Is It Easier On the Outside? Post author By Philip Lane Post date November 10, 2011 See this post at the Economist’s Free Exchange blog. Categories In Uncategorized 25 Comments on Is It Easier On the Outside? ← Public Capital Programme → Europe’s Banks Turned to Safe Bonds and Found Illusion 25 replies on “Is It Easier On the Outside?” The graph accompanying this post risks suggesting that all these countries were at the same income level in 2004. @Philip Lane Apologies for being off thread but I have just listened to a Dutch MEP [Corien WORTMANN-KOOL] on Channel Four News advocating more of the same for countries Like Greece and Ireland and Italy that ‘spent more than they should .. etc’. It was like listening to a neocon like the dear departed Bini-Smaghi. Well done to the US economist who opposed her. At least he knew what he talking about. http://www.europarl.europa.eu/members/expert/alphaOrder/view.do?language=EN&id=28167 Another well heeled articulate lady proposing ‘the steep and thorny path’ for the less well off. The sheer neck of these people. If that lady represents the new ‘inside’ in Europe then ‘count me outside’. LBS has left the ECB . . . for the groves of Harvard? @Peter Stapleton “The graph accompanying this post risks suggesting that all these countries were at the same income level in 2004.” It says it is relative to the EU average on a PPP basis? It is in everybody’s interest that Ireland should remain within the Euro. Basically there’ll be enough money to bail out the French banks with the Italian bailout (and they’re not that bad anyway – reckon Italy’s is the stalking horse for Spain (which is the real disaster)). Ireland owes its money to British banks. THey would much rather we paid them back in a nice strong Euro than anything else. If we are to remain in the Euro we will have to reform our country alot. Public sector wages down, social welfare cut but..there will have to be some mechanism to write down our debt too. This is a good debate to be having. Believe it or not they want us to stay in the Euro – so let’s use that to our advantage. Is it easier on the outside than the inside? We could always ask Slovenia. After being good boys and girls like Ireland, the government collapsed and their 10 year bond yield went up to 6.77% today. I wonder what would happen if they asked for a bailout next week out of the blue? Straws and breaking a camel’s back come to mind. Whatever about the next decade, I am firmly of the opinion that my 1 and 2 year old children will be better off if eurozone collapses. I for one am hoping for that outcome. @ Actuary, Here’s to the future, +1 @ Actuary Let’s see what’s on offer first before doing anything too crazy. This could work out well for us. Let’s see what they come up with I am for the Euro … but with a competent central bank. But if I have to chose between the Euro and a competent central bank, I chose the latter. I increasingly see a parallel between the behaviour of the BCE today and that of the Fed between 1929 and 1933. Basically, the Fed refused then to do its job as lender of last resort for US banks. Today, the BCE is refusing to do its job of lender of last resort for European sovereigns. Sorry, ECB, not BCE (moving between French, English, Dutch and German is sometimes a bit complicated) wage reductions in Portugal unconstitutional?! Nice work if you can get it. The de-leveraging of the banking system will require up to 5 trillion euros to cover everyone. The only source of these amounts is the ECB. The ECB will have to print the money and extend the terms for the sovereigns. Is this likely? If a sovereign bailout, does not happen, then it is imperative that we get out of the Eurozone. I the event of a disorderly break up of the Eurozone we will need credit and money supply above all else. A National Bank should do the trick. For this to work we will need our own currency again. All significant credit issuance will derive from this bank. Fiduciary discipline and prudent management should ensure that the state bank makes a profit with which to provide the State with funds to reinvest in the country. Large projects in energy and infrastructure would be able to access funds directly. Same for local authorities. Private banks would be able to borrow from the state bank, then lending into the economy as normal. In such a scenario, inflation cannot be allowed to happen or everything falls apart and the country goes down. Simple as that. Therefore several important changes would be required in order for this to work. Bank rules need to change radically so as to eliminate the effects of fractional reserve practices. Banks can lend their profits or borrowed money but not deposit money. Deposits need to be one hundred percent guaranteed with no interest payable. The implication being that there needs to be two (at least ) distinct types of banking institution; one must be exclusively a depository institution, any others can speculate. No bank should be allowed cover of a central bank (not the same as a State Bank). Central banking has proven the source of all evil in many ways. Capital formation will derive from savings again. Growth will come from within the country. There is no point in worrying whether we Irish will have the discipline and determination to operate a proper monetary system (it is true that we have not yet ever manged to do so), as we will have no choice. We will have to rely on ourselves to recover our fortunes in the first instance. Afterwards we can repair our relations with our European partners. The problem is that time is running out. Not only is our government ignorant of the State Bank option but it is hell bent on staying on the austerity road. Is it cynical to view this as the government simply holding the line until the whole thing blows up? It does not want to be the spark that ignites the conflagration. On the other hand, in many ways the government needs the end to come soon as prolonged austerity will sink the country deeper in the mire. In any event there needs to be some plan for when the end comes. So time is of the essence. Get printing punts. Legislate for the state bank. Change the banking laws. Have a plan A ready. As it is, our government seems to have no plan whatsoever. Darling’s article in the Independent today http://www.independent.co.uk/opinion/commentators/alistair-darling-what-europe-must-do-now-to-avert-calamity-6260510.html off topic but all of Colm McCarthy’s threads are “uncategorized”. http://www.irisheconomy.ie/?author=4 could they not be herded into something with a better name, such as ,for example “the ongoing crisis in cop on” http://www.businessweek.com/news/2011-11-11/slovenian-bond-yield-breaks-7-first-time-since-euro-entry.html Slovenia latest yields over 7%. This is a country with Debt /GDP of only 39% in 2010!! So what id the big deal deal of getting Debt/GDP down. Does it matter one iota at present! It does not seem to. http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-21102011-AP/EN/2-21102011-AP-EN.PDF It seems to me that austerity is simply the other side of ‘reduce taxes’ coin. Austerity means reductions in government expenditure which are in large part transfer payments to the less well off, particularly health, education and social welfare. Logically increases in taxes in Europe would obviate to some degree the neccesity for austerity. Howver tax increaases do not appear to be on the agenda, no matter how bad the situation is. Roll on the FAT tax and the fatter the better. In that sense the ECB would appear to be following the agenda the American Tea Party in insisting in austerity instead of tax increases. They would probably like to banish at least three countries from the EZ, Greece , Ireland and ……what was the other one….ah..ah..fumble notes…ah..ah….oops! Joseph, You neglect to mention Slovenia’s deficit, which was at 6% last time I checked. A country with a budget surplus can bully bond auctions. It’s yields will respond accordingly and even if they don’t – so what. If you don’t have to borrow, you don’t care what usurious interest rates the moneylenders are charging. So the thing always comes back to the fact that these guys want to keep borrowing more money in order to live beyond their means. Doesn’t take an economics degree to realise it’s when you have to go prostrate in front of the moneylenders, that’s when you get your teeth kicked in. @Eureka “This is a good debate to be having. Believe it or not they want us to stay in the Euro – so let’s use that to our advantage.” I agree but IMHO there are two difficulties which we need to be aware of so that we can make the most of of our limited energy and resources. 1) It is becoming increasingly impossible to know who “they” are. 2) If “they” mess around with the “can” much longer there is simply not going to be a Euro “worth its weight in D Marks or Drachmas”. In which case IMHO a stable and democratic European Union takes precedence over a currency. Of course we should fully recognise the fact that “they” (despite all the bluff, bluster and nonsence) want us to stay in the Euro which is something we need to be using to our advantage. The premium (should we decide to stay “inside”) must be 75BN Euro of debt taken over by the ECB which is where that debt actually belongs and the establishment of a proper Central Bank capable of being lender of last resort and identifying what valueless bonds should be burned while respecting national fiscal sovereignty. However if we are faced with only two options : a fragmented Europe which still uses a Euro in some parts or a stable and united European Union which no longer has a Euro currency within its boundaries than we will have no choice but to put our energy into preserving the latter. Destroying the European project in order to try and preserve a currency could easily produce alternative options which do not bear thinking about. @Ludwig@Joseph re “moneylenders” and “teeth kicking”. This is why I think the Irish coalition was right to quietly use the “opportunity” to ensure that 25BN remained in the current account kitty even though it meant raising the overall debt to 170 BN. This gives us over two years to observe (and learn) how larger EZ countries react to “teeth kicking” by “money lenders.” The “contagion” is not going to stop at the gates of Rome or Athens. Ironically many “money lenders” are not Economists , Political Scientists, Lawyers or Entrepeneurs .Many “moneylenders” are not even accountants or hold an undergraduate degree except for a handful of PR/Communications experts who seem to have “skipped” the diplomacy and ethics modules during their studies). Over the past few years “money lenders” have managed to irritate and frustrate all four professions and IMHO the biggest fear “money lenders” have is that these professions may follow President Obama`s advice (which was apparently picked up on an “open mike” at the G20 meeting) to start becoming “creative”. Slovenia latest yields over 7%. This is a country with Debt /GDP of only 39% in 2010!! You neglect to mention Slovenia’s deficit, which was at 6% last time I checked. Then Solvenia is the final, irrefutable proof that it is the Euro itself which is toxic. The Euro is the cancer which is killing Europe; a poison set flowing through the veins of the continent. A “leperous distilment”, long saturated, which now with sudden vigour, possets and curds once wholesome economies of every state, leaving only a vile and loathsome crust which chokes economies, peaceful relations, and democracy alike. It will be “‘Adieu, adieu! remember me.” to the EU and probably peace in Europe if the insanity of this currency is allowed to run its course. It’s time to purge the patients before the swelling really induces more violent reactions. @Livonian Good point – i think “they” are a core of France, Germany and The Netherlands – countries in surplus. Britain has influence too. Agree too about the two different options you outline. That’s the real strength of our negotiating position now. In or out – its all debatable and negotiable. Personally I think in is better – buying energy is the problem as I’d see it. @OMF It’s not the Euro – its the markets. They are evil. Really they are @Eureka “Britain has influence too.” Er, yeah. Quite where I don’t know, but it must be somewhere. I think Where’s the short-stop. Mind you, I don’t know is on third. I think Influence might be out injured today. Sufferring from an excess of earnestness. @Livonian “The premium (should we decide to stay “inside”) must be 75BN Euro of debt taken over by the ECB which is where that debt actually belongs and the establishment of a proper Central Bank capable of being lender of last resort and identifying what valueless bonds should be burned while respecting national fiscal sovereignty.” Unfortunately, the ECB will turn to the mass of repo that it has on over-valued assets (i.e. assets it is over-valuing for repo purposes). This might save a few bob for the state, but not much for the people who are in debt (some of whom are worthy of sympathy, even if the asset-stripping, tax-avoiding, jurisdiction-hopping awn-trup-inners are not. There’s a rather depressing piece on Naked Capitalism about how Iceland has handed its banks over to the vultures… http://www.nakedcapitalism.com/2011/11/iceland%E2%80%99s-new-bank-disaster.html Out of the frying pan, into the bessemer convertor. @Eureka Personally I HOPE in is better. However I am no longer sure I am willing to bet my solitary Transnistrian Ruble on it. @ Hogan Very thought provoking link. One striking sentence within the article: “An economic crisis is the financial equivalent of military conquest”. This week we did not see a Hellenic version of Pinochet appearing in Greece but were treated to the spectacle of a former ECB “Technocrat” being “temporarily” appointed as Prime Minister within the boundaries of the EU 15. It also looks like “Bunga Bunga” is going to be replaced “temporarily” by another financial technocrat as Prime Minister of a founding member state of the EU/EEC. @Philip I wonder if a more appropriate title to this thread could be : “Is it SAFER on the outside?” @Eureka “buying energy is the problem as I’d see it.” They are having this problem in Greece at the moment. Importing oil from Iran because other suppliers will only accept cash or monies from non Greek banks as payment. This is not going down well with those who want to impose further sanctions on Iran to try and persuade them to stop building the bomb. More recently they have been shipping it from Egypt to try and cover up the fact it’s come from Iran. Comments are closed.