McCarthy: The Eurozone can be saved

@ Stephen Kinsella

The problem is, of course, as you identify it. Merkel’s own council of economic advisers have put it in the spotlight. But the political conundrum is not unique to the EU. Washington has no intention of bailing out California. To expect Berlin to do so for Greece is unrealistic.

It is equally unrealistic to expect the ECB to take on a role which even the US Federal Reserve is unwilling to accept. Liquidity is the business of the central bank. The solvency of states and their banks is a matter for their governments.

Distinguishing between liquidity and solvency is, admittedly, almost impossible when in the middle of a crisis.

Are we mature enough for fiscal union? We still have a bipolar mood disorder when it comes to our place in the world. When we’re in charge we’re full of self-loathing and when Johnny Foreigner comes along we hate him even more. Look at the transition from Staunton to Trap. Hate Staunton, hate Trap. Why hate Trap? Because he’s stifling our innate genius with his fussy old discipline. Never mind the fact that half our players can’t get a starting place in the Premier League. It was the same under Jack Charlton – somehow we convinced ourselves that if only Dunphy or Giles were in charge we’d win the World Cup.

@DOCM
“Washington has no intention of bailing out California. ”
Er, and all that fiscal stimulus to the states from the Federal government funded by the Federal Reserve’s ‘QE’ program (I doubt more and more that it is QE at all – it seems to me that the Fed are running the opposite program to the ECB, in the Fed’s world I suspect it is the Fed that will take the haircut on the debt they’ve bought, not private sector creditors or social security, this is as it should be if you want to retain the soundness of financial systems and the goldbugs will be delighted, though I remain unconvinced it will really be inflationary).

So, of the Frankfurt group of eight, only the first three of them are elected?

@hogan

precisely!

The reluctance of Irish politicians to embrace the prospect of a referendum on treaty change is not a policy, it is an understandable gut reaction shared, no doubt, by electorates throughout Europe. But it makes no sense to reject treaty changes sight unseen, particularly if the seeds of the current turmoil can be found in the inadequacies of the existing treaties.
…..
These treaty changes could involve a loss of fiscal sovereignty for Ireland. But Ireland has lost its fiscal sovereignty already.

Colm McCarthy is skirting around the very real political issue here. How can Ireland hand up more sovereignty to central european Great Powers who have so far been perfectly happy to impose austerity, scorn and 15% unemployment on Ireland in order to save their own banks?

How can out politicians responsibly lead us into such a union? We would be looking at a repeat of the Act of Union, where the Irish Parliament voted away what little sovereignty it had left.

And for what? To keep the ATMs working and midnight take-aways open? There’s more to this now than economics.

The Sovereign governments of the eurozone are the source of funding for the ECB ,ESFS,etc.There is no direct taxing authority to backstop the euro.

In the US federal taxes are imposed on citizens no matter where they reside,even in States which have no income taxes themselves.

If the US Federal government refuses to bailout the state of Ca it does nt mean that Federal transfers such as welfare,social security payments for retirees etc are not made to residents of Ca.

This is a difference alluded to in some comments above ,between the US and the eurozone ;if eurozone countries arent bailed out their citizens starve whereas in the US this wont happen,just the State government apparatus will fold.

Therefore any treaty change will require direct democracy from the citizen to the EU and direct taxation of every EU citizen in addition to their own countries taxes.

From Colm’s article

This is not the case in Ireland, which complied better with the fiscal rules than Germany did in the years leading up to the crisis.

Wasn’t Charlie McCreevy giving the two-fingered salute to the European Commission before it was cool (and in particular, before France and Germany did it)?

Thanks Colm.

Also in the realm of quibble

German banks foolish enough to buy dud assets in the United States did not get compensated by the US taxpayers

There is a considerable overlap between the usual suspect list of Eurozone banks pressing the ECB for full recovery on bonds now (Deutsche Bank and SocGen especially) and the list of European banks that got full counterparty redemption from the AIG bailout in 2008 — which was US taxpayer financed.

Perhaps it’s even arguable that AIG — with the Squid et al getting full recovery on dud assets at taxpayer expense — was the disastrous template for everything that has followed.

@ ObsessiveMathsFreak

“Colm McCarthy is skirting around the very real political issue here”

Exactly. Is the Euro really politically viable in the long term? Roubini’s a great economist, but hes not a political scientist or historian, and this inability to deal with political realities and attempt to resolve everything with a myopic technocratic solution is maddening.
As Robert Skidelsky correctly observed in an otherwise fawning NYRB review of Niall Fergusons mediocre ‘Ascent of money’

“A final reflection on Ferguson as a historian. He is overimpressed by economics. Many historians feel that history is in some way inferior to the more exact sciences; the thought that he can “do” economics gives the historian an expanding sense of mastery. I know the feeling, because I’ve lived through it myself. Economics, especially in its mathematicized form, purveys a peculiar vision of society. Society to the mathematicians is a market imperfection. Among other imperfections…..This delusive, but powerful, idea suggests that behind the imperfection lies perfection”

Thats not to say I have a notion on how to resolve this crisis, but its time to start thinking of alternatives.

Is this the end game…..
http://www.nytimes.com/2011/11/13/world/europe/for-european-union-and-the-euro-a-moment-of-truth.html?hp

Only Germany can decide…
http://www.telegraph.co.uk/finance/comment/liamhalligan/8886350/Germany-must-decide-if-it-wants-the-eurozone-to-survive-or-perish.html

If we really are in an endgame situation for the euro, I repeat my question from some threads ago:

Has the Irish Central Bank printed a supply of notes in an alternative currency, and if not why not? It would be shockingly imprudent not to be prepared for any catastrophic outcomes at this late hour.

“…who tells Americans…”

Edit button please.

@ Colm McCarthy

In making my comment, I had several thoughts in mind. The first to try to puncture the illusion that a fully federal state will provide the solution. The second was to make the point that the distinction between liquidity and solvency is one that simply has to be adhered to as otherwise no banking system can function. The third relates to the mutual dependency between states and their banks. This has tipped too much in the direction of the banks. States have now recognised this by establishing a list of systemically important banks internationally.

As the experience with AIG shows, and as adverted to by some bloggers above, when push comes to shove banks, irrespective of their domicile, will be bailed out by the state whose entire domestic banking system – and economy – is at risk if it does not.

@Ceterisparibus
“Surely this will destroy any credibility the EFSF had.”
Yes, it seems to me that the EFSF in its current form is dead in the water and perhaps actually sinking.

“It strikes me as another ill judged compromise that unlikely to achieve much.”
Indeed and just look at the timings – another year of prevarication for something that is insufficient and misdirected. The search for a legalistic solution to an immediate financial problem is madness.

In contrast to the Dork, I believe it is solely a fiscal problem – monetarism has failed totally, by buying assets semi-directly and targeting the long-term yield curve the Fed has acknowledged this. The Fed, though, is operating in an economy where the state comprises a much smaller proportion of the economy than in Europe. Even in the open economy that is Ireland the state spends more as a percentage of GDP (and over 50% in terms of GNP) than the US. From a high of 52.8% (France) down to a low of 41.1% (Spain), the major economies in Europe are dependent on state spending.

In short, you can provide all the liquidity you want, but all the fiscal authorities of Europe are living beyond their tax income (barring the tiny ones). Even the 3% limit implies real growth of 3% which has been seen where on average over the last ten years?

@Gavin Kostick (when you read this thread)

Yes, it was supposed to be a different link in the last thread. Unfortunately, I can’t find it now.

Suffice to say you can expect to see major PR battles over the coming days between Germans telling you that the ECB must not become a lolr and everyone else pushing a major PR campaign to say it should. There’s a fault line running right through the centre of the EZ at the moment and unless someone does something about building a ruddy bridge across it we are all going to fall down the crack.

There is a lot in the aforementioned FT interview with Weidmann

http://www.ft.com/intl/cms/s/0/b3a2d19e-0de4-11e1-9d40-00144feabdc0.html

@all

My instinct tells me we are definitely in an endgame here which means we have to prioritse the the Europen Project over the currency. “Orderly currency liquidation” will be a lot more preferable than a disorderly political collapse.

———————————————————————–

Re article by Thomas Klau in Irish Times ( apparently Stephen closed that thread and referred comments to this one).

According to Thomas Klau:

“European credibility on the world stage would be destroyed for a very long time indeed”.

With all due respect to Thomas Klau IMHO that cannot be considered as a Political, Economic, Historical or Business argument and carries a pungent scent of desperation mixed in with fear.

Just because European leaders “risk” looking like a bunch of clowns to people in Figi or wherever will not effect how the rest of the world trades with Europe. That will only happen if we start tearing each other to shreds which risks occuring if discussions about “transfer of sovereignty” remain on the table.

It is only a few centuries since China believed (probably with some good reason) that we were a bunch of barbarians and the USA was established by people who had given up on Europe.

After 1929 we witnessed two opposing ideological attempts to unite Europe which failed abysmally and horribly.

The third attempt was the EEC/EU which “cycled along quite nicely” until the Euro currency along with “expansion max” was introduced and certain parts of Europe started referring to other parts of Europe as “PI(I)GS” in an attempt to conceal that various forms of contagious disease were spreading throughout the entire European body politic.

I hope that it is not too late to realise that the Euro (and not European Unity) in its present form is the illness and not the doctor .

In Ireland we witnessed enough half baked “doom mongering ” which promised all sorts of “plagues” if we did not vote in favour of Lisbon II.

Many Irish voters (I am glad to say I was not one of them) believed the “horsesh-t” that our future would be horrible if we did not vote in favour of it. Lisbon II was forced on us and forced through. Despite a yes vote the future immediately turned into excrement.

If we want to preserve European Unity we need to step back to the late 90`s and not take a leap into an uncertain future which will be manipulated by all sorts of opportunists.

If Europe takes a step back to a more recent and sane time we can then figure out how to go forward and take another look at how a common currency could actually work in Europe. After all we now have plenty of examples of how it does not work. We even have a ready made “think tank” called the ECB.

If Ireland cannot persuade Europe haw serious this is (and I am not sure we can although it may be worth one more brief effort) than IMHO Ireland better come clean about the fact that we have actually been printing a supply of notes in an alternative currency for the last few months.

Europe needs to step back to 1998 (when we had finally pacified the Balkans and knew what to do when Kosovo erupted) not “forward” to 1932.

@Hogan
I’m afraid you are right. If the EFSF cannot raise 3b in a postponed sale then it doesn’t auger well for leveraging it up to a trillion. If nobody wants the plain vanilla version it is going to be difficult,if not impossible, to sell the version with bells and whistles.

In the meantime Germany is getting prepared (apparently, unlike ourselves)… A preview of study on Greek default to be published on Monday by Der Spiegal…

The German government is preparing for Greece’s possible exit from the euro zone in the event that the country’s new government decides not to continue with the previously agreed austerity programs. Experts at the German Finance Ministry have been simulating a variety of scenarios based on different assumptions, SPIEGEL has learned.

A so-called baseline scenario is based on the expectation that the situation does not get too bad. Under this scenario, Greece’s exit from the monetary union could even contribute to the strengthening of the euro zone in the long term, following an initial period of turbulence. The thinking goes that the currency union could be more stable without its weakest member.
Admittedly, peripheral euro-zone members like Spain and Italy would still face challenges, but the assumption is that they would be better able to tackle their problems without the additional burden of the Greek crisis. According to the assessment of German government experts, these countries may currently be struggling to get access to money, but unlike Greece they are not close to insolvency.

Under the Finance Ministry experts’ worst-case scenario, developments in the euro zone would be less favorable. In this case, Italy and Spain would find themselves in the crosshairs of the global financial markets, and their borrowing costs would rise. In this simulation, the European backstop fund, the European Financial Stability Facility (EFSF) would be forced to supply those countries with fresh money. For this to succeed, the experts argue, the EFSF should be expanded as quickly as possible so that it has an effective lending capacity of €1 trillion ($1.4 trillion).
Vicious Circle

In addition, the government experts also looked at a so-called worst-worst-case scenario. In this model, Greece’s new currency would dramatically devalue against the euro. That would have the positive effect of making the country’s exports cheaper, but the negative effects would outweigh the benefits. The country’s national debt would rise despite a haircut, because Greece’s debts would still be denominated in euros. The country’s credit rating would be immediately downgraded again, and Greek companies would struggle to get access to money because the country’s banks would also be cut off from international capital markets.

Many firms would go bankrupt because their debts would also be denominated in euros, with the result that many more workers would lose their jobs. Domestic consumption would collapse, aggravating the downturn. The country could take decades to free itself from this vicious circle, and other nations might also be drawn into the vortex. The German government experts do not, however, consider this scenario to be the most likely one.

“The Central Fund is the amount standing to the credit of the EXCHEQUER ACCOUNT which is kept at the CB & FSA of Ireland.
The banking transactions of the fund are effected through the exchequer account” – extracted from the Irish Public fiance procedures document.

I believe this is the mark of true leverage in the domestic financial system – Karl can jump in and correct me if I am wrong.
Up until 1987 it was in the 10% to 12 % + GNP range so therefore we had a 8 to 10 leverage in the system.
It declined to 8% in 1995 and then began a more dramatic decrease to level off at 2.4% / 2.8% between 2002 & 2008 – it then increased during the economic crisis towards 5.7% in 2011.
We have a long way to go before we get back to the more rational leverage of the pre IMF in blueshirt / crony soldier of destiny clothing that was the 1987 Tallaght strategy.

@Ceterisparibus
“Under the Finance Ministry experts’ worst-case scenario, developments in the euro zone would be less favorable. In this case, Italy and Spain would find themselves in the crosshairs of the global financial markets…”
The German experts are idiots. Even their worst-worse case scenario is ridiculous. To deal with it first – there is no point in Greece leaving the eurozone if all private sectors are not redenominated in new drachma too. ‘Saving’ the sovereign at the expense of the private sector would be as incomprehensible as saving the private sector (banks) at the expense of the sovereign. Expect to see instead a fast-track examinership process whereby the companies get to rise phoenix-like from the ashes.

The worst case for Germany is that the markets take a close look at who loaned the money around Europe and then look at the German state’s capacity to support those banks when their assets go bad. That is the worst case for Germany – Germany moving from the strongest economy to the most bust.

@rf@Adrian Kelleher

Re Niall Ferguson(apologies to everyone else for straying back to Niall Ferguson but hopefully some readers,( especially those who cling to the hope that “one last effort” might save the Euro) may find my comment indirectley relevant to the to the thread topic.

I have enjoyed reading some of Niall Fegusonś history writings. Unfortunately I tend to instinctively disagree with many of his political views and his currrent affairs analyses (although he communicates them very well).

Around 2-3 years ago Professor Ferguson seemed to be a”go to guy” when everybody was panicking. Recently he has also emerged as “a go to guy” possibly because we are all panicking again.

Despite disagreeing with many of Professor Ferguson`s political views I feel it is not excessively partisan to caution people about some of his predictions.

A good economic historian (and Mr Ferguson is definitely one) is not infallible.

At the beginning of 2009 Professor Ferguson was critical of the US stimulus. However after some time he appeared to go very quiet about it on the media outlets that I follow.

I believe the reason why Professor Ferguson went quiet was that I remember him writing in 2009 words to the effect that if unemployment in the US managed to stay below 11% the Obama administration would hail the stimulus as a success.

These days the US administration do not claim the stimulus was a great success even though unemployment remained well below 11% during the stimulus period and currently stands at 9% (despite an increasing population and more discouraged unemployed people being “encouraged” to seek work)

The pro stimulus people claim that if the the stimulus had been 1.3trillion dollars instead of 780 Bn dollars it would have been a “success”.

Given that 780 BN dollars in 2009 and 2010 ensured unemployment is at 9% (well below Mr Fergusons 11% “success measurement” point) it is worth wondering what would US unemployment be if the stimulus had been 60% bigger. IMHO a conservative guess would be that US unemployment would not currently be 9% but would be 6%.

In fairness to Professor Ferguson I have not yet heard him claim (on any media outlets that I follow) that the US stimulus was a complete failure. However, I wonder if he felt confident about making that claim would he be glad to oblige?. 🙂

Are we all ignoring the reality that there’s virtually zero chance of any referendum giving more power to Europe being passed in Ireland or several other countries.

I suppose people can argue that it’s about ‘getting the message out’ and ‘running a good campaign’, but it seems clear that people’s trust in these institutions is so low that (in Ireland anyway), I can’t imagine a referendum passing.

I can see the ‘No’ camp already – the argument runs “You said ‘Yes to Lison, Yes to jobs’; you got your ‘yes’ but there are still no jobs”.

Simple and pretty convincing to many voters.

the related question that I would love answered seriously is: Can the Euro be saved within the current legal structures of Europe, or at any rate without a transfer of powers that requires a referendum, and if so how?

I think the Government might be equally interested in the answer to this question…

@Georg R Baumann

…these people have the hallmarks of fanatics or captured politicians, staying this course against all the evidence that is out there.

At the end, the objective of Germany’s reunification was to create a European Germany, and not a German Europe.

+1
It is a question of trust. And after the experience of the last three years would trust a German Europe or indeed a French and German Europe to be a Europe of equals.

@Livonian

Good point that it would be better to go back to 1998 than to darker places. But ever since Merkel came in she started to turn the German focus towards Eastern Europe and Russia.
She appears to have completely sidelined the Commission and has pursued a German/BUBU/ECB solution from the outset. A solution that has failed visibly at every turn but that did not bother her as the German economy was doing fine.
Merkel pursued a national solution to a European problem, regardless of the consequences. The conseqeunces are now the impending collapse of the EZ but are far more serious than that.
Merkel drove a stake through the ‘solidarity’ principle in the EU treaty.
It is doubtful if the fallout can be contained to a 1998 backstop.
Merkozy, Trichet and the ECB have too much damage done to hope for that.

EFSF says Telegraph story that it bought its own bonds not true

http://www.reuters.com/article/2011/11/13/us-eurozone-efsf-idUSTRE7AC0M520111113

@Bklyn_renter
“I don’t agree that the Germans are idiots…”
Not the Germans, per se, the “German experts” in the Spiegel piece that Ceterisparibus refers to. The inability to even perceive of really bad events is what got us into this mess, it has sustained the mess all the way through and it is going to be the undoing of the euro and with it the EU at the rate things are progressing.

In the sense that the German experts are ignoring the festering well of bitterness that their behaviour is creating, I would agree and the comments on trust with respect to European institutions ring very true.

There may be an element of Hubris in Germany’s behaviour, but up until now, at least, the Germans believe that they are still in control of events. They seem to be weighing the politics well, hold firm on a policy until it has well and truly exhausted it’s usefulness and then decide based on events. So they held tough on Greece until it looked as if it would fail and then they acted. Granted it came with a lot of noise and bluster, but they gave it another line of cash. Then when the Greeks exploded with the referendum decision, they stood back and considered, a full cave in or a double down. They chose double down, because for the first time, they openly stated that default meant expulsion from the euro and the EU.

I also don’t fully get the manner in which the market is behaving. In my experience, a market panic is an unseemly rush for the exit. All bonds collapse together or they all stabilize together, I have never seen a series of market mini panics such as this before. For instance, everyone knows that Italy has some 350bn of debt roll overs next year and everyone knows that the Caixa’s in Spain have been a toxic dump for bad debt for years. Yet, some bonds stabilize and the panic rolls on one country at a time. Why is that? A conspiracy theorist would say it’s because the ONLY buyer in the market is the ECB, and French/German banks. We are in a crisis, that is not faked, but we are in a managed crisis today. That may change, but it hasn’t yet. When it does, the question will be whether Germany will, by then, have succeeded in getting it’s message home (we are not resetting the debt machine) or not. If it has, then Germany will step up and start bailing, if not, they let the whole thing go. Today, all power is with Germany. The Brits are scared that the Germans will succeed in making a stronger union with transfer capabilities and a tamed financial system, because that would destroy their only remaining industry. This game has a long long way to run, IMO.

@Ceterisparibus
I wouldn’t expect it to come from government… random rumour alert: http://namawinelake.wordpress.com/2011/11/13/has-nama-made-a-financial-error-that-surpasses-kevin-cardiff%e2%80%99s/#comment-12834

@Livonian, rf

Krugman and Ferguson each dressed up his arguments in technical terms but, IMO, there was a more fundamental difference between the two that remained unstated.

Krugman doesn’t believe it’s worth it to preserve the dollar as the world’s reserve currency if it means decades of hardship for its unemployed and working poor. Ferguson likewise understands perfectly well the severe (and, in a country like the US enjoying basically limitless monetary freedom, avoidable) social consequences that must result if bond rates and the preservation of reserve currency status become the be-all-and-end-all of government policy.

The real difference between the two men is simply that this is a price Ferguson is willing to pay, or at any rate to have US citizens pay, to secure American strategic dominance into the mid-century period. This sort of reasoning might be expected of a man who metaphorically speaking spends a lot of his time in the company of the Committee of Imperial Defence.

I agree wholeheartedly with Krugman because I share his value judgement. OTOH, I haven’t looked in to the matter closely enough to decide whose claims were more accurate technically. I’d guess Ferguson would claim that even if the figures don’t support his viewpoint today it’s too soon to judge as his arguments cover a 20-30 year timeframe.

“You think too much about the French and not enough about France,” Pétain’s ADC once told him. Turned around, it applies well to Ferguson: “You think too much about America and not enough about the Americans”.

Seems that article by Ambrose is spot on judging by the latest story in the NYT
Which suggests that Christian Noyer recently claimed that the problems in Italy would dissipate on the coup occurred….or words to that effect.

http://www.nytimes.com/2011/11/14/business/global/france-keeps-a-watchful-eye-on-italys-financial-turmoil.html?_r=1&hp

@Eureka
“very important for us to start on contingency planning right now”

Very true…but will we just sit back and wait for it to happen?

Apparently the Americans are ramping up efforts to limit the exposure of their banks and estimates suggest that it could be up to 4 trillion.
http://www.reuters.com/article/2011/11/13/us-financial-contagion-idUSTRE7AC15220111113.
If all this retrenchment takes place it is going to bring down the European banking system anyway.

We continue to have many commenters blaming Brussels, Frankfurt, Berlin and Paris for the parlous state of our economy. There was no gun held to the head of a single Irish politician or bureaucrat. Of their own volition our politicians and bureaucrats, when asked, agreed to backstop our corrupt and bankrupt banks. Ir was a move that stunned the financial world, a government of a “sovereign” country bailing out privately owned banks. Unlimited guarantees, no terms or conditions, just take our taxpayers money and carry on your merry way.

If an agency of the EU had forcefully imposed the burden on us there would have been blood on the streets. Now there are many of us quite incapable of facing the facts, who carry on concocting victim scenarios because what has happened is so incredibly asinine that surely we could not have done this to ourselves. Well we did and since we cannot conduct the Auto de Fe of the Spanish Inquisition as in Toledo Aug. 16th 1846 we are reduced to whining about the European instititions that are our sole means of support.

@Frank Galton

“EFSF says Telegraph story that it bought its own bonds not true”

That’s what I would say if I were officially denying it.

There aren’t enough smart journalists around these institutions (they end up becoming institutionalised themselves and take whatever pap they’re given by PR Guys so they can file their copy quickly and get back to the restaurant in Paris/Frankfurt/etc.) who can ask questions like: “Can you show us tangible evidence to back up that statement?”

@Mickey Hickey
“We continue to have many commenters blaming Brussels, Frankfurt, Berlin and Paris for the parlous state of our economy. ”
Erm, I think on this thread they are being blamed for the parlous state of european governance and so the european economy, not the Irish one.

Lex on Saturday – the Euro will continue but not as we know it

http://www.ft.com/intl/cms/s/3/d0ce0414-0c7c-11e1-8ac6-00144feabdc0.html

Greece is probably doomed- what about Ireland ?

I think that ‘the Germans’ might believe the introduction of parallel currencies to be the worst case scenario. These currencies would then presumably be under national political control & the sovereigns issuing them as payment would then guarantee an exchange-rate with the euro. The guaranteed exchange rate when paying taxes would presumably be 1:1. Then there would be no need to change over credits or debits into new currency but the ones who are dependent on state-funding would then be paid partly in the new currency.

‘Liquidity-starved’ nations could then print themselves billions, that is, if they wanted and believed it to be a good idea.

Anyone considering bribing a tax-collector or hiring a tax-lawyer/accountant to minimise the tax-liability would then have an interesting choice: Pay taxes in a soft currency or pay a hard currency to reduce taxes…

“At least in the USA there is a genuine cultural unity and full mobility for jobs.”

Depends on the religious/secular split. Also, the housing crash means labour mobility is constrained. I

Here is a link to a graph via the FT which every EZ politician should be forced to hang on their office wall. It is ‘required reading’ for those who want to, or think they do, understand what has gone on in Europe over the last fifteen years.

http://av.r.ftdata.co.uk/files/2011/11/Eurozone-spread-history.jpg

@ PR Guy,

“does evidence from recent examples of QE (e.g. UK, USA, Japan) provide us with sufficient evidence (and that warm feeling) to tell us that it will actually work?”

Turn the question on its head. What would have happened the UK and US if they had not engaged in QE?

Only read the Thomas Klau article, quite an argument he has developed. It brought to mind this Tony Judt description written a decade and a half ago:

“What is Brussels, after all, if not a renewal of the goal of efficient, universal administration, shorn of particularisms and driven by rational calculation and the rule of law, which the great eighteenth century monarchs strove unsuccessfully to institute in their ramshackle lands? Indeed it is the very rationality of the European Community ideal which has made it appealing to many European intellectuals..which sees in Brussels an escape from hidebound practices and particularisms, much as eighteenth century lawyers, traders and writers appealed to enlightened monarchs over the heads of reactionary parliaments and diets.”

A decade later Judt continued this theme:

“For if we look to European Union as a catchall solution, chanting “Europe” like a mantra, and waving the banner of “Europe” in the face of recalcitrant “nationalist” heretics, we may wake up one day to find that far from solving the problems of our continent, the myth of “Europe” has become an impediment to recognizing them. We shall discover that it has become little more than the politically correct way to paper over local difficulties, as though the mere invocation of the promise of a united Europe could substitute for solving problems and crises in the present. To be sure, there is a certain self-fulfilling advantage in speaking of Europe as though it already existed in some stronger, collective sense. But there are some things it cannot do, some problems it does not address. “Europe” is more than a geographical notion but less than an answer.”

Perhaps this thread should be titled “should the Eurozone be saved?”

@Ahura/hoganmahew

Good points.

It would be interesting to see a couple of likely scenarios painted (by an economist who knows what they’re talking about) if the EZ went one way or the other at, say, 6, 12 and 24 months points in the future e.g. the impact on different things such as inflation, employment, growth, debt, social/political factors, etc. with as much quantification thrown in as possible.

The arguments currently put forward by both sides seem to be somewhat limited in their descriptions of the consequences if we do or don’t – damned if you do, damned if you don’t… it would be nice to hear a few more specifics instead of generalisations. Maybe I could live with, say, higher inflation/interest rates/Germany leaving the Euro if I knew how much by and that there were some benefits on the other side of the coin too, etc.

Increased death duties? Isn’t that a form of wealth tax? I thought we weren’t allowed to do that? That would be as bad as taking money from bondholders! 😉

Roubini says get the euro down to parity with the dollar

http://blogs.ft.com/the-a-list/2011/11/10/why-italys-days-in-the-eurozone-may-be-numbered/#ixzz1dgxPejGu

Another good one on the need for a bank recap policy

http://www.ft.com/cms/s/0/461464fa-0617-11e1-a079-00144feabdc0.html#ixzz1dgwPlB4d

It could all be over by Christmas

@ PR Guy,

“(by an economist who knows what they’re talking about), if the EZ went one way or the other at, say, 6, 12 and 24 months points in the future”

good luck with that; too many variables – the conclusions would be based more on assumptions as much as anything else. “by an economist who knows what they’re talking about” – how would you define that – I guess you’d want to filter out those who didn’t foresee the current crisis. Dr Doom perhaps? http://www.economonitor.com/nouriel/2011/11/10/why-italys-days-in-the-eurozone-may-be-numbered/.

Re unicredit: their takeover of HVB is a nice example of interdependencies. I wonder if German savers will get nervous.

@PRGuy

You might recall the extremely odd trading in Unicredit about 3 months ago., That looked odd.

They are very quick out of the gate.

Coincidentally, of course, just after Silvio resigned.

Wonder how much of an accurate reflection the accounts will turn out to be?

@Seafoid

That graph gives you the remarkable history of politically manufactured spread compression, which directly led to the excesses that are being exposed now. The left hand side is the LTCM trade (a correction to which blew them up). The right hand side can be thought of as analogous to a coiled spring.

It is a classic demonstration of the argument that politics at the end of the day, is largely macroeconomics, but the actors don’t realise that and have little appreciation of the subject.

QE is usually the first step in a multistep process. When individuals and businesses are over indebted as they are in Ireland QE is like an Aspirin in that it reduces the symptoms (reduced demand) in the short term but does nothing to alleviate the disease. The broad spectrum disease fighting drug is inflation which reduces the income to debt ratio and has never failed in the medium term. Even in Weimar Germany hyperinflation worked as people spent income within minutes of receiving it. The problem arises when inflation gets out of control and the inflation carousel has to be slowed enough to allow people to get off without injury. The introduction of the good as gold Dmark was what killed the Weimar republic economy. Sudden shocks even in the right direction are often catastrophic.

While we are in the EZ we do not have to worry about hyperinflation but we could fervently wish for inflation of 3-4% for a decade or so. On the other hand if we exited the EZ we could have 15-20% inflation in the first year followed by high inflation for as many years as we wanted. We would be much worse off in the medium to long term as Italy has demonstrated many times since 1861.

@Grumpy

“wonder how much of an accurate reflection the accounts will turn out to be?”

I haven’t seen any comment on provisions for sovereign debt, it seems only goodwill etc. was written down.
Also interesting that the capital raising doesn’t even cover the 10.4b.

Is this the “big one”.

If the troika are so sure that their plan saves Ireland and it’s banks, why don’t they borrow at 2% and deposit in AIB at 4%?????

From Blackrock
“Debt restructuring in Greece, Portugal and Ireland with write-downs for private creditors of 75 percent to 80 percent are needed to help stop Europe’s debt crisis turning into a global meltdown, said BlackRock, one of the world’s largest asset managers.”

This seems similar to what Colm McCarthy was suggesting last week in the indo. But they are explicitly including Ireland and Portugal and the haircuts are blade 1 all over.

@ Grumpy

Taking the longer view politics can also come on top. Did you ever see Brideshead Revisited ?

@Eamon Moran

That Blackrock report confirms what others have been saying for some time. Buiter of Citi has said that Greece needed an 85% discount to make their debt sustainable. But the inclusion of Ireland must raise alarm bells, particularly as we hired Blackrock to gain credibility with markets on the bank restructuring .
We cannot now rubbish their prognosis.
I have been banging on about our so called programme which is projected to lead to a debt GDP ratio of 118%..exactly where Italy found itself last week. With prospective growth falling rapidly..this is clearly unsustainable and this seems to be borne out by what Blackrock states.
It also now appears that we have a low key run on European assets and this may accelerate as markets digest this new information.
It’s looking grim.

How about this for cheek?.

From IT
“Irish Central Bank regulation of the interest rates charged by lenders “would not be a good policy outcome”, Jonathan McMahon, the bank’s assistant director general for financial institutions, has said.

“We can think of lots of very good reasons why regulation of interest rates would not be a good policy outcome,” said Mr McMahon said today. “Much better could be done through the process of supervisory interventions.”

He was speaking on the fringes of a conference on ethics and compliance in the management of financial services firms hosted by the Association of Compliance Officers in Ireland.

I thought that lack of compliance got us into this bloody mess. Supervisory interventions…just look at how the banks treated government intervention.
Are these people for real.

@Ceteris

re “Irish Central Bank regulation of the interest rates charged by lenders “would not be a good policy outcome”.

It looks like we have another Mr Neary. We have appointed a Governor who would prefer to leave governing to the banks. What a country.

So if banks increase mortgage rates to 15% in the morning, our governor does not want the power to stop them! Or 25%, or 55%.

“Much better could be done through the process of supervisory interventions.”

Much better?. For the banks, no doubt. A friendly game of golf with the Taoiseach of the day should allow the banks to get their way.

We are back at square one. Except this time we rae already bust arriving at square one.

@ All

Are Irish spreads widening when others are narrowing? Is this a reflection of the fact that the Irish government has revealed that it does not understand the consequences of its populist actions?

Previous day
Yesterday
This Morning

France
1.715
1.516
1.513

Italy
5.187
4.635
4.617

Spain
4.100
3.991
4.091

Portugal
11.169
11.015
10.562

Greece
29.768
29.180
34.50

Ireland
6.463
6.328
7.070

Belgium
2.736
2.611
2.581

Bund Yield
1.768
1.883
1.901

@ DOCM

Eh, you probably need to update that to this afternoon – Ireland was actually the best performer on the day pretty much, and Italy has blown out again, Spain too, and even Finland and Holland coming under pressure this time.

In Greece the minimum wage has become the new ceiling.

Renee Maltezou, Reuters Correspondent based in Athens, Greek speaking. Probably got it right.

http://www.theglobeandmail.com/report-on-business/economy/economy-lab/daily-mix/generous-minimum-wage-a-myth-in-greek-labour-wasteland/article2235557/

@TullMcAdoo

AIB got caught on the wrong side this time.
I have just seen on RTE news AIB at 3% (as you say) BOI 3.9%, Ulster Bank and PTSB ~5.3%.

If this were in the remit of the Regulator he could allow a range of ~1% differential or a weighted cost of funds markup.
The question still stands. When down to two or three players what is a govt to do if a bank increases its rates to 10%.
Wring its hands?
[There is price regulation in other industries. Electricity for example. I concede it has not managed to keep the either the cost of electricity or payroll costs at anywhere near reasonable levels.]

As for trackers? If the banks had been put into liquidation, the trackers could have been cancelled.

In fact I do wonder if the NPV of projected tracker losses were factored into the bank stress tests. Or are other bank customers going to have to continue to subsidise tracker losses until they are old and grey.

@seafoid@cp

“thrown to the dogs”.

That was already tried and did not work. Second time around I suspect Ireland wont be around to let itself be “thrown” anywhere.

The last major war in Europe was just an “emergency” in Ireland.

JR,
If we followed your 1 pct margin, banks would not earn an acceptable return to attract private capital. Even Japanese banks make higher margins than that at around 1.3%. Bof I business plan envisages a 2% margin.
No risk capital and no return on capital means no credit growth.
Also I fail to see how liquidating a bank means all trackers go away. What are you going to fo? Insist on full payment now or just change the terms to suit you. We have contracts you know.

Italy is in as good a shape or better than Japan. Individuals and businesses in Italy are wealthy by any standard. It is only the Italian government that is over indebted and much less than the Japanese government (<1/2). The panic about Italy seems overdone to me since Italy is self supporting domestically as is Japan. The worst that can happen in Italy is a wealth tax spread over 5 to 10 years and the problem is solved.

Currency movement restrictions are easier to impose in this highly automated environment. Equeally easy to acquire is a snap shot of liquid assets. Unpleasant, unwanted but doable. Confiscation is the new game. It is a pity our developers and bankers have bled themselves dry or FG would be on the horns of a dilemma.

@ Joseph

given that the banks can fund themselves at the ECB i’m not sure you could necessarily describe tracker mortgages as “onerous”, I’d just say they probably break even (on a pure cashflow basis) on most of them after costs etc are included.

Also, there is a big difference between putting a bank into resolution and putting one into liquidation. Lehmans went the liquidation route, which is generally seen as the main reason why no one in their right mind has tried that again. I don’t disagree with your point about tracker-holders being effectively bailed out btw, something that has often been missed in this debate.

@ Tull

“Would arrears increase?”

I suppose you’d have to ask where SVR rates would set if everyone was on them and there was no need for cross-subsidisation, and how this would tie in with where the average ‘pain’ point becomes on mortgage rates for the average mortgagee, ie if tracker arrears rose, would SVR arrears decrease, and what would the net impact be? Do people on tracker mortages have tiny levels of arrears relative to those on SVR’s?

I wonder where the debt crisis will go next. The UK, US and Japan have debt levels normally only seen in wartime. Will the vigilantes go after them once they are finished with France ?

@seafóid

“Will the vigilantes go after them once they are finished with France ?”

I thought the UK/US/Japan were the vigilantes! They’re the ones doing most of the trading? Or is it those naughty Germans turning a quick buck? Or ‘turning a crisis into an opportunity’ as one likes to say.

Hard to say where France is really going… back to 3.8? Sarkozy seems to be keeping a fairly low profile today. It will be dogsville if it breaches 4. The ECB’s bond buying programme could really get stretched if it ends up having to fight a war on several fronts at the same time (i.e. Spain, France, Italy) – though to some extent I suppose it is already. History never seems to have been kind to those who stretched/diluted their firepower like that.

Imagine if the ECB were faced with a “Sophie’s Choice”… which one to support and which to let go under… Who would take the ultimate decision and who would they consult (or ‘be consulted by’) before taking their decision?

What are the known ‘wrong’ things that could happen over the next few days to exacerbate the situation? Greece not putting their commitment in writing (and not getting their next tranche)? Mario Monti failing to name his ministers or failing the confidence vote? What else? And what are the ‘unknown unknowns’ that could creep out of the woodwork this week I wonder? I already have the popcorn out, sitting here watching the show unfold (or is that ‘unravel’?).

@PR Guy

“It will be dogsville if it breaches 4.”

4 isn’t even a Maginot line. The bond panzers can go through the woods and reach Paris by 5 .

EB

that would be because most of the loose Irish bonds have been mopped up by the SMP, so no sellers. It now looks like a lot of the big bond funds which hold only the core are dumping everything. The crisis is getting crisisier or the Frog is being boiled now.

@ Patrick

i think its not until mid-to-late December (Q2 was out 22nd Sept)

@ Tull

its true, the free float of Irish bonds are held by either (a) SMP, (b) domestic banks, (c) long term foreign holders, (d) eh someone else, so very little floating about out there at the moment. That said, most of the outstanding holders (and even without a-d above, there’s still a lot of bonds out there) seem happy enough to hold on to them at the moment, there is no panic selling of Irish amidst the rest of the mess out there.

@ Tull

Where is the money going if it is leaving EZ bonds?
And what will it mean for the banks ? Will Commerzbank go to bank heaven?

@ All

An idea floated on Der Spiegel (German edition) by Sebastien Dullien (N.B. of the European Council on Foreign Relations) is that the ECB would announce that to prevent a disorderly market, bond rates would not be allowed to rise above a particular level. Any takers?

Meanwhile, in the deck chair re-arranging department, the internal political debate in Germany continues apparently oblivious to what is going on elsewhere in Europe.

http://www.spiegel.de/international/europe/0,1518,797584,00.html

The impetus for constitutional change, as I have speculated earlier, is to be found in the series of institutional knots in which Merkel has succeeded in tying the European policy – or rather its capacity to implement one – of the German government.

@BEB

Cheers
Is any of it going to Switzerland ?

@All,

Having read this blog for sometime, the fact that there is no real argument on this thread is actually really worrisome!

What sort of Plan B can the Irish Government really have against what looks like like a tsunami?

@Colm McCarthy

‘The real issue is whether Europe can create a proper central bank and accountable decision-making authority to go with its premature currency union. If this can be achieved, the euro is worthy of rescue.

Yes.

Blind Biddy is in Beijing.

St Jude has been appointed as a non exec director

in the ‘public interest’ I assume ?

… and finally, Le Monde, begins to cop itself on and agree with McCarthy and Sinn Fein, Blind Biddy, and countless millions of stressed out European serfs …

There is a simple way to resolve the Eurozone crisis: the European Central Bank just has to state that it will be the lender of last resort for European states. But this solution, which has the support of many economists, is rejected by the ECB — a doctrinaire position, which a Le Monde columnist deplores.

Alain Frachon in Le Monde

http://www.presseurop.eu//en/content/article/1168981-ecb-has-only-say-word

@all Is Jens Weidmann more powerful than Mario Draghi?

Jens Weidmann, the new president of Germany’s Bundesbank, is strongly opposed to making the European Central Bank the lender of last resort in efforts to prop up the common currency. It’s a lonely fight, however, and the pressure from Germany’s European partners is intense. Some warn that Weidmann’s course could end up destroying the euro. By SPIEGEL Staff.

http://www.spiegel.de/international/europe/0,1518,797666,00.html

Ja!

@ All

We owe a debt of gratitude to Der Spiegel for providing a window to the debate in Germany.

@ Davd O’Donnell

Great article! But the question you pose is not the correct one. It should be; “is Weidmann right or wrong?”.

If we take the following extract as the key element, the answer is probably yes.

“Weidmann feels that these interventions are completely unnecessary. Italy, unlike Greece, is not bankrupt, he says. On the contrary, the country is very prosperous and could easily raise money by, for example, increasing taxes”.

On the other hand, there is the possibility that Weidmann could, paradoxically, like Andrew Mellon (“liquidate, liquidate, liquidate”), be both right and wrong. cf.

http://en.wikipedia.org/wiki/Andrew_W._Mellon

@ Grumpy

Mersch said today that the ECB does not regard itself as competent

was sufficient , frankly

re
“Weidmann right or wrong?”

Weidman was picked by Merkel to do a job. Debt Collector.
The wealth of a continent continues to flow towards Germany despite the crisis. Weidman’s job is to hold the line ‘for as long as it takes’.

The logic of the German position and actions to date would suggest that by torpedoing all other solutions, Germany would happy to have a managed collapse of the Euro and that they would be first out the door and back to the Dmark.

People should not be taken in by Merkel’s ‘we will do what it takes’.
I believe she has been extremely duplicitous all along.
‘Watch what I do, not what I say’, should be maxim for judging Merkel and Germany.

The header “the eurozone can be saved” reminds me of that old GAA joke.

Manager – “Pat- We’re taking you off”
Corner forward – “But boss we only have 13 players”
Manager – “Come off anyway”

@ seafóid

Yves Mersch is a Luxembourg lawyer who did his studies in Paris. Have you considered the possibility that when he used the word competent he did so in terms of its legal – and, indeed, most common – meaning in French which is to have jurisdiction with regard to deciding a particular matter?

@DODl

That’s a great Der Spiegal article.

This piece I found compelling and worth reprinting…..

Calls for the Big Bazooka

Only recently, a group of analysts from London were sitting in the black visitors’ chairs in his office. They were the same analysts who, a few months earlier, had assured him that Italy was solvent and had no financial problems. Now they were urging him to fight the euro crisis with the central bank’s “big bazooka.” And he is supposed to take advice from these people, these so-called financial experts, who, in actuality, base their assessments on nothing but the breathlessly fast pace of the markets?

Weidmann has opened his office window, which offers a view of the Frankfurt skyline with its bank skyscrapers. The ECB tower, however, is hidden in the fog. “We at the Bundesbank,” he says, closing the window with a smile, “are easier to see.”

Experts!!!! Was it Warren Buffet who said…”when the tide goes out you see who was swimming naked”…. Or something to that effect.

Richard Portes of the London Business School a well respected economist specializing in European Monetary, Fiscal and Sovereign Debt issues.

I would rank him with Willem Buiter.

http://www.theglobeandmail.com/globe-investor/investment-ideas/features/taking-stock/richard-portess-outspoken-enthusiasm-for-euro-falters/article2235023/

The comparison between Japan and Italy starts with their horrific demographics (with Italy being the lesser of two evils) and ends there. There is a massive gap in general productivity and a gap in competitiveness, even with the uber-strong yen taken into consideration. And Japan has its own currency, an overvalued one.

Looking at Japan gives you nothing regarding Italy.

@Fulcrum
About 70% is the figure I see bandied about. 30% of the third largest debt market in the world is a fair sum and I agree with you.

The similarity between Italy and Japan is that in both countries the Gov’ts’ are heavily indebted. The population as a whole and businesses in both countries are wealthy. The Italians are indebted to foreigners and the Japanese are indebted to themselves. In my opinion the nationality of the creditor is not important apart from currency exchange risk. Too much is being made of demographics as a risk factor. When Ireland was churning out at the rate of 7 to 8 as opposed the present 2 to 2.2 we were living in abject poverty. Italy and Greece are awash in cheap labour courtesy of the refugee conveyor from North Africa. In the EU no country is an island and goods, people and money stream across borders continuously.

In Greece, Ireland and Portugal the public, businesses and government are all in very poor condition. It is not possible for the government of these three countries to squeeze funds out of turnips. In Italy thanks to their innate conservatism and distrust of government the public and business have amassed impressive rainy day buffers. Government in Italy has to tap that mother lode first before coming cap in hand to the ECB/IMF.

Germany which became a country in 1869 and inherited more than a dozen currencies in the process has a wider perspective on the uses and abuses of power and money than most people. For example a currency based on Rye markets and other agricultural markets was one of those inherited. Gold, silver and other metals were all in play. For many years there was a two tier system one informal and localised and the other formal, national and sometimes known as the Rentenmark. Built into the German psyche is this two tier value system, one as good as gold and the other which can be eaten by mice and rats. Today the Euro which replaced the Dmark is the good as gold standard, in German eyes it cannot be debased under any circumstances.

I would not be surprised if a two tier currency system emerges to take care of the needs of Greece, Ireland, Portugal while allowing the rest of the EZ to carry on as usual. That means the Euro would continue to circulate freely but the gov’ts would accept GIPs. All that is required to have a functioning and accepted currency is that the government accepts it as payment for taxes, fees etc.. It goes without saying that the Punt, Drachma, Escudo could also be employed.

As the crisis evolves methods of dealing with it will also evolve.

The situation is serious enough to cause great minds to focus.