Eichengreen on the eurozone

Here is the latest from Barry Eichengreen, who is a busy man since he will be giving his Presidential Address to the Economic History Association this evening. Congratulations Barry.

But do be careful Barry, go too far down this road and you’ll have the Irish Times accusing you of being on the far left or far right.

51 replies on “Eichengreen on the eurozone”

This is a must read …

a few comments on it in the earlier Stark thread … [prob rugby heads early in da mornin ]

back to TIME ….. and one must note that Barry Eichengreen is a Professor of Economics AND POLITICAL SCIENCE …. but more than a little concerned that this focus on centrality of TIME is coming from Economic History rather than the pragmatic politics, economics, and social psychology that Today in the EZ demands.

Little Bill Hague joins the regression to nationalism …. tut tut … c’mon Argentina – Japan were incredibly entertaining vs France …. I’m switching to All Black Time – hopefully the BIG BIG BLACK HOLE IN THE EZ CORE MIGHT, just might be addressed by our Political Ostriches before I come back to vichy_bankers time …

Barry wrote:

– If these three urgent tasks are completed, there will be plenty of time – and much time will be needed – to contemplate radical changes like new budgetary rules, harmonization of other national policies, and a move to full fiscal union. –

A spontaneous thought crossed my mind that for ‘a certain mindset’ in Brussels, it is less favorable to have plenty of time to allow for a careful transformation.

It is easier to enforce their views of Europe as it should be by claiming that “There is no other way”, blaming external pressures that force their hands to do this NOW or sink.

Congrats Prof. Eichengreen!

Not impressed. If this is the ‘best’ level of analysis we can expect from someone of his calibre, things will get worse. I really thought this guy was good. Re-appraisal in progress.

“The first urgent task is for Europe to bulletproof its banks.”

No! Prof. We need to force insolvent banks to file! E

“The second urgent task is to create breathing space for Greece.”

Very good suggestion. How?

“The third urgent task is to restart economic growth.”

Good luck on that one Prof! D-

“Interest rates will have to be slashed, and the ECB will have to follow up with large-scale asset purchases..”

This is completely off-the-wall stuff. We have neg real interest rates. As for assets (which ones is he referring to?). Many are completely overvalued and need to FALL in value. E-

@KO’R: “But do be careful Barry, go too far down this road and you’ll have the Irish Times accusing you of being on the far left or far right.”

Or a suitable case for treatment of some sort. Anyway, reading or actually paying attention to IT financial and economic commentaries (C Fell, excepted) would be very bad for you.

Brian Snr.

Dr. Eichergreen has excellent experience with countries that cannot repay debts and was involved in the Brady bonds. His advice has been pretty spot on so far. He was immediatly critical of the greek ‘bond swap’ deal straight onto the fact it was only 5% cut instead of a 21% cut and that it wasn’t even beginning to get near enough. Also the fact that the Greek cut was accompanied by monetary tightening at the time wasn’t what he envisanged.
The ECB and Europen leaders would do well to pay more detailed attention to his ideas. I think they know he is right just they are also beholden to the health of their own countries banks.

Well someone better do something.

Greek 1 Year is yielding 97.964%.

Those who are positive about the outcome for the Euro might want to consider mortgaging all of their assets and putting every cent they can muster into this sure thing.

As stated in the media, the current German plan seems to be to throw the Greeks overboard & into a situation which could lead to the collapse of Greek society and democracy. If the latter that means exit from the EU. It could be the usual German bluster though that we had thought was gone since 1945…”do as we say or u will be shot”. Either way it is not very European and is more like the behaviour of an earlier age.

If the pursue this policy they had better be sure there is a firebreak around Greece to stop contagion from spreading across Southern Europe. In that case no amount of capital injected into the banking sytem will prevent collapse & from there an incalculable ngative impact on the Global economy.

One hope the G7 responsible adults have got the Germans into a room and explained the consequences of their current policy to them.

PIIGS European sovereign debt is toxic, and cannot be accurately priced. Franco German solutions thusfar, including for Ireland, have been a fudge.

Private investors aren’t buying the fudge…prudent sovereigns like the Swiss are dodging fudy countries.

And Merkel/Sarko rigged the EBA stress tests….so now the European bank sector is toxic

Fudges need to end, as global financial stability is imperilled. Either an orderly privately funded default…or fiscal transfer. Merkel may wish rto stay on the fence, but the world cannot wait for her.

Tull, they can’t toss the Greeks out of the Euro, there is no mechanism for that. The only sanction the Germans have is to stop lending the Greeks money and to live with what follows. That probably ends with a Greek exit but maybe only at the same time as everyone else goes their own way.

But it seems that the Greeks are not to get any more bailout cash and the consequences will be what they will be. My guess is that the Euro, under that decision, has days to live. If anybody ever wondered what a 30% drop in GDP looks like, get out your cameras.

I don’t think the Germans or French will be allowed do anything which precipitates a sudden major financial stability shock

In the US press, this issue is high on the agenda:

However the problem remains…if the US or China want to call Europe ….who do they call ?

I’m more convinced than ever that step 1 to solving this mess is to set up a proper EU Financial Stability Secretariat.

Such would provide direct advice to the heads of state and Ecofin, it would have professional economists and finance professionals and do things such as
– present clear options
– cost the options
– crunch data and send warnings
– co-ordinate response

This top level secretariat is what is missing, hence confusion, mis-information and significantly syb optimal decision making. A skeleton body of 20 people should be put in place today/tomorrow.

@Desmond brennan
What you say makes sense as one part of a better functioning euro zone. But even your modest proposal could not be implemented quickly, and could not be implemented at all, if such a body is to have any meaningful powers (which, of course, it must) without Treaty changes that will take a couple of years at least.
I repeat, catastrophe beckons. The evidence for this proposition is the simple fact that important Germans, like Stark, clearly relish that prospect.

You are correct. The denial of bail out cash would lead to the collapse of the Greek govt & possibly its democracy. In that case a Greek exit from the euro & the union would probably follow. The Germans Axis is playing with fire here….again.
That said Greece is insolvent. Debt needs to be restructured. Institutional expertise from outside is needed as is a fiscal transfer. A firebreak needs to be built and today. Otherwise it is headed for a collapse in the euro, a banking crisis and a 20% GDP shock. There won’t be many BMW sold in that event.

This catastrophe has taken the guts of 4 decades to incubate. Correcting it will take some time, and I suspect some folk are going to get ‘hozed’ in the process. Lots of broken crokery as well.

So far, the attempts at salvation have failed: the predicament is far worse than either the salvors imagine, or more likely they are fully aware of the nature and scale of the matter, but are stuck in a very dark political space, without any source of illumination to guide them.

Hence, they have dusted off the Business-as-Usual manuals, but these do not seem to contain any useful advice – advice that would work in the current circumstance anyway.

Inflation (of money supply) might work, but that brings its own problems. At best it would buy some time. Unpayable debts will have to be written off. That’s the conundrum. Who loses?

“Not me boss!”

Brian Snr.

@ Philip II Where, exactly, will Germany export to?

I’m not convinced that this is as big a problem as it’s made out to be. When the Bretton Woods system fell apart in the 1970s, the Germans had to cope with a strong D-mark in a Europe where the lira, peseta, sterling and the French franc were prone to rapid depreciation. They did just fine.

Perhaps one reason why German policy-makers seem a bit bloody-minded is that they feel pretty confident that, if push comes to shove, they can do it again. It won’t be easy but from their point of view it may be better than the alternative.

After STRAK’S RESIGNATION, it may be that the real problem is German Central Bank (which historically wanted to keep the DM!) starting recently with Weber (who taught Stark, Weidmann and ASMUSSEN ( who will now replace Stark).

Can it be that policy constraints/decison-making, in Berlin, are principally driven by GCBs reluctance to allow its (own) statutory authority to be reduced, as Merkel/Schauble seem to come around to thinking that Fiscal Union is the (ultimate!) route which will/may be gurantee the Euro Project.

Piece-meal decision-making on Greece bailout was principally result of Weidmann’s reluctance to agree to any bailout – whtsoever! He’;s responsible for making it a very, very costly *trasfer union* per se, me thinks.

@Philip 2
Perhaps relish is the wrong word. ‘Choose’ is a better description. The Germans are choosng a particular path. This may or may not make sense to us. It may or may not turn out the way the Germans expect.

But make no mistake, the path we are on means the euro has a lfe expectancy of days. Greece is the pin in the grenade. Once that is pulled, the European banking system explodes and with it much else.

A ring of 7,000 police around Mr Papandreou in Thessaloniki. I have to be out this evening but if anyone spots the text of his speech anywhere would they mind posting a link here?

Alas, I think I agree, yes, choice is better. Germany has a history of making choices however…
What % prob you put on the pin being pulled on the Stielhandgranate?

Excellent analysis and contribution by Eichengreen.
Fix the banks or banking (the vortex of the implosion), help Greece and implement a Europe wide stimulus package.

Quite different from the current and conventional policies. i.e

Pretend there is no problem with Euro banks/banking, bury Greece (alive if necessary as long as they keep paying something), and keep implementing ‘austerity’/growth inhibiting measures.

I would take Eichengreen’s solutions any day. He is certainly correct when he says that Europe is on a precipice.

@Philip 2
Right now, it looks like the Greeks are saying to the Germans (a) we can do no more and (b) if you toss us over the cliff we take the system with us, so suck it up and give us the money. The Germans, it seems, do not appreciate this negotiating stance and are minded to take their chances and not give the Greeks the next bailout installment.
Because this still looks like a mildly eccentric form of suicide, a rational person would describe the odds as low.
A dispassionate observer of history and the current stance of the German body politic would, however, say it is now odds on.

@grumpy – “you have to go out and miss a speech by Papandreou?!”

Yes… but you should see the girl!

History is supposed to rhyme but not repeat. Is it possible that Greece is Lehmans . It is overplaying its hand & about to be thrown to the wolves. The adverse response will serve to demonstrate the necessity to save not just the euro bit the project. Tough if you are Greek.

I think the Germans are betting it is only a grenade and the explosion will be contained. The problem is that we don’t know if Greece is a grenade or a nuclear device. Best not to find out.

Au contraire. I think we know with a very high degree of certainty what happens oncee Greece is tossed. Our hedge fund friends decide that that makes Italy more liquid and more solvent. Yeah right.

That why it would be wise not to throw Greece over the edge. It is too big a gamble to take that you can contain the situation.

There you go again with that rationality thing. You are forecasting what you would do. Not what they will do.

Maybe so. But if you stand on the edge of an abyss your options are to jump or turn. As things stand, the German axis appear willing to take Europe over the edge for the third time in a century. As Sir Edward Gray said about the lights in 1914.

Reuters have a story the the Troika will come up with a form of words that allow Greece to get the next tranche.

Might be a longer lasting slow motion train wreck.

History is replete with people doing things that even at the time looked pretty dumb, let alone with the benefit of hindsight.
It’s always about what they will do, not what they should do. They are now far too gone, far down a path from which there is no 11th hour reprieve.

History is also littered with examples of brinkmanship where rationality prevails just when all hope is lost. The odds favour your pessimism but odds on favourites get beaten. It happened today .

They, multiple plurals? Greece, the beastly gun and the rest of the passing parade (take a bow dr honohan) that have brought us to this economic late July 1914 pass…
These things are often precipitated by technicians…think the (german) railway engineers who told the general staf to relay to Kaiser W that it was no longer possible to recall the trains of troops…

Bloomberg reporting Geithner told EU to get act together at G7, and that he said same on TV. Ditto Mohamed Al-Erian of Pimco.

And Moody’s due to downgrade French banks next week opver Greek debt:

I don’t know what those fudge fiends Sarko and Merkel are up to…and whether Italy or Greece are in or out of the Euro…their debt still causes the same threat to financial stability right now

It is interesting that when Lagarde was Min Finance that she expressed her exasperation with Sarko, and that she continues to do so.

Bar the UK, Europe has a very weak batch of current leaders…Obama is a lame duck…down to ET or the markets to intervene now

@ Tull
Your comments make sense. And they may very well steer the situation back from the abyss ….this time….
But not next time.
The Germans will blame the Greeks for their slowing economy. The Greeks will blame the Germans for theirs. The Germans will also get really resentful of an Italian lead ECB leading bailouts for what they see as Italian banks.
So – there may be a fudged solution this time but the damage done has been immense.
Nobody knows how this will play out. There’s a real possiblity the Euro survive as it is.
But maybe the more pertinent question is – do we want it to survive if the price that Europe has to pay is pan-European austerity and discontent?

‘Europe on the Verge of a Political Breakdown’ just like Washington DC and California!

‘bulletproof’ banks with tax funds from Germany and France directly and indirectly via the EFSF?

Trichet said last Thursday that banks have access to unlimited liquidity.

Governments cannot micro-manage bank lending and the rise in overnight deposits is evidence of the impact of turmoil both in Europe and the US.

Simply, the public funds could be used elsewhere to better support economic activity.

The US is as dysfunctional as Europe in respect of what is required to bolster the faltering recovery.

The FT reports that Christine Lagarde, IMF managing director, confirmed at the G7 fin mins’ meeting that that the Fund was revising its estimates of the loss of tangible equity in European banks on Saturday, saying the estimated capital losses of €200bn were “tentative” and the Fund was “in discussions with our European partners to assess the global methodology” until the final estimates are published in a Fund paper released shortly before its annual meetings in a fortnight.

‘A senior US official said the IMF had moved towards the European position…In an agreed text, issued for fear that they would appear complacent if nothing was said, the Group of Seven signed up to statements they had issued many times before.’

As regards Greece, isn’t the problem that Athens has eased up on implementing reforms because of opposition from vested interests? If there was progress in this area, it would make it easier to give the country a ‘breather.’

Political gridlock reigns in Sacramento as it does in Athens and it’s the people at the bottoms of the economic pyramids who shoulder much of the burdens.


Just a thought.

What is the prevailing mood/opinion on the Greek equivalent of irisheconomy.ie?

Not having done Greek in the Leaving it’s not easy to follow the local debate.

Does anyone know how European indices follow-on when this happens on the S&P 500?

“An ominous development has occurred on the S&P’s 500 chart. A “killer wave” has formed on the Coppock oscillator. There have been 8 killer waves in the last 80 years, all leading to substantial losses. The average loss following a killer wave is 39.7 per cent over 20.1 months. Only 1987 saw a loss of less than 25 per cent.”


History has a nasty way of repeating itself so I won’t be going into the waters any time soon.

More details on the stormy G7 meeting…seems like there is almost no agreement, and only tow outcomes, one good:

“A senior US official said that Europeans
recognised they were responsible for three-
quarters of the dark things happening in the

and the other bad, being the IMF is signalling partial climbdown on European banks


Also it would appear there are large differences between France and Germany.

Regarding brinkmanship and Greece, the next step after the Troika cuts off liquidity to Greece may well be that the IMF takes on the job by itself, rather than allowing the sort of collapse discussed above.

Greece’s difficulties are little different to those that the IMF tackles year-in, year-out. The main obstacle to resolving them is not Greek intransigence; it is that two legs of the Troika refuse to countenance the large haircuts on debt that are a standard, well tested and necessary part of the IMF’s prescription.

Cut out those two legs, treat Greece as distressed countries are usually treated, and the country’s problems will become tractable.

My position has been that there can no longer be a fudge over Euro area sovereign debt, and the issue needs to be ringfenced/crystalized as else the uncertainty threatens overall financial stability.

Secondary to this for me, is whether an orderly default (private sector pay) or true bailout/fiscal transfer occurs…or something between.

It now seems that Germany is really minded to force this issue, check out these 2 articles (and ignore some of the author’s hyperbole):



Ireland will get asked to join a fiscal union…in my view we should decline, but stay in the Euro.

I see the last minute has kicked in. After a lot of German pressure, Greece has decided to introduce a new property tax to cover the missing €1.7bn the Troika were kicking off about (I wonder where they got that idea from?). They will get their payment this month and there will be no default this month.

NOw, that’s one fire put out, where’s the next one?

Whether the Greek people will actually pay it is of course another matter. No details yet but bets are it will be a blanket tax so will hit the poorest hardest.

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