Boone, Johnson and Wolf on the euro zone’s future

Read, and linked, the Boone and Johnston piece yesterday. It is one of the most devasting critiques I’ve read of EU policy … yet it need not have been so.

This crisis demands, and has demanded ab initio, a serious upgrading on the remit of the ECB. The system is not fit for purpose – yet ‘long live the system’ is the mantra.

Incrementalism is death. When the system is kaput, and when strong interest groups oppose essential change to ensure life, then dictatorial transformation is the only option to ensure survival. BasicStrategy101

I believe in the first hypothesis.

I had read Martin wolf’s article but the Boone and Johnson article makes for grim reading.

This bit struck me

“Whenever nations fail in a crisis, the blame game starts. Some in Europe and the IMF’s leadership are already covering their tracks, implying that corruption and those “Greeks not paying taxes” caused it all to fail.  This is wrong:  the euro system is generating miserable unemployment and deep recessions in Ireland, Italy, Greece, Portugal and Spain also.  Despite Troika-sponsored adjustment programs, conditions continue to worsen in the periphery.  We cannot blame corrupt Greek politicians for all that”

And Madame Lagarde pays no tax on her half a million salary.

John McHale is definitely an optimist.

FYI Der Spiegel

High-Stakes Referendum
Ireland’s Test Vote on Merkel’s Fiscal Pact
By Carsten Volkery in London

Though past referendums on European Union issues in Ireland have proven to be problematic, this time things are expected to go off without a hitch. When the Irish vote on the EU “fiscal compact” treaty on Thursday, their clear approval is expected. Polls predict that some 60 percent of the voters will tick the Yes box on the controversial treaty, which commits all ratifying members to fiscal responsibility.

But as certain as a majority vote may appear, German Chancellor Angela Merkel will nevertheless be anxiously focused on the activity in Dublin on Thursday. In the past, the Irish have repeatedly proven to be both unpredictable and resistant to being told what to do. Should they reject Merkel’s fiscal pact, it would be a further setback for the German chancellor following the election of Socialist François Hollande in France.

http://www.spiegel.de/international/europe/irish-engage-in-intense-debate-over-euro-zone-fiscal-pact-referendum-a-836006.html

NO .. er .. comment.

KD,JMH,
I think it is clear that the hard core do not want to move but have been forced by events to move as John describes. Each step has been a dollar short & a day late. It is probably too late now – recessions have turned towards recessions and bank balance sheets have been hollowed out. The last throw will be QE. After that a messy break up and every man for himself.

@ All

What is missing from the commentaries referred to, and a deal of the comments on the thread, is recognition of the fact that Germany is a democracy like any other and what it will decide to do is uncertain and will certainly be a reaction to events rather than leading them. Merkel has shown that she is incapable of doing anything else.

Nevertheless; “Germany is the most admired country in the EU and its leader the most respected”.

http://www.pewglobal.org/2012/05/29/european-unity-on-the-rocks/

What the opinion of Ireland would have been had we been included can only be guessed at. Just as well!

Dogmatic misdiagnosis of the core problem – the European (and entire Western) banking systems’ insolvency – has been rampant since the credit bubble burst in 2007. A misdiagnosed ailment cannot be cured, except by implausible accident.

The interbank market has been broken for nearly five years – no bank will lend to another, except on a collateralised basis – and acceptable collateral has nearly run out. Monetary policy has no transmission mechanism.

Germany, with the ECB to the forefront of the misdiagnosis tendency, cannot afford to leave the euro without facing a guaranteed collapse of its banking system, and the loss of competitiveness that a swift and savage currency revaluation will bring it.

Germany equally can’t afford to stay in, or the slow-motion train-crash that’s happening now – all too predictably – will cause exactly the same effects, only they just might happen over a slightly longer timeframe, if markets continue to believe that no country could be so stupidly self-destructive.

Just like I’d have a grudging admiration for the likes of Nick Leeson or John Rusnak if they’d squirreled their hundreds of millions in a Swiss bank account instead of blowing it, I’d have the same feeling if Germany were moving along a path to maximise its own gain from the current and persisting travails. However, I think it’s a case of them, and the ECB, not having a clue what they’re doing, and at this stage afraid or unwilling to change tack, as to do so would be to admit the repeated policy failures of the last five years (and probably more).

To throw another Greek word into the mix, what the whole system needs is some form of catharsis – and as things are going it will be uncontrolled and unmanageable.

The current economic landscape is scary, it seems to me that Irelanrds influence in shaping what will unfold is minimal. It is important that irrespective of what unfolds at EU level , we deal with whatever is within our control

A significant part of our economic woes can be laid fairly at the door of Fianna Fail led governments. Last years election was an opportunity to kick them out, and this was done. A consequence of this was the arrival of the Fine Gael/ Labour government. They rode in as white knights to rescue the country from the wasteland that Fianna Fail had left.

This represented an opportunity to make a truly new beginning with significant political, economic and social reform. It has not happened; and it wont happen.

Voting yes in tomorrows referendum will simply ensure a continuation of policies that are incapable of solving our many problems

John McHale

I wonder at what point you (& others) are going to take a step back & see if you can see the full reality behind this mess.

The Euro is deeply flawed by design & was the product of an ideology & flawed macro economics driven by the narrow interests of the financial sector elites.

At every stage of the last four years, from one crisis to the next, within Ireland & beyond, the interests of the financial elites have been followed assiduously & only marginally challenged at the very brink of meltdown.

Every creditor made good, no matter how reckless & at whatever cost to citizens. Punitive interest rates on gov borrowing required to do this. Democracy bypassed or junked, policy dictated by financial sector elites at the ECB & EC.

The only reason ‘growth’ has now entered the PR wall of spin (no substance, mind) is because Greece & Spain are taking us to a new brink.

Authorities could otherwise care less how many unemployed there are.

Charles Hugh Smith explains exactly what the underlying agenda has been throughout & it has not changed. Nor will it be changed unless voters demand a thorough examination of the mess & a radical, negotiated & complete package of reform to be put forward before we sign up to or vote on anything else.

“The E.U., Neofeudalism and the Neocolonial-Financialization Model”

http://www.oftwominds.com/blogmay12/EU-neocolonial5-12.html

Interesting view on the No side posted on Dr Gurdgiev’s blog.

http://trueeconomics.blogspot.com/2012/05/2952012-fiscal-compact-one-very.html

Completely off topic, but…

The prime minister Jean-Marc Ayrault, aware of the unease at fat-cat excesses weeks before the parliament elections, took a hard line, announcing in an interview with the weekly L’Express that the executive pay-cuts would apply to those already in their posts rather than only new contracts. “I believe in the patriotism of company leaders. They can understand the crisis requires the political and financial elite to set an example”. The president and cabinet have cut their own pay by 30%.

http://www. guardian.co.uk /world/2012/may/30/ hollande-france-clamp-down-fat-cat-pay

@Al

What on earth makes you think that is remotely off topic?

The third option sounds like the conclusion of McWilliams Punk Economics 4

@ John McHale
Many thanks for this.
I have often noticed how people who are wrong with conviction are so much more highly valued than those who are right with circumspection.
We don’t know how this is going to pan out. Our task is to position ourselves in the least bad situation for all eventualities. It’s unsexy and its boring but the least bad situation generally involves not making unnecessary enemies

@Paul Krugman

Excellent Newsnight programme. A classic K-Crusader vs Tory ‘business leader wisdom’ finale. Spot on about the Euro.

Recommended viewing for all.

How come you kept declining Paul Mason’s invitations for so long, and in particular prior to the last general election?

@Zhou
“how grim is that”

About as grim as the following…
““We’re in a situation of total emergency, the worst crisis we have ever lived through” said ex-premier Felipe Gonzalez, the country’s elder statesman.”

I think it is getting serious!

@ John McHale,

I’ve studied the Boone and Johnson piece a little bit, and I liked it. I liked the way in which it attempted to frame the scale and dimensions of events as have happened, and are likely in the immediate future to happen. I liked the way in which they attempt to describe Germany and its relationship to the periphery of the EUROPEAN UNION.

I would wish to bring in the observations of one currency speculator into this discussion, if I may. George Soros, I can recall described better than almost anyone I know who gets public platforms in these debates, what really did occur around the time of the financial collapse in the United States in 2008, and the subsequent ‘flight to safety’ of capital, into things such as south American commodities after 2008.

Soros, then quite neatly described, that following some of the guarantee mechanisms put into place by the US federal government, resulted in capital again switching its location back to the centre – and how the GLOBAL periphery got side-swiped again.

The point, I am trying to make, is that capital in the modern era only very reluctantly wants to locate itself at the centre of the GLOBAL financial system. Indeed, as Soros would also point out, that perhaps the reason why so many reserves did end up in north American markets following the series of Asian collapses in the 1990s – was indeed, that flight away from risk at the GLOBAL periphery – to the markets at the core of the global financial system, which were supposedly sophisticated enough to ration out same to purposes most well becoming.

So we have to accept for the time being, that what may be holding a lot of capital at the centre of the GLOBAL system, at the moment, is the series of financial supports instituted by the US federal system – to prop up its own main street – but which is also (only barely), managing to create a ‘safe’ haven for funds at the time being. The US is operating like a large hydraulic brake in the system of global financial flows.

What we have basically, is something akin to a large, un-wanted, and difficult-to-control, volume of capital – something like when a river swells up from too much rain. We are looking for ways to delay the flood, and make ponds almost, for it to accumulate. My amateur-ish guess is though, that it will basically boil down to large creditor nations such as China and the middle east, and how they deem necessary to respond to the situation.

My best amateur-ish guess, is that the last thing those large creditor nations ever want is to see that capital flooding back towards themselves. We have probably witnessed a number of decades now, in which those large creditor nations have proven themselves very, very poor in initiating their own plans to create their own markets for management of their own capital. In effect, to take some of the pressure off of centres such as London or New York.

What seems to have characterised much of the late 2000s crisis, was an unacceptable kind of financial relationship between western and eastern markets. We probably do require a couple of more centres of capital management to come back to the fore, such as Japan, Australia and one or two Pacific rim locations – and maybe even Russia. As for advanced markets in India in the near to medium term, it is probably asking for too much. BOH.

@grumpy

Are peripheral governments (and electorates, and special interests) likely to want to stick as much of the burden of “saving the Euro” onto the core as possible, without any concern for what would be fair or proportional? Sure – or at least, true enough to be going on with. But the reverse seems to be more or less equally true of the core. Are the PIIGS likely to go wild with Daddy’s credit card as soon as EU debt is (further) mutualised? Sure. Is the German government determined to free-ride on the Spanish taxpayer’s indirect bailout of German (and other core) banks’ bad private-sector lending to Spain to absolutely the maximum extent possible, even at the cost of pushing Spain into external assistance? You bet you.* I don’t see much to choose between Tweedledum and Tweedledee in this struggle, do you? Each will simply take as much as he can get, without regard to fairness (except as a rhetorical weapon to use against the other), and only then decide to carry what’s left of the load. Or perhaps, not to.

\* To be fair, there is of course the fact that as soon as the Spanish banks can borrow directly from the ESM then the Spanish government has an incentive to stimulate the Spanish economy by pushing losses onto the Spanish banks. If anyone wants to seriously tell me that German unwillingness to accept an EU bailout of the Spanish banks is solely based on this second-order concern about the size of the bank bailout, and not at all on the first-order concern of simply not wanting to contribute to it at all, then I have a flying unicorn to sell you.

I think this one paragraph outlines the future for Europe (HT BBC) – the discussion was about Spain:

“Last night the crisis was discussed in a video-conference call between Angela Merkel, Mario Monti, Francois Hollande and Barack Obama. Investors are fleeing to safer havens, however low the return.”

Absent? Why, the key stakeholder of course. Spain was not involved in the conversation about them.

One assumes that they are merely waiting until the ESM is set up on 1 July to give Spain it’s bailout? I’m assuming the ESM delivery is still on target for 1 July. I can’t see the need for a delay given how Spain’s goose tapas looks well and truly cooked.

@anonym

I think the currently ascendant German view is that there may be a case for propping up Greek banks, but not the Greek state. They might (though it might as you suggest be more complicated than they realise) sanction a recap so Euro liabilities could be at least paid in part (to the ECB!) while allowing local Greek payments (eg to state employees) to become Bonds / IOUs and by default Greek / Euros and in fact a local currency (see Hoganmayhew, grumpy et al. 2011).

…and you will have to employ loads of people to enforce the new sun lounger towel tax, solving unemployment in Spain at a stroke!

@values

This bit: “The end of the euro system looks like this. The periphery suffers ever deeper recessions — failing to meet targets set by the troika — and their public debt burdens will become more obviously unaffordable. The euro falls significantly against other currencies, but not in a manner that makes Europe more attractive as a place for investment.”

precedes your quote form Mills and Boone, no, scratch that, that is the Irish political establishment reference library – sorry, Johnson & Boone.

I think they are referring to a pre-break-up scenario there where Euro depreciation pushes up prices in Germany, facilitates wage rises there, is visualised as occurring in tandem with printing by the ECB, and is ‘unacceptable’ to the German psyche. Whelan (without reading the piece, admittedly) is I think concentrating on Bundesbank printing after German Euro exit.

@PRguy

“How are they going to raise the funds without a bailout? ”

Lorenzo Bin Smug & Wrong will announce to the investment community that they are being irrational, Spanish yields drop, and we all form an orderly queue to throw money at Spanish banks

@grumpy

If this was the deal being offered to Spain today, or if it had been offered to Greece two years ago, then it might show Germany being willing to hold its end up. But as it is it just fits the pattern I described. The core will make sure that as much Spanish tax revenue as possible is poured (indirectly) into the core banks; only when the husk is more or less dry will they then make up the balance (or perhaps do something else).

(Also, weren’t the Greek banks (unlike the Irish or Spanish ones) more or less solvent back in 2009-2010, only to be destroyed by the gimmicks used to keep the Greek sovereign out of a normal IMF program and restructuring? That would make this case even more bitter.)

@anonym

“If this was the deal being offered to Spain today, or if it had been offered to Greece two years ago, then it might show Germany being willing to hold its end up. But as it is it just fits the pattern I described.”

If they had been offered that a couple of years ago don’t you think the political elite would have been as absolutely determined to keep all liabilities (not least to themselves) denominated in Euros? Isn’t that the free choice Ireland has made?

@grumpy

And so what if they hadn’t? There is no conservation of guilt – if the Greek politicial establishment are fools and knaves it doesn’t follow that the German political establisment are largely in the clear. That ain’t real life.

@grumpy

Anyway, how could the Germans have forced that ’solution’ if the local politicians didn’t want it at that point?

Back in 2010 Greece was set fair to enter a proper IMF program probably incorporating an immediate or early default. That’s not the same as the devalue-a-quasi-currency plan you discussed above, but I’m certain you agree it would have been a clearly better course of action than the madcap EU/IMF debt-snowball “rescue” which was actually put in place instead.

Now, all the German government had to do to effectively force Greece into that vanilla IMF program was do nothing. Greece was broke, it was a member of the IMF, it probably didn’t have any other options – or it wouldn’t have had any other options if the EU-controlled alternative “rescue” hadn’t been put together. The EU-led Plan B would not have gone ahead if the German government had declined to support it. In fact it wouldn’t have gone ahead if the German government hadn’t joined the others in scrambling to put that ad hoc plan – totally contrary to the design of the Eurozone as established by Lisbon – together.

So in fact, not only was Berlin able to force Greece into the IMF with perfect ease – Berlin had to strive mightily to prevent Greece from having to go to the IMF. In fact, it may have gone even further. I’m not sure, but I do seem to recall EU member states threatening to use their votes in the IMF to block a vanilla IMF program for Greece – in other words, trying to force Greece into not taking the sane, appropriate IMF route. In the face of all this, that there was bad behaviour and bad judgement in Athens too (no surprise) doesn’t exonerate the rest of the EU very much.