The Eurozone’s Next Decade Will be Tough

Martin Wolf writes on the adjustment problems within the euro area: you can read it here.

27 replies on “The Eurozone’s Next Decade Will be Tough”

“A wave of defaults…. ”

A ‘tsunami’ might be more accurate. There will be a huge amount of debt defaults by individuals in the PIIGS by Q3 2010. The writing is on the wall. Somebody in a post on another topic used the phrase “waiting for the second half of the hurricane” I think. It amounts to the same thing…. and I don’t just mean problems for the banks. Real social problems we have not experienced before (in our lifetime).

Mark my words.

That article neatly sums up Ireland’s predicament and generally highlights important structural flaws in the Eurozone project.

Martin Wolf: “Many have argued that, within a currency union, current account deficits do not matter any more than between Yorkshire and Lancashire. They are wrong. Deficit countries are net sellers of claims to the rest of the world. What happens if people in the rest of the world sell these claims or withdraw their loans? The answer is a recession. But within a country, people can move relatively easily to another region. That is usually far harder across borders. There is another, bigger, difference: the Spanish government cannot respond to the complaints of the Spanish unemployed by arguing that things are not so bad elsewhere in the eurozone. It must offer a national solution.”

This is an interesting point. One of the reasons that the Soviet Union eventually collapsed was that the supranational organisation did not eliminate nationalist behaviour. The issue of national identity within the soviet union and how to deal with it was a bone of contention within Soviet communist ideology all the way back to Lenin’s time. According to Robert Service, Lenin thought that Communism should not pander to national identities but Stalin felt that to ignore or deny issues of national identity was impractical.

It is clear that a somewhat similar problem arises in terms of the Eurozone. The zone is designed so there can be free movement of workers and employment. However, the truth is that people don’t want to leave home, that language barriers cannot be overcome and that mutual recognition of qualifications is limited. As Martin Wolff says, the question for the Eurozone is whether it can overcome these difficulties.

It is difficult to see how a union dedicated to peace and security promoted through economic union can persist with a economic solution which causes disharmony rather than unity. A structural solution is required. Is further political integration the only solution?

In relationt o Joseph’s point, Martin Wolf commented in a recent column how fragile our civilisation is and how economic collapse seriously threatens our way of life.

@Philip Lane
If Ireland has any problems we can simply cut pork spending and eliminate tax breaks. There are billons to be saved by doing that.
Why haven’t we done it instead of cutting the blind and the disabled?
Because the income of FF party members and the wealthy would be badly hit.

We have not been in danger of the IMF since April 2009 according to the minister and Brendan Keenan. I fully agree with them. If we were there is plenty of pork to trim. What put us in danger of course was the reckless and inexplicable guarantee to bondholders in Sept 2008. If we – as Morgan Kelly advises – passed the necessary bank legislation, repealed the guarantee for pre-Sept 2008 bondholders and implemented a bank resolution we would have the basis to plan a real economic recovery in the next few years. Otherwise it’s the slow, painful adjustment the article talked about – like bone grinding against bone – and not even the wealthy foreigners coming to live here as FF/GP are likely to knock down all the empty houses before they would allow their price to fall enough to sell them.

I like this so I’m posting it again:

Question: Who get’s fired after an Irish bank collapses?
Answer: The public.

Question: Who get’s a paycut after an Irish bank collapses?
Answer: Cleaners working for the government. The blind and the disabled get their benefits cut. The bankers? They get a pay rise.


“Mark my words.”

Is it just me, or does somebody saying “mark my words” or “trust me” make you trust them less?

@Zhou Enlai

I think you’ve hit on the main challenge facing the Eurozone right now: when times were good, integration was always a force to bring us together, but now we’re seeing the opposite effect as the consequences of integration lessen individual countries’ ability to disentangle themselves from our own messes.

I was hoping he would be a Euro basher but everything he said rang bells!

A fiscal clusterf&^*! No one to blame but the bloody economists! And no one takes them seriously, except other economists.


I agree with you both.

Ireland does have the low tax rate tho. Germany will have to put up with some tasty profits and wages leaking into Ireland! As the best English speakers, with multifarious ties to USA, Canada and Australia we are also well placed to attract more than our fair (who said finance was fair?) share of FDI. And with politicians like ours ….. well maybe things aren’t so bad? At least we are not lying about global warming or terror ….

The political integration will mean the loss of our tax regime. Not really on the cards?

Cutting the tax breaks has to be done as a matter of social and fiscal urgency.

As the West struggles in vain to get it’s bankrupt bankers to abide by a new code of ethics, it seems to have no idea of the REAL problems which are developing elsewhere.

For example, here in Ireland we seem to have forgotten about the ‘GreenTech’ revolution which was to assist in giving us energy security in the years ahead. There is also no movement on a national debate on the nuclear issue. Failure in these areas will cost us dearly in the next decade.

Wolf’s point about internal devaluation is important (and has been made many times on these pages). But have we given enough thought to what ongoing domestic deflation does to the macro economy when that economy remains so leveraged? Surely all of the models tell us that our debt + deflation cannot lead to anything other than prolonged recessionary conditions?

An independent Irish civil service has existed since 1922. It will celebrate its 90th anniversary in 2012. On top of 90 years of cover up of massive child abuse does it also want to celebrate 80 years and still going of cover up of political corruption? If not, it should respond to this naked bribe by revealing all about FF/Banker/Developer criminality.

Whistle blowers should be promoted not silenced. It’s time for unions to defend them not allow them to be persecuted. The Iron Curtain fell 20 years ago. It’s time for an ethical revolution in the Irish civil service.

I’m uneasy with the speed of integration in the EU (though I support the overall project). To quote the better known Zhou Enlai when he was asked for his view of the significance of the French revolution: “It’s a little too soon to say.” I’d prefer the slowly slowly catchy monkey approach.

Currently we share a currency but not an economy. As each country puts its own interests first, the ECB’s policies/toolbox has been restricted. For example, the ECB could easily have printed money (put it to good use and probably lower the value of the euro) during this crisis. I suspect one of the reasons (besides German sensitivities) this wasn’t followed was allocating created money would be difficult.

Martin Wolf missed a critical distinction between Eurozone member states and Lancashire: banks headquartered in Manchester do not enjoy a guarantee from Lancashire County Council. Banks headquartered in Dallas are not guaranteed by the state of Texas either.

The EU’s model for integration is virtually unprecedented, which makes it an easy target for scepticism, particularly when times are tough.

Increasing intra-EU labour mobility is doubtless one path towards easing imbalances across the euro area. While EU labour mobility is still low, it is rising rapidly. Intra-EU immigrants are now the fastest growing group of migrants (10% per year since 2002) within the EU.

Also, we should not forget that the EU is still just an infant, and the euro is only a baby. When you match that against the 218 years of history the dollar has behind it, we start to look pretty strong.

@ Ahura
“Currently we share a currency but not an economy.”
Intra-EU trade among the EU-15 increased by 64% since the intro. of the euro.

Unprecedented outside Europe, maybe, but it is the model that combined France, Germany, Italy (to a degree).

German Landesbank are guaranteed by their resident states, not by the Federal Republic, no?

The Eurozone? I fancy all the zones will encounter significant financial, food + water, energy and socio-political predicaments during the next decade. Its not a matter of if, but when. The decade-long, reckless expansion of credit availability and the creation of the massive debt burdens (state, corporate and personal) have guaranteed a miserable outcome.

Poorer regions go down first – parts of Asia, Sub-Saharan Africa and Mid-east are prime candidates for failure. India might be the ‘canary in the coal mine’ – burgeoning population + fragile food production. Time frame: 3 – 5 years perhaps.

The current shenanigans amongst the politicians, CBs and associated financials of western democracies are a sort of ‘drowning man’ flailing around behaviour. It will be to no avail. I like what’s happening in Iceland: sovereignty being taken back by the citizens. We need more of this.

B Peter

yoganmahew: you may be right about the Landesbanken, I don’t know. The Eurozone design is only half an economic and monetary union, since (as everybody understood from the beginning) there is no central fisc. But we have just learned that each component state regulates, or fails to regulate, its own banks, and stands behind them (alone) if they fail. Texas can only go broke if the state borrows too much, but not if Texas banks borrow too much. Big difference.

@Philip Lane
In terms of getting out of the hole we have now stopped digging ourselves deeper into, inviting these Canadians to speak to our establishment would be a good idea.

“A petite, francophone former chief of Canada’s civil service under the 1990s Liberal administration of Jean Chrétien, Jocelyne Bourgon makes an unlikely pin-up for Conservative party leaders.

But as architect of a dramatically successful cost-cutting strategy which saw Canada eliminate a huge spending deficit in just three years, Miss Bourgon’s experience and advice has had an almost messianic effect on influential quarters of a party preparing for the same challenges in Britain.

In May, Miss Bourgon and Marcel Massé, the former cabinet office minister and her main partner in the project – dubbed “program review” – spoke about it at the Institute for Government, a think-tank in London.

They drew a capacity crowd of Whitehall mandarins and senior Conservatives including Francis Maude and Philip Hammond. Impressed, the Tories requested a private breakfast with the Canadians to find out more. The video of Miss Bourgon’s presentation became an internet hit in party circles.”

Canada is a federal system so the central government was able to dump responsiblities/costs on the provinces. Also, all this gain didn’t come without a lot of pain.

“There was considerable grumbling at the time and some industrial action by teachers and hospital staff. But Miss Bourgon said there were no major public sector strikes, business and union leaders were “by and large supportive”” and the government was re-elected (though with a reduced majority and with two cabinet ministers in badly affected constituencies losing their seats).

“Everyone had to make sacrifices – no one was exempted. That was critical,”” she said. “The collective judgement was about the total fairness of the package rather than an individual piece.””

We face years of painful adjustment. Brian Lenihan said we have turned the corner. It would have been more honest to say that the budget was only the end of the beginning. That’s why accountability for our disaster is so important. Canada only had a large budget deficit – we also have a massive moral deficit. If we are to foster a spirit of collective sacrifice we need to punish the guilty.

We have now had the revelations about the PR stunt that is the Anglo investigation. It’s time for real investigations. First send the police in to all those lenders who lent more than conservative multiples of people’s incomes. Find out the worst 400 politicians, bankers, developers and public servants. They have sentenced a generation to negative equity and low living standards. Now we must have justice. Not vengance, justice. If the constitution will has to be amended to allow retrospective legislation, superior to EU law as Germany’s constitution is, to ensure their criminal & civil punishment so be it. This crime is so vast that justice must take precedence over normal legal practice.

€65 Billion of direct costs, billions more of lost output and a huge amount of human misery requires no less.

“we have just learned that each component state regulates, or fails to regulate, its own banks, and stands behind them (alone) if they fail. Texas can only go broke if the state borrows too much, but not if Texas banks borrow too much. Big difference.”
Well, yes and no. For sure there is no centralised FDIC-style bank resolution process in the eurozone (and I expect there will be by early in the next recovery). We are sort of in the position that the US was in pre-FDIC. So, what did the states and the Federal government in the US do pre-FDIC? They let banks go bust. I’m still not quite sure why that is not an option in the eurozone? Or why the ECB as lender of last resort didn’t just suck it up. (Of course, since NCBs are responsible for their own solvency and repo in their own country, and the individual states are responsible for their NCBs, it wouldn’t have made much difference anyway, I suppose).

Only the Netherlands have let a bank go bust so far and it was a pretty half-hearted attempt on their part (as they saved the Too-Bust-To-Ever-Repay-The-Bailout ones).

It remains to be seen if, like Texas, an individual eurozone state will be let go bust. My betting is on yes. Which rather begs the question, why save the banking system to the detriment of the state?

@ YM

i thought (but could be wrong) the Landesbanken werent even guaranteed by their municipal government anymore, due to state aid restrictions etc? I thought the municipal govts now acted just like any regular shareholder. As an example, i thought the municipality that governs West LB (Berlin?) threatened to let them go bust if they didnt agree to certain provisions in their bailout?

Yes, not guaranteed, you’re right. But on that basis none of the banks are guaranteed. And yet, here we are throwing billions into them. And not just us, the Germans are at it too!

Imagine, a government standing up to its banks… tell me again how much new blood has been brought into AIB and BoI at the government’s insistence?

PS Sorry, meant to say, but the regions are responsible for them. I believe that is what Colm also meant?

@yoganmahew: His timeline was 2-5 years. So you have until Jan 2014 before you can say “it didn’t happen”.

“This leaves peripheral countries in a trap: they cannot readily generate an external surplus; they cannot easily restart private sector borrowing; and they cannot easily sustain present fiscal deficits. Mass emigration would be a possibility, but surely not a recommendation. Mass immigration of wealthy foreigners, to live in now-cheap properties, would be far better. Yet, at worst, a lengthy slump might be needed to grind out a reduction in nominal prices and wages. Ireland seems to have accepted such a future.”

Can’t see too much mass immigration of wealthy foreigners, so mass emigration coupled with deflation is the irish ‘solution’.

We have been saying that for longer than I care to remember.

Interesting quote at Fistfulofeuros:

Mark Pittaway, Senior Lecturer in European Studies at the UK Open University goes even further, by adding a CEE dimension:

“If the zone does lock weaker economies into ‘competitive disinflation’ vis-a-vis an export-oriented Germany, why is it in the interests of ‘peripheral countries’ to say in the Eurozone at all? Why is it in the interests of CEE countries to attempt to join in the first place, since if Martin Woolf is right, it would mean Hungary and other states abandoning their long-term goal of having living standards like those in western Europe?”

“Given that political legitimacy in many European states is all about welfare, and ‘European’ legitimacy is about the alleged social superiority of a ‘European model’ over its Anglo-Saxon equivalents (whether this is actually true is irrelevant, the point is that many European believe it to be true), then the potential size of this crisis is quite big. And one thing is clear, that Brussels and others will have to do some fairly serious re-thinking if they want to go forward.”

“If the zone does lock weaker economies into ‘competitive disinflation’ vis-a-vis an export-oriented Germany, why is it in the interests of ‘peripheral countries’ to say in the Eurozone at all?”

Competitive disinflation enforces for citizens the reality that we were living beyond our means and that our way of living was not sustainable. Inflation does not enforce this reality and so does not lead to political reform. It is an escape hatch for politicians and the financial system. Obviously disinflation affects investment but at least it stops us investing money we don’t have.

“Given that political legitimacy in many European states is all about welfare, and ‘European’ legitimacy is about the alleged social superiority of a ‘European model’ over its Anglo-Saxon equivalents (whether this is actually true is irrelevant, the point is that many European believe it to be true), …”

Only a brit could come up with a statement like that! It must be nice to be so sure that one is at the centre of everybody else’s universe.

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