Willem Buiter: Race to save the euro will follow “Grexit”

Willem Buiter provides another incisive analysis of the euro zone crisis is this FT article.

From the article:

The endgame for the euro area, if the political will to keep it alive is strong enough, is likely to be a 16-member area, with banking union and the minimal fiscal Europe necessary to operate a monetary union when there is no full fiscal union.

Minimal fiscal Europe will consist of a larger European Stability Mechanism, the permanent liquidity fund, and a sovereign debt restructuring mechanism (SDRM). The ESM will be given eligible counterparty status for repurchase agreements with the eurosystem, subject to joint and several guarantees by the euro area member states. There will be some ex-post mutualisation of sovereign debt. Sovereign debt restructuring through the SDRM will recur.

One question is whether vulnerable euro zone countries could ever hope to regain robust creditworthiness with the SDRM hanging over them.   Given the likely effects of threatened “bail ins”, it seems too early to give up on more ambitious efforts for ex-ante debt mutualisation along the lines of the German “wise men” proposal.  (Gavyn Davies provides a useful analysis of the proposal here.   This Bruegel blog post considers the less ambitious alternative of “eurobills”, which could be a stepping stone to more ambitious “eurobonds”.)

69 thoughts on “Willem Buiter: Race to save the euro will follow “Grexit””

  1. http://www.youtube.com/watch?v=p4NP4oXQp3o&feature=relmfu

    Frank Galton Says:
    May 17th, 2012 at 6:30 pm
    @All

    A little birdie brings news of a Willem Buiter presentation and the following highlights therein.

    Ireland: off the charts figures on debt and errors of historic proportions on policy, most notably our favourite evening in government buildings in September 2008. Despite all the adjustment, prognosis still bleak because public debt is in the danger range while household and non-financial corporate debt still far too high. Can’t believe that regulators and ministers missed the surge in household debt 2000-2008. Now an economy with 4 deleveraging sectors (households, firms, government, banks) — it can’t be done.

    Greece: Euro exit alone will be useless or worse than useless — there will be immediate inflation and a rubbish currency. No resource boom to bail them out a la Russia and Argentina. Large scale debt restructuring throught out the economy the only option. Amazed that IMF signed on to the 2010 program and doesn’t know how they managed a debt sustainability analysis. 2010 was the time when a more contained restructuring could have worked.

    Eurozone in general. No place entirely immune from debt concerns, even German has rising CDS spreads. Spain to be in troika program this year, Italy next year. Italy managing only because the ratio of PR to performance has been so high, but underneath it’s Monti working with the same political system that got them into the mess into the first place. Does not think that Italy can comply with the fiscal compact without severe disruption given the growth rate and size of debt. In principle Italy has the household wealth to support solvency but with chronic declines in tax administration capacity worldwide, not clear that this can be tapped.

    UK: Has Irish style profile in some respects but being helped for now by inflation which is having significant impact on debt reduction due to the maturity profile.

    US & Japan. Both fiscal basket cases being protected by special factors — home bias of Japanese savers and the reserve role of the dollar, respectively. Neither can last. Outsiders will be the marginal purchasers of JGB within 5 years and yields will have to rise. US is stuck between social democratic spending preferences and tea party tax preferences. Republicans going for another showdown on debt which will be bad economics and bad politics. Thinks that markets and pundits are too sanguine about dollar as a reserve currency — it can remain a reserve currency but at much higher absolute yields. Then the fiscal crisis will kick in.

    Krugman and Summers: Complaints about both. Summers role in the US financial deregulation in the 1990s. Krugman too committed to the Keynesian cross — there is no Keynesian Laffer curve. Austerity is painful but it does reduce deficits. More austerity = more deficit reduction. The constraints are political, not economic.

    Demand for “less austerity, more growth” is essentially a demand for non-market financing. Unless a specific kitty or Santa Claus is being identified, it’s meaningless.

    Overall outlook: advanced economies need mass debt to equity conversion. Household negative equity becomes bank equity. Sovereign debt converts to GDP warrants. Huge agenda remains on banks — most Eurozone countries still have no special resolution regime for banks, let alone a pan-Eurozone one. Legislation needed to break the pari passu link between depositors and senior unsecured creditors. Household mortgages need to shift to Islamic finance — insane that the system worked for so long with highly specialized households being landed with such a rigid financial instrument like a mortgage. Massive deadweight losses to reposession and bankruptcy.

    John Corcoran Says:
    May 17th, 2012 at 6:56 pm
    @Frank Galton

    Excellent article.

  2. There will be no ‘race’ (EC/EZ don’t do anything that quickly) and no saving the Euro.

    The next common currency in Europe will be the Peasanto.

    Glad to see Spain will work out OK. Only 24% unemployment, worst case scenario for banks is only €62bn, house prices are diving, bond rates are only 7%, etc. What could possibly go wrong?

  3. No thanks Willem – but there is a method to your Euro madness.

    Germany & Holland is borrowing off the peripheries accounts…..
    This means the Greeks and the rest of us cannot bid for oil and other raw materials on anything like a equal basis , sustaining the cores unsustainable business model by directing most of the remaining physical surplus raw material to the cores cold dead heart.

    It does not matter that the Rotterdam / Rhur / Rhine area is the most effiecent geographical heavy production area on the planet and we are not.

    As its making goods we neither need nor want (if we snap out of this credit opium daze) – therefore this physical capital is being wasted on a biblical scale.
    http://www.youtube.com/watch?v=aRghETHFvYs

    The Core and especially Germany will collapse into its own mercantile even horizon if we learn to say No to the Germans running the Germans , and the Irish Germans running the Irish.
    No to the cores plan to expend our now shared physical & human capital to export to Asia for a income that destroys net capital over time.

    This is a flawed Industrial strategy that orbits bank credit and not fiat and is clearly grossly unsustaianable.
    Its time the core just Beat it.
    http://www.youtube.com/watch?v=3mvuQ6Es6Do

  4. @John McHale

    I would regard a Greek exit (in whatever shape or form) as a potentially fatal blow to the Founding Principle of Solidarity that underpins the European Project.

    “Does Paddy Power consult with Willem Buiter, the coiner of the obnoxious term ‘Grexit’, or other high profile financial commentators when calculating the odds of when Greece will leave the Euro? If so, I’d say the odds are shortening every day, but one of the most frustrating things about reading Buiter’s latest comment today is that it ignores the fact that it is the policy of ‘reforms’ themselves that is forcing Greece out of the Euro. If as he says Greece get a small relaxation on it terms, but over all has to remain within the austerity program there is no way that they will be able to stay in the Euro. The programme itself is bringing about a situation it was designed to avoid. But of course, rhetorically it was supposed to be about resolving the crisis in the Greek economy. In reality it was about saving banks and the bailouts are merely the way to achieve this politically. What we are seeing is the failure of European politics to hide the nature of the power relations within Europe.”

    It’s quite obvious now that both Spain and Italy will enter bailout programmes under the Troika with all the conditionality that that implies, even though in Spain as in Ireland sever austerity has already seriously eroded the economy, which in turn has further weakened the banking sector nursing losses from the busting of the property bubble. It is the conditionality, based on fiscal contraction, demanding further reduction in wages, deregulation and privatisation that is the motor behind the present crisis. As that other widely cited commentator Anatole Kaletsky argues, of the suggested solutions for the Eurozone crisis most regularly called for, fiscal and political union, a banking union, sovereign debt mutualisation, have all been vetoed by Germany. He says that EU countries should work to have Germany removed from the Euro area, rather than the end of the Euro being unpeeling of the onion, as Buiter outlines will happen if “procrastination and policy paralysis prevail”. This persistence can be witness by the Reuters report today that Germany ‘has agreed economic growth measures for Europe‘. But this is nothing more than a deal with the SPD to get their support for the Fiscal Compact which must be passed in the German Parliament on the 29th of June for it come into effect by the 1st of July. ‘Growth’ measures are the usual supply side prescriptions that are part of the conditionality of the Troika programs in Greece, Ireland, Portugal, and soon Spain, with Italy close behind.”

    http://www.irishleftreview.org/2012/06/21/race-save-euro-follow-grexit-willem-buiter/

  5. @John McHale

    The strategy of this German administration has failed – most abysmally and destructively in Deauville. Time for other Europeans to wise up, stand up, and cop themselves on. The Financial System needs a severe pruning ….

    European Union
    Why German Europe is a non-starter

    21 June 2012Gazeta Wyborcza Warsaw

    It’s become a commonplace Berlin is to impose its political vision and economic order upon the EU. Not so simple, says a Gazeta Wyborcza columnist, because its social model is in decline and it is no more prepared than its partner political union.

    End of symbiosis
    The sources of Europe’s German problem – or Germany’s European problem – lie elsewhere and are more fundamental. Firstly, the current crisis has hit Germany hard. Not in economic terms, but in political and moral ones. Far from heralding the onset of a “German Europe”, it actually means its end. The common currency system was based on the German model, with the European Central Bank as a copy of the Bundesbank.

    The crash of this “Maastricht Europe” effectively undermines two assumptions crucial for Germany policy – that German solutions are best for Europe and that the German economic model thrives in symbiosis with European integration.

    READ ON:
    http://www.presseurop.eu/en/content/article/2217201-why-german-europe-non-starter

    The American economist Raghuran Rajan wrote some time ago that politicians are unable to respond to dangers of unknown scale. This is a good explanation of Ms Merkel’s stance. Until now, German policy has focused on limiting the damage and trying to preserve as much of “German Europe” as possible.

    In recent days, Chancellor Merkel mentioned the need for establishing a political union, a prospect the EU leaders will discuss during the summit at the end of this month. It is not Berlin but Paris that may prove the greatest obstacle in the process. The dilemma “the EU’s collapse or a political union” has become very real today. Perhaps Ms Merkel’s greatest fault has been her inability in recent years to prepare the public for either of these scenarios.

    @Dr Merkel

    Go.

  6. Moody Blues nite …. for 15 Swingers on junk floor … bit late in spring for prune_ing but better dead financial wood than dead citizens.

    “The largest banks in the world have systematially overestimated their assets for years.” Bill Black on Aljazeera right now ….

    Egypt at a seminal moment: military or democracy?

    I suspect a procedural correlation between the Egyptian military and the power of the financial system over European Democracy.

  7. And no Blitz culture as there once was in the UK…… now merely bits and pieces of once that was but we have nothing to fall back on … nothing…
    en.wikipedia.org/wiki/Community_rail

    They dropped a series of monetary Neutron on this country – the buildings remain but the people are dead inside.

  8. From Gavyn D:

    “Even with the lower interest costs which would be generated by the redemption fund, Italy would still be required to run a primary budget surplus of 4 per cent of GDP indefinitely in order to meet the repayment terms imposed under the plan. And Spain’s primary surplus would need to be 2.5 per cent.

    Of course, the austerity needed to achieve these budget surpluses would still be very demanding indeed. In the long term, that would be the plan’s Achilles’ heel. But the Redemption Fund could buy some time, and is perhaps the only form of debt mutualisation which would be acceptable to Germany.”

    from Bloomberg:

    http://www.bloomberg.com/news/2012-05-16/italy-tax-agents-on-frontline-of-anti-austerity-backlash.html

    http://www.bloomberg.com/news/2012-06-20/italians-openly-dodge-property-tax-in-test-for-monti-s-austerity.html

    Taking Ireland as a familiar example for a thought experiment, try taking a couple of minutes to think about the likely reactions of elements of Irish society to this swap:

    You get;
    31bn of promissory notes written off, ESM direct equity recapitalisation of the Irish banks and 70 % of all the senior bond redemptions since 2010 relating to IBRC reimbursed to the Irish state. Access to German football technology.

    You agree to;
    German tax rates and pay, pensions and welfare rates and terms for all publicly funded contracts (eg state commissioned legal and other professional services), public sector and semi-state employees (including the banks). All existing contracts and pensions to be adjusted also.

    Actually, two minutes will probably not be needed.

  9. Willem Buiter’s analysis is spot on.

    The Royal Bank of Canada (a commercial bank) summed things up well in a note this week: what could work is impossible and what is possible doesn’t work.

    On one side is conservative Germany; its trade is almost in balance with the other 16 of the EMU and from a consumer level, in the growth regions of the world, with 3 top car brands and global powerhouses in other sectors, it will remain strong. The disparity in natural; gas prices will likely lead to a shift in chemical production from Europe to the US.

    On the other side led by France, are demands for radical moves while President Hollande has no mandate for domestic reform.

    Muddling through is teh best taht can be expected.

    grumpy summed up the Irish scenario well above – – the late Freddy Mercury and Queen come to mind: ‘I want it all. I want it now!’

    Robert Watt, secretary general of the Department of Public Expenditure and Reform, in The Irish Times yesterday appears to think a lot has been achieved when the reality is baby steps amidst a storm.

    A double jobbing medical consultant can make up for any squeeze in public earnings by screwing a private client at €200 or more for a 15 minute consultation.

    Robert Watt’s delusions were matched this week by those of Danny McCoy of IBEC, the business lobby group.

    A number of factors made an ambitious real growth rate of 3.4% achievable, he said. “We have form; we have capacity.” Ireland’s “remarkable” infrastructure gave “huge potential for our growth rates” while our “malleable workforce” and the availability of capital in the form of foreign direct investment were also in Ireland’s favour.

    President Herbert Hoover said to singer Rudy Vallee in the grim spring of 1932, “If you can write a song that will make people forget the Depression, I will give you a medal.”

    Valee recorded: ‘Brother, Can You Spare A Dime?’

    The Irish bulshitters will surely also run out of tunes to their liking.

    In Ireland, the comfortable are still comfortable; taxes remain low and more than 4 in 10 owner occupied houses have no mortgage and so on.

    http://www.irishtimes.com/newspaper/opinion/2012/0621/1224318353604.html

    Professor Milton Friedman at a symposium at the Bank of Canada (the central bank) in 2000:

    I think the euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it. I think that differences are going to accumulate among the various countries and that non-synchronous shocks are going to affect them. Right now, Ireland is a very different state; it needs a very different monetary policy from that of Spain or Italy…

    You know, the various countries in the euro are not a natural currency trading group. They are not a currency area. There is very little mobility of people among the countries. They have extensive controls and regulations and rules, and so they need some kind of an adjustment mechanism to adjust to asynchronous shocks – and the floating exchange rate gave them one. They have no mechanism now…

    It’s only a year old. Give it time to develop its troubles.

    On Thursday, Anna Schwartz, an economist and co- author with Milton Friedman of ‘A Monetary History of the United States, 1867-1960,’ died at 96.

    Ben Bernanke said in 2003 that the book had a “critical influence” on the outlook “of a generation of policy makers.”

    Schwartz wrote in The New York Times in 2009: “Mr. Bernanke seems to know only two amounts: zero and trillions.”

    The male dominated trade lost another prominent woman last week.

    Elinor Ostrom, 78, was first and only woman to win the Nobel Prize in economics.

  10. @ John McHale

    The likely outcome, as has been evident from various signals over several weeks, is a mixture of steps set in the context summed up in this Voxeu article.

    http://www.voxeu.org/index.php?q=node/8093

    The pressure on Merkel is now enormous, the most recent example being the comments of Lagarde. But the confusion domestically in Germany is evident.

    The key issue IMHO is the signal the markets are looking for i.e. that Germany accepts that it is on the hook as far as maintaining the euro is concerned. The eurobills proposal could do the trick.

    Buiter may well be right regarding Greece but he has the situation back to front. Greece will continue to be a ball and chain but what policymakers want to achieve is to make what Greece decides irrelevant i.e. to take away its blackmail leverage.

  11. FYI

    Simon Johnson on The End Of The Euro: What’s Austerity Got To Do With It?


    In Spain and Ireland, capital inflows – through borrowing by prominent banks – pumped up the housing market. The bursting of that bubble has contracted their real economies and brought down all the banks that gambled on loans to real estate developers and construction companies. Their problems are not much to do with fiscal policy. As conventionally measured, both Ireland and Spain had responsible fiscal policies during the boom – but they were building up big contingent liabilities, in the form of irresponsible banking practices.

    When the banks blew up in Ireland, this created a fiscal calamity for the government – mostly due to lost tax revenue. It remains to be seen if Ireland can now find its way back to growth.

    Peripheral Europe could, in principle, experience an “internal devaluation”, in which nominal wages and prices fall, and they become hypercompetitive relative to Germany and other trading partners. As a matter of practical economic outcomes, it is hard to imagine anything less likely.

    European governments should never have put their heads so far into the lion’s mouth with regard to public sector borrowing. But the politicians – and many others – convinced themselves that they were all going to become more like Germany.

    Peripheral Europe will never be like Germany. It’s time to face the implications of that fact.

    http://baselinescenario.com/

    @Ms Lagarde

    Welcome to the ‘slow learners’ club’ on finally figuring out the lunatic idiocy of The Conflationist Fallacy. Better late than never …

  12. @ David O’Donnell

    The common scenario that is presented here by Simon Johnson is that because the headline figures appear to show sound fiscal policies, they were in fact ‘responsible’.

    The reality was the opposite.

    Monumentally misgoverned countries build up big balances during a property or oil boom that support debt and high spending but eventually result in disasters, is nothing new.

  13. Monti is saying there is only one week left to save the EZ. I wonder what Angela thinks? The fragrant Christine appears to be telling her what to think.

    “Endgame” is a very overused word but I am starting to wonder.

  14. @MH

    Agree. they were ‘artificial’ & false policy based in these artificials are well known around here from PD/FF insanity – but the key point argued by Johnson remains sound: this is not primarily a fiscal crisis – it is a financial crisis due to dodgy, and too many, and unregulated or ignored capital flows due to flawed remit of ECB_undesbank and the deutsche fetish of projecting itself onto to others which in true Gestalt fashion has now dashed back out of its mirror in reverse to slap itself across its nose so as to return to some form of reality not based on semi-neurotic teutonic romantic illusions.

    Course, we do continue to have no scarcity of gougers and eejits here either …

    Malaysian economy doing well I hear .. credit where credit is due!

  15. bit off thread but politically relevant ….

    The giant’s weakness

    The second, seldom acknowledged, reason for Germany’s European dilemma today has to do with its own socio-economic situation. The benefits of Germany’s economic success of the last decade have been distributed very unevenly. Economic inequality has grown more rapidly than elsewhere in the industrialised world. During the boom, Germany’s export competitiveness stemmed in large part precisely from relatively labour costs, which means low wages.

    True, those who were previously unemployed benefited from the creation of new jobs. But the quality of most of those jobs is a far cry from the cushy terms of “Rhine capitalism”. Germany has the highest proportion of “junk” job contracts in Europe.

    This is accompanied by very high debts carried by many municipalities, which, forced to introduce drastic austerity measures, are closing down public utilities, swimming pools, culture and welfare centres. Paradoxically, the erosion of the German social model has accelerated since the launch of the euro and the resulting economic boom.

    http://www.presseurop.eu/en/content/article/2217201-why-german-europe-non-starter

  16. @PR Guy
    re Monti is saying there is only one week left to save the EZ. I wonder what Angela thinks?

    Very significant comment by Monti.
    From the Guardian:

    “Monti warned: “A large part of Europe would find itself having to continue to put up with very high interest rates that would then impact on the states and also indirectly on firms. This is the direct opposite of what is needed for economic growth.”

    Outlining the result of a failure at the talks, Monti said that, faced with creeping economic paralysis, “the frustration of the public towards Europe would grow”, creating a vicious circle. “To emerge in good shape from this crisis of the eurozone and the European economy, ever more integration is needed,” said Monti. Yet, if the summit failed to resolve the problems quickly, “public opinion, but also that of the governments and parliament… will turn against that greater integration”.”

    Translation. The Italians are not going to destroy themselves to save the euro and Monti is not going to destroy Italy to save the euro. They will not pay interest rates of ~6% to raise debt just to save the euro, while Germany , another EZ members) benefits from close to zero %.

  17. Interesting article and as John Corcoran points out no country in the Eurozone is immune to debt worried, even Germany. The reason being that every euro has a corresponding debt since they are created through the banks loan process.

    If every country exited the euro and their new currency was created by banks in parallel with debt nothing would change in principal.

    We’re unwilling or unable to organise loans and hence no new money is being created by banks. We’d be unwilling or unable to organise loans in punts aswell.

  18. A few home truths from Germany:
    http://www.guardian.co.uk/commentisfree/2012/jun/21/merke-germany-europe-teutonic
    from the editor of Die Zeit.

    I wouldn’t travel all the road with him and would have a few quibbles, but he goes right to the heart of the matter with the characteristic matter-of-factness of central and northern Europeans that I so enjoy – and which contrasts so forcefully with the mealy-mouthed selective blindness of so many Irish commentators:

    “With great power comes great responsibility; this is true. But Merkel’s tormentors – mainly US and British economists – would have a much more compelling case if they could show that Keynesianism to the max has worked in their countries. Yet 10% deficits (now declining) have not turned the tide of unemployment in the Anglo world, nor have trillions in extra liquidity. Straight Euro-welfare does not work either, as the Spanish case shows. Hardly had Madrid pocketed €100bn for its sinking banks, when yields on its 10-year bonds shot up again to record levels.

    Merkel is right on yet another point: “It’s the micro-economics, stupid!” It is not just consistent overspending that has brought the Piigs (and France) to their sorry state, but also frozen labour markets, lavish welfare benefits, short working lives, bubble-feeding cheap money, and costly sops to public-sector unions. If youth unemployment in Spain and Greece is double the overall rate, you know there is something profoundly wrong with labour markets that protect insiders and punish newcomers.”

    Of course, we don’t do microeconomics here. Apparently, we haven’t enough people with the relevant expertise. And when a bit of microeconomics that might have broader policy implications breaks the surface (cf the Crilly, Pentecost & Tol working paper) there is a concerted effort to push it back below the surface. And we seem to have no shortage of experts to do this job.

    Sure, with everything so pure and wholesome on this island of saints and scholars aren’t we perfectly entitled to rail at the perfidy of foreigners?

  19. @bazza

    The argument from Keynesians was that austerity leads to a deflationary spiral. The evidence from both Latvia and Ireland suggests that is false, since these two economies have stabilized.

    The new argument from Keynesians is that austerity did not prevent both Ireland and Latvia’s precipitous decline from bubble levels to where they are today. No one is contesting that.

  20. @skeptic01

    I don’t really care about old and and new arguments from supposed “Keynesians”. Latvia has implemented austerity-max compared to austerity-lite in Ireland.

    The point is that Latvia is being held up by the likes of Weidmann as a role model that the peripheral states should follow. Not only is this foolish as the initial conditions in Latvia were very different to those in the periphery – Latvia’s sovereign debt is only 40% of GDP even today. It is also plain wrong as the recession in Iceland was less severe than in Lativa and the recovery has been stronger – see this graph.
    http://krugman.blogs.nytimes.com/2012/06/14/peripheral-performance/

  21. @skeptic01

    Ireland and Latvia being relatively small places, they are not a closed system. Yet Irish growth is now inhibited by the lacklustre economy internationally. I think people would argue that austerity across a large part of the EU is different than austerity in a small part of it.

  22. @skeptic01

    I don’t really care about old and and new arguments from supposed “Keynesians”. Latvia has implemented austerity-max compared to austerity-lite in Ireland.

    The point is that Latvia is being held up by the likes of Weidmann as a role model that the peripheral states should follow. Not only is this foolish as the initial conditions in Latvia were very different to those in the periphery – Latvia’s sovereign debt is only 40% of GDP even today. It is also plain wrong as the recession in Iceland was less severe than in Lativa and the recovery has been stronger – see this graph.

    http://krugman.blogs.nytimes.com/2012/06/14/peripheral-performance/

  23. Hold on, hold on
    4th largest trade surplus in EU. Good export performance.
    Ireland’s economy is actually fundamentally good. Please distinguish between the economy and the banks.

  24. @ bazza

    Yes, I have seen Krugman’s graph. It’s primarily himself that I mean by “Keynesians”.

    Iceland has managed its affairs very well, including a 50% currency devaluation which was the right choice for them. We won’t be seeing Weidmann advocating that option for Eurozone members, although some may well choose it in the end.

  25. @bazza

    Latvia & Austerity Fetish & DOCM_da_screw da serfs austerity spinner …

    Particulars of Austerity – A Minsky Moment

    Policy Note 2012/5
    Austerity that Never Was? The Baltic States and the Crisis
    Rainer Kattel and Ringa Raudla

    The commonly cited example of the successful application of “internal” devaluation as a strategy for economic recovery is that of the Baltic economies. In this Policy Note, we discuss whether the Baltic austerity plan worked, how it was designed to work—and, most important, whether it can be replicated anywhere else. We argue that the Baltic recovery has unique features that do not relate to domestic austerity policies, nor are they replicable elsewhere.

    The Baltic economies (Estonia, Latvia, and Lithuania) are occasionally cited as examples of the successful application of austerity and “internal devaluation” as strategies for economic recovery. In this Policy Note, Rainer Kattel and Ringa Raudla discuss whether the Baltic austerity plan worked, how it was designed to work—and, most important, whether it can be replicated throughout the eurozone periphery. They argue that little actual devaluation took place in any of the Baltic countries, and that the Baltic recovery has unique features that do not relate to domestic austerity policies and cannot be replicated elsewhere.

    The Baltic recoveries were essentially “outsourced”: they depended on an extensive use of European Union funds and a deep integration of Baltic exporters in economies that weathered the financial crisis relatively well. All three countries also feature flexible labor markets, quiescent civil societies, and dramatic levels of emigration—they do not offer a model that could be imitated eurozone-wide, according to the authors.

    http://www.levyinstitute.org/publications/?docid=1545

    ….

  26. I think you may be deluding yourself there Eureka my good man. Certainly you’ve cant be unemployed(or a cadillac driving welfare queen, as paul hunt would have it) because then you’d get to see up close and personal just how “fundamentally good” our economy is. Things are very, very bad.

  27. @Skeptic 01
    Economy stabilised……
    Did you have a look at Aprils import figures by any chance ?

    Both Latvia and Irelands role is to feed the cores cold dead heart with cheap capital by shutting down domestic economic activity.

    Its the core that has experienced a economic collapse – however their superb tactics thanks to various Quisling like characters in these juristictions has externalised the losses on the periphery.

  28. @PR Guy
    ““Endgame” is a very overused word but I am starting to wonder.”

    Well, Soros said they had three months to save the euro, to September, I think.
    So between one week and two and a bit months to save it.

    I suppose a lot can happen in that time given what we have seen to date but I haven’t seen such confusion and half baked ideas floating around since this crisis began.

    I’m getting the impression that Merkel will make a big bang announcement one of these days…..and we won’t like it.

  29. @ceterisparibus

    Patricia the Irish_Sovereign_in_Exile appreciated her invitation to Ascot recently for tea with HRH. She also made a good few bob on young sterling O’Brien.

  30. @DOCM

    re : “The Italians need to cop on and make the necessary structural and cost changes as is happening, notably in Ireland and Spain, and even Greece, according to this report.”

    Indeed. I’m sure Merkel will advise Monti of that today.

    But to cannibalise another old crisis analogy, when half the the continent is burning is no time to insist that all the fire engines must be serviced immediately.

    But I tend to believe that Monti is serious on this. It is the tone of the comments that convince me that he is serious and as I understand that he is a fluent English speaker, he would understand the tone of the remarks very well.

    Re FAT tax:
    I certainly question the Irish government’s opposition to this tax.
    I think the FAT tax may be the one good thing to come out of all this mess.

    While the UK may oppose the tax, one wonders given their need for revenue, if such a tax could well suit the conservative govt more than meets the eye.

  31. Some of us are suckers for fairytales.

    High GDP per capita and a big trade surplus (resulting from a collapse in domestic demand and lots of smoke in the merchandise export figures) coincide with a reality that policy makers are clueless as to where 200,000 net sustainable jobs could be magiced from — that is fundamental not spoof data.

    William Manchester, the late American historian said that in December 1929 President Hoover declared that “conditions are fundamentally sound.” Three months later he said the worst would be over in sixty days; at the end of May he predicted that the economy would be back to normal in the autumn; in June the market broke sharply, yet he told a delegation which called to plead for a public works project, “Gentleman, you have come sixty days too late. The Depression is over.”

    As to devaluation, this issue seldom gets beyond pub level. People choose the example that suits and even if Iceland’s exports took off after devaluation, which they didn’t, if a country exports a lot of fish, it of course has a low or no import content.

    The Indian rupee is down 20% against the dollar from last August and 27% against the renminbi.

    The trade deficit has surged – increasing oil prices more than offset any benefit on the export side.

    Have some of you missed the UK export miracle following a trade weighted dip in sterling of up to 25%?

    @ Ceterparibus

    This chorus of 7 days or 3 months for the euro is bullshit — a slow death maybe but not anything like the calamity howling of armchair experts. With so many news sources close to hand, the rate that so-called facts become conventional wisdom has really accelerated.

    Still, facts are scare because for most people, it’s a pain in the aorta to source them. Besides, Google isn’t much use unless you’ve an idea where you’re going.

    The dollar euro rate today is $1.26.

    In the period Jan 27 2000 to Nov 06 2002, the euro was below parity with the dollar apart from about 3 days of trading.

    When the Chinese decide to dump their euros, then it will be time for the lifeboats.

  32. @Ceterisparibus
    Maybe the Irish state can go for UK bankruptcy-lite? Sure we’re all British citizens now…

  33. @MH
    I don’t think you could call Monti or Soros “armchair experts” and these are the people that are ” calamity howling”. I think Madame Legard did a bit of it today.
    Yes, the dollar rate is remarkable given the various crisis and as Joseph puts it above …..”half of Europe burning”. I suppose it is accounted for by all that printing the Brits and Yanks are doing.
    I cannot see the Chinese shooting themselves in the foot by dumping euros. I believe they hold a lot of EU paper.
    Still, you never know…..pigs may fly.

  34. @Hogan
    We would have to pay them back the dosh they kindly lent us first. Or we could exchange slots in our ports in perpetuity instead..and have no more of that old nonsense.

  35. @Ceterisparibus
    They’ve always wanted a second Hong Kong. Not sure about the weather in Dublin though…

  36. @all

    “is likely to be a 16-member area,..”

    IMHO if that kind of wording starts entering broad politcal discussion we may well be reading articles mentioning ” 15 member area” within one month, “9 member area ” within three months and “some knd of area that includes Germany , Austria, Luxembourg, Finland and Estonia ” ( with the latter two hanging around because they have no where else to go) within six months.

    Either this crisis is fixed for all countries within the EZ or we will face the reality of other countries “getting a taste” for giving up on the Euro especially if the perception is created that Greece is being “chucked” out.

    Many members of the EZ may prefer to make a decision to leave the Euro rather than facing the humiliation of a “chucking” out, other members may lose patience with perceived German indeciciveness while other members may simply make a calculated Political/Economic decision in their best interest.

    Sylvio B of Italy has reportedly said that discusiion about Italy leaving the Euro is not “blasphemous” consequently it may well be a good idea for the German Government to delay worrying about their re-election prospects in 15 months time and concentrate on what can be done in the EZ/EU over coming days and weeks.

    Best…@Livoniangoose 🙂

  37. Is this the beginning of the two speed euro….

    “Today’s meeting of EU finance ministers has killed off the idea of one tax across all the Union’s 27 countries.
    Before 9 July, nine EU countries will write a letter saying they want to go it alone, Germany, Austria and France are in the vanguard.
    After the letter is received by the European Commission then a proposal will be put to all 27 EU finance ministers.
    If two thirds of them are happy that an FTT of nine countries, or more, does not negatively impact on the others then it can go ahead.
    Diplomats suggest that an EU-9 FTT will be at the lowest common denominator, which will probably be based on a form of stamp duty.
    Officials have noted that it would most likely be set at a lower rate, 0.25 per cent, than Britain’s current stamp duty tax of 0.5 per cent.
    Could it be that a European FTT, set at half the UK rate, will start looking rather appealing to financiers based in the City of London?”

    Where does it leave us? Stall speed?

  38. “There are now reports on Twitter that the new Greek finance minister has collapsed and been taken to hospital. Reuters cite Government sources, saying that he was taken to hospital after a fainting spell. ”

    He’s clearly seen the real figures.

  39. and this…

    “Bloomberg ……Spanish policy makers are considering forcing investors who hold equity and junior debt in banks to absorb losses in a restructuring. “

  40. Oh for goodness sakes – you couldn’t make this up (someone from the Troika poke him in the eye?)

    “Antonis Samaras. Apparently he is not in hospital yet, but will have surgery tomorrow to repair a damaged retina.”

    For once in my life, I may sit down and watch a soccer match this evening as Greece and Germany are playing. Stick a load of Greek and German supporters in a stadium together after they’ve had a couple of pre-match drinks? What could possibly go wrong?

  41. @Micheal
    You will find printing does not devalue as much as you think if it has something to “devalue” into…….resourses both human and physical.
    Hoover was withen weeks of creating a catastrophic implosion of the US political construct as the medium of exchange was simply drying up……unfortunetly the next president listened to Keynes rather then Fisher but thats another story.

    As for Iceland – its in a much better position then Ireland.
    It does not import any Nat Gas because of it Geothermal investments…zero
    Total TPES , Y2009 :5.52 MTOe
    of which Geothermal:3.55 MTOe
    Hydro :1.06 MTOe
    of which oil……… : 0.84MTOe

    Of course since2008 / 2009 its oil demand has slumped……but thats because they can’t afford to drive their 4*4s on the Icelandic Plateau anymore so they simply hike it like the old days.

    omrpublic.iea.org/demand/ic_tp_ov.pdf

    omrpublic.iea.org/demand/ic_dl_ov.pdf

    Indeed when times are hard they don’t need any oil for heating …zero.
    omrpublic.iea.org/demand/ic_ho_da.pdf

    They just need some of the spice to move around the Reykjavik burbs (60% of the pop)
    en.wikipedia.org/wiki/Greater_Reykjavík
    And to hunt their fish stocks.

    In the final analysis they have something to sell that is inherently Icelandic – be that fish or aluminium.
    We sold our fishing rights for thirty pieces of silver and our aluminium “industry”…. well that can move at any time.

    We are a perfect little globalist bitch …..Hibernia was always a dirty aul whore anyway.
    It makes sense that we have contracted a sort of economic syphilis.

  42. @PR Guy
    The Bloomberg report is not doing any harm to Spain today with their 10yr in 26 bp to 6.27%.

    Are the banks buying so as not to scare the horses?

  43. @Ceteris

    “Ireland will not be part of the FTT…according to Noonan on rte news.

    Slow lane?”

    I suppose it depends on who is on the “fast lane”.

    If the “fast lane” only comprises Germany, Luxembourg and some increasingly nervous/acrimonious “hangers on” a “slow lane” (or “alternative lane”) might become increasingly attractive over the coming days and weeks 🙂

  44. @Livonian

    Looks like all the AAAs and highly rated bar Luxembourg. Already being referred to as the “core”.
    I looks like the precursor to a fiscal and banking union for the core.

  45. FYI

    Miserly pittance of a ‘blueprint’ – wouldn’t even handle the Aldi bill …

    Agreeing that austerity alone will not be enough to pull the euro zone out of its deep crisis, the leaders of Germany, France, Spain and Italy agreed on Friday to the blueprint for a growth pact for Europe. With a value of 130 billion euros, the leaders hope to impress markets with the pact at next week’s EU summit.

    Spanish Prime Minister Mariano Rajoy, French President François Hollande, Italian Prime Minister Mario Monti and German Chancellor Angela Merkel at a Friday meeting in Rome.

    http://www.spiegel.de/international/europe/germany-france-italy-and-spain-agree-to-growth-pact-a-840495.html

    Hardly enought to provide water and vinegar to all those serfs lined up on The Appian Way to be crucified again in yet another act of Nietsche’s Eternal Recurring …

  46. Angela gaining some Her_Men_EU_tics on The Fields of Athenry ….

    Slow and steady wins the race: That has been Chancellor Merkel’s motto in recent months as she leads efforts to solve the euro crisis. But as problems in the common currency area intensify, many are urging her to hurry up. The next week will be crucial.


    Furthermore, Merkel’s crisis management has been blasted by leaders around the world, including US President Barack Obama and the leaders of Brazil, India, Argentina and Russia. The media too has gotten on her case, the most recent — if breathtakingly tasteless — salvo coming from the British magazine New Statesman, which compared Merkel to both the Terminator and Hitler in the span of a few short paragraphs and also said she represented a greater threat to the world than Iranian President Mahmoud Ahmadinejad.

    http://www.spiegel.de/international/europe/euro-crisis-enters-crucial-phase-before-next-week-s-summit-a-840398.html

    The Iranians are no threat – they have not invaded in years. Blind Biddy is ‘sound’ in Tehran … foolish move to close that Irish embassy .. very foolish. The intellectual centre of Shia Islam deserves more respect.

  47. @Ceteris@Livonian

    “Looks like all the AAAs and highly rated bar Luxembourg. Already being referred to as the “core”.

    And then there were : 8, 7, 5,……?

    I wonder when nostalgia for the “17” will appear as German voters, realise during the 2013 German election campaign, that their exports are dwindling faster than the “core” members ? 🙂

  48. Imagine if Madame Lagarde’s first name was Brigitte instead of Christine.
    It would be possible to say that Greece was BLagarded by the IMF
    which I think it was.

    Whoever said that the Irish economy has stabilised needs to wait until the banks run out of phone credit.

    @ MH

    Blaming the euro mess on chronic misgovernance is poor form . The financial sector tore the arse out of it. Profits were privatised and losses were socialised. Losses were bigger than the capacity of national balance sheets to support them. Every loan made to Greece was signed off by company risk committees. It suited finance to play the game- the rules are fantastic.

    And the neoliberal model is broken. It’s very similar to the situation in Egypt- the people who brought you the disaster are still calling the shots.

  49. @Livonian
    Half Time. Germany 1 Greece 0
    Greeks putting on a brave performance…but the Germans won’t let them get near the ball…they want possession all to themselves.

  50. Nobody is going to recover from that second German strike.

    I’m talking about the football.

  51. @PR Guy

    Good to see progress on the book – “The PR Guy Monologues” … when may we expect a first ‘working’ draft?

  52. @ seafóid

    Explanations for an economic crash cannot generally be distilled into a soundbite.

    There are always several issues: what’s important is where they are ranked.

    People tend to pick what suits their view and myths develop such as that even shoe shine boys were trading in stocks before the Oct 1929 Wall Street crash — the facts show that only 2.5% of the population had owned securities in 1928.

    Misgovernance is an important factor — not the only one of course.

    Preceding the rise in annual Irish credit growth toward 30% was the extension of property tax incentives to every village in the country and a cutting of the capital gains tax rate to half the top rate in tax.

    Allied to a Tammany Hall culture rather than neoliberal, in a country of limited accountability where the buck generally stops nowhere, was monumental incompetence in regulation and leadership at the Central Bank.

    When France cannot balance its budget one year in 36, is that because of external forces or internal failures to address unpalatable truths?

  53. @David O’Donnell

    “Good to see progress on the book – “The PR Guy Monologues” … when may we expect a first ‘working’ draft?”

    Enough of the monologues already! I only talk to myself under times of great stress: such as when I went to work that time and forgot to put a stop loss on a bet (sorry, I mean ‘investment’) that unfortunately went the wrong way while I was on the train in my pre-smartphone days. That cost me the upgrade to business class I was planning on a trip to NYC.

    Vis the real PR Guy stories, I go off into retreat on 3rd July for two months….. so should have finished the writing by September and will get it up on Kindle/iWhatsit asap after that. It will be the bonkiest of financial services bonkbusters ever bonked in bonkendom. Bonking good stuff.

    Did you see Angela jumping up and down a hollerin’ and a shoutin’ and waving her arms in the air yesterday?

    I believe she went to a football match shortly after that.

  54. I heard she was smokin something reallly good from the Black Forest & sipping duty-free Jamieson … must ensure to have a good supply from Enda the Silent’s stash for the upcoming key EU summit – all he has to do is pass the pipe and the EuroZone will be saved while Angela admires the highlights of his smile as he says natthin ….

  55. @ ciaranjk

    During a boom at least, a country should aim to have a surplus.

    France’s public debt has risen from 22% of GDP to 90% and it could now use some stimulus funds but it has to borrow from private investors and two-thirds of them are outside the country. So they tend to expect a higher return because of the risk.

  56. It’s rather handy that both the new Greek PM and FM are going to be unable to meet the Troika tomorrow (so visit is now postponed) or be at the EU summit later in the week. Just a coincidence of course.

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