The Euro problem

March 11th, 2013 at 12:00 pm by David Farrar

Brian Carney at the WSJ reports:

Seventeen years ago, Bernard Connolly foretold the misery that awaited the European Union. Given that he was an instrumental figure in the bureaucracy and publicly expressed his doubts in a book called “The Rotten Heart of Europe,” he was promptly fired. Mr. Connolly takes no pleasure now in having seen his prediction come true.

The solutions:

Two immediate solutions present themselves, Mr. Connolly says, neither appetizing. Either Germany pays “something like 10% of German GDP a year, every year, forever” to the crisis-hit countries to keep them in the . Or the economy gets so bad in Greece or Spain or elsewhere that voters finally say, ” ‘Well, we’ll chuck the whole lot of you out.’ Now, that’s not a very pleasant prospect.” He’s thinking specifically, in the chuck-‘em-out scenario, about the rise of neo-fascists like the Golden Dawn faction in Greece.

The other “solution” is they leave the Eurozone.

Yet unemployment is close to 27% in Spain and Greece. The euro-zone economy shrank ever-faster throughout 2012. And—most important in Mr. Connolly’s view—the economic fundamentals in France are getting worse. This week France announced it would miss its deficit-reduction target for the year because of dimming growth prospects.

It’s one thing to bail out Greece or Ireland, Mr. Connolly says, but “if the Germans at some point think, ‘We’re going to have to bail out France, and on an ongoing, perpetual basis,’ will they do it? I don’t know. But that’s the question that has to be answered.”

Italy isn’t too flash either.

Which brings us back to the politics of the euro crisis. At some point, the people in the affected countries presumably will call a halt to the pain and sweep in a government willing to think the impossible—leaving the euro, for example.

To avoid that, Germany could well agree to pay for a transfer union, either believing that the transfers needn’t be permanent, or hoping they’d be less expensive than a euro break up. But, Mr. Connolly warns, once a mechanism is in place to transfer money from Germany to the current-account deficit countries, it’s only a matter of time before Germany is faced with the question of adding France to its list of dependents—something even Berlin may not be willing or able to afford.

I suspect Germany’s limit may come before even that.

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32 Responses to “The Euro problem”

  1. RRM (9,917 comments) says:

    Maybe we should have just left Europe to the Germans in 1944? ;-)

    [Jokes, dears... take it easy!]

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  2. Colville (2,268 comments) says:

    Its a bit funny really. A bunch of smart people are just waking up to the fact that if you keep gifting people free money they will just keep asking for more and more and more and moooorrrreeeeee……

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  3. Harriet (4,969 comments) says:

    The French once before asked for ‘proof’, so it marched right into Paris under a German flag!

    Looks like the whole of Europe will soon live under German means -unless ironicly- they return to their own facist pasts by ‘chucking out the lot’.

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  4. wat dabney (3,756 comments) says:

    ‘Germany’s anti-euro party is a nasty shock for Angela Merkel – Political revolt against the euro construct has spread to Germany.’

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9920666/Germanys-anti-euro-party-is-a-nasty-shock-for-Angela-Merkel.html

    It’s interesting how the same statist misinformation and smear tactics deployed against EU and Euro-skeptics are also used against global warming skeptics by our self-appointed political elites.

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  5. seanmaitland (500 comments) says:

    The sweet irony of this situation is brilliant. The Euro-Zone relying on Germany to keep their heads above water.

    I bet if Russell Norman was in charge in Greece, they would be world leaders in green technology, and have the bestest economy in the world. Ever.

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  6. Colville (2,268 comments) says:

    The average salary for the Greek state owned rail company was around 100,000 euro/yr.
    Why not pay them well, its free money afterall!

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  7. Manolo (13,754 comments) says:

    For they sow the wind, and they shall reap the whirlwind.
    Very applicable to the urbane, refined and sophisticated but socialist European elites.

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  8. Jimbob (641 comments) says:

    It is common knowledge in financial circles that if some of the larger countries leave the Euro, the shock is going to be felt World wide. For a start France’s bank would all become insolvent over night, let alone some banks in the UK and US. It would be a disaster, 2007 will look minor in comparison. The only way out is for all the credit to be defaulted over many years, not all at once. Joe Blogs in the street hasn’t a clue how bad this situation is.

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  9. EAD (1,072 comments) says:

    They’ll have to destroy it – to save it.

    I am no EU fan but think this through……If Italy follows through (or Spain, or France) and drops the Euro there will be defaults on a massive scale – and they will tear down the global financial system – and economy. It has to happen – it had to happen from the day the fools put this insanity together…..

    But you won’t see me clapping and cheering as it crumbles because this will be a catastrophe of epic proportions. Any clear thinking person can see the writing on the wall yet what do the political leaders of these countries say, “we must not listen to our critics, the answer is more Europe, not less”. They fret over the big issues of the day like wind farms, gay marriage & foie gras yet remain oblivious to the Tsunami that is about to hit Europe. It’s Alice through the looking glass.

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  10. Kea (12,812 comments) says:

    The EU is an openly socialist organisation. It makes no secret of that. What surprises me is that the Europeans thought socialism would provide any other outcome than financial ruin and civil unrest. They should have known better. Of course the average European did not decide this. That decision was made by a political elite looking to extend their power beyound the boudaries of thier own country.

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  11. Bob (497 comments) says:

    I am no expert on economics. Right from the start I have not been able to understand why disparate countries should all have the same currency. Here in New Zealand the government has refused to consider joing currencies with Australia. We know it would be to our disadvantage. The same thing should apply to all the countries collectivelly in Europe. Why does Britain get the benefits of the common market without joining the Euro? When countries are not equal and you try to force them together something has to give. We can now see what is giving.

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  12. Harriet (4,969 comments) says:

    “…..The EU is an openly socialist organisation….”

    Yep!

    The left stomped their way right across Europe and Scandinavia imposing their rightousness on all who resided ‘beneath’ them – and then they stepped on the Anders Breivik mine!

    Who wouldn’t have second thoughts about supporting ‘progress’ if they counted up the dead and beaten under ‘progressive rule’ – the forgotten statistic by the media, that is 100 times higher than the Norway massacre.

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  13. EAD (1,072 comments) says:

    They are setting up a Soviet style Dictatorship to enslave the masses by impoverishing them so the people can never challenge their divine right to rule.

    You can’t don’t do this by making the people healthy, wealthy and prosperously independent, Western European peoples have to be brought to their knees through any and all means necessary, abort, them, flood them out of existence, create laws to attack them, and impoverish them with more and more debt.

    The political elites of Western Europe are at war with their own nations and people. If all people do about this is moan,they will simply laugh and carry on. Although preferable to do it via peaceful means, there is only one language that Tyrants understand, and the sooner the citizens understand that en masse, the sooner they can get back to living like a civilisation rather than debt serfs. We’ve had the Arab Spring, is 2013 going to be the year of the European Summer?

    PS: Listen to Italy’s Beppe Grillo, the so called “clown politician” as the mainstream media tries to portray him. He almost alone in Europe, understands the underlying causes the never-ending crisis in Europe – the monetary system.
    http://www.zerohedge.com/news/2013-03-10/why-central-planners-are-so-scared-italys-beppe-grillo

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  14. thedavincimode (6,759 comments) says:

    Right from the start I have not been able to understand why disparate countries should all have the same currency.

    That pretty well makes you enough of an expert on economics Bob.

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  15. thedavincimode (6,759 comments) says:

    and then they stepped on the Anders Breivik mine!

    And didn’t that jolly well serve them right Harriet.

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  16. CrazyIvan (89 comments) says:

    Given that Norway isn’t a member of the EU (and has twice voted against joining) I’m don’t quite get Harriet’s Anders Breivik analogy.

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  17. Sean (301 comments) says:

    There is actually a potentially easier solution and that is for Germany to leave the Euro zone. Almost overnight this would solve a number of issues. Note there is no need to leave the European Union. A strong, independent Mark, like the Pound, is compatible with the single market.

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  18. barry (1,317 comments) says:

    CrazyIvan (50) Says:
    March 11th, 2013 at 1:52 pm

    You dont get Harriets analogy……..

    Well it is a bit out there – but the Anders Breivik incident (its irrelevant that norway isnt in the EU – its geographically in the EU) is the desperate cry of a citizen of the EU who is saying “enough of this crap”. His target is the immigration (and immigration in the EU is really making a mess of the place. Lets face it, if the african escapees werent there, there wouldnt be any unemployment).

    But there are people all over europe with similar worries – about the CAP (agriculture) employment laws (It cost a company I worked for 130,000 Euro because they fired a guy who was drunk and caused a car accident – and its wasnt the first time hed done this. The EU law is such that you cant take someone off the road just cause they are drunk and way over the limit.), industrial process laws, etc, etc.

    Yes – they dont go out and shot a heap of people but they certainly feel like it sometimes.
    They all know that the system isnt sustainable……………..

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  19. Harriet (4,969 comments) says:

    Craztivan# Barry#

    “….The left stomped their way right across Europe and Scandinavia imposing their rightousness on all who resided ‘beneath’ them – and then they stepped on the Anders Breivik mine!…”

    I did seperate the two, but the point is, as you suggest barry:

    People in Europe are seeing all around them that the ‘ruling’ EU leaders -as that is what they actually are- are ‘imposing’ their will onto the people – and the results that are ‘enforced’ into all areas of their citizens lives have delivered very little in the way of quality. Breivik didn’t see anything of quality at all, but rather only of loss.

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  20. wreck1080 (3,906 comments) says:

    Having a common currency in the EU is like NZ having a common currency with Zimbabwe – then trying to have a monetary policy which works for both countries despite major differences in unemployment, productivity , education, house prices and so on.

    It is difficult enough to set monetary policy in NZ alone — decreasing interest rates to increase employment outside Auckland causes an “asset bubble” in Auckland.

    You can see why Australia has such a problem with it’s 2 sided economy inflicted by the mining industry.

    If anything, it would be best if monetary policy could be set at the street level — but, of course this would be so hard to implement.

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  21. wat dabney (3,756 comments) says:

    I am no expert on economics. Right from the start I have not been able to understand why disparate countries should all have the same currency.

    When your aim is an EU superstate controlled by central bureaucrats then the fact that a single currency cripples disparate economies is a feature not a bug.

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  22. CrazyIvan (89 comments) says:

    Cheers Harriet for the clarification. The EU seems a lot like Scientology – promises of salvation and benefits at the beginning but before you know it you’ve given away all of your possessions and independence to allegedly omnipotent superiors.

    Seriously, the EU seems fine as a free trade union (when it was the ECC), with the free movement of goods and people between member states. Where its collapsed is due to external immigration of people, (in France where just because someone speaks French doesn’t make hold a shared culture with their new countries), and the belief that peace and end to two thousand years of history can be achieved by socialist bureaucracy.

    The EU is the top of a pyramid where everyone passes responsibility on to those ‘above’ them – voters let governments sort out their problems, who then pass the buck to the EU (in reality the other member states like Germany) to bail them out because they can’t manage those problems, or have signed up to such strict union arrangements that they can’t solve them. And at the top is a bureaucracy that is quick on making rules, but short on finding solutions.

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  23. SPC (5,619 comments) says:

    The Eurozone nations should have a common debt cost – it makes no sense to have a common currency and separate national borrowing rates.

    Much of the Italian budget goes to historic debt repayment – not because the debt is that much higher than in Germany but because the debt cost is so much higher. Why does Italy pay over 6% and Germany only 2% (the German debt is c90% GDP).

    Germans use the weaker Euro nations to keep their currency weak and thus stay competitive in the global market – then also gain by the lower debt cost. The arrangement is a form of economic imperialism where other nations end up beholden to German largess (Germany dictating terms of the bailouts), it is not the basis for partnership.

    The organiser of the system France (seeking to bind Germany to an order beneficial to France) also gets cheap debt cost finance (c3%) and of course large CAP transfers.

    Acceptance by France and Germany of common debt cost (c4%) woud ease the budget crisis in the southern zone.

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  24. thor42 (971 comments) says:

    *Very* good comments here.

    Yep. The EU is a bunch of bureaucrats who care for nothing apart from feathering their own nests. Oh, and ripping away as many rights as they can from the people in the street. Goodbye, free speech. Goodbye, democracy.

    The situation has been dragging on and on for blimmin’ ages – like a sprayed fly that refuses to die. I just wish the damn Eurozone would collapse and get it over with ASAP. For starters, in the massive unrest that would follow, it’s likely that Muslims would be massive casualties (and IMO that’s not such a bad thing…..). Silver linings in the clouds and all that.

    For another thing, you might have a coup or two that would actually revoke the stupid “hate speech” laws that are only EVER used against people like Geert Wilders – not against Muslims who march around with signs saying “God bless Hitler”.

    So yeah – a Eurozone collapse, calamitous though it would be, would be by no means all bad news.

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  25. thor42 (971 comments) says:

    @barry – “the Anders Breivik incident (its irrelevant that norway isnt in the EU – its geographically in the EU) is the desperate cry of a citizen of the EU who is saying “enough of this crap”. His target is the immigration (and immigration in the EU is really making a mess of the place. Lets face it, if the african escapees werent there, there wouldnt be any unemployment).”

    I agree. I am sure that a *huge* number of people in the West share the same concerns that Breivik had (about immigration, especially Muslim immigration). Ok, Breivik may not have acted on those concerns in the “best way”, but his (and everyone else’s) concerns are no less valid in spite of that. They are no less real.

    When people have their valid concerns ignored by those in power and they feel disenfranchised, then about the only thing left is to take to the streets.

    I look at Europe and I see (in Sweden) that the ruling political parties refuse to even work with the Swedish Democrats because they are –
    **shock, horror!** – anti-immigration, and are therefore (stupidly) seen as “racist”. What can you do if you’re Swedish when even the party that you
    vote for is sidelined???

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  26. gazzmaniac (2,307 comments) says:

    it makes no sense to have a common currency and separate national borrowing rates.

    I think it makes sense. It’s no different to people getting different rates on money from a bank, based on their risk of default.

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  27. SPC (5,619 comments) says:

    gazzamaniac

    Not when the Eurozone cannot allow member states to default and the stronger nations obtain improved competitiveness via the currency being held down by the weaker nations.

    They should pool national debt up to 100% GDP and have a common debt cost for it.

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  28. gazzmaniac (2,307 comments) says:

    But they did let Greece default.

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  29. Viking2 (11,467 comments) says:

    France will go and take Italy with it. Told you all that 4 months ago.

    Wait and see.

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  30. labrator (1,850 comments) says:

    I don’t see the currency being the problem. The United States has a “common currency” and there are none of the problems like Europe has. The real problem is the absolute farce of acceptance into the EU, Greece being the main example here, and countries not adopting to not being able to inflate away the mistakes of those in power. If Greece was not part of the EU, the drachma would have collapsed and Greece, internally would be in a better, albeit still painful, position. This however has nothing to do with how any of the countries in trouble completely threw away any form of fiscal sense during the boom times. Much like Labour in NZ makes claim for the 2002-2008 pre GFC boom, so too many idiots in Europe though they had some control over it and that they could do no wrong. Well the could, they did and now they don’t have the old exit clause.

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  31. SPC (5,619 comments) says:

    gazzamaniac,

    Greece has not defaulted. It is just living under budget terms and conditions for bailout.

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  32. OneTrack (3,089 comments) says:

    They should just tell Greece to leave and focus on Spain, etc. Otherwise they will lose the lot.

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