Eichengreen on Leaving the Euro

The Greek situation is regularly discussed as being “a threat to the Euro” and, on this blog and elsewhere in Irish commentary, it has revived the idea that the solution to our economic problems is to leave the Euro and re-establish our own currency.

This idea is often discussed as though membership of the Euro simply involves being locked into a disadvantageous fixed exchange rate, which we can address by getting out of the Euro. In fact, the process of leaving the Euro would be far more complex than that and could have many downsides that would offset the benefit of a more competitive exchange rate. Perhaps it’s been linked to on this blog before but this paper by Barry Eichengreen provides plenty of food for thought on this issue.

Update: Thanks to Philip for pointing out that Eichengreen has a new column on Greece and the Euro. Link here.

55 thoughts on “Eichengreen on Leaving the Euro”

  1. @ Karl

    two things immediately jumped out at me from a quick read through:

    1. “But the fact that the rating agencies do not dramatically differentiate between fiscally messy Belgium and Italy and fiscally responsible Finland and Ireland is widely commented upon”

    Oh dem were the days…

    2. the graph showing public opinion on the advantageousness (or not) of the Euro in each country. Ireland was highest (by far), Greece was lowest. Thats why ultimately we wont leave the Euro, but why there is at least a discussion on Greece leaving (which i still don’t think will happen).

  2. @ Karl

    Being an innovation economy, we should leave the euro and institute an electronic currency. We have a skilled workforce, especially with many Govt ministers extremely experienced in these matters!

    Al

  3. I think we discussed it last year.

    To me the conclusion is that it is impossible for a weak country to leave the euro buth that one or more strong countries could leave separately or together to form a new joint currency (die Euro Mark 2, which would no doubt be commonly known as the Mark) or revert to independent currencies.

  4. “it has revived the idea that the solution to our economic problems is to leave the Euro and re-establish our own currency”

    Is this being seriously advocated in Ireland? I very much doubt it.

    Even George Lee is now denying that he said we should.

    Are the Chambers of Commerce, the IEA, the IDA, the IFA, IBEC, ISME advocating it? I’d be amazed if they were.

    Are Fianna Fail, Fine Gael, the Labour Party, or the Green Party advocating it? Not that I’ve heard of.

    Is it being discussed at all beyond the usual collection of cranks in the media? No.

    And why should it be? The idea is sooooo 2009.

    A year ago there might have been some support for leaving the euro, in the immediate aftermath of the Pound sterling depreciating by 25 per cent. But, a year on, Ireland’s HICP inflation rate is 5.9 per cent lower than in the UK and, combined with the small (5% or so) rebound in the Pound sterling, Ireland’s competitiveness against the UK has improved by about 11% compared with a year ago. So, if ever there was a time to ‘ revive the idea of leaving the Euro’, now is not it. Its a dead duck issue.

  5. @JohnTheOptimist – it seems to pop up now and again although it is never thought through properly when it does come up.

    In the context of Greece though one should make the distinction between opting out and being de-facto pushed out. Their public don’t want to take the medicine their government prescribed, they are not going to be too keen to take the worse medicine that the EU is expecting them to take.

  6. @ Jto

    You’re quoting the piece above in a selective manner. What I wrote was

    “on this blog and elsewhere in Irish commentary, it has revived the idea that the solution to our economic problems is to leave the Euro and re-establish our own currency.”

    So I was pretty clear about where this idea was being put around — commenters on this blog and certain influential media columnists.

  7. Running away from a difficult situation. Doing something.

    It would certainly distract and confuse responsibility for all of what would follow. This would appeal to many with interests that were strong. Economically, there will be extra costs in reneging on these treaty obligations and no guarantee that barriers to trade would not be erected to entice Ireland back. We must recognize geography. If the NWO ever does come about, this will be profitable experience for the enlargement of trading blocs and monetary unions.

    There has been profit in the Ireland position in the EU, up until now. Those fundamentals have not changed, particularly since we are losing the illiusion of wealth that was seperating us from the safe dull average. We may have learned some useful lessons about interest rates and greed for wealth by means of leverage which will help in or out of the EU. Leaving the EMU will instantly raise the cost of borrowing money and interest rates could double. Income will undountedly drop, as no stimulus to trade can be expected from the rapid devaluation of the currency given the Depression that has now gripped three quarters of the world. Voters will face Icelandic type situations with all that isolation entails.

    There is guarantee that leaving the EMU will not mean having to leave the EU.

  8. The new paper on Greece seems to be a mass of common sense.
    Coming form someone who has thought deeply about the whole Euro construct, his opinions should be respected.
    But then I would say that, wouldn’t I.
    😉

  9. @Karl Whelan

    I wasn’t getting at you for bringing it up here. By all means do so, so that the idea can be vigorously challenged. And you do say that ‘leaving the euro could have many downsides’. Agreed. The main downside I see would be a surge in inflation. I gave figures on another thread yesterday highlighting just how much basic necessities have increased in price north of the border since the Pound Sterling depreciated, around 20 per cent in many cases, while for the same necessities prices have been stable or falling south of the border.

  10. I would draw your attention to Issing’s article in today’s FT. It is as hard hitting as it is logical. We all joined knowing the rules. We all joined despite the widespread agreement that EMU without political union was a unique experiment, fraught with specific and forecastable risks. Which have now come to pass. The biggest threat to EMU now comes, according to Issing, from not following the rules. Hence, he argues there can be no bail-out of any kind. A bail-out is the biggest threat to all our memberships of the EURO. Acept the rules and their consequences.

  11. @All

    “Well, if Europe is serious about its monetary union, it will have to get over its past. It needs not just closer economic ties, but also closer political ties. … The Greek crisis could be the Trojan horse that leads Europe toward deeper political integration. One can only hope.” Eichengreen

    I’ve commented before here on Greece etc – so briefly – our future imho is European and Euro – we benefit enormously. This particular ‘Greek crisis’ is defining moment and have followed it on this blog and elsewhere since it emerged …… I agree with B. Eichengreen that EU needs ‘closer political and economic ties’ [I would add military, social, and cultural] ……… hence EU cannot break ‘solidarity bond’ with Greece if EU to have a future – if Greece breaks it – so be it. For Ireland to even think about breaking the ‘solidarity bond’- is unthinkable. Some “bonds” are ‘priceless’ … yet of immense, if immeasurable, intangible value. Political Economy.

  12. @Simpleton:

    “Acept the rules and their consequences.”

    What if the rules are ill-conceived and the consequences dire? Hows about changing the rules in order to achieve better consequences.

    For me the key paragraph from Eichengreen’s op-ed is this:

    “…Germany is not innocent of responsibility for this crisis. It demanded an extraordinarily independent and unaccountable central bank that is now running an excessively tight monetary policy, aggravating the plight of the PIIGS (Portugal, Ireland, Italy, Greece, and Spain). Germany’s enormous current-account surplus aggravates their problems further. Germany has also done too little in terms of fiscal stimulus to support the European economy.”

    There are two ways of explaining the current tensions in the Eurozone: 1) blame the feckless Greeks/Irish/Spanish etc., 2) blame the flawed institutional design of the Eurozone.

    Of course 1) and 2) are not mutually exclusive – probably both are true. But in my view relying on 1) lets Germany off the hook and doesn’t offer viable solutions.

  13. @Simpleton
    The truth is that our government do not live in the real world. On top of their ginormous salary ministers get a special tax allowance to cover the costs of their Dublin residences if they are from outside the capital.

    Full details given on this blog in November. Two names currently in the news are mentioned.

    http://thestory.ie/2009/11/04/the-dual-abode-allowance/

  14. @simpleton – Issing has been giving a lot of interviews in recent days – he is also reported in the German press. He does not seem to be a lone voice either.

    The German press is also reporting on the response to the Greeks in an interesting way – “Greece must show tangible and measurable progress like Ireland or Latvia”. It seems we are in the good books at the moment (at least until the Greek tragedy comes to a finale).

    As I had anticipated, the Greeks will need to show their solidarity to the rest of the EZ before any solidarity is shown to them.
    @James Conran – the consequences are considerably more dire for Greece than for the EZ. Germany is not (and was never) going to provide a stimulus for the whole EZ – they have problems of their own to solve and would much rather not be bothered by countries that don’t understand the consequences of irresponsible fiscal policy. Whatever about flawed rules, and there has been lots of debate and research about that, it is not too difficult to figure out what disciplines a currency union imply.

  15. “It demanded an extraordinarily independent and unaccountable central bank that is now running an excessively tight monetary policy, aggravating the plight of the PIIGS (Portugal, Ireland, Italy, Greece, and Spain).”

    See, this is where I start to fail to understand. I understand that there is a zero bound. I understand that if you give money away free, speculative bubbles ensue. I understand that once you hit the zero bound, you can continue by debasing your currency through swapping new lamps for old (money for dodgy debt – it only really works well if it is dodgy debt, the dodgier the better). All this I think I understand.

    What I don’t understand is why you want to do this? Why do you want to have effectively negative interest rates? Why do you want to blow another asset bubble just so it can pop in a few years time? Why do you want to create a zombie economy like the Japanese have done – now caught between deflation and bust?

  16. @James Conran
    I think you may have missed the point. The rules look just fine to the people who designed them. We might have a different perspective but the rule designers (Herr Issing & co) did point out to us at the time the nature of the club we were joining. The rule designers are speaking up so that we realise we have no basis for complaining. We were told.

    @yoganwhatever
    You really have missed the point. Japan is a zombie economy because it hasn’t had negative real rates for nigh on 20 years.

  17. @ yoganmahew

    As you say, there is a zero bound. ECB rates have not hit the zero bound. The European economy is in dire shape. What is it holding back for?

    Also, there is a contradiction between two of your statements:

    1) “if you give money away free, speculative bubbles ensue.”

    2) “a zombie economy like the Japanese…. caught between deflation and bust”

    Japan hit the zero-bound as a consequence of a speculative bubble, not the other way around. It has, as you say, been mired in deflation since hitting the zero-bound.

  18. Sorry chaps, I’m not being clear.

    Japan hit the zero-bound as a consequence of a speculative bubble. As a result it has given away free money to unproductive enterprises. It is then stuck at the zero-bound. If it tries to raise interest rates all the unproductive enterprises will go bust. All attempts to have negative rates (through massive deficit spending for example – you missed that one out simpletonwhateveryoucallyourself) simply create increased malinvestment and more speculative bubbles. They are trying to stop themselves from drowning by diving deeper.

    Speculative bubbles are deeply deflationary in consequence once you try and stop them (by normalising interest rates) if they are funded by debt. Ultimately, in a fiat currency, they will be funded by debt because everythings is owed to someone else…

    When the Japanese were building their bridges to nowhere, construction costs boomed in Japan. Concrete and steel prices were high. The Chinese are doing the same thing now with raw materials prices. Yet deflation is still happening in the rest of the world, demand is still falling. When Japan ran out of stimulus, deflation resumed, but with greater air to deflate. The same will happen with China.

  19. @ Edgar,

    To be sure, “the consequences are considerably more dire for Greece than for the EZ” – asymmetric shocks etc. But I think Greece et al’s mistake was more than failure to “understand the consequences of irresponsible fiscal policy”, but perhaps also failure to understand the consequences of inappropriate monetary policy and, relatedly, sub-optimal currency areas.

    “…it is not too difficult to figure out what disciplines a currency union imply”

    Fair enough. But which countries have met the disciplines of the Stability & Growth Pact? Certainly not Germany or France – indeed their inability to meet its requirements are arguably the reason such discipline has never been enforced as originally envisaged (i.e. the failure to impose sanctions on offenders arose partially because France and Germany didn’t want to be sanctioned themselves).

    Also, does a currency union not also imply fiscal federalism (all the more so given the absence of a pan-European labour market), firmly opposed by Germany?

  20. @yogi
    You don’t reduce interest rates by ‘massive deficit spending’. Fiscal and monetary policy are, you may be surprised to learn, quite different things.

  21. Le Monde today:

    Le délai de trente jours accordé à Athènes est un compromis entre ceux qui estiment, comme en France, que l’effort demandé aux Grecs est d’ores et déjà considérable pour un pays en récession, et ceux qui veulent, comme en Allemagne, forcer le gouvernement grec à durcir encore l’assainissement des comptes publics.

    La Banque centrale européenne (BCE) s’est rangée du côté de ces ” faucons “, partisans d’une ligne dure : elle exige, d’après nos informations, que le déficit soit réduit de 5,25 points de PIB dès 2010, alors que les Etats ne demandent, à ce stade, qu’un effort de 4 points.

    Dans la soirée, les ministres des finances se sont bien gardés de préciser quels seraient les outils à leur disposition pour tenir cet engagement de principe.

    Car les avis divergent toujours au sujet des modalités d’un éventuel plan de soutien à la Grèce. ” Nous sommes confrontés à un gros problème allemand “, dit une source européenne. D’après elle, ” aucune réponse ne sera formulée, tant que le problème ne se pose pas “.

  22. @simpleton
    Go on then, you tell me how you make interest rates negative…

    (Nothing to do with fostering inflation through massive deficit spending using samurai bonds as funding…?).

  23. @yoganmayhew

    Go read Milton Friedman. It’s all about helicopters. And central banks buying bonds, not issuing them.

  24. Central banks issuing bonds? Why that sounds to me like fiscal policy, not monetary…

    Remind me again what negative real interest rates are? I was under the impression that it was interest rate – inflation rate… that would be two variables and two levers.

  25. @yogislowlearner

    You said;
    ‘Nothing to do with fostering inflation through massive deficit spending using samurai bonds as funding’

    I’ll try and speak slowly: creating inflation at the zero bound is done by buying bonds, not issuing them

  26. @Kevin O’Rourke

    As noted by Edgar and others earlier, French banks hold ‘lion’s share’ of Greek debt – others German, Dutch, Swiss …….. hence the projection of ‘un gros problème allemand’ here and French sympathy for ‘l’effort .. considérable’ by the Greeks [and 5.25 in one year is massive] ….. intensely political stuff – if it wasn’t so serious it would be fun!

  27. @simpleton

    So you are telling me that if I, the government of Japan, borrow massively and pump that into stimulus packages of public works, it is not going to be inflationary in the short term? That if I increase social welfare spending, that that has no effect on money in circulation?

  28. It shouldn’t be forgotten that all the PIGS got truckloads of cash from Germany.

    Ireland will not become a net contributor to the EC budget until 2013 — 40 years after joining and over €40bn in net aid.

    Germany had its own problems following the 1 for 1 exchange of the D-mark for the Ostmark on reunification and later it had the difficult task of reducing generous state benefits.

    It took 18 years from the fall of the Iron Curtain in 1989, for the first budget surplus to be recorded.

    Each year since 1990, German taxpayers had pumped more than $100 billion into East Germany. Approximately $3 trillion had been spent on infrastructure.

    While there is still a need for further reform of spending and tax, it’s not clear how running up bigger deficits will help the smaller countries.

    The CAP remains a big farmers’ welfare program and the EU internal market in services is still only an aspiration.

    Germany is the export powerhouse but reformed Med countries should still be able to prosper.

  29. @simpleton & yoganmahew

    As an economics illiterate, can ye continue this to hopefully some point where I can figure out what ye are saying or even arguing over.

    p.s. if ye need to slag someone off or think a point is too obvious so as to be patronising to either one of ye; you can address the comments to me 🙂

  30. @Garry,

    Apologies – that spat was both self-indulgent and tedious in the extreme. Sometimes I get fed up with the economic solecisms visited upon this blog. I have no role as policeman, nor should I even try. But I can’t resist one last dig:

    @yoganmayhew
    Precisely. The government of Japan has been following your policy advice for 2 decades – spending lots of money, financed by bond sales. Those cumulative bond sales have resulted in a debt/GDP ratio of 200%. Japan has had no growth for those 20 years and is still stuck in outright deflation. It’s called a liquidity trap. Monetary policy could have cured that deflation (it really is very very easy if you try) but they chose not to do so.

  31. @simpleton
    It is not my policy advice. It is the advice of people who now say “ah shure yis should have tried outright bond purchases all along”… of course that’s not what they said at the time. The great Friedman-acolytes proposed deficit spending as the solution to Japanese woes.

    I think it’s a stupid idea.

    My point, which you chose to turn into a series of ad hominem attacks on me, is that you can’t cure a liquidity trap with liquidity. It doesn’t matter if the liquidity is deficit spending, it doesn’t matter if it is QE, it doesn’t matter if it is outright purchases.

    Once you hit the zero bound, it is likely your economy is a bucket with holes in it. You have to fix the holes before you put any water in it. You can catch the water falling out the bottom and put it back in the top (deficit spending) or you can stick the bucket under a tap (printing), but it is not going to cure the holes.

    Therefore, negative interest rates at the zero bound are irrelevant.

    Supposing you flood the japanese economy with liquidity and generate wild inflation. Will that bring japanese asset prices and disposable income back into balance? Will it introduce workplace flexibility? Will it boost the reproduction rate? Will it reduce the resistance to foreigners? Will it fix the zombie banks? Will it do anything other than start another speculation that will collapse with the same distressing symptoms as the last one when you try and normalise interest rates and cut off the purchases?
    (I’m not saying that one, some, or any of these are the problems with the japanese economy; they’ve all been put forward at some time or another and many more besides – the age-related one, being intractable, is popular at the moment…).

  32. @Al
    I don’t agree with leaving the euro but the insiders must give us back our country. As I have said before, after a few years outside the Euro the establishment would be pawing at the door trying to get us back in. Where upon there would probably be another crisis…leading to demands that we leave the Euro. Ireland is just Greece without the sunshine and the Mediterranean. If you think the Greeks are angry now try giving them austerity PLUS gray skies and the Irish sea. Like Greece, our only long-term solution is to transform our governance.

    @All
    Interesting article from Sept 2009 here:

    “It (NAMA) is worthy of substantive debate — one based on factual analysis, not misinformed cynicism.”

    http://www.independent.ie/national-news/call-spade-a-spade-and-bury-the-myths-1885338.html

  33. @james“…Germany is not innocent of responsibility for this crisis. It demanded an extraordinarily independent and unaccountable central bank that is now running an excessively tight monetary policy’. How is the monetary policy tight, the ECB rate is 1 Percent. This reflects the current stagnated economies of europe. I see no reason why old prudent german savers should suffer inflation (particularly damaging for pensions) in order to devalue the debts of the reckless. The problem with the EMU over the last few years was that we had too low interest rate for too long and nobody in ireland recognised this as a bad thing. Does anyone remember George Lee telling us the bad news of increasing interest rates when they finally did start to rise.

  34. @Sam
    As was demonstrated when our government boasted of being closer to Boston than Berlin – while we were still receiving very large sums from the them, in a river of cash that had flown to us for many years – the Germans can expect little gratitude from official Ireland.

    @ALL
    Also of interest.

  35. @yoga
    Repetition doesn’t make a dopey argument right. It’s still dopey.

    Liquidity traps can, and have, been cured with liquidity. Theory and evidence, for once, is pretty clear on this.

    No matter how many times you say it, fiscal policy is not monetary policy. Look it up in your ladybird economics textbook.

    Curing the liquidity trap is a necessary but not necessarily sufficient condition for curing Japan’s ills. You started by arguing that Japan’s problems had a simple and single cause: a bursting speculative bubble. Now you say it’s all a wee bit more complex than that. Well done. Progress.

    Neither Friedman nor his acolytes would ever ever advocate stimulative fiscal policy. Again, I would refer you to Friedman’s writings. But that would need access to a library I guess.

    Taking the piss is not the same as ad hominem.

  36. “One can only hope” concludes Barry Eichengreen.
    My hope is that such analysis would be based on sound knowledge of both institutional law and practices.
    “Other member states can provide assistance to Greece only by bending the rules, which prevent them from lending except in response to natural disasters or circumstances beyond a country’s control”, states the article.
    Not so, if we takes member states to mean just that, and not the EU institutions.
    Unfortunately a lot of the associated analysis is tainted by this and other misconceptions.

    The paper opens on the line
    “Europe is now moving ineluctably toward a bailout”
    whereas
    “Completing its monetary union requires Europe to create a proper emergency financing mechanism. ”
    The two solutions are radically different.
    There are other outcomes too. I for one don’t see why an “emergency financing mechanism” would have to be both explicit and unconditional
    I’d have done exactly like what the Heads of State did do.

    @ Kevin O’Rourke
    You plant a quote from a non-English language newspaper article of no special value. And you certainly don’t indicate why it should be of value.
    I read the article you quote from and it fails to stress the conditionality that JC Juncker attached to what he said…
    ie. *IF* Greece’s measures are found to be lacking, Eurogroup will vote more on 16 March. That was always Eurogroup’s position.
    Far better off going direct to the source, and transcripts of Ecofin press conferences are available.

    Kevin, you launch interesting threads (IMF one for instance of a fundamental nature) but no follow up, no analysis on your behalf!

  37. @simpleton
    Okay, which liquidity traps have been cured with central bank purchases? That haven’t resulted in a worse problem down the line? The Japanese monetary base was expanded by 50% between 2001 and 2003 ( http://people.su.se/~leosven/papers/jep2.pdf ).

    I’m not arguing that fiscal policy is monetary policy. What I am arguing is that inflation is not always and everywhere a monetary phenomenon and that neither is deflation.

    I am also arguing that curing the ills are a necessary condition for curing the liquidity trap, otherwise the liquidity trap will return, as has appeared to be the case in Japan once positive inflation was achieved and interest rate rises were attempted.

    My understanding is that Friedman thought stimulus to be weak and temporary in effect, but that his acolytes thought it enough to bump an economy out of mild deflation. Initially that was what Japan was faced with.

    If you are so certain, why don’t you wave your monetary wand and fix all our ills?

  38. @ Sam

    ECB policy is too tight because Eurozone unemployment is 10% and inflation is well below the 2% target (which is itself arguably too low a target).

    You “see no reason why old prudent german savers should suffer inflation…in order to devalue the debts of the reckless.”

    What inflation? Also, the recklessness of borrowers is equivalent to that of lenders. Ultimately the lenders were your prudent German savers. In any case millions of non-reckless people (including Germans!) should not suffer unemployment because of anti-inflationary policy that borders on sado-monetarist paranoia.

  39. @yogan

    “All attempts to have negative rates (through massive deficit spending for example…”

    Massive deficit spending should drive interest rates up, not down. If the government is borrowing lots of money the demand for capital is increased, hence so too is the price of capital (i.e. interest rates). Obviously this is an “all other things being equal” principle – if private demand for lendable funds is plummeting (as is often the case when the govt engages in big deficit spending) then interest rates won’t rise. But deficit spending won’t cause them to drop.

  40. @James
    “Massive deficit spending should drive interest rates up, not down. ”
    I agree, that’s what the theory says. But it hasn’t in Japan, why not? It hasn’t in the US or parts of Europe either, but that may be exceptional liquidity support in Europe (tantamount to QE, given the level of sovereign debt issue) and QE in the US.

  41. @yoganmayhew

    “Okay, which liquidity traps have been cured with central bank purchases?”

    How about much of the Western world circa 2009?

  42. @simpleton
    It’s all cured? Nothing to do with competitive devaluations? I believe you are giving me a French revolution example… as zhou would say, it’s too soon to say if it has been a success…

  43. One thing to bear in mind in these discussions and something I find is usually not properly relfected is that the justification is not simply to seek a reall effective depreciation of the exchange rate.

    Instead it is a decision to restore real effective exchange rate flexibility.

    The distinction is of upmost importance, because the costs to economies contained within a sub-optimal currency area will ocntinue to accrue over time. Greece, Ireland, Portugal etc. will continue over time to experience REAL economic adjustment in the absence of price flexiblity until such a time (if not when) as the constituent Euro countries suffer less from assymmetric shocks, have fully integrated labour markets and labour mobilitiy, etc etc.

  44. Something I remeber Patrick Minford told me he used to tell his undergrads. Every morningn in front of the mirror repeat to yourself 10 times. “the exchange rate is just a price”

  45. @James Conran – “But which countries have met the disciplines of the Stability & Growth Pact?” – that is a fair point but again there is an obvious asymetry – the large countries are in the drivign seat.

    I noted before that Greece is going to be pushed very hard, and possibly out. Hans Eichel former German finance minister is quoted today as saying that it had been a mistake to admit Greece into the EZ.

    @Michael Hennigan – I raised the fact that the German government would rather focus on other matters and that they have their own experience of bailouts through reunification and their own domestic bailouts of federal states significantly in the Sunday Business Post last sunday:
    http://www.thepost.ie/newsfeatures/germany-reluctant-to-bail-out-the-piigs-47390.html

    @sean o’ – I agree with Karl – there are huge downsides to leaving the Euro so I think you are wrong.

  46. @Edgar

    Any chance of a few snippets, preferably in local lingo, on references to Nero, milk, asses, senators, Roman epics and so on as local political discourse in Germany heats up ………. (-;

  47. @james ‘What inflation? Also, the recklessness of borrowers is equivalent to that of lenders. Ultimately the lenders were your prudent German savers’
    Sure banks and individuals who bet on a wrong horse should lose their money (unfortunately this isn’t happening enough) but you cannot throw my elderly germans into that cohort. They have nothing productive to do with it so they have it in pension funds and on deposit where it SHOULD then be reused and invested in productive enterprise. They hold no responsibility and took no risk in lending it to the wrong activities. True we don’t have inflation now which is good but with the stimulus advocated by some we soon would. Someone with money on deposit is making money available at no risk, this is prudent and it would be a ‘moral hazard’ to engineer hyper-inflation to bail out those who borrowed and lent recklessly. Having ECB rate at 1 percent is help enough and inflation won’t be far away in EMU (not sure about ireland).

  48. “They hold no responsibility and took no risk in lending it to the wrong activities.”

    Of course they took risk. I’m sure they didn’t think they were, but they were – if their bank went bust by lending to “reckless” borrowers then their savings were at risk. I’m sure many borrowers you consider to have been reckless were in the same boat – do you think they expected the property market/world economy to collapse?

    Lack of inflation is good for savers but it is bad for borrowers. You (like many others it has to be said) seem to think savers are necessarily virtuous and borrowers probably sinful.

  49. @james
    I certainly don’t think borrowers are sinful but many did suffer from ‘irrational exuberance”. This is what caused the problem, people being overly optomistic.
    Sure in theory individual savers are subjecting there money to some risk, but I can’t see how they hold any responsibility for the crisis,
    , Hence my disdane for a stimulus policy that would cause inflation.
    But of course risk taking is importance and a balance need to be struck. If the ECB rate was 5 percent I would be calling for it to be lowered.

  50. @James Conran
    “Lack of inflation is good for savers but it is bad for borrowers. ”
    Is this so? Interest rates rise more quickly than inflation (they rise at the rate of inflation expectation which overshoots actual inflation on the upside) maybe?

    The result is that savers are insulated and borrowers penalised.

    That is, if you have a central bank that actively seeks to limit losses due to inflation…

  51. @ yogan – but don’t forget that the real burden of the principal is diminished by inflation as well.

  52. @James Conran
    I agree with you, but those who set interest rates know this very well – unless they incrementally take the loss of principal by interest, they lose. Now, can you really see a situation where banks would lose out by inflation? They would all go bust! That could never happe.. eh, well, um… you win!

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