Saving the euro zone

This post was written by John McHale

I don’t think it is an exaggeration to say the next few weeks will be make or break for the euro zone.   Four elements should be kept in mind:

1.  Lacking a reliable lender of last resort to (large) states, the creditworthiness of countries with large debts and uncertain growth prospects is extremely fragile.   Where any doubts exist about solvency, it is easy to shift to bad equilibrium, even where it is very likely that the state would not default if interest rates stay low.   Ryan Avent at the Economist provides a good analysis here. 

2.  Introducing a credible lender of last resort creates big transfer-risk externalities.   All euro zone countries should be wary of such a lender without some central controls on fiscal policies. 

3.  Even absent the need for central controls, euro zone countries would benefit from stronger national fiscal frameworks given the propensity to (structural) deficit bias.   And some degree of external surveillance and enforcement can help to make those frameworks more credible.   The cost of central controls should not be exaggerated. 

4.  It will be much harder to pull out of the crisis without the use of growth oriented macroeconomic policies where they are feasible.   This applies to fiscal policy in countries where some degree of fiscal space exists, monetary policy and macro prudential policy.

87 Responses to “Saving the euro zone”

  1. Livonian Says:

    @John

    So perhaps a valid question to ponder might be : Is it easier to opt out and go back to the drawing board or try and stay in?

    IMHO it probably would also be a question many other countries (with considerably more at stake tahn Ireland) in the EZ may have to ponder over the next few weeks.

    One thing we can all be sure about is that the choices are very limited.

  2. seafóid Says:

    John

    Did you think it would come to this all along ?

    The ECB bear how much responsibility ?

  3. Paul Hunt Says:

    It is both tragic and ironic that the German restraint on the ECB in its determination to avoid creating the conditions that generated its own nightmare 80 years ago - by feeding inflation and rewarding feckless governance - is creating precisely those conditions throughout the EZ and further afield.

    It is difficult to see how a way out will be crafted.

    However, Ireland should rejoice that it is so well governed - and that it has the IFAC to keep the government in line. If the EU’s Grand Panjandrums cobble something reasonable together the sunlit uplands will be in sight for Ireland.

  4. Livonian Says:

    @all

    IMHO the saddest thing about all this is that (just as in November 1995 after Europe stood idly by for over 3 years standing idly by watching the Balkans tear each other to shreds) the US is going to have to step in and “knock heads together”.

    If the US does not (or can not) then it will not only be a disaster but will also be a sad indictment of the European Project.

    If the Euro disintegrates than Ireland (which actually carries very little historical baggage and is a mature democracy compared to most other Europeans) in addition to implementing a currency chageover will also need to concentrate a lot of effort on preserving and strenghtening the European Union.

  5. Paul Hunt Says:

    The Polish foreign minister speaks for Europe:
    http://www.economist.com/blogs/easternapproaches/2011/11/polands-appeal-germany

    But will Germany listen?

  6. John McHale Says:

    @Seafoid

    Our own experience earlier in the year did point us towards the vista. Here is a post from March: http://www.irisheconomy.ie/index.php/2011/03/22/the-black-hole-grows/

    But I certainly would not exaggerate any prescience.

    On the ECB, I do have sympathy given the way they were set up. But they now have to show some flexiblity or they may have no — or a very different — euro to protect. I have little doubt that they are well aware of the multiple equilibria nature of the crisis they face. But they need political support to play the LOLR role and a way to deal with those externalities.

  7. John McHale Says:

    @Livonian

    Given the revealed fragility of creditworthiness within the euro zone (at least as presently organised) it would be be good if we could wind the clock back. But “going back to the drawing board” now would be a leap into the dark, with a high probability of a real disaster. The best course is to try to fix the flaws in the arrangements we have. A key point in the post is that it is important not to exaggerate the price of the necessary fixes in terms of greater central controls. I know you objected to the use of the word “maturity” on a previous thread — and it was badly chosen — but all sides need to move from entrenched positions.

  8. Tonicforthetroops Says:

    There’s no evidence that the ECB heads are willing to play the Lolr. They are more interested in lecturing places like Ireland that it’s our fault and suck it up. In the day that Greece is predicted to shrink by 6%, the notion that we can cut our way out of the hole is fast losing sense.
    The guvnr, dr honohan, late of this parish, has clearly been on a cleansing retreat in a Trappist monestary. What else would account for his silence as the ship careers to the rocks?

  9. Tonicforthetroops Says:

    Btw
    Tonight’s sticking plaster will be the efsf….nice design, but where wil they get the cash?

  10. Kevin Donoghue Says:

    “I don’t think it is an exaggeration to say the next few weeks will be make or break for the euro zone.”

    I do think it’s an exaggeration. But I’ve made a note in my diary for 20th December to check whether the EZ has indeed been made or broken. My prediction is that we will be looking at much the same depressing mess we are looking at right now.

  11. Eureka Says:

    @ John
    “Introducing a credible lender of last resort creates big transfer-risk externalities.   All euro zone countries should be wary of such a lender without some central controls on fiscal policies. ”
    In lay does this mean any idiot could borrow and the sensible countries will be left on the hook? This leads to pressure to print and inflation? I can see the German problem with this.
    So you can’t have lender of last resort without a really tough bank clerk. Who’s going to be that clerk? IMF? Troika type body?

    The German stance is actually infuriatingly correct. Would be great to assume a scenario where the ECB does lend but through an agent and then to figure out the positions we would be in. Ultimately this boils down to what scenario leaves us in the best position to restructure.

    Very interesting post ta for the opportunity to try to understand and discuss

  12. Georg R. Baumann Says:

    If ECB becomes lender to the IMF, which I consider the ultimate nightmare scenario, be prepared for one word….

    COLLATERAL

  13. simpleton Says:

    “It will be much harder to pull out of the crisis without the use of growth oriented macroeconomic policies where they are feasible. ”

    Almost right. The hedge fund community is now focussed on a simple view: eurobonds, ecb bond buying, whatever, are so yesterday. If the ceb did a volte face the effect would last roughly 72 hours.

    Italy hasn’t had any growth to speak of for 10 years. It already is japan, but with less cohesion & willingness to pay taxes. More generally, lack of growth is the problem and only a solution to that problem will solve the crisis.

  14. Johnny Foreigner Says:

    @John McHale

    “The best course is to try to fix the flaws in the arrangements we have.”

    I agree. The flaws in the arrangements we have are:

    1. We are tied to a monetary union without fiscal union. That won’t work.

    2. A fiscal union is a non-starter for a thousand political reasons which can’t be ‘fixed’ - they represent the desires and prejudices of millions of European citizens.

    The solution is to leave the eurozone, return to our own currency, restructure our debts in a way that does the least possible damage to our reputation but still allows us to grow, get rid of our structural deficit in one budget and institute pro-growth policies. It won’t be easy but there isn’t any choice.

  15. christy Says:

    @John McHale

    The ECB is perfectly entitled to take objectives other than price stability into account when it makes its decisions - the way it was set up - by which i think you mean its limited objectives - are not as ironclad as is sometimes said

  16. simpleton Says:

    Of course, the ECB is about to suffer multiple failure; much more relevant than multiple equilibria. The ultimate failure will come with the demise of the euro. The intermediate failure is the collapse in inflation that is coming.

    2% inflation is now but a pipe dream for the next few years. Massive monetisation is needed just to hit the inflation target. (anyone noticed EZ monetary data recently? break even inflation expectations? etc etc)

  17. Georg R. Baumann Says:

    Allocating capital and managing risk, both are the essential tasks of a financial system, and both are failing.

    I wonder what monetary and macro prudential policy John has on his mind given that the both above tasks were not achieved and social breakdown is on the agenda if no serious stop breaks are implemented.

    The disparity of expectations and the reality of GDP in the near future, I would not be astonished this to be in the trillions.

    It was flawed economic theory that enabled all this to happen, just as was the case with LTCM, well, they got the Nobel prize.

  18. Colm Brazel Says:

    “And some degree of external surveillance and enforcement can help to make those frameworks more credible.”

    We tried that by joining the EMU, didn’t work!

    We should go back to good old capitalism and democracy and end EUSSR socialism for the banks implicit in above; before enforcement comes with jack boots and goose steps:(

  19. DOCM Says:

    @ John McHale

    It is not reasonable to expect a central bank to exceed its legal mandate in order to compensate for the political cowardice of leaders who hold the ultimate responsibility for the solvency of their banks cf. remarks by Mervyn King some days ago.

    http://www.guardian.co.uk/business/nils-pratley-on-finance/2011/nov/16/mervyn-king-ecb-intervene

    The solution will not be found in this context. It has to be sought elsewhere by posing the question; why are the markets (i.e. investors) deserting the euro area? And answering it!

  20. What Goes Up... Says:

    Ha! Ha! Ha! Ha! Ha! Ha! Ha! Ha! Ha! Ha! Ha! Ha!

    It’s the end of the world as we know it….

    Meh.

    The money men are yanking your chain.

    They want bankers in charge, controlling the purse and they want the people to beg them for it.

    The sky is falling!

    Oh look! A cave! Cool!

  21. Ceterisparibus Says:

    The medicine prescribed for Greece is not working and the patient is now in terminal decline…..is our medicine equally ineffective?

    “Citigroup makes gloomy forecasts for Greece

    Citigroup economists predict that Greece will be in recession until 2015 and should not expect a return to growth before 2013, they said in a report published on Tuesday.

    In «Prospects for Economies and Financial Markets in 2012 and Beyond,» the international financial services group also predicts that Greece’s economy will shrink by an additional 5.6 percent of gross domestic product this year, 4.9 percent in 2012 and 3.1 percent in 2013, before which the country will be unable to return to growth.

    The report warned that the new rescue package being drawn up for Greece by the European Commission, the European Central Bank and the International Monetary Fund, in combination with a sizable haircut to Greek debt, are measures that will prove insufficient to guarantee the sustainability of the country’s public debt.

    Its forecasts for unemployment are not optimistic either, as the report suggests that the percentage of the country’s jobless would shoot up to 20.1 percent in 2012 and 20.9 percent in 2013, from the current 16.6 percent.”

  22. John McHale Says:

    @Georg

    On monetary policy, while I don’t hold out too much hope, it would be hugely beneficial if the ECB would adopt a symmetric inflation target of, say, 4 percent (or even better a price level or nominal GDP level target).

    Olivier Blanchard and co-authors make the case for a higher inflation target here: http://www.imf.org/external/pubs/ft/spn/2010/spn1003.pdf

    Christina Romer Makes the case for a nominal GDP level target here: http://www.nytimes.com/2011/10/30/business/economy/ben-bernanke-needs-a-volcker-moment.html?_r=1

    Paul Krugman makes a good case for the advantages of a higher inflation target in terms of facilitating real depreciation in the periphery: http://krugman.blogs.nytimes.com/2011/11/01/repost-european-inflation-targets/

    On macro prudential policy, there is a real danger that higher capital ratio targets will intensify the credit crunch, adding to the pro-cyclical forces on policy. A better policy would be targets for nominal capital levels. Andrew Haldane makes the case for a more counter cyclical macro prudential policy here: http://www.bankofengland.co.uk/publications/speeches/2011/speech513.pdf

  23. Joseph Ryan Says:

    @John McHale
    The Euro Zone as it was constructed is not worth saving.
    The Euro Zone reconstruction as a German controlled Dmark zone is not worth saving.
    Ireland needs to think beyond these few weeks or months and finally try to work out what is Ireland’s interest. Taking one for the team got us nowhere.
    The team ruthlessly and deliberately put the boot in, not once but several times.

    Ireland needs to prepare for realignment with a 25% devaluation and a link to sterling at that level.

    Ireland needs to get up off the floor and start fighting. The Troika needs to be asked for their side of the bargain. Growth. Where is it??
    Who in the ECB signed off on the growth forecast?
    Who in the Commission signed off on the growth forecast?
    The very people who now play brinkmanship with the future of hundreds of millions of people.
    We owe these people nothing.

  24. Paul Hunt Says:

    I expect the IFAC, given its ‘advisory’ remit, will steer the government in the direction of these wonderful ‘growth-oriented’ macroeconomic policies - unless, of course, our magnificent government is already on the case.

    They might stumble upon them unaided as they seek to avoid, at all costs, any meaningful contact with efficiency-enhancing and productive investment-enhancing microeconomic policies.

  25. Ceterisparibus Says:

    @DOCM
    “The solution will not be found in this context. It has to be sought elsewhere by posing the question; why are the markets (i.e. investors) deserting the euro area? And answering it!”

    It is not that difficult to answer the question.

    They are deserting the Eurozone sovereign bond markets because of the level of uncertainty of being repaid in full. Greece is a prime example…still no resolution of PSI involvement with reports of the new government seeking 75% reduction in debt…and the market today reflects this with a price on ten Year
    Of about 24 euro. Regardless of the treatment of CDS contracts, the precedent is now about to be established that Eurozone bonds can be defaulted on with the backing of the EU. Furthermore, the ESM CAC proposals further establish this proposition. So is it any wonder that sovereign bond buyers are exiting a market they previously viewed as safe. The risk is now so obvious that only the foolhardy will invest in any Eurozone bond not guaranteed by Germany.

  26. DOCM Says:

    @ All

    The latest from Martin Wolf may be of interest.

    http://www.ft.com/intl/cms/s/0/81af241a-19b7-11e1-ba5d-00144feabdc0.html#axzz1f64mf0ut

    His belief in the IMF as a deus ex machina is touching. His comment; “The world, whose interests the Fund represents ….” will come as news to many.

    It ignores the fact that the major players to whose aid it is supposed to come are also the major players in its own decision-making. And the biggest - the US - is rather like the Wizard of Oz. lots of sound and fury but without the wherewithal to back it up.

    The key concession to reality that has to be made is that by Germany. As Margaret Thatcher so elegantly put; “you can’t buck the markets!.

    On the points made by John McHale in reply to George R. B, if I may take the liberty to comment, none, apart from the last-mentioned, are in the realms of the possible.

  27. DOCM Says:

    @ Ceterisparibus

    Spot on!

    But the only news to emerge from the latest ECOFIN confabulations is that the Greeks are getting their money, without any prior agreement on PSI!

  28. Georg R. Baumann Says:

    @ John

    Thanks. Just briefly - I promised to clean the kitchen - Christina’s framework is clearly a case for another round of QE. Prior rounds had little to no or even adverse effects.

    I do not think either that hawkish ECB policies will change any time soon. I am afraid they might just look into the option to have the IMF become LOLR, the consequences of such a move are many, and personally, and I do not think the IMF should be empowered to this role.

    The “Incrementalists” in Europe refused to tackle this with the much required impulse for two years now, the devastating results of their policies will stay with peripheral countries for a very long time.

    Perhaps, where we are at today, we might need to think about the case that it has advanced to a stage where it is unfixable?

    If we take that at least into consideration, we might become more open for other possible solutions that could be hidden in the steam of the pressure cooker that everyone seemingly is willing to be submitted to.

    The overwhelming impression remains, and in fairness, also the results they can show for to date…. they do not know! Slave to the rhythm?

  29. Livonian Says:

    @John

    Please rest assured that when I wrote “mature democracy” I did not have any “previous thread” in mind. If I had a “previous thread” in mind I probably would have written “developed democracy”. As you are aware I always try to play the ball and not the man”:)

    Back on topic:

    I agree all sides (by which I presume you mean the various member states) need to move from their entrenched positions and Europe needs to start getting creative. This “kick and hope” game has run into very restricted extra time.

    Europe is in danger of moving into a very dark era inspired by rows over a badly designed currency.

    If the Euro Zone cannot come up with concrete proposals towards a sustainable solution by the end of next week than a voluntary Irish exit may, ironically, prove to be a “catalyst” for reform within the European Union. Which is what I mean by going back to “the drawing board”.

    Ireland is a developed democracy which has managed to purge a lot of its historical baggage. However we can not (AND MUST NOT) presume the same about very many of the other EU/EZ member states.

    IMHO it would be very bad Governance for any soverign democratic state to cede greater central fiscal control in such an “undeveloped” environment especially after what Ireland experienced in September 2008 and November 2010.

    Ireland only has two choices regarding currency : integrate or separate.

    An compromise choice can only be explored after 75BN of our debt is recognised as odious ( we can be “flexible” in how we describe it) and transferred to the ECB.

    Thereafter Irelandś constitutional right to use a referendum can be utilised to ensure “central controls” are accountable through representation.

    IMHO Ireland is the only state capable of holding such a referendum on this issue in a short space of time. However if we did hold a referendum and it was passed other states could (AND SHOULD) replicate it.

    Many other states in the Euro Zone do not even have any choice even though they are well aware they are in a rapidly accelerating train wreck.

    IMHO this crisis can only be solved by democracy, transparency and representation. Any other “fudge” is a recipe for disaster and undermines the reasons why the EEC/EU was established in the first place.

    Many thanks for opening this thread:)

  30. Sporthog Says:

    @ John McHale,

    “Even absent the need for central controls, euro zone countries would benefit from stronger national fiscal frameworks given the propensity to (structural) deficit bias. And some degree of external surveillance and enforcement can help to make those frameworks more credible. The cost of central controls should not be exaggerated”

    This point would have been applicable to the situation in Greece, where the state broke the banking sector.

    However in Ireland’s case, it was the banking sector which broke the state.

    Therefore, close monitoring of the states fiscal situation will not prevent a repeat of the Irish disaster.

    Is the EU going to implement tighter control of the banking sector, to ensure the banks cannot derail any soverign state again?

    In addition what areas of our sovreignty do you see which will have to be ceeded to our new masters? It will be interesting to see which lines in the sand the existing Irish Govt coalition will draw, if any.

    Some really really big decisions will have to be made by the Irish Govt within the next 12 months.

    I think it is ironic, on approaching the anniversary of 1916 the possibilty of the state ceeding more powers to Europe is increasing.

  31. grumpy Says:

    @John Mch

    ” Four elements should be kept in mind”

    I would be a buyer at just 4.

    “euro zone countries would benefit from stronger national fiscal frameworks given the propensity to (structural) deficit bias”

    Both stronger - specifically aimed at the medium term rather than current numbers - and sensible national fiscal frameworks. There is a simplistic anti-public borrowing craze which has its origins in the right wing of financial analysis and is much simpler for politicians to peddle than more measured approaches (note the US, Japan and UK) can borrow almost for free). There is a danger that the fiscal frameworks that might be bulldozed through in the current climate might eventually come to be regarded as the macroeconomic equivalent of a permanent commitment to wear platform shoes and 18 inch flares.

  32. Livonian Says:

    @Grumpy

    “There is a danger that the fiscal frameworks that might be bulldozed through in the current climate might eventually come to be regarded as the macroeconomic equivalent of a permanent commitment to wear platform shoes and 18 inch flares.”

    +1

  33. seafóid Says:

    The thread feels like a funeral with acquaintances relating their own memories of the life and soul of the party, now defunct

  34. Ceterisparibus Says:

    @DOCM
    Looking around for confirmation of Greek payout and found this…telegraph

    “Mr Schauble said eurozone finance ministers, who are meeting in Brussels, could not agree on the terms of the European Financial Stability Facility (EFSF). He told Germany’s Handelsblatt that although Europe desperately needed a fund “capable of action”, plans for the EFSF were too “intricate and complex” for investors to understand.
    The finance ministers, who were meeting ahead of a full Ecofin summit today, admitted the €440bn (£376bn) fund was unlikely to win support to leverage it up to €1trillion. It would be closer to €625bn instead. There was also disagreement about whether the bank recapitalisation programme should be carried out nationally or by Brussels.
    However, Mr Schauble concurred that the €8bn of international aid to Greece should be disbursed before Athens runs out of cash in two weeks. Evangelos Venizelos, Greece’s finance minister, said: “In Greece we have all the necessary conditions in order to go ahead with the next disbursement.
    It was seen as a small advance amid the worsening crisis. “

  35. Eureka Says:

    @ John
    Important not to be whimsical.
    The Germans have scared the bejaysus out of everybody enough to get what they want - an agent through which the IMF will lend.
    It’s a dangerous game of bluff. They think we want the Euro at all costs?
    Our questions are:
    Are they right?
    If not what cost?

  36. seafóid Says:

    @ DOCM

    “It is not reasonable to expect a central bank to exceed its legal mandate in order to compensate for the political cowardice of leaders who hold the
    ultimate responsibility for the solvency of their banks ”

    You evoke very strong memories of Leaving Cert. Peig Sayers with that beal bocht do na bancanna.

    If politicians are ultimately responsible for the solvency of “their banks” then they have to have power to to levy taxes on banks to fund this insurance and the power to destroy broken banks. It’s heads I win tails you lose all the way so far for the banks. And it doesn’t work.

  37. hoganmahew Says:

    @John McHale
    “Paul Krugman makes a good case for the advantages of a higher inflation target in terms of facilitating real depreciation in the periphery: ”
    Great, that’s just what we need. Price inflation at a time when the private sector has zero wage traction. It’s only any good for those with inflation-linked salaries…

  38. Livonian Says:

    @Ceteris@DOCM

    re Greek Finance Minister

    If I remember correctly this same Minister said some time ago that Greece just about had enough money to get through October before they needed the next “disbursement”.

    Now it looks like they can limp along for another two weeks until the next “disbursement”.

    Maybe he found some loose change behind the couch:)

  39. Jagdip Singh Says:

    @John,

    Timely analysis.

    If the UK can Quantitatively Ease GBP 295bn in a GBP 1.5tn economy and Brits haven’t swapped their wallets for wheelbarrows, then why not QE 20% of EuroZone GDP and get €2tn available now. Yes we might have 6/7% inflation, but this “danebenbeneben” by the EU/ECB/Eurogroup is almost comical when the markets are doing that dance from “Gerry McGuire”

    “Show me the money! Show me the money!”

  40. John McHale Says:

    @Hogan

    Out of interest, what category of worker that you know of has an inflation-linked salary these days?

  41. DOCM Says:

    @ seafóid

    Governments do have such powers but only if they are solvent. There’s the rub!

  42. Ceterisparibus Says:

    @Livonian
    Yes, Evangelos said that…but he was bluffing.
    I suppose the EU ministers had little option but to give them the 8b or bring the house down within the next few weeks.
    But it does raise the credibility of the Troika and it’s programmes. Don’t meet the targets and you still get the money. Of course, the IMF have not indicated that they will go along.
    Greece is an utter disaster…I see today that they have no petrol for the police cars…apparently the Defense ministry who handle the fuel owe the petrol company 35 million.

  43. paul quigley Says:

    @ John McHale

    You quote Ryan Avent:

    ‘There are many facets to the crisis in the euro zone, but at heart the problem is fairly straightforward. The euro zone developed a balance-of-payments problem; some of the countries in the single currency accumulated large external debts. There are many facets to the crisis in the euro zone, but at heart the problem is fairly straightforward. The euro zone developed a balance-of-payments problem; some of the countries in the single currency accumulated large external debts’

    As other commentators above have noted, this analysis is partial and skewed. The EZ financial crisis is anything but straightforward. It is a highly complex, world-historical set of contingencies, which historians will be unravelling for decades. New linkages are continually being uncovered, and the only certainty is that things will remain uncertain.

    Mr Avent conveniently omits to mention, for example, the fact that core EZ banks gambled heavily, and lost, on derivatives. He neglects the extraordinary accumulation of household debt, and the role played by the EZ in massively expanding the opportunities for profitable lending. Not a word either about banker’s bonuses, and the toxic culture which sustains them. This is an unprecedented scenario, which demands original syntheses.

    Schauble and his like are pushing the ‘fiscal discipline’ line day and daily. It’s a like the gruel in Oliver Twist. A bit thin and not very nutritious.

  44. BeeCeeTee Says:

    I’m coming to the conclusion that what is needed is a much more limited version of LOLR than is generally being proposed. The ECB LOLR function should only be used to keep governments functioning, not to bail out creditors.

    Governments in receipt of LOLR funding that think they are solvent should be expected to forcibly extend bond maturities, rather than repay anything. Those that think they are insolvent should be supported by the LOLR through the sort of composition with creditors that the IMF would typically arrange where it is the lead international actor.

    Support for Governments that think they are solvent should be programmed to decrease at a set pace, forcing them to choose between strengthening their fiscal position and going the insolvency route.

    The transfer-risk externalities under this version of LOLR are much more limited than under the versions currently being canvassed. Indeed, over the long run the explicit threat of forcible maturity extensions and facilitation of compositions with creditors are likely to make attempts by states to run excessive deficits, or to take on large private liabilities, very costly.

    Under this version of LOLR, there would be little need for central fiscal controls. There would, however, be a greater need for centralised regulation of financial services to control systemic risk.

  45. Actuary Says:

    @John

    Great thought provoking thread.

    I think it is time everyone started seriously thinking:

    1. What conditions would have to pertain where you would think Ireland would be best served if Euro was no longer our currency?

    2. How can we prepare for such an outcome.

    As some people have noted, being at least somewhat prepared will at least increase our leverage when time comes. I remember Roy keane saying re his contract negotiations at Man Utd that you have to be prepared to walk away in order to get the best deal.

    I also think, contrary to John’s point re fiscal controls that countries, like teenagers should be allowed to fail if that is what people want (I mean want as in that is the result of their voting actions). It’s democracy and giving people (political extremes?) someone to blame may be more costly than benefits gained by controls.

  46. Ceterisparibus Says:

    Off topic
    37 banks downgraded by S& P including the Squid. Could cost Bank of America 5b. All the big banks seem to be included and put on negative watch.

    More trouble for Europe?

  47. Tonicforthetroops Says:

    “I suppose the EU ministers had little option but to give them the 8b or bring the house down within the next few weeks.”
    Just as the ECB would have no choice but to aacqiesce in the Irish state handing the Anglo mess over to them. It’s all a monstrous game of bluff.

  48. David O'Donnell Says:

    Der Spiegel International - a reasonable summary

    Euro Zone on the Brink: A Continent Stares into the Abyss

    Fear is spreading through the financial markets as investors pull their money out of the crisis-stricken euro-zone countries. With Chancellor Angela Merkel opposed to using the ECB’s firepower to solve the crisis, the monetary union appears increasingly in danger of breaking apart. Some economists are even arguing for Germany to reintroduce the deutsche mark. By SPIEGEL Staff

    http://www.spiegel.de/international/europe/0,1518,800285,00.html#ref=nlint

    @ceteris

    Shure the MatrixsQuid prob bet against itself (fill left pocket); now it will bet for itself (fill roight pocket) - win win …

  49. seafóid Says:

    “The euro zone developed a balance-of-payments problem; some of the countries in the single currency accumulated large external debts”

    But what drove the accumulation of debt?

    As the FT editorial said on 5.9.2008

    Further declines in global equity markets are not inconceivable, particularly in the light of history. In real terms, stocks in many advanced country markets are worth about one-third less than at the peak of the dotcom boom. The bear market that began in 2000 was then reversed by a wave of cheap money. It may now be resuming.

    But why was there such a bear market ?

    No analysis would be complete without a mention of the tendency of the system towards stagnation

    http://monthlyreview.org/2006/05/01/the-household-debt-bubble

    It follows that increasing inequality in income and wealth can be expected to create the age-old conundrum of capitalism: an accumulation (savings-and-investment) process that depends on keeping wages down while ultimately relying on wage-based consumption to support economic growth and investment.

    http://monthlyreview.org/2008/04/01/the-financialization-of-capital-and-the-crisis

    Warning signs were evident for years to all of those not taken in by the new financial alchemy of high-risk debt management, and not blinded, as was much of the corporate world, by huge speculative profits.

    So crucial has the housing bubble been as a counter to stagnation and a basis for financialization, and so closely related is it to the basic well-being of U.S. households, that the current weakness in the housing market could precipitate both a sharp economic downturn and widespread financial disarray.

    http://monthlyreview.org/2008/12/01/financial-implosion-and-stagnation

    But, you may ask, won’t the powers that be step into the breach again and abort the crisis before it gets a chance to run its course? Yes, certainly. That, by now, is standard operating procedure, and it cannot be excluded that it will succeed in the same ambiguous sense that it did after the 1987 stock market crash. If so, we will have the whole process to go through again on a more elevated and more precarious level. But sooner or later, next time or further down the road, it will not succeed…We will then be in a new situation as unprecedented as the conditions from which it will have emerged.

    —Harry Magdoff and Paul Sweezy (1988)1

    “The first rule of central banking,” economist James K. Galbraith wrote recently, is that “when the ship starts to sink, central bankers must bail like hell.

  50. David O'Donnell Says:

    @all

    I still believe that sane, pragmatic realist Germans exist. I do not trust the present French Admin one single Anglstrom … The Kohl/Habermas grand coalition is working away …..

    Some see Germany’s Federal Constitutional Court as as a guardian of democracy in the euro crisis, others see it as an obstacle to rescuing the currency. Now members of Chancellor Merkel’s ruling conservatives want to lessen its power by amending the constitution — to remove its jurisdiction over European issues.

    http://www.spiegel.de/international/europe/0,1518,800465,00.html#ref=nlint

    If the pragmatic realists do not succeed - then Scenario of Exit becomes not only plausible, but necessary.

  51. David O'Donnell Says:

    further, the major impediments to Irish progress remain Internal - not external.

    @John McHale

    A progressive taxation system would be of great benefit - whether we are IN or Out. Cf Eurostat ….

  52. David O'Donnell Says:

    And on a much happier and more positive note …

    Happy New Year ….

    http://www.spiegel.de/international/europe/bild-800618-287703.html

    Lovely to be out of the bond markets :lol:

  53. seafóid Says:

    http://monthlyreview.org/2008/12/01/financial-implosion-and-stagnation

    “The first rule of central banking,” economist James K. Galbraith wrote recently, is that “when the ship starts to sink, central bankers must bail like hell.

    But, you may ask, won’t the powers that be step into the breach again and abort the crisis before it gets a chance to run its course? Yes, certainly. That, by now, is standard operating procedure, and it cannot be excluded that it will succeed in the same ambiguous sense that it did after the 1987 stock market crash. If so, we will have the whole process to go through again on a more elevated and more precarious level. But sooner or later, next time or further down the road, it will not succeed…We will then be in a new situation as unprecedented as the conditions from which it will have emerged.
    —Harry Magdoff and Paul Sweezy (1988)1

  54. seafóid Says:

    Interview with Ron Paul

    http://www.youtube.com/watch?NR=1&v=gQGpr1ERamA

    8:39
    “We have to question that. This country’s bankrupt”

  55. Mickey Hickey Says:

    @D’OD
    Sane and realistic ?
    A list of noted logicians will show 19-Germans, 12-French, 1.5 Irish (hyphenated).

    In my mind the French invented logic although the Greeks did dabble previously. The Germans of course perfected it. The Irish went one better and turned it on its head.

  56. PR Guy Says:

    @Ceterisparibus

    “Greece is an utter disaster…I see today that they have no petrol for the police cars…”

    They are buying oil from Iran - being shipped from Egypt to pretend it’s not coming from Iran to keep the US and UK happy. COD. I am not joking. Straight from the horse’s mouth that one.

  57. PR Guy Says:

    I presume you’ve all seen the headline in the FT tonight?

    http://www.ft.com/intl/cms/s/0/25ab975a-1a9f-11e1-ae14-00144feabdc0.html#axzz1f8mE9iHT

  58. Georg R. Baumann Says:

    http://yanisvaroufakis.eu/2011/11/30/eurobonds-that-can-work-now-a-critique-of-the-european-commissions-green-paper-on-stability-bonds-by-stuart-holland/

  59. Gary O'Callaghan Says:

    This post has all the pseudo gravitas of an appraisal of the iceberg as dawn breaks. As the Titanic goes down, John, you might want to consider that it was the vessel that was not built for purpose.

    You might want to jump on a lifeboat ahead of broadcasting any warnings of “transfer-risk externalities” to future Atlantic crossings. (Please be assured, they will learn that lesson without you).

    John, do you really not realize that we have a systemic crisis on our hands? Can you not take a stand on the system that we have? Will Irish economists forever be known as equivocators? (At this stage, your “guidance” on these matters is bordering on condescension).

  60. Mickey Hickey Says:

    If one subscribed to the Austrian School mode of reasoning then the credit propelled boom can only end in a crash. The higher the boom and the longer the boom the bigger the crash. Low interest rates, QE, extend and pretend will delay the day of final reckoning only slightly. We all, myself included, believe that Governments, EU and its institutions must take action to ameliorate conditions. Any action taken is like medication for influenza, it helps slightly with the symptoms but recovery takes seven days with medication and one week without. It is the illusion of an energetic, helpful gov’t that we are enamoured with but all it can do for our wallets is show concern much like Mommas do when the little one scrapes his knee. Of course the little one gets his scrape kissed but I stop short of asking our TDs’ to do that, even though some of them would be more than willing.
    Despite the logic being against it I am still hanging on to the hope that this being Europe a civilized part of the world since before Christ that an agreement will be hammered out before we go over the brink. We have to temper our expectations.

    @Tonicforthetroops
    I read your comment on Honohan quickly and took it for granted that he had gone into a monastery to do penance and ask forgiveness for his sins.
    I almost went into shock, it was with great relief that I read it again and confirmed it was not so.

  61. Eureka Says:

    @ Gary
    That’s a bit tough. It’s a difficult conundrum…..
    Let’s say we don’t implement enough austerity - what then?
    Do they kick us out? Do they refuse to fund us? In either of those circumstances we are in a great position to restructure. It could be worth a try - we’d force their hand.

  62. David O'Donnell Says:

    @Mickey Hickey

    I’m perplexed on the 1.5 Irish …

    Irish turned it on its head! Musta been after Wittgenstein went on the bender in Dublin and refuted his Tractatus …. but I get your gist

    On philosophy I’m essentially, if belatedly on ‘mature .. er ..reflection (-;], German …

    The Arab invention of Zero deserves a mention … the most beautiful number ever thought when it comes to any discussion on odious debt …

  63. The Dork of Cork Says:

    Its time to leave - the ECB seems to be working in the interests of the US treasuary / Goldman , therefore game over.
    A interesting simple & accurate French view of the banking world……………….
    http://www.youtube.com/watch?v=P8fDLyXXUxM

    This zero defecit Irish meme (which means non money creation) that some well meaning but naive commentators wish to have in order to get “independence” from the international financiers would have exactly the opposite effect much like how the Euro boys have destroyed Europe via low gov defecits relative to credit.

    I am Glad to see Karl has accepted the concept of CB defecit spending to reduce the debt load - I always knew he was a honourable but prickly man.

    Its a shame Europe did not get together and do the big things that no one state could accomplish such as undersea tunnels / comprehensive European nuclear programme and the like etc etc but such is life - as US agents & Euro Cardinals such as the Barossos of this world have destroyed it from the inside via a combination of needless state micromanagement and pure badness.

    Its a shame - but we must somehow move on as a centralised US treasury dominated CB would be even more disastrous then a fragmented albeit broken Europe.
    The best we can hope for is partial independence from the BoE I am afraid - as Ireland is a beaten broken bird.
    The later stages of this Globalisation episode has only feed the insatiable appetites of the greedy as they always do.
    They collapse due to their own internal contradictions inefficiencies and corruption as their chain of command becomes confused , compromised & convoluted.

  64. disgruntled observer Says:

    @ Dork of Cork,

    You’re absolutely right about the need for people to cut out the zero deficit scaremongering, however sincerely that view is held. It’s nonsense. There is zero requirement for a zero deficit and every requirement for investment spending in the current circumstances.

    Which brings me to your belief that independent states cannot do big projects. If a project makes sense it can and should be financed. If there is spare capacity the state should finance it itself if necessary. Remember the channel tunnel was a collaboration between two independent states. That fantastic bridge that runs between Denmark and Sweden ditto. And most pertinently for us in terms of what a small country can do if the project makes sense: Panama is taking on the expansion of its canal at a cost estimated between 55-100% of GDP.

    http://www.pancanal.com/eng/index.html

    Now that’s one hell of an investment by a small country. And sure closer to home, but back a few years there’s Ardnacrusha. Or even before that, with some ingenuity, the dikes of the Netherlands.

    We’re far too willing to see limitations these days. Everyone thinks that countries can’t do anything anymore. And if we’re to stick with the current bunch of Europeans countries won’t be able to do anything anymore. We need to forget the crap we’ve been taught and remember what came before it. It’s a requirement. We’ve got big challenges ahead. Not least in the area of climate. Christ, if we can’t cope with failed banks and a currency change, how are we going to get our heads around a climate shift.

    I guess, what I’m trying to say is, keep the chin up! There’re too many defeatists claiming enlightenment.

  65. BeeCeeTee Says:

    @Gary, I believe the point of John’s post is to put a little dressing around the argument that there is no alternative to central fiscal controls. The Government will shortly need political cover for some form of formal surrender of sovereignty in this area, that may extend to an attempt to pass a referendum. John would appear to be making a start on trying to provide it.

  66. Joseph Ryan Says:

    @Georg R Baumann

    “Perhaps, where we are at today, we might need to think about the case that it has advanced to a stage where it is unfixable?

    If we take that at least into consideration, we might become more open for other possible solutions that could be hidden in the steam of the pressure cooker that everyone seemingly is willing to be submitted to.”

    +1

  67. anonym Says:

    @Georg R Baumann, @Joseph Ryan

    Yes. “When failure is not an option, success can get very damned expensive.”

  68. paul quigley Says:

    @ Dorlk

    Perfect link :)

  69. clintideal Says:

    @mickey Hickey

    “Despite the logic being against it I am still hanging on to the hope that this being Europe a civilized part of the world since before Christ that an agreement will be hammered out before we go over the brink. We have to temper our expectations.”

    i was thinking a lot of people thought that in 1914 and 1939, we can all be
    blind at times the Euro elite are no exception

  70. Garry Says:

    I think that the four items mentioned in the original post by Mr McHale are important but incomplete….

    #5 on my list would be all politicians who have held government office for X years before should lose all rights to salary/pensions/expenses etc for countries that have to go to the lender of last resort. It would be undemocratic to say they cant stand for election; but I suspect removing all renumeration would be penalty enough.

    There are laws stopping people who have traded recklessly holding company directorships, surely there should be laws with penalties for people who have led their countries recklessly…. And having to go to the lender of last resort is proof of reckless leadership.

    The suggestion may seem silly but I believe if it were implemented it would have a transforming effect on Irish governance

    Just imagine, Brian Cowen, Bertie Ahern, Mary Coughlan etc would have some personal consequences for their ‘leadership’

  71. PR Guy Says:

    Anyone got any thoughts, news, predictions re the European Finance Ministers meeting today or will it just end up in a pass to the dear leaders on the 9th December? Will it all be over by Christmas? Will some form of ‘distraction’ be set up for us instead? Maybe a strike on Iranian nuclear facilities? An invasion somewhere? A terrorist incident? I’ve no doubt someone has something up their sleeve.

    I’ve been expecting a ‘big’ resignation this week but the drums have suddenly gone quiet in the past 24 hours.

  72. Georg R. Baumann Says:

    Thought provoking:

    http://arxiv.org/PS_cache/arxiv/pdf/1111/1111.1331v2.pdf

    We present a dialogue on Counterparty Credit Risk touching on Credit Value at Risk (Credit VaR), Potential Future Exposure (PFE), Expected Exposure (EE), Expected Positive Exposure (EPE), Credit Valuation Adjustment (CVA), Debit Valuation Adjustment (DVA), DVA Hedging, Closeout conventions, Netting clauses, Collateral modeling, Gap Risk, Re-hypothecation, Wrong Way Risk, Basel III, inclusion of Funding costs, First to Default risk, Contingent Credit Default Swaps (CCDS) and CVA restructuring possibilities through margin lending. The dialogue is in the form of a Q&A between a CVA expert and a newly hired colleague.

  73. Georg R. Baumann Says:

    P.S.

    About the Author:

    http://www3.imperial.ac.uk/people/d.brigo

  74. seafóid Says:

    @Pr Guy

    the carnage might wait until February when the bond issuing gets serious

    France has to issue 53 bn in Jan and 36bn in Feb
    Italy has 16bn in Jan and 53bn in Feb

    Spiegel carrying that FT story about businesses preparing for the unthinkable

    http://www.spiegel.de/wirtschaft/unternehmen/0,1518,800773,00.html

    But how can they prepare adequately for the hurricane that may be around the corner?

    Is it going to be the tragedy of the commons ? A breakup of the euro will be devastating but nobody will do anything to stop it.

  75. DOCM Says:

    @ PR Guy

    In response to your post, I would suggest the links below.

    http://tinyurl.com/dysp6v8

    Also to a rather sardonic article by the veteran Brussels correspondent of the French left-wing daily Liberation, Jean Quatremer, based on a recent briefing at senior level in the Chancellery. (Google Translate will give the gist of it).

    http://www.liberation.fr/economie/01012374116-angela-merkel-veut-mener-l-europe-a-coups-de-strict

    Believers in Santa Klaus i.e. those that believe that Germany will shift position on the issue of the wider LOLR role for the ECB and on eurobonds are likely to be disappointed. ESRI please note!

    A third link to the French business paper Les Echos shows that Paris and Berlin are talking past one another and it seems that neither Sarkozy tomorrow or Merkel Friday will be in a position set out particularly informative positions

    http://tinyurl.com/c8p5ts5

    It may also be noted that some weeks ago Schaeuble said in his newspaper confrontation with Weber that what Berlin was looking for in terms of powers for the new “Euro Commissioner” were a tighter legal framework involving the ECJ (i.e. simply deleting Article 126.10 TFEU) and powers similar to those held by the Commissioner in charge of competition. It is not, by any means, certain that such changes would “alter the essential scope or objectives of the Communities” to which the EU has succeeded. Paris does not like this for obvious political reasons, not least that it might force a change in budgetary policies.

    Finally, and back where it really matters, with the markets, a report from Kathimerini on PSI.

    http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_29/11/2011_416991

  76. PR Guy Says:

    @seafóid

    Getting through to February looks like it might be a major achievement at the moment…

    I agree with you that a breakup of the Euro would be a major shock to the system - devastating as you say - and I was just saying elsewhere that there seems to be a hope (not a strategy) that the rest of the world will reluctantly ride to the rescue via the IMF because it’s simply in their own interests not to let it all fall over in Europe and they don’t see the politicos here managing it.

    We live in interesting times alright. The next couple of weeks look like they’re going to be pretty lively.

    I’m at a large co. later today and know their CRO well enough to ask if they’ve done any Euro breakup contingency planning.

  77. Eureka Says:

    Ah the Germans
    Like a really annoying DJ at a party that’s beginning to suck
    http://www.rte.ie/news/2011/1130/eurozone-business.html
    You know how it works - one says I’m leaving and the others are pretty quick to follow.
    God how I hate German techno!

  78. seafóid Says:

    @ PR guy

    Planning for the Euro breakup would probably be like BP’s disaster planning for an accident in the Gulf of Mexico. No clue and the reality far worse than the worst scenario envisaged. Followed by crippling lawsuits.

  79. Fitz Says:

    Apparently Central Banks around the world are coordinating action to ease the funding crisis in interbank lending-RTE news. Developing story

  80. Fitz Says:

    Including the ECB

  81. DOCM Says:

    @ PR Guy

    On re-reading my post above, I note that the phrase “It is not, by any means, certain that such changes would alter the essential scope or objectives of the Communities to which the EU has succeeded” should have been put in parenthesis. In other words, should this turn out to be the legal situation, a referendum in Ireland would hardly be required. The paper by Gavin Barrett, to which Ciáran O’Hagan provided a link on another thread, explains the background.

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1938659&

    This woulld also be true of the amendments to Protocol 14 on the Euro Group sought by Germany the nature of which is not clear. The main objective, no doubt, would be to remove the word “informally” in respect of meetings - the insertion of which was insisted upon by the UK as it feared the undermining of ECOFIN - which limits the scope of action of the Group.

    All appearances to the contrary, things are beginning to move. However, no concessions will be made in advance.

    Next stops! What will Sarkozy say tomorrow and Merkel on Friday?

  82. David O'Donnell Says:

    @DOCM

    Next stops! What will Sarkozy say tomorrow and Merkel on Friday?

    I resign. I resign.

    Bout time …

  83. DOCM Says:

    @ All

    FYI

    http://www.lemonde.fr/crise-financiere/article/2011/11/30/paris-et-berlin-l-impossible-entente_1611102_1581613.html#ens_id=1268560

  84. seafóid Says:

    @ Paul Hunt

    “It is both tragic and ironic that the German restraint on the ECB in its determination to avoid creating the conditions that generated its own nightmare 80 years ago - by feeding inflation and rewarding feckless governance - is creating precisely those conditions throughout the EZ and further afield.”

    This week’s Spiegel observes that there are only 2 ways out of the Schuldrenkrise “und beide sind furchtbar” - the two of them are appalling.

  85. Mickey Hickey Says:

    @clintideal
    A couple of books recommended to me dealing with the thought processes that have become prevalent since the early 1970s’.

    Why America Failed by Morris Berman

    Empire of Illusion by Chris Hedges

    Empire of Illusion written in 2009 deals with attitudes that brought down the Romans and how a similar detachment from reality is now undermining America. It is relevant in that in Ireland we have imbibed deeply from the fount of US truisms.

  86. Kevin Donoghue Says:

    “I don’t think it is an exaggeration to say the next few weeks will be make or break for the euro zone.”

    Time’s up. Which was it then?

  87. James Nash Says:

    The sooner the Eurozone collapses the better. Saving it only means the better off get richer and the poor suffer more. Austerity measures don’t work.

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