Cross of Euros

Alan Taylor and I have a new paper on the never-ending crisis in the Eurozone (and yes, the crisis is still with us, unless you regard mass unemployment as a matter of no concern, and has a way to run yet). It is available here.

28 replies on “Cross of Euros”

Just on a technicality, the footnote in the paper in the table about Anglo-Irish monetery union that states “British currency accepted in Ireland” should probably read something like “Both currencies circulate on island of Ireland” (and perhaps also Holyhead as banks there accepted Irish currency until 1979).

Good, clear paper. So many moving parts, but any solution will be political in the first instance. Can’t see euro breakup in the “short to medium term” as you say. It has already surprised on longevity. However, despite that, it’s clear that the whole system is on the slippery slope.


“how can the costs of a eurozone break-up be minimized?”

I’m not sure it can be minimized but I’ve no doubt it can be compartmentalised…. and most of the problems dumped elsewhere for the bigger players.

“Cross of Euros” – ha, ha. Very good. Did you ever see the film “Cross of Iron”?

The US and the EU are not comparable undertakings. The other comparisons in the paper are of little relevance.

Rumours of the death of the euro are exaggerated. They are certainly not believed by the holders of it which have made it the second international reserve currency after the dollar.

It may be that the difficulties confronting the euro may not be confined to the countries mentioned. However, the main players have given every indication of their political willingness to confront any situation that arises by the creation of the ESM.

The markets believe them.


German Stasis: In the Grips of Merkel’s ‘Lethargocracy’
By Markus Feldenkirchen and Christiane Hoffmann

The German economy may be doing well now, but significant challenges lurk in the near future. Chancellor Merkel, though, has succumbed to the torpor of her electorate and has shown no willingness to address badly needed reforms.

Will read later …

Europe’s Intellectuals:
Whatever happened to freedom of thought?
8 August 2013 De Morgen Brussels

More than simply a political project, Europe should be a moral project and a haven of free speech and tolerance. Intellectuals play a central role in this, but sadly they sometimes lack an open mind, remarks philosopher Alicja Gescinska.

I heard a rumour that an Irish intellectual once lived in Leitrim – but methinks she has since died. Anyone know of any others?_preferably alive!

@Kevin O’Rourke & Alan Taylor

“… the European Central Bank should allow a higher rate of inflation for the eurozone as a whole at times of economic and financial stress to facilitate relative price adjustment. […] If these kinds of changes are politically impossible, pessimism about the euro’s survival becomes more justififiable. […] Banking Union Essential […] ability of national governments to default is
also essential,”

Quite a few reach these conclusions; as I do.

“So where the eurozone needs to go in the long run, we argue, is towards a
genuine banking union; a eurozone-wide safe bond to break the sovereign-bank
doom loop; a central bank that is more flexible and willing to act as a true lender
of last resort against such bonds and other assets as necessary; and a fiscal union at least suffifi cient to support the above. But the short-run problems facing countries in the periphery of Europe are now so great that politicians may never get a chance to solve these long-run problems because the eurozone may well have collapsed in the meantime.”

Metaphorically, we need another Stalingrad and a few political Vaitsevs!

@ Kevin O’Rourke

You seem to hint at the root of the financial crises with the line;

“The costs of dealing with banking crises has worsened governments’ fiscal positions, putting further strain on banks’ balance sheets, in turn crimping credit creation, thus leading to a further deterioration in the economy and governments’ fiscal positions, and so on.”

I’m glad to see the term ‘credit creation’ in the paper as opposed to ‘credit intermediation’. I would like to go a step further and call it ‘money creation’.

In terms of resolving the eurozone debt crisis, even if we did somehow manage to get people willing and able to have banks create money for them, such money can only be created by recording a matching debt. How can the debt crisis be resolved when every euro must co-exist with a debt?

Using your approach, it’s not debt itself that is the issue. Yes, every debit has a credit. However, it’s the dislocation of debit and credit, plus the lack of income that is really the issue. The countries and people with the most debt have reduced income, and vice versa. The acceleration of the debt (via early call, default, distress, etc) exacerbates the issue. In a European context, these imbalances are at all levels, local and cross border. At its core, the acceleration of debt is a function of lack of confidence and mistrust, first beginning with the banks globally during the credit crisis….and the resultant mismatch between reduced collateral values caused by that systemic reduction in confidence and outstanding debt balances. The wiping out of equity /capital buffers further exacerbated the issues….receding tide of credit confidence has been self fulfilling. That may be a simplistic explanation. However, I disagree with your analysis re interest causing a natural and inevitable gap in the system. Interest payable by one is interest receivable by someone else…..just another form of ‘credit’.

I think that Kevin’s paper is useful in alluding to the confidence issue (in essence). Unless the Germany’s of the world begin to trust the PIIGS of their world, there will be a confidence and cascading credit (ok, money) creation. That trust must be underpinned by action and mutualism, and not the current creditor dogma.

Another difference in my beliefs vs those of JMcH and co is that I am far more skeptical that the ultimate political will exists (or can exist) in the current European context. That being the case, I am a greater supporter of early Irish adjustment and debt restructure than those in Official Ireland. I can understand that the majority in Ireland would prefer to remain ‘comfortable’ for now in the hopes of something good /better turning up to save the day before something “bad” happens or is deemed absolutely necessary. I understand that Official Ireland is fighting the slippery slope. However, I fear that there is no plan B if things don’t work out. If that happens, the Irish in Ireland will be much poorer than they are now……the Troika /creditor system will make sure of it…..

By the way, the overwhelming one source of private sector confidence in Ireland originates from the US. That support took some blows recently via the tax haven item, Anglo tapes, etc. However, it’s amazing (and welcome) that America still invests heavily in Ireland.

There is also public, Troika “confidence” in Ireland, for very /mainly different reasons.

In a European context, the has been a genuine and potentially permanent (for the foreseeable future) reduction of private (and public?) sector confidence in Ireland, evidenced for example by the unanimous wish of the foreign banks in Ireland to exit there when they can (believe me, currently they all wish to get out of domestic banking…..distinguished from IFSC banking, and with the exception of ‘cherry picked’ corporate banking to healthy corporates in Ireland).

Final thought for now – a significant issue undermining confidence has been disjunction in accounting rules. Bankruptcy remote off balance sheet securitization for instance did not withstand the stresses of the credit crisis. Hence, massive off balance sheet leverage had (and continues) to come back on balance sheet….that process continues…..resulting in massive strain on “regulatory capital” for bank, FI assets and liquidity purposes. Lack of trust in what is contained in bank / FI bank balance sheets continues…..does anyone believe that the balance sheets of the Irish banks reflect “a true and fair value” of assets and liabilities?…..only those who are trading the Troika proxy.

Regulation is way behind the curve here in reality… will take years to redesign the system. It’s a huge issue internationally for banks. In the meantime however, globalization of European banking is retreating…..interestingly, recapitalized and stronger US banks have been piling into (cherry picked) parts of EU banking. Japanese banks, with massive liquidity at their disposal, are bidding up everything, everywhere…”Unintended consequences” continue in dramatic fashion. Hopefully all this doesn’t go wrong. Truth is, the “experts” haven’t a clue what will happen.

Final, final comment – confidence also requires leadership. There has been little of that in Ireland for some time. John Moran’s paper on the previous thread is another example of “conformity”….lacks the leadership element. The Irish “system” seems to engender this type of predictable response / group think approach. Not sure how one addresses this issue…..real leaders are passionate, self consumed in the task….and relatively (not absolutely of course) less self interest driven.

Interesting history but a little light on detail on remedies for the patient now.

I assume that the title comes from the 1896 ‘Cross of Gold’ speech, and as with recent protests in emerging economies, the issue of a bimetallic standard was essentially about sharing the fruits of prosperity (William Jennings Bryan, the once young radical, who was the Democratic Party’s candidate in 3 presidential elections, ended up in 1925, a pathetic figure as the chief prosecutor in the famous Monkey Trial, in Tennessee).

The calamity howling about the imminent demise of the euro seemed overdone in recent years; China would have had to take a big hit on its reserves and even if Greece had defaulted in 2010 and left the EMU, while French banks in particular would have taken a big hit, there would have been a massive injection of liquidity from the ECB.

Euro reserves accounted for 24% of global reserves last June.

The process of change will be long but a crucial issue is that in a country such as Italy with a high household savings rate, there is no significant interest in returning to the lira, under the control of scrounging elites. In Greece, which has effectively been a kleptocracy, Alexis Tsipras, head of the opposition party Syriza, and a likely future prime minister, is not advocating a return to the drachma.

In modern times, with the exception of natural resource producers, no poor country has become sustainably rich or set itself on a path to achieving it, without increasing external trade, boosted by foreign direct investment (FDI) and that has been the story from China to Ireland.

In the Irish case, while there have been knowledge spillovers from the FDI sector, it remains very difficult to develop indigenous internationally tradebale sectors. The recent sale to a US firm of the shrunken Elan, a once bright star, is a recent example. This week again, armchair ‘experts’ in Dublin are naively calling for increased agency staff in embassies in emerging markets to help magic up business.

There has been a growth crisis in several European countries for decades. Italy’s jobless rate is back to the mid 1990s level and Spain last had a jobless rate above 20% in 1997. The advent of the euro provided a temporary prosperity in some countries but even during a global credit boom, Italy stagnated.

Stimulus and transfers could only marginally help Italy, absent domestic reform. Yes it’s a boring issue but the country no longer ranks with former communist-ruled Mongolia on the ease or more accurately, the difficulty of starting a business.

For the foreseeable future, the ECB and FDI will be the main agents of cross-border flows.

On reform at institutional level, both Germany and France have to take the lead in this area.

It cannot be like the CAP negotiations with every country vying for bragging rights and it would be naive to argue that Germany alone should take the risks as France remains immobilised in fear of the barricades.

How hard would it be to agree on issues such as tax and retirement ages before getting to the issue of eurobonds?

Germany is moving towards a pension age of 67; France has reverted to 60 years.

On a positive note, German merchandise trade with the EMU is in balance; the EA 16 (ex-Germany) had a trade surplus with the rest of the world in May and on the rebalancing front, this week China allowed the renminbi to rise to all-time highs against the US dollar.

@ Paul W

I agree with the points that you make.

In relation to confidence, and the role of US investment, being within the EA, and intending to stay there, is, of course, a significant element.

@ Michael Hennigan


One alternative way of looking at the impact of the euro is that in the crisis – which had its roots in the US – it has blocked the usual exit, that of devaluation, for the inept and, it seems, the corrupt running of certain lagging economies, Ireland included. The euro did not create the lag, a fact which can be easily demonstrated by reference to various economic indicators, including historic bond rates.

@ Paul W

I’m worried that the economic system will be unfit for purpose for the foreseeable future.

At the moment we’re encouraging debt reduction but this reduces the money supply also and without deflation in prices and wages the system will be even more unfit for purpose.

Conversely, even if we do somehow grow the economy the money supply must go up also. However this can only be accompanied by an increase in the level of debt in the economy also.

In short, less debt = less money and more money = more debt. How can we get to a point whereby the economy has less debt but an adequate supply of money with which to trade?

On another note you’re suggesting that the charging of interest is not a fundamental problem. However, bank only create the principal of each loan but expect the principal plus interest back.

I understand that it’s not as simple as P < P + I therefore not all loans can be repaid. Indeed banks only delete the principal of the loan and the I still exists so straight away it’s possible, in theory, for all loans to be repaid as long as the banks respend I into the economy before the next loan repayment is due. All theory aside though, just look at the extent of the mortgage and SME arrears problem and tell me the fact that we owe more to banks than exists isn’t a huge part of the problem.

@ All

Given the disparities in make-up and historical experience of the two continents, and the limited level of political ambition with regard to the future integration in the EU (one large member state being, ostensibly at least, already in the departure lounge), comparisons between the US and the EU are of limited use. The one point that is certain is that the EU is at the pre-Federal Reserve stage in terms of its development. What US banks did in the 19th century about the situation of a non-existent LOLR is comparable, in the view of one expert, to what EA governments – and their banks – are now attempting.

N.B. New FAQ on future bank recapitalisation.

@ All


From the ESM FAQ on its preferred creditor status of which Professor Winkler takes a dim view, maintaining that it defeats the purpose of the exercise i.e. that of establishing investor confidence.

A18 – Will ESM loans have preferred creditor status?

It is the mutual understanding of ESM members that ESM loans under a macroeconomic adjustment programme and recapitalisation facilities will enjoy preferred creditor status in a similar fashion to those of the IMF, while accepting preferred creditor status of the IMF over the ESM. This would, however, not apply to ESM financial assistance in the form of ESM
loans following a European financial assistance programme existing at the time of the signature of the ESM Treaty. The decision to forego preferred creditor status in the case of the recapitalisation of Spanish banks was one-off in nature, as the Financial Assistance Facility Agreement (FFA) was
negotiated by the EFSF. This FFA will be transferred to the ESM with rights and obligations, including the EFSF’s pari passu status.

A19 – Would it be possible to make changes to the ESM’s seniority status without amending the ESM treaty?

Seniority for ESM loans is a mutual understanding between ESM members and is mentioned in recital (13) of the ESM treaty. Reference is made to the decision of Heads of State and Government in that regard. A repeal or amendment of their earlier statement would therefore also require a decision by the Heads of State or Government. In several Member States it would require support by the national parliament.

A20 – Would it be necessary to amend the ESM Treaty for the ESM to directly recapitalise banks?

Based on Article 19 of the ESM Treaty it would be possible without a treaty change, by a unanimous decision of the Board of Governors.

Very thought provoking piece.
As it stands the Germans are having it too good and see no need to reform anything.
They don’t really mind whose on the cross as long as they get paid for the nails.
It will need to get a good bit worse before it gets better

@ All

John Gallaher linked to this paper by the Patrick Honohan at a recent BIS conference. Sovereign risk: a world without risk-free assets?

A more lucid and balanced exposition of what happened in Ireland would IMHO be hard to find.

To a layman, it seems to boil down to a simple conclusion; the markets are back in charge – see Figs. 1 and 2 – after a ten-year period of somnolence the main reason for which seems to have been a collective exaggerated assessment of the financial, institutional and political underpinnings of the euro.

What I find most disappointing in this is that KoR is probably somewhere close to the (mainstream) vanguard of the view that the Euro zone system is not fit-for-purpose & lies at the heart of it’s inability to recover overall. And in terms of the weaker member states, is accelerating their social destruction on an epic scale – only paused (can-kicked) so that neoliberal head office’s ‘useful idiots’ or PR dept. (you choose) – Merkel/Shauble etc. – can get re-elected before the next, likely even larger, crisis threatens.

Yet KoR & his mate, 5 years into this accelerating mess, come up with nothing more than heterodox economists told them +before+ the Euro was introduced.

So, having described the reasons for the mess – obvious & in plain view for years to those paying attention – what do our ‘vanguard’ (-ish) scholars come up with for possible solutions? Pretty much nothing, nada – another stunning shout for TINA!

How pathetic. How utterly intellectually bankrupt & devoid of any notion of intellectual exploration.

Really? Fives years into this accelerating mess & this is all KoR & Taylor want to examine?

How about….

The issuer of a fiat, floating & non-convertible currency has the power to buy +anything+ that is +available for sale+ in +the currency+. (Oh…say, to hire the 10s millions of available workers rotting on the shelf…)

This is a basic +fact+ of the monetary system of the Euro, just as it is with the $, £ Yen & most others.

No ‘market’ power can trump this. By definition, there can be no ‘shortage’ of such currency – or ability to spend, as defined – except by pure political choice.

There is only one constraint – inflation – and in the worst & deepening recession in 80 years, we are not remotely near this constraint.

These are the simple, basic, macro economic, monetary, facts.

For two, supposedly macro economists, to completely ignore such facts in a ‘paper’ discussing the obvious existential threat to the EMU, & noting the mass unemployment of 10s of millions, & precarious situation of 10s of millions more….well, words fail me.

KoR & Taylor…..just don’t bother, ok? Don’t pretend some concern for the millions who are suffering under the yoke of neo liberal dogma.

If this all you write about, not from some political office, but from what should be the open domain of academe, well, just do us a favour & don’t bother.

@ All

This article from the Journal of Economic Perspectives deserves a home on this thread.

It is very persuasively argued. There is, however, a major misunderstanding at the heart of it (page 131).

“To foster those goals [peace and security], European states created two sets of institutions, supranational institutions such as the European Commission, Parliament, and Court of Justice, and intergovernmental institutions, such as the Council of Ministers and, later, the European Council, formed by the heads of state or government of the member states.”

Earlier, the author refers to the fact that the ECSC provided the “institutional template” for the development of what became the EU. This template provides the basis for three institutions to act together to adopt supranational legislation i.e. the Council and the Parliament acting together under “co-decision” on the basis of a Commission proposal. The Council is not acting as an “intergovernmental” institution in this arrangement although does do so in respect of the Common Foreign and Security Policy, the “ghost” of the intended Defence Community.

This does not, however, detract from the argument made with regard to Monnet’s “chain reaction”. Reversing it seems to be the main item on the agenda for Merkel once the election is out of the way, with the help of the UK and the Netherlands. Open Europe has provided a translation of what she actually said.

“I believe that in Europe at the moment we have to take care to coordinate our competitiveness more closely, and for that we don’t have to do everything in Brussels.

‘More Europe’ can not only mean transferring competences from national states to Europe, but you can also have ‘more Europe’ by coordinating national political actions more intensively and rigorously with others. So we discuss if we need even more competences for Europe.

However, we can also consider whether we can give something back. The Dutch are currently discussing this. And we will also have this discussion after the Bundestag elections. Or we can give more competences to the Commission in order to set agreements on specific issues with national states.”

To be continued…

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