The Euro killing Europe?

March 27th, 2013 at 2:00 pm by David Farrar

Daniel Altman at Foreign Policy writes:

In 1999, the traditionally hard currencies of Europe’s north merged with the softer currencies of the south to form a new money that was somehow supposed to be stronger than any of the ones it replaced. Under the stewardship of the European Central Bank (ECB) in Frankfurt, the was meant to — and did — become a reserve currency to rival the dollar. Though the supposedly prudent northern countries didn’t always keep their budget deficits under control, they still managed to survive the worst of the global economic downturn. By contrast, the profligacy of the south, together with its flawed banking systems, has created a hotbed of crises that stretch 2,300 miles from Lisbon to Nicosia.

These crises would have been a lot shorter if the countries involved — Greece, Portugal, Spain, now Cyprus, soon Slovenia, and perhaps Italy for a second time — had possessed their own currencies. But all of them use the euro, so their monetary policy is set in Frankfurt at the ECB. Instead of devaluing their currencies in order to spur exports and ease the repayment of debts, all of these countries have had to undergo some combination of fiscal austerity, deflation, and, most notably in Cyprus’s case, loss of assets.

The lesson is you can’t have monetary union without fiscal union. Monetary policy and fiscal policy need to work together.

The interesting thing is the impact on political stability as well. They have a table showing how Parliaments in southern Europe have become more fragmented and extreme, which threatens Europe as a whole to a degree. They use the  Herfindahl Index to calculate the fragmentation.

The NZ Parliament Herfindahl Index is currently 0.34.

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16 Responses to “The Euro killing Europe?”

  1. Manolo (13,837 comments) says:

    Socialism is also killing Europe.

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  2. kowtow (8,522 comments) says:

    The Euro isn’t killing Europe.

    The notion that all countries are equal and can enjoy the benefits of the wealth of other nations,along with the undemocratic nature of the European Establishment elite ,is killing Europe.

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  3. duggledog (1,559 comments) says:

    Yet the Northern countries say they will do whatever it takes to keep everything going.

    It’s a macro version of New Zealand – parasites feeding off hosts to the eventual detriment of all

    I would sit back and enjoy the spectacular end result of what was always going to end in disaster, if I wasn’t so concerned the tsunami of shit was going to wash me away with it!

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  4. JeffW (327 comments) says:

    “The lesson is you can’t have monetary union without fiscal union”.

    The real lesson is that no matter how hard they try to disguise reality, profligate government cannot spend other people’s money forever.

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  5. lastmanstanding (1,297 comments) says:

    IMHO the biggest issue with Cyprus is that we now have a precident where a government can steal money from a citizens bank account to prop up that government and fix the problems both the government and the bank have cuased.

    Now I realise that in this case Merkel et al are getting their hands on dirty money laundered by the Russian Mafia but the principle has now been set.

    So at some point in the future a NZ government will be able to point to the Cyprus theft as a justification to raid my and your bank account and take whatever sum they wish.

    Doesnt exactly give me any confidence to keep any money in a bank.

    And while we are on the subject again IMHO mid term deposits say 1 to 2 years should be earning me 4% to 5% PLUS the rate of inflation PLUS the tax I am required to pay on the interest.

    Otherwise I am subsidising profligate borrowers.

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  6. kowtow (8,522 comments) says:

    And another really frightening thing about the undemocratic Euro elites is they are hell bent on Turkish membership.

    They want to smash “old” Europe.

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  7. SPC (5,643 comments) says:

    kowtow, it is France (and your Vatican) opposing the entry of Turkey – the UK is more likely to support it, the UK is hardly of any EU elite.

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  8. SPC (5,643 comments) says:

    The real lesson is that a currency zone requires a common debt cost. This does not require fiscal union.

    It’s absurd that Germany pays 2% on its debt, France 3% on its debt and Italy 6%. Its the debt cost that explains much of the budget deficit funding difficulty of the southern states and thus rising debt levels.

    The ECB should fund all national debt up to 100% national GDP at a common debt cost. An interim step would be to fund up to 50% GDP debt via the ECB, then increase it in 10% instalments to 100%. The gain from the reduced debt cost burden on the budgets of the southern states should be put to use in paying down debt.

    Of course this would increase the budget pressure on Germany and France – paying a higher rate on their debt, and this is why it is not occurring. Instead Germany benefits from the weak Euro and low cost debt and plays benefactor to the weaker states – dictating terms for aid. It’s not fair and its certainly not altruism, it is all about power and dominance.

    Any order that results in the strong gaining an advantage over the weak is bankrupt.

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  9. Ed Snack (1,883 comments) says:

    Actually, I believe that this has been rather badly reported. The Cypriot banks had a large exposure to Greek Bonds (they were paying good interest originally, and there';s a lot of political affinity). Thus when the EU “negotiated” a substantial haircut for private Greek bond holders, they cut the asset base out from under the Cypriot banks.

    That is, the Cypriot banks became insolvent because a big chunk of their assets became worthless when the Greeks defaulted. Now what do you do with insolvent banks ? The textbook example would be that first the shareholders lose their investment, yep that happens in Cyprus; then the bold holder setc to the banks, yep, they lose; the finally, the depositors get whatever value remains, with a special exemption for “insured” depositors as there is a government guarantee for amounts under 100K Euro; Yep, that looks like happening.

    So where’s the theft ? What the eventual solution looks like being is a textbook case to wind up an insolvent bank, only the EU Taxpayer (read German taxpayer) is ponying up a few billion Euro as well for some reason to allow the Cypriot Government to meet its obligations on insured deposits.

    The original public proposal, to levy the insured depositors, was, as I see it, just a PR fig-leaf for the Cypriot government to say to the Russians that “we really tried to salvage some of their money, but we couldn’t…” The EU and the IMF originally proposed just about the exact deal that has now been struck, it was a Cypriot initiative to levy the insured amounts.

    I guess the alternatives are either the Irish one, have the taxpayer stump up for the lot (but the Cypriot government couldn’t and the Germans refused), or the Icelandic, let the chips fall where they may and tough titty depositors (but the EU liked that even less).

    I reckon it ain’t anything like theft, your money’s in an insolvent bank, not nice, but shit happens. Word has it that the Russian Oligarchs mostly were wise to this, and it was the precipitate flight of a great deal of hot (or at least extremely warm) Russian money that helped trigger the crisis. In this case, it appears that there was ” the quick and the poor”.

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  10. Michael (910 comments) says:

    They did have a Fiscal Union – to belong to the Euro, you had to meet certain policy targets. That the Southern European countries simply fudged the accounts to meet them is the lesson.

    The only solution now is for France, Germany and perhaps the Low Countries/Scandanavia to leave the Euro. The Euro will collapse but the Southern Governments will have manageable debts. All those who lent to them knowing their long history of fiscal unreliability will get reamed, but that will be mainly France, Germany and to a lesser degree the Low Countries and Scandanavia.

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  11. Reid (16,509 comments) says:

    In this case, it appears that there was ” the quick and the poor”.

    Or possibly the well-informed and the ill-informed. And where did the well-informed get their info from?

    The lesson is you can’t have monetary union without fiscal union. Monetary policy and fiscal policy need to work together.

    The lesson is, the model for a one world govt is apparently falling over for that reason. Given that, you can choose either to believe the people who designed the model didn’t know what they were doing or that this issue (the GFC I mean not just say, Italy or Cyprus or Greece or any other individual member state’s current predicament) is merely another milestone along the long and winding road leading eventually to creating circumstances that result in the member nation states giving up their sovereignty, voluntarily or by force and coercion, economic or otherwise.

    Given that it is a no brainer for your averagely well-educated economist to have predicted that a bunch of less productive nations trading off German interest-rates isn’t sustainable in the long term, and given that the people who designed the model are far more well educated than your said average economist in all sorts of disciplines and have unrestricted access to the best intelligence and datasets, and given that these people share deep connections with the same sort of people who operate in all the major power centres all over the world including the US, Asia, Africa, the ME and little ole us in the SP, what’s the likely answer to the above?

    The alternative of course is to merely listen to the MSM as they rabbit on breathlessly as if its all just a bunch of random stuff that happens, today Cyprus, tomorrow who knows and pretend that those people really do tell it like it actually is and there are no patterns, no plans, no underlying objectives, all of which fits perfectly with most people’s worldview, not because it’s probably true but simply because most people have never bothered to turn their minds to the alternative hypothesis and explored the likelihood or otherwise of those alternatives.

    Sad really, because history tells us which of those two alternatives is the more likely and despite most people knowing that well known quote about what history does when they forget it, they still forget it.

    That’s the lesson.

    It’s a fascinating period in the EU evolution, or devolution. If you adopt the former perspective as a hypothesis, the only possible way they can achieve their goal of amalgamating all those ancient, strongly-protective sovereign nations, is to make conditions so bad the people have no alternative but to go with giving up their sovereignty, simply to make the never-ending pain with no end in sight, go away. And as we all know, conditions aren’t yet anywhere near that level, not by a long shot. And then on top of that you lay over the UK obduracy and their very good rational argument which the local politicians point to about being a world financial centre.

    But what if Shanghai and Moscow was to take over that role from NY and London? Not now, not even in ten years, but say, in twenty? Those two centres have all the infrastructure, all the equipment, all the people needed to do just that, and frankly, once Shanghai gets going, it will easily eclipse NY and Moscow will do the same to London.

    We are in 2013 on the cusp of massive worldwide change in terms of shifts in the power centres of gravity. The olde world all of us grew up in where the Western nations ruled the waves and the science and wrote the history following their conquests, is over. The olde world is a hollow shell of what it once was. The olde world can’t even successfully fight an asymmetric war against thugs armed with rifles and homemade explosives. Of course this is because the olde world has been and is being furiously white-anted by its own political leaders, not just in that campaign but in their economies as well. I mean just look what offshoring has wrought in the US manufacturing sector, for one relatively tiny but highly damaging example. There is no way the US can recover its economy without that sector, and it doesn’t have it anymore.

    So like I said, you can if you like continue to look at it precisely as the MSM presents it: a mere bunch of stuff that randomly happens with no direction, no guidance, no plans. Or you can look at history and see what that says, and then turn your mind to considering the possibility, just as a mere hypothesis – it doesn’t have to be true, you just have to drop your scepticism and consider it as a hypothesis rather than outright dismissing it as nonsense because then you’ll subconsciously bias your evidence assessment – who, if anyone, has wrought all of this we see happening around us.

    On the history question, I’m reading The Lessons of History by Will and Ariel Durrant at the moment. Only up to chapter 6 so far but it’s quite interesting. It won’t give you insight into the above questions, but it will give you a sense of how history repeats, over and over and over again.

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  12. wreck1080 (3,923 comments) says:

    @michael — ‘policy targets’ are still too loose.

    The only solution is a United States of Europe with a single government, where member states must cede sovereignty to belong.

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  13. UglyTruth (4,551 comments) says:

    wreck1080, a single government cannot be formed unless the member states cede sovereignty voluntarily.

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  14. kowtow (8,522 comments) says:

    SPC

    My vatican does not get a vote on Turkish membership.The Vatican couldn’t get a special mention for Christianity in the new EU constitution.

    http://www.turkishweekly.net/news/8681/eu-downplays-vatican-influence-on-turkey-s-bid.html

    http://www.christiantoday.com/article/pope.slams.eu.for.excluding.god/10093.htm

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  15. pq (728 comments) says:

    farrar blandly states above on masters orders,

    These crises would have been a lot shorter if the countries involved — Greece, Portugal, Spain, now Cyprus, soon Slovenia, and perhaps Italy for a second time — had possessed their own currencies. But all of them use the euro, so their monetary policy is set in Frankfurt at the ECB. Instead of devaluing their currencies in order to spur exports and ease the repayment of debts, all of these countries have had to undergo some combination of fiscal austerity, deflation, and, most notably in Cyprus’s case, loss of assets.”

    what Farrar is stating here is NZFirst policy. NZ is in trouble and should devalue. Come on out farrar be brave, come on out Farra be brave

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  16. unaha-closp (1,165 comments) says:

    The interesting thing is the impact on political stability as well. They have a table showing how Parliaments in southern Europe have become more fragmented and extreme, which threatens Europe as a whole to a degree. They use the Herfindahl Index to calculate the fragmentation.

    You are wrong. Europe is failing, because it is governed by centrist politicians.

    The centre left and the centre right response to the GFC is giving $billions and $billions of subsidies to underwater and incompetent banks to mitigate their toxic assets. The banks respond by borrowing money from the government to purchase lots more toxic assets to sell to the government at a guaranteed profit. The centrist policy therefore doesn’t work and then the centrists give more money. And that doesn’t work. And repeat. As long as the current centrist policy continues its effects will be high employment, low growth and stagflation – a continuing crisis.

    The hard left solution is imprisoning/executing incompetent bankers.

    The hard right position of letting the banks go bust.

    Both the hard right and the hard left offer solutions that have a chance of actually working. People of Europe choose hard left or hard right political parties, because these are better economic policies.

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