debt levels broke them.
But the Eurozone members can’t do that! Or rather, they can break away—but they won’t break away, until it’s too late and the damage has been done. Various European-wide subsidies and programs and wealth-redistribution schemes—otherwise known as bribes—will keep the countries all tied up for a while. For quite a while, in fact, human nature being what it is, and hope always being the last thing to die.
Each day the fixed exchange rate continues, though, is one day closer to complete Eurozone collapse—which will be a tragedy. Because European prosperity insures European peace, from the Urals to the Irish Sea.
But by the time they all realize that the GR-€ is destroying their economies—much like the dollar-peg in ’82 trashed the Latin American economies—it will be too late. The European Union will be wrecked, much as Latin America was wrecked in ’82. And that crisis ushered in all sorts of foolish craziness in many many places.
God Alone knows what will happen once the Eurozone is wrecked.
We are currently watching this wreckage—we just don’t realize it. Greece is not an aberration—it’s not even the canary in the coal mine: It’s the beginning. The GR-€ is wreaking havoc on all the other countries of the Eurozone, starting of course with the weakest, Greece. But it won’t end there—far from it. The GR-€ will take out, in no particular order, Portugal, Italy, Spain, until it eventually hits France.
Then it’s over for the Eurozone. Because once France decides to break away, there’s no more Eurozone—and possibly, no more political stability.
The single most important reason for the collapse of the Eurozone is that each member state was allowed to issue its own debt. This ability, coupled with the fixed-exchange rate otherwise known as the Euro, is the core “systemic contradictions” of the Eurozone.
Right now, we are watching the Eurozone in its death spiral. And I’m afraid that all the talk of IMF bailouts of Greece and whatnot aren’t addressing the key problem: Sovereign European debt.
If somehow, all European debt could be centralized, then maybe the Eurozone would survive. But if the Europeans lack the political will to sort out Greece now, then such collectivization of European-wide sovereign debt is impossible.
So that mean, the Eurozone death spiral is inevitable. And we are now watching it unfold.
ADDENDUM:
Today, Sunday, April 11, it’s just been announced that Europe has prepared a €30 billion ($40 billion) bailout of Greece.
Good for the Europeans—crisis in Greece apparently averted.
However—will the Europeans bail out Italy, Spain and Portugal, when their time comes? And if they do, how much will they shell out? Because €30 billion won’t be enough for any of those three—try €35 billion for Portugal, €50 billion for Italy, and €75 billion for Spain. At least.
I’m just wonderin’ . . .
ADDENDUM D’OH! (as Homer Simpson would call it)
Reuters is reporting that a “senior [Greek] official” said that, over the next three years, Greece will need an additional €40 billion—this is, on top of the €30 billion that were pledged today by Europe and additional €10 by the IMF.
In other words, THIS YEAR’S bailout for Greece is €40 billion, while 2011 and 2012, they’ll need an ADDITIONAL €40 billion.
That is, €80 billion ($108 billion) to tide Greece over until 2012—just Greece. Nobody else. €80 billion to salvage an economy whose nominal GDP for 2009 (according to Wikipedia) was €250 billion.
If I’m lyin’, I’m dyin’—see the Reuters article for yourself.
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If there was really a systemic problem with the global economy, the MASTERS Golf Tournament would not be underway in Augusta, GA.
Totally. But isn’t it eerie to hear in the background the voice of Tiger’s dad tell him how to swing???
Well, Phil Mickelson’s (winner) wife will be able to afford medical care for her breast cancer. Pity for the rest of us; heaps of ashes and incurable infections on us all.
All deceptions involve a diversionary action.
Deception is the strongest political force on the planet.
There is one similarity here that both situations exhibit broken systems, but not only on the Latin American or EU side but also all over the world of international finance. While the European system is broken, so is every other system. Go get the Waaambulance. Chinamerica isn’t working, Japan makes US and EU levels of debt look like a pittance.
Latin American debt was approximately 50% of GDP on average when the debt crisis happened. You don’t think there was a concerted run on the Latin American economies by international capital markets. In the case of Latin America it was the US money center banks that were heavily exposed, recycling petrodollars into Latin American debt. These US banks were basically insolvent, but nothing happened to them they got a “regulatory forebearance” and Latin America countries had to default and put their poor populations through hell by way of SAPs.
Whereas in Greek debt it is EU banks that are heavily exposed. Since LDC we have pretty much thrown bank leverage requirements out the door. German and French banks carry a combined $119 billion in exposure to Greek borrowers alone and more than $900 billion to Greece and other countries on the euro-zone’s vulnerable periphery: Portugal, Ireland and Spain. So who exactly is the EU bailing out their overleveraged French and Germany banks who are heavily exposed to Greek debt or Greece?
Latin American states were predominantly Authoritarian they had high levels of inequality and concentration of capital in the hands of the few. The European countries have managed to afford their citizens a standard of living that most Latin American states would die for. With this type of concentration capital flight on the part of the Latin American elite was rampant. Internal capital flight isn’t going to be a issue with Greece for obvious reasons, EU currency. In addition, if Greece got tax evasion under control they could almost halve their deficit. Greece’s revenue from income tax was 4.7% of GDP in 2007, compared with an EU average of 8%, add that is only income tax.
European states are currently close to 100% debt to gdp. Japanese is close to 200%. Californian debt to GDP is 7% at the end of 2008 according WSJ. California the 8th largest economy in the world, has a bond rating two steps lower than Greece. They were trying to call California a failed state.
What do you think this means. We are playing russian roulette, and there isn’t one bullet in the barrel. The global finance system and capital markets are like the salem witch trials. It is like watching 6 year olds play soccer they run from one part of the field to the other. But you want to tell us that the problem here is the EUs very complex fixed rate exchange system. What about the piss poor banking system and terrible regulatory structure that let all this happen? The Latvian crisis was just another hack job by international banks. Sharks are just going to keep feeding, general populace will just keep giving blood.
Californian debt to GDP is 7% at the end of 2008 according WSJ. California the 8th largest economy in the world, has a bond rating two steps lower than Greece. They were trying to call California a failed state.
Shouldn’t California’s share of the US Federal debt show up somewhere in this calculation? The point of this blog post is to call for EU level debt and so it is important to point out that then not only would Greece have its own national debt to deal with but then also an EU level debt to service.
“Shouldn’t California’s share of the US Federal debt show up somewhere in this calculation? The point of this blog post is to call for EU level debt and so it is important to point out that then not only would Greece have its own national debt to deal with but then also an EU level debt to service.”
No, I dont think so and heres why. Californias state generated debt is truly a debt that can be paid off by raising state taxes(not only by raising the rate but by raising state GDP and keeping the rate constant). The state owes money and cannot create the currency to pay it off.
Their “share” of the federal debt is actually an ASSET. Each Californian owns a percapita share of the federal debt that is domestically held (which I believe is over 2/3rds). They could use the federal debt assets to pay down the state debt liability if they wished. Problem is the bonds are not held collectively but by a few Californians (and Oregonians, Nevadans etc etc) It would be far from “fair” or “right” to put “their portion” of the federal debt onto them without first admitting 1) their portion of the federal debt is held by very few Californians 2) Those Californians actually look at their US debt as an asset.
Try asking those Californians to liquidate their Treasuries so they can pay down their states debt? Aint gonna happen
I think the comment was about an allocated share of the US public debt short position (by state population as % of US population, or state GDP as % of US GDP, for example), not a redistribution of long positions in that debt held by certain mostly wealthy Californians.
Interesting thougth process.
What the author is saying is that each state in Europe can issue debt that it doesn’t have to pay back. In other words, Greece does not have to balance a budget. But California does have to by law.
Law/Schmaw – Everyone says this about the states, that they have to balance their budgets by law, but it is not in the Federal Constitution. So if it is in the state constitution, that can be changed, even by judicial fiat, constitutions being living at all that blah, blah, blah. If California wanted to lever up it could certainly do so. The only constraint is the one that Greece faces, that it would possibly have to pay a penalty rate. But then it could always secede and issue it’s own currency and modern monetary theory, aka Cheneyomics, argues that this would be its best course.
I’ve heard this argument many times, but really, it’s based more on perception than actual data.
The economies of the Euro member states are actually far more closely correlated than those of US states.
For the last couple years of percentage GDP growth, there’s about a standard deviation of about 1.3-1.7 between Euro member states. Within the US, there’s a 2-2.5 standard deviation between the Gross State Products.
I’m not sure I understand: “Because—unlike in the US—in the Eurozone, each member state can issue its own debt.” Of course each US State can issue debt, just look at California.
At the end of the day, there’s really nothing magical about a currency that can’t be done in an equivalent (and probably more fair) way with tax policy and/or default. Sure, a country can inflate its debts away (essentially a very regressive tax on wages and savings).
Well, that’s cast rather a gloom over the
evening, hasn’t it?
Actually, it’s the contradictions
inherent to socialism. There is a large
politically empowered class of government
employees who all would like to show up
and make their powerpoint slides for a few
hours and then go home to their wives and
families and live happy lives. These guys
all feel entitled to their lifestyle and
they have the political power to make it
happen.
The creation of the EU
prevented the earlier collapse of
western European welfare states by
providing a way to keep the money coming
in a little longer. Eventually the cost
of government exceeds the ability to fund
via taxes, and then due to the exponential
nature of borrowing, the ability to fund
government via borrowing ends. This
is happening right now in Greece. In the
end the only way to keep it all going is
via generating more and more money.
Your word “eventually” reminded me of Margaret Thatcher’s famous phrase:”The problem with socialism is, that you eventually run out of other people’s money”. BV
Ahhh, the commentary I’ve been waiting for! Someone who recognizes the deal made this afternoon for what it is! By the way, Simon Johnson claims – here: http://baselinescenario.com/2010/04/06/greece-and-the-fatal-flaw-in-an-imf-rescue/ – that Greece may need €150B, not €30B.
You will note that all Euronations contribute to the loans to Greece, yet there is no talk whatsoever of the problems in Spain, Portugal & Ireland. Yes, Trichet mentioned ‘deflation’ in Ireland somewhere, but Trichet might as well leave with pension – this political intervening finished the ECB as an independent institution.
The crisis of 2008-09 has been averted by moving the risk form the banks and economy to the sovereigns. If one sovereign fails won’t they all fail? There really is no way to stop that once it starts to happen, right?
Sovereigns don’t fail. They default on their debts, which will lead to the banks failure.
But honestly, who cares?
I for one will be very happy to see the EU collapse. On the handful of occasions when the elite was forced to allow the ordinary public to vote on whether they wished to see further integration, they voted no. As a result the vote was either ignored or they were made to vote again until they got the ‘right’ answer.
The productive citizens of European countries are sick of funding a massive corrupt unelected bureaucracy in Brussels which destroys jobs and freedom.
“If one sovereign fails won’t they all
fail?”
I’m not sure what you mean by fail exactly.
I assume if Greece defaults, which
might actually be best for Greeks, then
what happens is that the other weaker
EU states will have trouble borrowing
money. That, and banks will get another
hole in their balance sheets. Is this
the end of the world? I don’t know, I
suspect life would go on, really.
Very well said.
What does fail mean, in the end? A state can’t fail as a private corporation can.
In the worst case, Greece will default on its debt either partially or fully. Which would hit the banks before anyone else.
A bailout of Greece is thus also a bailout of the banks that are Greece’s creditors.
The same is true for any other state that is endebted to banks.
I am not quite sure what to think about this article, on the one hand, the argument is not without merit, that there are vast discrepancies between the competitiveneness of various Euro nations.
On the other hand, I do not really see, how Germany is to blame. Giving up the Deutschmark in in exchange for the Euro was widely seen as the price for Germany to pay in exchange for agreement to German reunification, a point pushed and made an implicit condition, especially by my government, underscored by the “franc fort”(strong french franc) policy pursued by my government prior to monetary union.
How this whole scheme can now be considered a German scheme to exploit the rest of Europe is beyond me.
The article however does have a point, the time may have come to do what should have been done at the start of the Euro: only joining countries in a monetary union, that should have been together from the start. Instead of putting each individual country at the mercy of speculation, the idea might be to split the Euro in two, with a fixed perspective of reunification. Creating a Med-Euro and an Atlantic-Euro, with the Med-Euro being the successor to the Euro(i.e. the currency in which all debts will have to be paid), might be a solution affording the troubled countries an opportunity for devaluation without destroying the idea of a common currency. Every nation should be given a vote on which Euro they want to stick with for the next 10 years.
I was not implying that Germany deliberately exploited its neighbors—not at all.
What I am saying is, Germany’s deflation—produced by the slow-down—is pulling down the rest of the Eurozone.
Because the Euro is, as I argue, a complicated currency peg among the nations of the Eurozone, weaker and/or weakened economies—Greece, Portugal, Ireland, Italy, Spain, etc.—are suffering disproportionately because of the German-Euro’s deflation.
To infer from this that the Euro is some sort of “German conspiracy” is to severely misread my post.
Dear Gonzalo Lira, are you really serious?
“Because the Euro is, as I argue, a complicated currency peg among the nations of the Eurozone, weaker and/or weakened economies—Greece, Portugal, Ireland, Italy, Spain, etc.—are suffering disproportionately because of the German-Euro’s deflation. ”
Do you really belive in that statement?
Come one, wishfull thinking doenst work.
Of course you can argue that Club med had real interest rates low or even, briefly negative. But you must count a simple fact. Before the euro, the interest rates for Clubmed were very high. That was the first error. Some countries had a stimulus to the internal demand that created some bubbles. But in future, I bet, that external shock will not replicate again because the economies are more in sincronization with central Europe. The economic cycle for the Clubmed wasnt at same speed for others, especially France and Germany. However, with the more economic integration, the businesscycle will be more harmonic.
What is forget too is this: before the credit crisis, almost everibody believed that fiscal and trade defictis didnt count because the currency was common to all and the markets worked well with that belief. The discrepancies between the interest rates across eurosystem were very low. Even the monetary market believed that the risk was very low across several bond issuers. Now the market is working properly because the credit crunch cut the fantasy on free and cheap money.
Thats why just few understood the position of mrs. Merkel. She wants that every bond issuer, every cowntry, pay for their lending acordding with the market risk perception. Because the bail out isnt giving money. Is a gift to Greece gay time to implement economic reforms and change their behaviour.
Those who think that bailout is the first from a serie of news bailouts are completely wrong. Every cowntry can have help with emergency money but doesnt mean that can live forever with money that costs less than the market demands, acordding the risk perception. Those who think that this bailout is the firt of news bail outs, are completely wrong.
Of course a lot of voices are disapointed. Very disapointed because this bailout isnt the end of the euro. Too much concern with the euro is pure wishfull thinking. Is the secret desire of Europe failure that put disapointement in some voices. Sorry, chaps, but the euro isnt dead and is here to satay.
Bye, bye dolllar.
Dear Gonzalo Lira, I like to read your text but isnt so factual as I wish. Is more a text from who is disapointed because this isnt the end for €uro. I noticed your secret desire when you wrote this piece of your text:
“”Because the Euro is, as I argue, a complicated currency peg among the nations of the Eurozone, weaker and/or weakened economies—Greece, Portugal, Ireland, Italy, Spain, etc.—are suffering disproportionately because of the German-Euro’s deflation. ”
Isnt the €uro a complicated currency. Is your mind. Sorry. Its the plain true. because you mix wishfull thinking with facts. The proof is that you believe that Germany has deflation. But, my friend, deflation is falling prices. Generaly, persistentaly and in medium/long term. Are you seeing that in Germany, in the past ten years? If so, let me tell one thing: price stability is low volality in prices. Low volality, even with small rises or falls in prices. unless do you believe that deflation is having inflation under 2%.
Its funny reading some things here. But hey, the euro is rising a lot tonight agaisnt the dollar. As I said before, what others saw weakness I saw strength. But the dollar…
Good points PJM. The Euro is here to stay– everyone living in Europe knows that. Noone wants to go back to all those national currencies. Correction: Almost no-one.
The exchange rate is also very interesting to watch over the next few weeks.
Deflation is not falling prices—deflation is money-supply and credit-supply tightening. Falling prices are a RESULT of deflation, not a cause of it.
You yourself proved that my argument is valid and accurate of what’s going on—
You wrote: “Club med had real interest rates low or even, briefly negative. But you must count a simple fact. Before the euro, the interest rates for Clubmed were very high. That was the first error. Some countries had a stimulus to the internal demand that created some bubbles.”
Your key phrase is, “Before the Euro, the interest rates for Clubmed were very high.”
Exactly.
The Euro pegged all the currencies—just like the dollar peg did in LA—and allowed weaker and/or less developed economies in the Eurozone to go into massive, cheap debt. As my argument posits, the strong Greek-Euro allowed for debt in cheap German-Euros. Everything was fine, Club-Med had their party on borrowed money—until there was no chance to roll over the debt.
Now look what’s happening in Europe.
Your comment ties in with exactly what I’m saying—and if Europe cannot bailout ALL of Club-Med (which it obviously cannot), then the Eurozone, unfortunately, is finished.
BTW, I am not a cheerleader of a Eurozone crash—the EU is an important bulwark of stability in the peninsula. If it goes, we might find ourselves back to August, 1914—which I certainly wouldn’t want.
One thing is what I HOPE, another is what I THINK.
Dear Gonzalo Lira, as I said before, the ideology doesnt help a lot:
“Deflation is not falling prices—deflation is money-supply and credit-supply tightening. Falling prices are a RESULT of deflation, not a cause of it. ”
My friend, let me say one thing. What you believe is one thing, what is the reallity is another. Deflation is the contrary of inflation, and we allways talk about prices. What can cause the both fenomena is the money and his velocity versus production, but nobody could prove that relantionship. In the past, even with falling money supply and credit, the prices rose. But even if the money is the best important factor, deflation is allways falling in prices. Unless you can say too: therent exists the day aond the night, only rotation of the earth. Are you really tell me that we can change the meaning of the words because the mechanism that causes the fenomenum? Inflation is a fenomenum that come from inflate or gives air to be bigger. Deflate is the contrary. So, inflation and deflation is about rising and falling prices. This is the true meaning, not the what causes or we think that can cause both fenomenuns.
As I said before, youre mind is very complicated. try to be simple before to be complex, because later you can be confused about this kind of simple things.
You allways be confusing the things:
“The Euro pegged all the currencies—just like the dollar peg did in LA—and allowed weaker and/or less developed economies in the Eurozone to go into massive, cheap debt. As my argument posits, the strong Greek-Euro allowed for debt in cheap German-Euros. Everything was fine, Club-Med had their party on borrowed money—until there was no chance to roll over the debt. ”
It wasnt the €uro per si, it was the market that didnt believe that money was very cheap for the bond issuers, because, even rates discounts low, the money marked didnt gave the real cost of that money for the risk. That is the mrs. Merkel is trying to say but everyone dont listens, because their own motivations an ideology. Its was an error, not only by political decisors ans investors, who gave low risk to their debt when should be give more risk and demand more high interest rates.
The problem is looking for the €uro with ideology. I never read here nothing about the crude reality: it was the market the first delusional about fiscal and trade deficits. The mainstream economists did the same error, but I think it was the market who fails first.
Of course political decisors made some mistakes. When they lost the power to manipulate money markets inside the countries, they should use theirs powers, on the public finances, to do counter economic cyclic . The famous anti-cycles instruments. Nobody did because markets were wrong, the mainstream economists were wrong and even the economic agents were wrong. All are discovering that they were wrong and it was the credit crunch that told us the crude reality: strong internal demand without nobody working against that.
Thas why I said before and I still do: isnt Germany the problem. Is inside the countries that starts and ends the problem. The countries must use their powers to cut pro cyclical mechanisms. And is this that mrs. Merkel is trying to do, but almost everybody doesnt understands her position and blame her or Germany for the problems of the Clubmed.
But as I said before, the countries are more sincronic in their economic cycle and their decisions will be more acurate because they know on crude reality: no one inside Europe can manipulate the monetary markets to give ilusions about their problems. The political decisors must to make economic reforms to face the crisis in stead using the monetary policies to avoid problems.
Maybe for you or others, that isnt good. Too complicated, you said. No, isnt complicated. is simple: the Clubmed must uses his economic policies to improve the economy, not the monetary asteroids. And thays why the euro will be one of best curencies in the World. isnt manipulated by politicians.
In strange ways, the euro is gaining some caracteristics that the goldbugers asks for the end of the Federal Reserve and want the gold standard.
It’s not the debt, but sovereignty. (what those debt means, if the debt is fraud/legal or not)
There is pretty much one standard in the US. The legal system is the same. There is such think as federal crime and fraud if a state is doing something like Greece.
Well… just to be polite, let us all refer to Greece as a “subprime borrower”…lol
Vinny
EMU is not going to change as long as it benefits Germany to mantain an export surplus against other member states with a limited central redistribution authority. The various cohesion programs have failed to do much since they depend on many controls and require that each member finances internally up to 25% of the program. There are too many structural differences between the member economies. The ECB and all EU governments are implementing austerity programs and mantaining a high steady state un/under employment of productive resources following a neoliberal ideology of “fiscal discipline” that will only lead to unstainable levels of private debt. At this point member countries that have high external public debt should procceed to renegotiate and extend the maturity of their debt with a haircut. Otherwise, they should prepare to leave the euro and institute their nonconvertible free floating fiat currency, assuming that they will not continue to impose voluntary revenue constraints upon their fiscal policy.
ABC,
What exactly is Greece doing that applies to crime and fraud. Lets be serious.
Free market capitalism does not exist any where on the planet. It is a decoy mask for the gangsterism of the global wealthy ruling elite and their central banks who construct, own, and control world governments.
The Eurozone, the common market and the Euro are constructs created (against the will of the citizens involved) by the ruling elite to facilitate divide and conquer debt trapping the inhabitants so as to manipulate them and control them.
In the now almost totally dead vanilla greed period — where profit was the premier goal — the credit chains were used to exploit and extract profits and control resource consumption through favored corporations.
In the new pernicious greed period we are now in — where control trumps profit — the credit chains are used to create perpetual war in, and eliminate, the now superfluous under classes so as to create a two tier ruler and ruled world where the greatly reduced population of ruled are controlled by keeping them in perpetual conflict with each other. The herd is being thinned as we speak.
It is not a bail out. There should be no joy. Its an adjustment/delivery of stronger debt chains and a ramping up of the divisiveness.
Keep your eyes on Tiger’s balls and you will not notice the incremental pressure being applied to your own, nor will you notice the home you sit in watching the Masters go down in value as the deflection on the screen unfolds.
Deception is the strongest political force on the planet.
“Vanilla Greed’ period — ah, the nostalgia.
You have a way of putting things in sharp focus, which I appreciate. Not happy about the way things are, but yes — what makes most sense is that this is more of the IMF-type ‘medicine.’
Any chance that this bailout is NOT a LOAN? If it’s a loan, it comes with the inevitable tight-fisted austerity measures on the people. Just like we are seeing in the US where perps (banks) get free bailouts but then the people get told that Social Security is too expensive………
“That is, €80 billion ($108 billion) to tide Greece over until 2012—just Greece. Nobody else. €80 billion to salvage an economy whose nominal GDP for 2009 (according to Wikipedia) was €250 billion.”
For convenience sake, I suggest we round that up to the nearest trillion…
Vinny
Default without remorse / The 600bn€ question(~1/3 of German gvnt. debt)
I agree with the general idea of this article, there is however another side to the medal.
Every country would love to reduce its burden of debt(especially considering the latest BIS-report: http://www.bis.org/publ/work300.pdf?noframes=1), however there are very few countries that would be in a position which in enables them to perform a default(in relative terms, with regard to GDP in local currency) without upsetting the markets.
Germany(along with the Netherlands,Luxemburg,Finnland, possibly Austria&Slovenia) has the option of doing precisely that. If Germany by itself or in conjunction with some of the aforementioned nations where to leave the Euro, its currency/the currency of this group would appreaciate by between 30% and 50%, if the whole argument concerning the internal devaluation holds any water. Given the fact, that all debts of all European nations are currently denominated in Euros this looks like a win-win scenario.
A reduction of national debt in terms of (new) local currency from ~80% to just above 50% or even 40%, would even leave more than enough room to compensate for any shortfalls in terms of competitiveness(via the tax system), whilst giving all other European nations a chance to devalue.
In addition, with a commitment to rejoin the currency union once revaluation has taken place, this does seem like a win-win all around.
Hooray.
And thanks.
Because you could be dead right about all of it.
Which causes us to consider what comes next.
That is to say, to recognize the need to look at alternative strategies and methods for exiting the European Monetary Union.
An Exit Strategy.
First for the worst off, and ultimately for all.
Ought to have been taken into account in planning the creation of this new money power.
For those who joined, and lost.
Who is working on the exit strategy?
Somebody, I hope.
I am working on the “Euro Exit Strategy” (also known as “EuXS” and pronounced “You Excess”).
It works like this: I get in my new Lexus (sorry, Germany, but Japanese cars are so much better), I drive to Vienna, and exchange all my fiat Euros for freshly minted Austrian gold coins, which I then bring back to Greece and bury in the ground. Then I wait.
Vinny
Don’t forget to put your eye-badge on!
I have one more suggestion for today: let us change the name of the “Euro” to the “New Italian Lira”. And for convenience sake, let’s just call it the “NIL”…lol
Vinny
Don’t believe everything you read on the ‘i’nternet; otherwise, you soon will likely be ‘iConned.’
Please!
So, a sliver of welfare for the global oligarchy is being passed on to Greece. This can last much longer than you can remain a credible blogger.
Hey Felix, how is this guy a neocon? I thought neocons were for US world domination? Oil men and international bankers seem to get together in this NWO lust. The Euro would actually further the cause of fewer currencies and more control by the central banks. So, how is this author a neocon as he says that this NWO will, at least with the Euro, fail.
“they adore using that steam-roller phrase: “systemic contradictions”. It sounds so thrillingly lapidary, so discussion-ending, so terminal. Nothing can escape its grasp, or the base indignity of it.”
Wow, just for starters, let’s see some of the secondary effects of the “systematic contradictions” those pesky marxists keep talking about. Five centuries of war, slavery, conquest, genocide, and now, at the beginnig of the XXI century, global ecological devastation, etc. There is no need to be a marxist to see that a world with limited resources cannot keep feeding the unending thirst of the capitalist system to devour everything in its paths to mantain its own growth. But of course all that remains out of sight for such a committed neocon as Mr. Lira. But what is most interesting is that he starts his diatribe pontificating about how marxists are all wrong in their jugdement on capitalism, only to show, in the course of his post, that he HAS ABSOLUTELY NOTHING TO BACK SUCH A DEFINITVE STATEMENT. As for the euro zone, who ever said that THAT IS THE ONLY ONE ALTERNATRIVE TO A NORTH AMERICAN FORM OF CAPITALISM? (By the way, I’m not a marxist myself, but rather a middle of the road social democrat who see benefits and problems in both sides of the road).
Sorry, I meant this for Felix:
Hey Felix, how is this guy a neocon? I thought neocons were for US world domination? Oil men and international bankers seem to get together in this NWO lust. The Euro would actually further the cause of fewer currencies and more control by the central banks. So, how is this author a neocon as he says that this NWO will, at least with the Euro, fail.
Just keeping you up to speed, Gary. (har, har, har).Sorry for that unintentional laugh, but it just happened that your question brought to my mind something that Mr. Wolwovitz, or something, one of the neocons at the origin of the infamous document New American Century, answered when asked, after the fall of Wall Street, in Sept. 2008, what was all about. He said that anyone who thought that the U.S. would dominate the world in the XXI Century, that that was the idea of the aforementioned text, was out of his mind. What a change of heart, no? What I mean by that is no, Gary, the neocons are no more for world domination, it seems, they are all for saving their skins and their (ill gotten) gains.
I don’t know. They want the dominionist, Sarah Palin, to win, and were disappointed when she turned out to be a dud. But obviously some neocons are just trying to get the money. It was Wolfowitz, BTW.
A very interesting paper. However the present facts do not support the often repeated argument, ‘a currency union cannot hold without a debt/fiscal union’. This argument has been recently forcefully repeated by euro-integrationists who do not want to waste the opportunity of an ever-closer union that the present crisis brings.
Prior to the financial crisis, Spain had one of the healthiest public finances of the G20, with no deficit and a very low public debt. Ireland had decent finances as well. Greece did not. Thus reckless sovereign debt behaviour was not a common characteristics of the PIIGS. Their common characteristic was reckless debt behaviour, period. In Greece and to some extent Portugal, it was public debt. In Spain and Ireland, it was private debt (household and corporate, e.g. banks and construction).
A common European public debt would have done nothing to prevent Spain and Ireland to become PIIGS, as public debt was not one of their problems before the crisis (it has become a problem now, since (a) the collapse of the bubble economy has eviscerated budgets and (b) private debts have been, are being or will be socialized).
The common characteristic of the PIIGS is the very low or even negative real interest rates that these countries have been given by a ECB rate policy that was fit to the needs of Germany and, to a lesser extent, France. Spain has had real negative interest rates for several years in the 2000s. In a growing economy, this is extremely dangerous as it encourages reckless borrowing (public, private or both). This is what happened.
Debt union promoters implicitely assume that the euro was a good idea that was poorly implemented. This is, I am afraid, a fallacy. To force such different economies into a one-size-fits-them-all policy is simply proven to be unworkable. Because it is unworkable, it probably cannot be fixed. The response of euro leaders to the growing contradiction between political will and economic reality will decide of the amount of pain that Europeans citizen will endure. A departure of Germany from the euro would probably minimize this amount of pain.
“A departure of Germany from the euro would probably minimize this amount of pain.”
That would mean reintroducing the Deutschmark. Such a move would have huge political implications. I am afraid that could trigger a new wave of German nationalism, which is, making things even worse, traditionally ethnic oriented (“voelkisch”), strongly xenophobic, and antisemitic, reinforcing the renationalization of the political thinking in Germany and Germany’s hegemonic ambitions, which already have been present, since at least the so-called “reunification”, but which has also been diluted by the European integration so far. This could be a disaster for Europe and the world. There are things brewing in Germany under the political surface in parts of the population. I wouldn’t like to see these demons getting out.
rc
Völkisch? Gimme a break, “cosmopolitan”. Germany has learned its lesson once and for all.
Has it? So why is the definition of who is a German, which is laid down in the Bundesvertriebengesetz (“Federal Displaced Persons Law”) almost identical to Nazi Germany’s definition of who is a German laid out in Himmler’s Volkstumserlass (There isn’t even an English translation for this word. Something like “Decree about Affiliation to a People”)?
Today valid in Germany (since 1953):
Bundesvertriebengesetz, Par. 6, Abs. 1:
“(1) Deutscher Volkszugehöriger im Sinne dieses Gesetzes ist, wer sich in seiner Heimat zum deutschen Volkstum bekannt hat, sofern dieses Bekenntnis durch bestimmte Merkmale wie Abstammung, Sprache, Erziehung, Kultur bestätigt wird.
(2)…”
(http://bundesrecht.juris.de/bvfg/BJNR002010953.html)
Translation: “A Person is of affiliation to the German People for the purpose of this law, if this person declares to belong to the affiliation of the German people, insofar this declaration is confirmed with characteristics as such as ancestry, language, education, culture.”
According to Himmler’s Volkstumserlass (09/12/1940) a person is German (in the conquered territories in the East), if
“a) Wer sich bis zum 1. September 1939 nachweislich zum deutschen Volkstum bekannt hat.
b) Wer sich zwar nicht bis zum 1. September 1939 nachweislich zum Deutschtum bekannt hat, spaeter aber ein entsprechendes Bekenntnis abgelegt hat, wenn dieses Bekenntnis durch Tatsachen wie Abstammung, Rasse, Erziehung und Kultur, bestaetigt wird. Im Zweifelsfall ist entscheidend, ob der Betreffende rassisch einen wertvollen Bevoelkerungszuwachs darstellt.”
(Reference: Bernhard Wagner, “Deutsch zu sein bedarf es wenig. Zur Aktualitaet der Volkstumspolitik”, in “Deutsches Staatsbuergerschaftsrecht. Diskriminierend & Grossdeutsch”, GNN-Verlag 1997, pg. 24)
Translation:
“a) who has demonstrably declared to belong to the people of German affiliation until September 1, 1939
b) who hasn’t demonstrably declared to belong to the people of German affiliation until September 1, 1939, but has provided such a declaration later, and this declaration is confirmed with facts as such as ancestry, race, education, and culture. If in doubt, it is determined by whether the individual is a racially valuable addition to the population.”
Well, “race”, and “racially valuable” aren’t in the current law anymore. At least some difference here 65 years later, although the out-of-fashion word “race” is sort of covered by “ancestry” anyway.
Germany’s law, constitution, and the whole bureaucratic apparatus with its guidelines regarding legislation on asylum, “German resettlers” from Eastern European countries, immigration, and citizenship is still based on an ethnic understanding of who is “German” and “German nation” and on Jus Sanguinis. And, beside this institutionalized ethnic nationalism in Germany’s state and law, how many Germans in Germany today accept German citizens with a different color of skin as “true Germans”, although they aren’t “Germans” according to an ethnic definition of “German”?
So, I’m not convinced of what you are saying. The facts speak against it. I wouldn’t trust a bit a Germany where the political elites and the population decided to break away from the Euro. Actually, such a step would already presume a nationalist surge in Germany, because without it it won’t happen. I don’t expect it will happen, though. There is too much at stake for Germany’s industry, which has been among the biggest winners of the Euro union. Such a large part of Germany’s GDP is realized through exports to EU member states.
rc
A view from Europe: a group of German economists, led by Mr
Starbatty, who was given an op-ed, in the NYT, has threatened
after the ‘second support agreement’reached in Brussels in
March, to bring forth a lawsuit in front of the German Consitutional Court, to ask for Germany to leave the European Union for ‘having broken’ the European treaties by implicitly providing support for another member country
http://dealbook.blogs.nytimes.com/2010/03/29/op-ed-euro-trashed/?scp=2&sq=starbatty&st=cse
On the current change ongoing in Europe, the FT’s columns
by W.Münchau can be found on http://www.eurointelligence.com
while the renowned German sociologist Ulrich Beck is also deeply preoccupied
For Gonzalo Lira: “El e-nacionalismo aleman” by Ulrick Beck published last Friday in EL PAIS
http://www.elpais.com/articulo/opinion/e-nacionalismo/aleman/elpepiopi/20100409elpepiopi_13/Tes
Reports of the death spiral of the Euro is premature. There wss never any doubt in my mind but that Greece would be bailed out. To say that Germany gave up the DMark for the Euro is not quite right, Germany insisted on a governance structure, policies, rules and regulations that were every bit as sound as what they had at the Bundesbank. Every member of the Eurozone has benefited from the existence of the Euro. The Greece-European Commission tango was largely choreographed by Frau Merkel and she accomplished what she wanted which is a decline in the Euro vs the other major currencies and the perception that she fought and won against the profligate Greeks. All this goes down well with the German electorate. The Euro is bouncing back so the next tango act will enter stage left within two months and there this will be a four act play that may be a tragi-comedy but will not end in tragedy. The big question is will the Europeans be able to keep the Euro down.
I am replying here both to “Perplexed in Montreal” and “MickeyHickey”:
You are both right—but neither of you are carrying your points to their logical conclusions, which would lead you both to intersect (and agree) with my argument.
First “Perplexed”: You wrote, “The common characteristic of the PIIGS is the very low or even negative real interest rates that these countries have been given by a ECB rate policy that was fit to the needs of Germany and, to a lesser extent, France.” I’m not sure about the second half of that statement of yours, but let’s not quibble.
Insofar as the first part of your statement, I agree with you completely—the inflation in Italy, Spain, Greece, Ireland, Portugal and the other emerging economies in the Eurozone led them to have, effectively, negative interest rates. So of course they loaded up on Euro-denominated debt.
Which is exactly what happens in emerging markets during an upswing when their currencies are pegged to a stronger economy’s—that was my point re. Latin America in the 1980’s. The weaker LA economies hitched their wagons to the dollar, which was fine during boom times, and the interest on their dollar-debt was effectively negative. But once a downturn hit, they got hammered in ’82—as is happening in Europe today.
Greece has been bailed out today—but can Europe afford to bail out the bigger messes in Spain, Portugal, Italy, Ireland? Or will severe austerity measures—a la Latin America in the ’80’s—be the only remedy to purge this debt-drunk? My thinking is, the weaker Euro-economies won’t stand for severe austerity measures—it’s politically unfeasible. So if they’re not bailed out, then they’ll break away from the Eurozone.
Second, “MickeyH”: You wrote, “The big question is will the Europeans be able to keep the Euro down.”
Well that’s the problem, as I pointed out in my piece: The German-Euro is deflating, while the Greek-Euro is pegged to it—as is the Italy-Euro, the Spanish-Euro and so on. The point of my piece was, the Euro is a currency peg. So of course, with the GR-€ strong (and Germany being the largest economy), the weaker economies with Euro pegs will suffer disproportionately.
This disproportionate pain can only be alleviated by either bailouts, or breaking away from the Euro and returning to local currencies. Obviously, one smallish economy can be bailed out—but not five fairly large economies. Since as I said above, politically, severe austerity measures are not feasible, what is left is breaking away from the Eurozone, back to a local currency, to ease the local pain.
(Parenthetically, you’re claiming Merkel deliberately drove down the Euro before agreeing to a Greek bailout—which is a post hoc ergo propter hoc fallacy. Merkel agreed to the Greek bailout BECAUSE the Euro was crashing due to her intransigence, and the Bundes-bonds’ yields were widening, signalling inflation. The Germans are terrified of inflation to an inordinate degree—they are propping up Greece because they have only recently (literally last week) realized that letting Greece go down the tubes would crash the Euro as a currency. So don’t ascribe Einstein-like brainpower to Merkel—she’s reacting to events, in this case, the cratering Euro.)
My own thinking is, the world NEEDS a united Europe—the Eurozone insures the peace, even in non-Eurozone countries adjacent to it. The Eurozone keeps the peace from the Ural mountains to the Irish Sea. A disunited Europe? Well, we saw that in 1914 and 1939.
The only real, long-term solution to save the Eurozone is a single fiscal policy, with a single debt-issuing organism.
Though I hope I’m wrong, I’m afraid that won’t happen—which is why I think we’re seeing the beginning of the end of the European Union.
Just a few questions on your proposal:
You seem to be calling for a EU version of the US treasury bonds. But wouldn’t Greece and other countries still be able to float bonds just like California? Are you saying ALL public sector debt even for municipalities would be conrolled by Brussels? Will Eurocrats really be better at judging appropriate levels of debt than markets? How will this proposal affect private sector debt? In general do you think adding a federal level of debt in Europe will increase or decrease the total amount of debt issued in Europe?
And a quick follow-up:
Wouldn’t concentrating debt in Brussels also imply concentrating all social program in Brussels. In other words all of the different universal health care systems, pensions, school systems, etc. would go to Brussels?
Don’t all these social programs threaten American oligarchs? Don’t the low Gini index numbers in Europe set a really bad example that plutocratic Americans, looking to further concentrating wealth, see as a threat? Would concentrating all these program in Brussels tend to help or hurt the effort to protect them from the jackals of Anglo-Saxon wealth, who are so hell-bent on destroying the European social model?
You are getting the wrong lesson from this. If anything this shows that the social democratic system is unstable. With a few exceptions, you end up with too much debt and not enough income.
I’d say it is a balancing act and the countries currently with the most debt in Europe are the least social democratic. It is very expensive to not be social democractic — huge underclasses, an expensive and unproductive police / penitentiary complex, etc.
Northern Europe has in general been quite social democratic (Gini scores currently in the 20’s) since post WW2 and they are not in a debt crisis. The US has been moving away from social democracy for the past thirty years but the debt just continues to rise.
I just do not see the historic link between debt and social democracy
The not ‘enough income and too much debt’ is due to falling income from taxes and tariffs. There were too many tax decreases and the WTO did and is doing the rest to a states income base. However, this is not due to social democracy, but is a direct result of capitalism and globalisation.
The only fault with social democracy is that it thinks capitalism can be tamed by working with it. This is a big mistake in my view.
The EU and Euro isn’t going anywhere.
A country like Latvia would be a better place to look for Euro and EU disintegration, given their large Russian population and proximity to Russia, but their political class still wants to join in.
I suspect the problems with the Euro are going to be worked out, albeit with a lot of drag on growth, over the next decade. In the end, these resolutions probably eliminate IMF influence over another section of the globe. That possibility is what Simon Johnson is most hysterical about.
Well, we should keep the terminology straight, otherwise it is just confusing.
There is no such thing as ‘free market capitalism’. Free markets and capitalism is a contradiction in terms.
Capitalism leads to the accumulation of wealth into the hands of a few, disempowering the many. Because only a few players dominate, there is no free market. At least if you understand ‘free’ as meaning ‘free for all’ and not meaning ‘free for the powerful to do as they see fit’. But that would just be changing the meaning of terms to conform to your beliefs.
While the US population might think – and indeed has been spoon-fed – the idea that you had free markets, in reality it is not the case.
It may be difficult to face up to reality and get rid of this romantic notion of free markets, and admit that you are living in capitalim in its purest form.
Exactly right. A ‘free market’ is in reality a licence for a tiny group of winners to hoover up all the wealth and power within range – as a black hole does with nearby matter.
For markets to work in a socially-productive way for the benefit of all they must be ‘open’ meaning contestible by new entrants, smaller players etc. It is the smaller players that keep the big guys honest.
The trouble is that ‘open markets’ are generally not stable over time. Therefore unless laws protect the smaller firms they will eventually be rolled up. That is what the US system of anti-trust did through the middle years of the 20th Century with obvious success until Reagan quietly changed the ground rules in favour of allegedly ‘free’ markets. We have seen how that works.
I strongly recommend Barry Lynn’s newish book ‘Cornered: The New Monopoly Capitalism and the Economics of Destruction’ in which he goes into al this in some detail.
First of all the EU and the euro are not the same thing. Switzerland and the UK are part of the EU but have their own currencies so we should not mix the two up. I find the argument here rather confusing because all currencies are really a way of pegging, for instance England and Scotland have rather different economies and would probably benefit from different exchange rates and interest rates. Similarly we can argue that California and Texas would benefit from different exchange rates and interest rates. How granular should you become with your currencies and policies, down to city and town level?
There is however a major difference between the Euro and the Dollar in that the relative sizes of the weak and strong economies is different and the Euro tends to reflect the strong economies like Germany and France. In comparison monetary policy in the US tends to reflect the state of the weakest part of the economy.The result is that you will always get bubbles, over spending, and parts of the economy over heating in the US and in the UK come to that where as in the euro area you are more likely to get a driving force towards stabililty. There are all sorts of problems with the Euro currency, but I don’t think all the consequences have quite been thought through here.
Switzerland in the EU?? I think you mean Sweden.
I agree with the rest though!
Switzerland is not formally a member of EU, but is so tightly linked with it by way of bilateral treaties, that you can almost consider it being part of the EU.
Already in the late 1960s when it was obvious that the Breton Woods currency peg was coming to an end the EC started to make plans for their own currency peg, the first own was started in the early 1970s. Currency pegs was ongoing until the EMU/Euro. The pegs was riddled with recurrent crisis, exchange rate adjustments and countries leaving and entering the peg. Did they learn anything, not really, everything that went wrong was the fault of the individual countries absolutely not the currency peg system. Breton Woods currency peg faulted, European pegs recurrently faulted. What to do? Then the European politicians came up with the bright idea, if we block every way to exit the peg then it must work?
Already in the late 1960s when it was obvious that the Breton Woods currency peg was coming to an end the EC started to make plans for their own currency peg, the first own was started in the early 1970s. Currency pegs was ongoing until the EMU/Euro. The pegs was riddled with recurrent crisis, exchange rate adjustments and countries leaving and entering the peg. Did they learn anything, not really, everything that went wrong was the fault of the individual countries absolutely not the currency peg system. Breton Woods currency peg faulted, European pegs recurrently faulted. What to do? Then the European politicians came up with the bright idea, if we block every way to exit the peg then it must work?
“Europe [EU] is a monument to the vanity of intellectuals, a programme whose inevitable destiny is failure: only the scale of the final damage is in doubt”
Lady Thatcher
I think Lady Thatcher’s quote might have worked even better if slightly reformulated:
The British Empire was a monument to the vanity of intellectuals, a programme whose inevitable destiny was failure: only the ever increasing scale of the final damage is in doubt
Anyone who quotes Thatcher to back up an argument must be wrong. I lived through the Thatcher administration and it did a lot of almost irreperable damage to my country.
I think that you should always first check who’s talking before what’s been said. I don’t know who’s Mr. Lira but to me it was enough to read behind his name that he is a novelist and filmmaker (and economist). This means that he’s good with words and knows how to make a good story (and he thinks that he knows something about economy but is honest enough to put this knowledge in parentheses). I think that his thesis could make a fun fiction novel or a movie but as an economic theory it is banally wrong and dramatized for entertainment purposes. Old Lady is the craddle of civilization and has begun unification processes in order to achieve stability and long-term wellbeing. There is no chance that Europeans will abandon this ideas at the first few obstacles. EU will eventually find the necessary mechanisms to manage common and particular countries’ finances.
OK, now that 45 billion freshly printed Euros are awaiting the good people of Greece, which comes down to a nice 4,500 chunk of Euros per capita (almost 15 grand for my household alone), I think I better get busy around here. For starters, I need a bigger pool, a larger plasma TV, and a few repairs on my boat. For the pool and the boat I’ll just hire my cousin and pay him off the books. The plasma TV I’ll get from a Cypriot smuggler, this way I save on EU import fees. This should get me through 2012. After that I’ll be waiting for the next EU handout, which I hope that the good people of Germany are working on already, because I really need that cruise around the world.
Finally, I’d like to send a heartfelt thank you to the good people of Germany, and the good people of France. Your hard-balling us these past few months has taught us a lesson we will never forget, and we promise we’ll spend your financial gifts wisely…
Oh, one more thing: may I have my 15,000 Euros in cash? Small bills, please. Thank you…lol.
Vinny
There are many resentful statements in this thread from you. You don’t seem to understand how a loan works, though. Loans aren’t handouts or gifts. They are expected to be paid back with interest. So, unless the debtor defaults on a loan before the loan amount is paid back, debt means wealth transfer from the debtor to the lender, i.e., in this specific case, wealth transfer from Greece to the holders of Greece’s sovereign bonds. This transfered wealth is being produced in Greece. The “bailout” for Greece guarantees that the wealth transfer from Greece to the owning and investing class of the world continues and that the members of the class who are holding claims on Greece’s productive assets in the form of bonds don’t lose these claims.
rc
Like all other sovereign debt, there is no chance it will ever be repaid. It is just a noose around their neck.
That sovereign debt is rolled over again and again doesn’t change what I said. The debt means wealth transfer from the debtor to the lenders. Investors don’t buy sovereign bonds out of altruism. They do it because they expect an income stream from it in addition to getting back the invested amount, and usually they get both.
rc
Right… But you don’t seem to be familiar with Greek history and the skeptical view people here have of the West in general.
The investor class and the international criminals at Goldman Sachs, other Wall Street banks, and London’s City may expect to transfer wealth from victimized Greeks into their offshore accounts, but in the end they may only get an international arrest warant for all the stealing and looting they have been doing.
However, it is unlikely Greece will tap into this phony “aid package” which is no aid at all, but rather another scam orchestrated by the gangsters mentioned in the previous paragraph.
Vinny
Well, it’s not a conspiracy. It’s just capitalism with its “systemic contradictions” and its “character masks” (Marx) functioning in their roles.
Anyway, I seem to have misunderstood the tenor of your previous comments to which I had referred. My apologies.
rc
If Greece should have all its debt, mainly foreign on 5% it would mean something like 6-7 % of GDP to service it. That is on the edge. Technically a country without a currency of its own has all public debts in foreign currency.
How will Greece be able to create growth to get the relative debt level down? The internal economy is mandated to severe austerity measures. In modern industry the wages is a minor part of the cost, the wage level is not a major part of competitiveness. Is Greece going to get out of the euro trap by low level service (tourism) and low level labor-intensive manufacturing? Competing with China? Germany is probably still one of the countries with the highest labor costs in EU and I still the major vehicle producer in Europe, up to 50% of the cars sold in Europe are made in Germany. GM had an phony contest between the Saab factory in Sweden and Opel in Russelsheim a few years ago, the gross labor cost in Russelsheim was 30% higher than the Saab factory the production line did still go to Russelsheim. How low is the e.g. Greece labor cost to sink to get a European vehicle producers plant?
Modern manufacturing is much more sophisticated and complex than what would be achieved by moderate adjustment of currencies and ditto labor costs, anyhow modern manufacturing is also highly import dependent so net currency rates will hit both ways, devaluations is primarily effective on undeveloped economies that relay on export of raw materials to pay for imports.
The “stupid” thing about the Euro-system and the Washington Consensus system alike is that it forces countries to get indebted in foreign currencies for matters that should be handled with a sovereign nations own currency. Like Latvia, Poland, Hungary, Island and so on that have almost all of it’s real-estate financed with foreign currency, why on earth should a sovereign country let something that is firmly planted on its soil like real-estate be finance in foreign currency with the high risk for the nation it imply.
My friend, please see my posts about greeks not wanting to be germans… Or chinese for that matter. People here don’t want to work in auto factories… Besides, who in their right mind would buy a Greek car.
But Greece has great tourism, a nice maritine industry, nice weather, lots of olives, and plenty of temples to visit. This is what Greece has to offer, and it was good enough until the greedy Western banksters started systematically destroying and discrediting this nation. As I wrote here before, this is by design, in order to set a precedent of enslaving an entire nation, and then apply that same formula to larger nations.
Vinny
“As I wrote here before, this is by design, in order to set a precedent of enslaving an entire nation, and then apply that same formula to larger nations.”
You got it Vinny! The debt traps are snapping all over the globe!
World depression by design,
The wealthy elite are doing fine …
Deception is the strongest political force on the planet
Maybe I’m slow, but it would easier to follow if DE were used for Germany instead of GR. I keep having to re-read the darn thing everytime I get confused as to how the Greek Euro can be playing such a key role in distorting the rest of Europe. Of course, Greece should probably be HE anyway, but then we get ES in Spain, etc. France, Italy and Portugal are all good to go, however.
So the Irish laid off a few hundred thousand federal workers to keep GNP to debt levels in line. How many have the Greeks laid off?
California will be voting to legalize pot sale and hope to bring in billions in new taxes. Maybe the Greeks could legalize cigarette smuggling.
Greece needs a lower currency so it can get back to the business of fleecing tourists.
Yes, I can support that :)
But what I don’t support is Germany trying to make greeks act like germans.
Vinny
Europeans put the euro together on the cheap. Debt had not only not built up but was easy to finance. Markets were moving into the upside of an enormous bubble. Political cohesion was what was important, a statement that Europe was more than a geographical fact. Any financial weakness in a country like Greece was winked at. It was just a cost of doing business. The “construction” of Europe was more important. Rather than using this golden time to increase fiscal discipline, fiscal laxness was tolerated. And as there are always two sides to any transaction, it wasn’t just the PIIGS increasing debt through imports but Germany selling in to them increasing its trade surpluses in the process. At the same time, French and German banks were greasing the skids with financing making high debt levels more tolerable. Now we are on the downside of the bubble and meltdown. Now France, Germany, and the Netherlands are treating the erstwhile trading partners that they profited from so well so recently like deadbeats. It isn’t just the euro but the whole concept of Europe being more than an accident of geography that is now at stake. What we are seeing though in the powerhouse countries, however, is that de nile is not just a river in Egypt so prospects are not good.
Another gloomy article of imminent doom; so many apocalypses and so little time.
On the bright side, these converging global convulsions—economic, military, and ecological—are, IMO, inevitable and even needed. Notice how 2012 recurs as a pivotal year in so many scenarios? Tectonic shifts are ocurring, and it is an exhilirating time to be alive to bear witness to the coming transformations.
Thank you, Mr. Lira & commenters for the stimulating discussion.
I think the parallel makes no sense at the least for the time being, at the least because the scale of the economies we are talking about is totally different from the one of Latin America. Of course, everything comes to an end and maybe this will be the case also for the USA by the way, albeit no one could bet how and when! Yet, it is somehow correct that we are somehow dealing with a fix exchange rate market and Europe needs a stronger “Central Voice” to call for who does what and how.
Dear Gonzalo,
I get your point of view and I can understand it, at least if you’re observing Europe from oversea.
Nonehteless, it’s worth to take a deaper look inside european economic system (and not only to its finacial side) to put all things into the right perspective and put some limits to purerly currency-driven conjectures.
For example, try to split the european peripheric zone from the core. Too often I read about Club-Med as if it were the same thing when talking about Portugal or Greece as of Italy or Spain. It isn’t. If you are familiar with the european industrial structure, you will surely know that Italy -say its northern part-, for instance, is much more essential to the franco-german industry than the rest of the ClubMed. Although the italian public debt/GDP is far above a reasonable one (as it is for Portugal or Ireland) it’s strongly counterbalanced by essential industrial assets, skills, expirience, all things that lie among people, schools, banks and that hardly could go broken only for currency mistakes toward the rest of the eurozone. Add, alway for instance, the south-italian criminal business (sad, cinic as you want, but extremly true) which every year inflows into the italian banking system (and not only) a big part of its 200bn€ turnover (mainly from abroad). Consider, again as instance, the geopolitical influence of energy infrastructures from extra-europe (the South-stream project by ENI, the german Sahara-solar project whose energy transportation into europe will be ensured by ENEL,…).
When you think about the eurozone, you should think about a strongly interdipendent economic system in which financial-industrial-geopolitical issues are often acting as self-adjusting variables within an internal capital-wealth allocation system (imabalces or misallocations by one variable are almost automatically counterbalanced by the others).
EU is a very aged community of different peopoles that deeply know each others since long time ago and whose equilibrium is the natural outcome of centuries of wars, alliances and mutual exchanges.
Can you see my point of view too?
I was trying to reply to this post (see below).
“Greek banks, who ironically were the ones responsible for buying a lot of recent sovereign issuance …”
This is the most relevant post on this topic so far. The point is that European economy is a complex organism and you cannot reduce it to matters of currency.
Also, having debt is not a problem per se either for companies or for countries. It’s always also a question of your collateral assets and the strength of your economy. The Greek can always sell the Acropolis and repay debt :). Macroeconomics is concentrated mostly on Profit & Loss side of national economies such as GDP or budget deficit. I would like to see national Balance Sheets but these are not that simple to make even for companies as they are a matter of valuation criteria and completeness.
Thanx Sasha!
The Tiger Wood is not only the main concern for Golf….