It is time for outsiders to save the single currency Post author By Philip Lane Post date September 6, 2011 Barry Eichengreen, Peter Allan and Gary Evans explain in this FT article. Categories In Uncategorized 48 Comments on It is time for outsiders to save the single currency ← Irish Government Debt and Implied Debt Dynamics: 2011-2015 → Ireland’s Competitiveness Scorecard 2011 48 replies on “It is time for outsiders to save the single currency” Wow ! A good intervention, though I’d caution against too much trust in the EBA, as it is a fledgling organisation (CEBS was only a top level forum), and has already sullied its bib. Oddly…oddly…our own (new) Central Bank staff have a lot that they could contribute, the recent PCAR/PLAR is the deepest ever European stress test, and could serve as a partial model to Europe. “Asian countries should want to do this: their own stability hinges on the stability of the world economy, of which Europe is a critical part”. Yes, that is some argument. The article says us Europeans are too incompetent so you Chinese should come riding to the rescue. I don’t think so. What about injecting their own reserves into China to bring up the standard of living of the 700,000 million Chinese living in dire conditions, rather than trying to repair, “spoilt” Europe to use a Mr. Ogle phrase. Someone is going to have to ride in and save it because Angela and Van Rumpypumpy used the ‘excluding’ word last night. As in, they would not support any member (i.e. Greece) being excluded etc. You need to appreciate that in PR, the gradual removal of a word like ‘not’ is all part of a planned strategy (think Orwell/Animal Farm). I guarantee you that exclusion is precisely what they will be discussing at the moment. Their worry though is the domino effect. I also thought it was interesting that Angela Merkel put Italy in the same sentence as Greece last night. I can’t recall the exact word she used but it was something like ‘fragile’ – that should make for a week on the markets that she would describe as ‘not dull’. An improvement in the dysfunctional systems in both Barry Eichengreen’s own state and at federal level, could have benefits both for the US and Europe. At least as bad as Europe is to manage, it does not have a situation akin to one where a private sector company, Amazon.com, is threatening to bankroll a public referendum on a proposed tax measure. As for Asian countries funding European banks from reserves, that is unrealistic as Robert Browne suggests. Japan, South Korea and the city state of Singapore are the only developed countries in the region and the first two have their own challenges; the rest are emerging with significant low income populations – – propping up European banks to cut the debts of what to Asians would be wealthy countries, is a non-starter. China is more likely to invest in European sovereign bonds as the alternative is exposure to bank losses and embarrassment at home. @Robert Browne “Yes, that is some argument. The article says us Europeans are too incompetent so you Chinese should come riding to the rescue. I don’t think so. What about injecting their own reserves into China to bring up the standard of living of the 700,000 million Chinese living in dire conditions, rather than trying to repair, “spoilt” Europe to use a Mr. Ogle phrase.” Yes, this could and should be done not only by releasing the reserves but also by allowing the Chinese currency to appreciate but economic empowerment of Chinese internal market is not going to happen any time soon. Once Chinese bellies are full and there’s a plasma TV in every house the people may become hungry for democracy. So less money and potential to lose power are not very appealing to KP of China. The Euro is not worth saving It is a disaster It brought nothing but trade imbalances and credit bubbles Let it die – it’s not worth saving I think only the insiders can save the Euro and it appears the JCT is back in the market today buying Italian and Spanish debt as reported by CNBC. PR Guy has a point…you can be sure they are trying to figure out how to get rid of Greece without creating the domino effect and Silvio isn’t helping by dithering with his austerity. Euro project is worth saving – also for Irish Tiger! Yet the this mkes clear my argument (earlier) that the weakest link in the eruo chain is the health of its banking sector. European banking system is the principal holder of sovereign debts; eg. Italy, France nd Germany. Current market developments – like Lehman case in 2008 – could easily precipitate a run on the banks in EU. Eventually also affecting the banking in Lond City. That would be worse than 2008! @PR Guy: the famous vote of confidence in a soccer club’s manager, eh? This is what eurointelligence had to say: According to Financial Times Deutschland a Greek exit from the eurozone is no longer a taboo for Angela Merkel’s coalition. The paper quotes Merkel from her meeting with CDU and CSU deputies last night where they discussed the disruption of the troika talks with the Greek government due to the lack of delivery on the agreed consolidation package. Merkel denied that a Greek exit was an option but according to FTD she did so in a less categorical manner than previously. This is not going to happen. The politics of it, not least in Europe, are simply impossible. @ PR Guy +1 Well spotted! No lads yee are missing the Bull in the China shop – the SNB has signaled it will no longer play with the ornaments All that useless 30 year old dollar credit can only flow towards the shiny stuff now – recaptilising the ECBs balance sheet. Ireland is in a trap. If there is a global recovery interest rates in ECB go up and the pressure that puts on the domestic economy offsets th export boon If there is a global recession there is no growth and debt to GDP will remain stubbornly high. There is a very high likelyhood that Spain or Italy will exhaust the meagre funds available to the EFSF and that we will be well and truly screwed in 2013. We will have endured 5 years of high unemployment and emigration at that stage only for both to get worse. The break-up of the Euro will be bad for Ireland but is possibly the only way out of the current mess for us. If we make contingency plans for it now we could get through it. If I hold CHF today – where do I go tomorrow ? @The Dork of Cork – the Swiss Central Bank has announced that it will hold a target exchange rate against the Euro. @Edgar Yes, at zero interest rates and if the SNB holds the line – where do I go ? There can only be one in a debt based system that has reached debt saturation. Gold will sterilize all those useless eurodollars (which are not necessarily in Europe) @ Dork If you hold CHF don’t spend them in CH. Meat is 3x prices in Cork. @ All FYI http://doc.research-and-analytics.csfb.com/docView?language=ENG&format=PDF&document_id=804326740&source_id=em&serialid=OtY9EhZvgwxb53tmOyt21DVQZpT6XNymEqnLTTSYhI0%3D June seems like an age away. I was struck at the time by this Sarko quote : Pledging to exercise control over France’s own debt, he said: “I wasn’t elected so that France would experience the agony of Greece, Ireland and Portugal.” It’s not exactly the spirit of the three musketeers Back in February comments by Hildebrand of the SNB drove the CHF beyond 1.30. He said that Switzerland needed higher interest rates and that the then current level , also today’s, was unsustainable. Drastic times. @Seafoid I hold exactly 750 CHF – to get me through a few weeks of a possible currency crisis – I have archaic nationalist pre-programming and its hard to dump the old floppy disk despite the new information inputs into my now corrupted files I am not sure the English market will accept CHF paper but I have not experimented with that exchange yet……………………. I wonder if something is going on. I haven’t see this message on ft.com before SERVER LOAD Our server was unable to complete your request due to high volume. Please try again by clicking your browser’s reload button. If you receive this message again, wait a few minutes before attempting to access the page again. The Lehman’s word is being bandied about a lot lately. What was so awful about the Lehman collapse was the disorderly nature, there was utter panic about counterparty risk, and most banks lied about it. Similarly the toxic sludge of low grade MBS’s (and derivatives) caused massive uncertainty. Greek debt is now toxic, with other countries also tainted. I don’t doubt that Merkel and co can get the most efficient deal out of Greece et al via austerity and economic reform. Indeed let’s say she manages to get a great result: say 15% more of debt repaid. The problem is that in the real world, that toxic uncertainty cannot be kept on bank’s balance sheet for years. Yup what she can get may look like the most money…but the real economy will be ruined by it. @DOCM Thanks for the link. I note from the document that it was amended on the 13 th of July 2011 to provide 780b giving effective 440b availability. Seems to be a misconception around here on this. It simply is not enough and it is now unlikely that Angela can increase it further. @ Seafoid When sensible people like you think “there’s something going on” it shows how close we are to real panic When idiots like me then go and check the link just to make sure – it shows we’re closer still This might be what they’re looking at – German industrial orders apparently fell more than expected http://www.ft.com/cms/s/0/5c8ce13a-d872-11e0-8f0a-00144feabdc0.html Doesn’t look too bad to be honest though – but it’s all the little things that are beginning to add up at this stage Looking a sub headline from the FTs Swiss headline. BULLION TUMBLES……….. to yesterdays spot price. Give me a break – it will have to get to a 5 figure sum to clear the debt if these bozos want to keep this debt based monetory system. The Swiss move is perhaps the first stage back to a Gold standard system – this is big. Until now we have had a system of freefloating currency pairs only – is the monetarist era over ? Unlike Sterlings fail against Soros – the Swiss are trying to reduce the value of their currency rather then peserve its value. A CB can do this in its sleep. @ Ceterisparibus The Credit Suisse note is a mine of information and its assessments are, in my my non-technical opinion, judicious. (I am not, however, sure about the assessment at the top of page 8 in relation to lending for the benefit of financial institutions. The US ran a guarantee scheme during the Lehmans crisis and none of the banks involved were too shy about their reputations – including Morgan Stanely – about using it). On the volume of funds likely to become available under the two sets of agreed changes, I thought everyone was clear on this. The volume of funds, in any case, does not seem to me to be the decisive issue. The real problem is the issue of flexibility and the strong impression that Germany is giving of not actually believing in the effectiveness of a construction of her own design. For those waiting, or impatient, for the balloon to go up, I recommend: http://www.ft.com/intl/cms/s/0/a0074f52-d79d-11e0-a06b-00144feabdc0.html#axzz1X5bhTcVR http://ftalphaville.ft.com/blog/2011/09/06/670431/athenian-rhapsody/?updatedcontent=1 Brilliant. @D Of C… “The Swiss move is perhaps the first stage back to a Gold standard system – this is big.” Care to explain a bit more here? If the swiss are weakening their currency surely the move is in the opposite direction than toward a gold standard system? @Grumpy It would be great performed by Merkel and Trichet. Can’t see the IMF issuing any enhanced letters of credit to Greece following the recent breakdown in negotiations with the ‘Troika’. In the case of Greece, Italy and several other states their situation would improve immensely if they actually collected taxes. So far there doesn’t seem to be either a popular or official appetite for any changes. Regarding Chinese enterprise, it (CostCo) has already pushed money into the port of Piraeus, effectively taking control of it. Stories vary but it is generally believed that several politicians were able to capitalize on land deals during the process. The long term problem for Europe, in my opinion, is whether it will be able to produce stuff in sufficient quantity and at price points that can be sold competitively both at home and abroad. This seems to get lost in professional commentary. Maybe that’s the price democracies pay for developing hosts of non-market institutions, professional elites and bureaucracies. They destroy themselves competitively at first and then politically. @JudgeJohnDeedes Post 71 all currencies became freefloating currency pairs – you hear a lot of talk such as reducing fiscal defecits to bring back growth which is a nonsense in a pure monetarist system. Why – because even under a Gold system new money was created when given to the miners , this created a discipline of sorts where the CB controlled its bank sisters credit indiscretions. However under Bretton woods II credit has already been hyper inflated – only fiscal expansion can soak up the credit losses if not defaulted on. Previously under Bretton woods all currencies tied their value to the dollar which tied its value to gold. The SNB could be signaling the end of the freefloating currency system which ultimately reached its zenith when Soros attacked the BoEs Sterling fix. Before that time (late 70s 80s) it was just a nessary fiction. But the SNB is not trying to peserve the value of its currency such as under the Sterling episode – it is trying to destroy it. You see all those CHF buyers will naturally move to Gold – the SNB wants this – its the only central bank that can make this happen. Dollars can no longer get a real positive yield and the SNB does not want them flowing into Francs because of trade disturbance issues. The Debt system is now recapitalizing itself – moving away from the dollar / oil standard to a much higher freefloating Gold or Gold standard system. All currencies in the future may just tie their value to a freefloating Gold system most likely. PS – this is just a opinion of a Dork – do not take it as Gospel. However its either a debt free token system or a much higher gold price / debt system – this present monetory system is not fit for purpose. Thanks D of C. Interesting info. Clearest sign yet that Angela is preparing to oust Greece (in my humble opinion)… “Greece must meet conditions for aid, Merkel tells party German Chancellor Angela Merkel told members of her Christian Democrats that Greece will not receive aid payments due this month unless it meets conditions of the rescue, two party officials said. The remarks, made at a meeting of ruling party lawmakers in Berlin late Monday, were repeated by Finance Minister Wolfgang Schaeuble and reiterate existing policy, one of the officials said, speaking on condition of anonymity because the talks were in private. “It was very clear that we expect Greece to meet its obligations, that there can’t be more aid without adequate behavior by Greece,” Peter Altmaier, the chief whip for Merkel’s Christian Democratic Union, told reporters after the talks. “But it was also very clear that we stand by our commitments within the euro stabilization and that we’re ready to maintain and defend the euro as our common currency.” Maybe others think differently. I think one very dangerous factor in the current mess is the lack of global co-ordination. The US acted unilaterally with QE1 and QE2 causing massive problems for countries like Brazil. Although some effort was made in Q1 there isn’t a snowball’s hope of getting agreement on how to rectify the global imbalances that were such a part of the build up to September 2008. Now Switz has gone on a solo run. What other countries are likely to follow in their own narrow self interest ? And what will it mean for the bigger picture? @Ceterisparibus – it is usually a good idea to figure out who comments like that are aimed at. The main news from last night is that a sizable number abstained or voted against the July 21 agreement at the parliamentary party meeting. While the total number still leaves a narrow majority there are apparently more considering voting against. I expected the SPD to help out but it appears that presents are not on offer! This is from the grauniad of a few weeks ago. http://www.guardian.co.uk/world/2011/aug/05/greece-healthcare-brink-catastrophe If Greece is forced out of the Euro the suffering will be immense . @Edgar I realize she was speaking to the faithful but must also have in mind the reaction of her junior government partners. My view is that she is saying we will defend the Euro as we have already stated unequivocally but Greece is not meeting the targets set for them and won’t get any more money. Interestingly, I see that leaked reports are saying that Greece has failed to meet two thirds of the targets. @ Ceterisparibus In any case, what else would she say? Greeks outside the PAYE sector make a virtue of not paying their taxes, especially VAT, arguing that the government wastes them! Some Greek islands, and not the poorest, operate soley on the basis of cash. The game of chicken as to who will blink first will continue indefinitely, notably with the two countries evidently incapable of running a modern economy: Greece and, unfortunately, Italy. Salvation for Greece lies with the Greeks, not Germany. @DOCM I think salvation for the Greeks lies with the Drachma. It’s looking inevitable. 2 year finished at 52.3%. Cutting off the funding tap to Greece, and resultant default, would at least give certainty. But if it happens in a shambolic fashion from this German constitutional court, people will rightly take a very dim view of the Germans. I see no need for Greece to exit the Euro, and in the short term at least, moving to the Drachma is not feasible or desirable. The options now re Greek debt are 1) Further fudge 2) Writedown with the holders taking the hit 3) Writedown with countries taking some or all of the hit People seem to be missing that option 1 is the worst option…and if option 2, that needs to be orderly. @Desmond Option 1 would appear to be a non- runner. The ECB are getting increasingly noisy about politicians sorting it out and they control the purse right now. Option 2 is not working as the banks have until Friday to sign up for haircuts and so far only 60-70% have indicated willingness and the Greeks are saying 90% is mandatory. In any event 21% is insufficient to help Greece in a meaningful way. Option 3 is going to be a hard sell in Germany, Austria and a lot of other countries. Then you have the problem of collateral. That raises a myriad of problems including IMF seniority. I cannot see the Greeks giving their islands as security to the Finns. All you hear from Von Rompy is “it will be all right on the night lads” As for a Greek exit not being feasible..it appears events are overtaking the Greeks. The Troika inspectors did not walk without major cause. So it is a matter of what are the effects of the failure of the Troika to release the next tranche of funds. Incidentally, CNBC reporting the DOW are saying Italy,Spain and France are in the firing line. Nicky won’t like that. I’m actually past caring about the Euro at this point. It really is an ex-Parrot. The continent needs to move on. In case anyone missed this wonderful UBS note earlier: http://www.forbes.com/sites/afontevecchia/2011/09/06/greek-euro-exit-60-currency-devaluation-default-banking-sector-collapse/ A real, real problem at this stage is that the EU has no Financial Stability Secretariat…so cohesive policy planning and contingency planning don’t exist. There’s a real risk here of getting bounced into some significantly sub optimal decision. I would suggest one needs to be setup pronto…and staffing to start tomorrow. @ All I posted this on the ‘Ireland in Europe’ thread but it also fits in here. @ All FYI the press release of the German constitutional court. http://www.bundesverfassungsgericht.de/pressemitteilungen/bvg11-055en.html Donal Donovan’s summary of the various avenues open in the context of national “inability to pay” is also of interest. http://www.irishtimes.com/newspaper/opinion/2011/0907/1224303634602.html Notably, the following extract: “The use of International Monetary Fund resources also involves a subsidy. But this is less overt to the taxpayer, since the financing mechanism of the IMF can be accounted for in different ways in national financial accounts and parliamentary approval for each specific loan is not required. Former IMF managing director Johannes Witteveen has recently proposed that the fund create an enlarged “debt facility” financed by all countries (including cash-rich emerging nations like China). This would spread the cost of the subsidy burden more broadly among the net contributors to the fund and might circumvent to some extent the political “lock” exercised by Germany on increasing the EU bailout facility”. Maybe the constitutional court has a view on the constitutionality of how German contributions to the IMF are dealt with! At least one finance minister in the Euro Zone is reportedly speaking openly about his doubts that Greece can be “rescued”. It would not surprise me if many more are also speaking openly about this by speaking in their mother tongue. The irony of all this however is that it would seem to me that the desire to “rescue” Greece may well be more important to some other EZ countries than it is for Greece. Recently I have been listening to interesting anecdotal evidence which suggests that Greece has actually been hoarding Euros (which may well be the countries future foreign reserves) ahead of a possible conversion. Perhaps this “Euro hoarding” is how Greece is “rescuing” itself ahead of an increasingly probable conversion back to the drachma. As I understand it the complete process of coversion would take 12 to 18 months during which time two currencies (Drachma? and Euro) would operate circulate in Greece. It would not surprise me if Greece is going to reintroduce a national currency very soon and despite the use words like “exclusion” and “rescuing” by non Greeks I hope the sparation is amicable and Greece can still continue as a satisfied democratic member of the European Union regardless of what currency it uses. IMHO it is important in the middle of all this to keep in mind that the Euro currency is not the only currency in the EU and Europe. It is, after all, the European Project which has kept Europe at peace for decades not the ECB. Comments are closed.