Saving the euro zone

@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.

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.

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

But will Germany listen?

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

@ 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

“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.

@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

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.

@ 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!

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.”

@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.

@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.

@ 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!

@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:)

@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.

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

@ 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?

@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…

@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!”

@ seafóid

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

@ 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.

@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.

“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.

“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.

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 ….

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

@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.

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

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).

@ 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.

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.

@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.

@Georg R Baumann, @Joseph Ryan

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

@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

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.

P.S.

About the Author:

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

@ 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

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!

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

@ 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?

@ All

FYI

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

@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.

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.