The Euro Debate and the Abuse of Language

Defenders of the Eurozone’s initial design, subsequent management and purported reform invariably refer to the system as a ‘monetary union’. So do academic commentators including the authors of the recent Vox piece on the origins of the crisis. Whether intended or unconscious, this is an abuse of language.

Monetary unions do not experience selective bank closures, the re-introduction of exchange controls or the numerous other manifestations of financial fragmentation that have occurred before and after the Eurozone ‘reforms’. Germany is a monetary union. In 1974 the Herstatt Bank collapsed in Cologne and several banks based in Dusseldorf went down in the recent crisis. Both cities are in Nordrhein Westfalen, but there was no closure of bank branches in the state nor were exchange controls introduced by the state authorities on either occasion. Interest rates in Nordrhein Westfalen did not detach from rates elsewhere in Germany nor did bank deposits flee the state.

When the Continental Illinois Bank went under in 1984, at the time the largest-ever US bank failure, the state of Illinois was not expected to handle the fall-out. In the recent crisis the state of Delaware, home to lehmans, and the state of North Carolina, home to Wachovia, were similarly spared. The USA is also a monetary union and there is federal responsibility for bank supervision, bank resolution and the protection of bank creditors.

The Eurozone in contrast was established in 1999 as no more than a common currency area, with a ‘central bank’ responsible only for monetary policy in the aggregate, in pursuit of an inflation target. To describe it as a ‘monetary union’ is to deny that there is any distinction between a common currency area and a monetary union. If the Eurozone really was a monetary union in 2008 the history of the crisis would have been very different.

Language matters. In his 1946 essay (Politics and the English Language) George Orwell put it like this:

‘The great enemy of clear language is insincerity. When there is a gap between one’s real and one’s declared aims, one turns as it were instinctively to long words and exhausted idioms, like a cuttlefish spurting out ink. In our age there is no such thing as “keeping out of politics.” All issues are political issues, and politics itself is a mass of lies, evasions, folly, hatred, and schizophrenia. When the general atmosphere is bad, language must suffer.’

The danger is that relentless description of the Eurozone as a monetary union deflects attention from the awkward truth that it is not, and from the political unwillingness to make it so.

78 replies on “The Euro Debate and the Abuse of Language”

This would have been an insightful piece in early 2011. The policy landscape has changed but Mr McCarthy’s stock article on the eurozone has not!

Soon to come into force is the single resolution mechanism (google it) which includes policy novelties such as shutting down failing banks, imposition of losses on depositors and a fund to (at least partially) cover it.

Some actual policy events such as imposition of losses on creditors in Cyprus also took place almost three years ago now.

Whether this brings us in practice closer to monetary union is debatable as the new supervision/resolution architecture is completely untested. But to fail to even refer to it in an article on the topic is pretty lax.

And an inflation target. To be reached via sub zero interest rates, apparently.

reminds me of the old GAA joke.

-Pat, we’re taking you off
-But we only have 13 players, boss.
– Come off anyway

The other interesting geopolitical development is the Syrian refugee crisis. The EU has just offered Turkey 3bn and opened accession talks (never mind the Kurd and azeri minorities) in order to save Schengen by keeping Syrians in anatolia or Syria. And ISIS and France. C’est tres complique quoi.

But if Schengen falls anyway what’ll happen the Euro? Currency unions don’t have border controls either, do they, Colm?


Google takes patience! Here’s a piece from 2011 for your collection which makes the same points – there are others:

The resolution mechanism has yet to be tested – I am not the only sceptic, it looks deliberately under-resourced and when the test comes there will be more Saturday 3 am meetings in Brussels. Hope it comes in some expendable place like Malta or Slovenia. If it comes in Spain or Italy………

The SSM was tested on June 28th last when the judgement of the supervisory arm was countermanded by the Governing Council. The Greek banks, solvent according to the SSM people, were denied liquidity in the face of a depositor run, resulting in closure, exchange controls and suspension of the internal, as well as the external, convertibility of the Greek currency (the Euro). This, note, in a monetary union already ‘reformed’.

I hope you don’t think the Cyprus episode was a Bright New Dawn – even Mario Draghi has since expressed his embarrasment.


You ask

‘Did you expect the EU’s “monetary union” to emerge from the egg fully grown and with all its feathers?’

Yes basically. It was recklessly irresponsible to inflict, and consciously (read Harold James’s book) a half-assed pretend monetary union and has done enormous political as well as economic damage. Anyone who cares about the European project (I think you do) should be angry.

I think the Euro was a child of the post unification Germany and the optimism of the late 90s (remember Tony Blair’s 97 election and things can only get better through to Gordon Brown’s Iron Chancellor and an end to boom and bust with the only macro noise in the background being the continued lowering of interest rates to reflect lower levels of risk, as if.)

And when calamity turned up the fragility was everywhere and nobody had priced it . Diversification was a mirage. And there was no institutional robustness. And if it happens again it’ll be exactly the same. There have been some attempts at reform but what’s the budget for deposit insurance? And how much is on deposit ? So it seems to me the Euro concept was for a far more optimistic reality.

Central Bank magic keeps the markets going for now. But growth is derisory compared to 10 years ago. Demand is still very weak.

Italian yields at 151bp. I get more in my local credit union for far less risk.

I don’t think abuses of language are confined to the Euro project. Modern finance and economics are in denial about what’s actually going on . Janet and Mario and co are in uncharted territory with their DGSE models. Something like 90 months at zero and the US is a long way from liftoff. Europe is even further behind. People are getting excited about a 25bp rise in December but nobody knows what comes next. There has never been so much debt to service in the history of finance. Here’s a snippet from a recent Fed communique. Note the level of assurance that it conveys.

“Members emphasized that this change was intended to convey the sense that, while no decision had been made, it may well become appropriate to initiate the normalization process at the next meeting, provided that unanticipated shocks do not adversely affect the economic outlook and that incoming data support the expectation that labor market conditions will continue to improve and that inflation will return to the Committee’s 2 percent objective over the medium term. ”

And as Albert Edwards noted recently, “there is a trigger point where you can create inflation. I don’t know where that is. The central banks don’t know where that is”.

Maybe they thought the Euro would morph into coherence over time, as is the European Union way, say like the Agriculture budget or, indeed, the Union itself. But money is so much more visceral, innit.

I still think the great men who gave birth to the Euro never gave a thought to tail risk and how crises unfold and the timing of poor decision making within crises.

Triffins paradox relates to any currency that becomes global reserve. The use of the dollar in this role leads to tension between its national and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account, as some goals require an outflow of dollars from the United States, while others require an overall inflow.

And there is something like that with the Euro as Germany’s currency. tension between the need for a LOLR and bank recap versus the German need for an undervalued currency (compared to where the DM would be). Nice cheap German exports versus coherent deposit insurance.

Colm: yesterday’s Eurointelligence briefing had a story yesterday according to which Schaueble is organising a blocking minority to thwart any moves towards common banking insurance.

“Die EU-Kommission tut gut daran, es sich nicht mit uns zu verscherzen, sonst verliert sie ihren wichtigsten Unterstützer bei anderen Vorhaben”

There is precisely zero evidence that the Germans are willing to move towards real monetary union, and lots of evidence that they are not.

Ireland should oppose any moves to ‘real monetary union’ (as defined by other posters above) if that entails either (a) irresponsible politicians in Ireland expecting to borrow lots of lolly and expecting other countries to pay for it OR (b) irresponsible politicians in other countries expecting to borrow lots of lolly and expecting Ireland to pay for it.

The current limited common currency area suits Ireland just fine (as evidenced by its spectacular growth rates). Namely, all the advantages of a common currency but still retaining the freedom to pursue distinctive economic and fiscal policies (Corporation Tax etc). Let sleeping dogs lie. Ireland should oppose both the breakup of the Eurozone and any moves to a ‘real monetary union’ (as defined above). It is up to each country to adapt to the Eurozone as it now is, not as they imagine it to be. Ireland failed to do this for a number of years prior to 2008/09, but since then it has done so with great success. Namely, utilise the ‘convenience’ advantages of the common currency, but also use the freedom of action it still allows to improve your own competitiveness and not expect some other country to pay for it if you don’t.

The R. Ireland inside the Eurozone is growing much faster than N. Ireland outside the Eurozone. The N. Ireland economy has been badly hit in recent years by the ascent of the £UK sterling and, unlike the R. Ireland inside the Eurozone, its almost impossible for N. Ireland to improve its competitiveness by an internal devaluation.

Membership of the Eurozone provided a platform of stability for Ireland during the depths of the 2008-10 global recession, a platform that enabled Ireland to resume Celtic Tiger growth once global conditions improved. Suppose the Irish punt had been decoupled from the Euro in 2009 and allowed to float free. Given the hysteria of the time, with scores of economists predicting imminent economic armageddon, it would have sunk without trace. I’d probably have been able to buy Donegal.

I recently spent a few days in Lisbon. I got fleeced at Gatwick airport by money-changers when I changed my sterling to Euros. Someone travelling to Lisbon from Dublin (e.g. that chap who runs the Web Summit but whose name I forget) doesn’t have that inconvenience. A trivial matter, maybe, but multiply the inconvenience by 1000 when we are talking about companies doing business.

Of course there is no denying that in Ireland at least its partly a political matter. Some Irish opponents of the Euro have argued that the reasons for Ireland joining were partly political and that Ireland wanted to show it was independent of Britain. There is some truth in this. However, it cuts both ways. Many of those opposing Ireland’s membership of the Euro are opposed to Ireland being independent of Britain and see Ireland’s membership of the Eurozone as a step away from the reunification of the U. Kingdom which they long for.

The optical illusion of European Monetary Union is perhaps the biggest that the EU and national political, administrative, corporate and professional elites project and seek to sustain. But it is just one of many and the ability to project and sustain this optical illusion – and to seek to suspend disbelief for as long as possible – relies on projecting and sustaining layer upon layer of other optical illusions. There is little point lamenting the political damage caused by projecting and seeking to sustain this illusion while largely ignoring the layers of other optical illusions on which it relies.

For example, we are told by the elites that we have, at the EU and national level, effective and independent economic regulation that protects the interests of final consumers of essential infrastructure and utility services – and these include banking and insurance services. This, quite simply, is a lie. It is just another optical illusion. The reality is that economic regulation facilitates the gouging of final consumers. We are told that we have effective competition and consumers protection law and policy. While there might be some substance to this claim at the EU level – even if the process is very much politically driven, the claim is totally laughable at the national level. We are told that policies are formulated and developed on the basis of evidence taking account of international best practice. We are then told that they are exposed to thorough scrutiny in the legislative process before being enacted. This is totally laughable. When inevitably aspects of implementation go pear-shaped inquiries and reviews are established that will take any public or media focus on the problems out of the news cycle and findings will eventually emerge (when most people have forgotten about the initial problems) which will never hold any one accountable. There will always be some sort of system failure to blame.

What is even worse, hardly any of those with knowledge and competence explain to the general public that all governments create money out of thin air when they spend. Taxation, the shuffling or receipts and expenditure and public borrowing are post hoc activities. When calculating deficits government accounts make no effective distinction between current and capital expenditure. This contributes to outlawing borrowing to fund vitally necessary capital expenditure with interest rates close to zero (or, in Ireland forcing households and businesses to pay upfront to part-finance the investment inefficiently).

Nor is it explained that banks create money out of thin air when they lend and that accumulating deposits, capital, bonds and borrowing to back these assest is again a post hoc activity. The result is a brutally short-termist focus which kills productive investment.

Optical illusions of this nature are projected and sustained in all EU member-states and at the EU level. But in Ireland the projection and maintenance of these optical illusions is an art form. Increasingly though, more and more voters are beginning to see through these optical illusions. Unfortunately, since they can only choose among the alternatives put in front of them, as they reject the mainstream politicians projecting these illusions they are falling for the charms of peddlers of even more dangerous illusions. Even more unfortunately the selective shattering of illusions, such as EMU, plays in to the hands of these peddlers of dangerous illusions.

sonst verliert sie ihren wichtigsten Unterstützer bei anderen Vorhaben

Otherwise they lose their most important supporter in other cases

But there is so much that is trina cheile at the moment beyond the EZ where inflation is nowhere to be seen. The Syrian flows are so unpredictable in terms of EU politics and they are scraping the barrel offering Turkey 3bn. It’s a long way from the good old days when the Buba was in charge. A very messy future needs a strong EZ.

and the Germans need Italy and Spain to keep the currency cheap.


A few points.

Language does matter. What the basic article in the “constitution” of the EU states (Article 3.4 Treaty on European Union) is “The Union shall establish an economic and monetary union whose currency is the euro”. (A foolhardy and opportunist British prime minister seems to be under the illusion that this language can be unpicked).

The default setting of Ireland, both establishment and electorate, since we joined the EU has been the béal bocht. There is no sign of it changing, as the performance of the government in relation to climate change targets currently demonstrates.

I am a committed supporter of the EU, mainly because the alternatives have been tried before and with disastrous results. However, I do not expect its development to follow a set successful path any more than was the case in the US. I find debate based on such an expectation to be a bit pointless, to be frank. Without wishing to disparage in any way the value of history, and the lessons to be learned from it, in this instance I feel compelled to quote Bismarck “history is simply a piece of paper covered with print; the main thing is still to make history, not to write it”.

I happen to think that the view taken by the creditor countries – in the matter of the trade-off at the heart of the management of the EMU and its currency – is the correct one. That is not to say that I think that their leader, Germany, is not wide open to criticism on other issues, notably the skewing of her economy by deliberate administrative measures to promote the export sector at the expense of other areas of the economy.

The quotation in German seems to be from an anonymous representative of Scaheuble’s ministry. He is too long in the job to be quoted directly. His main concern is not the issue of common deposit insurance but the sequencing of all the measures relating to the creation of a “genuine” banking union (whatever that means) as the Der Spiegel article evidently makes clear.

His concerns are elsewhere, notably getting countries to put up the money for the SRF cf.

We, no doubt, will borrow it.

An excellent point, well made.

However, a precursor to and consequence of full monetary union is some form of political union (e.g. through pooled fiscal sovereignty or increased fiscal oversight) and a de facto transfer union (e.g. through EZ wide deposit insurance).

Question: given the prevailing hard-money, inflation obsessed, macro economic dogma in Germany, would it be advisable for smaller EZ states to enter into fuller political union?

As Wolfgang Munchau has said: there are two types of German economists – those that haven’t read Keynes and those that don’t understand Keynes.

It would seem to me that the prevailing dogma in German is incompatible with political and monetary union and no amount of hand-wringing is going to change that. Unless there is an intellectual sea-change in Germany, the current situation will continue indefinitely.

@ seafóid

The German equivalent of clodhopper would describe the official who gave these quotes to Der Spiegel. The parties to any agreement are the members states and the European Parliament, who together constitute the legislature, not the Commission. This is stated in black and white in the treaties (it being obviously too tedious a task for many to actually read them, including the official in question). The Commission must “promote the general interest of the Union” (Article 17.1 TEU) in any proposal, which is the only basis on which an agreement can be struck and on which the Commission cannot be overruled except by unanimity by the member states which, almost by definition, cannot be found. This legally binding “balance of powers” constitutes the fundamental building block of European construction.

Of course, what constitutes the “general interest” may be open to dispute and Schaeuble evidently has doubts in this area, not least because the commissioner in charge happens to be the former French finance minister. The German official was evidently, and very clumsily, sending a shot across the latter’s bows, we must presume on his minister’s behalf.


A central point with regard to the future development of EMU is the hybrid nature of the agreements reached so far i.e. the institutional arrangements largely within the EU supranational legal framework, the money outside in an inter-governmental one. It is notable that with regard to the first, the decisions were taken by way of the strongest EU legal instrument, that of a Regulation, which can be adopted entirely at the EU or “federal” level, if you will. Member states have previously been most unwilling to act on this basis. But needs must! And they contradict as a matter of observable fact the thesis that creditor member states in general, and Germany in particular, are dragging their feet and incapable of moving forward.


I wonder if the German obsession with inflation isn’t more likely to end up as deflation. There is something that doesn’t make sense about the German fear of inflation set against their utter carelessness about ever increasing debt expansion. And I don’t think continuing indefinitely is an option. The maths will flop before that.

On the timing issue, from the Q and A.

“3. Why do we need EDIS now?

EU legislation already ensures that all deposits up to €100 000 are protected, through their national deposit guarantee scheme (DGS), in case of a bank failure. However, national DGS can be vulnerable to large local shocks. EDIS provides a stronger and more uniform degree of insurance cover for all retail depositors in the Banking Union, ensuring that the level of depositor confidence in a bank would not depend on the bank’s location.
Any divergences, perceived or real, between national DGS can contribute to market fragmentation by affecting the ability and willingness of banks to expand their cross-border operations. EDIS would ensure a level playing field for banks across the Banking Union by reducing the vulnerability of national DGS to large local shocks, weakening the link between banks and their national sovereigns, and boosting depositor confidence overall.
In the Banking Union, EDIS would increase the resilience of the banking sector against future crises and contribute to financial stability. Ultimately, greater confidence in bank deposits would enable greater lending to the economy, meaning more growth and jobs for Europe. ”

It may be noted that the commissioner responsible is Lord Hill. (I had forgotten that the EMU portfolio had been divided). One country’s “local shock” in the banking sector may be viewed simply as an error of economic management in the judgement of another.

Again, to quote Bismarck, “politics is not a precise science”.

Using a name which misdescribes something a bit is fairly standard in the marketing business and habitual in politics. Imaging you were a politician with the destiny of your place in history (and Wikipedia page) at stake, which would you choose…

“We are great politicians, having agreed to use the same currency in each of our states, instead of different ones!”


“We are great politicians, having achieved Economic and Monetary Union for Europe.”

See? With the second version you don’t even need the exclamation mark. It also carries additional gravitas and intimidates the journalists, who are the conduit to your public, into passing on the message without question by inclusion of the word “monetary” which you know they don’t really understand (because, being honest, you know you don’t).

“Economic and Monetary Union” is up to twelve syllables depending on how it is pronounced, so almost nobody ever used the term. “EMU” became the three syllable alternative in common use, but as with all acronyms there was little focus on the meaning of the words in the full version.

The project generally became known as “the common currency” or “the Euro” in analytical circles.

EMU, although accepted by journalists, was a poorly chosen acronym in the UK context since it had to compete in the public consciousness with Rod Hull’s immensely popular comic icon of the same name. (I think the Commodore PET computer was re-branded because something other than “Personal Electronic Transactor” would spring to the French mind). A hurdle the Eurozone crisis has made it even more difficult to overcome despite the passage of time.

Docm asks: “Did you expect the EU’s “monetary union” to emerge from the egg fully grown and with all its feathers?”

As Colm says that would have been a better idea – although it would have risked a delay and the plaudits would likely have gone to a different generation of politicians as a result.

Here is a link to “How to groom your EMU”

There would be much understandable scepticism, in a UK audience at least, about the wisdom of trying to retrofit one.

As an alternative analogy, here is an attempt to wrestle an eel into a jar:

Don’t forget though that the award for making it commonly assumed that a State is responsible for reimbursing creditors of failed banks rests firmly on the shoulders of the Irish parliament via its successful attempt to impose a regime of de facto risk-free banking onto the rest of Europe via the solo-run 2008 smart-ass Bank Guarantee bluff – something it found it impossible to row back from two years later.

Where to put the commas in the Nicene Creed, was once a taxing issue.

Then there was the use of the name Ireland which the Brits and Unionists objected to but bizarrely they didn’t have a problem referring to the 26-county area as Eire — the Gaelic word for Ireland! So we have compromises like Irish Embassy in London, and the BBC still uses the term Irish Republic.

George Orwell was right and Frank Luntz, US Republican Party Svengali and wordsmith would agree — death taxes, death panels and so on do have an impact.

When is a mandatory charge a tax? Why aren’t farmers’ CAP subsidies called welfare?

It did take the US monetary union sometime to evolve and President Andrew Jackson got his wish in 1836 when the charter of the Second Bank of the United States, effectively the central bank, was not renewed. It would take until 1913 for the US to have a federal national bank again.

This development followed the Panic of 1907 — which triggered a bad depression — when J. Pierpont Morgan, the top US banker, organised a bailout of weaker banks on Wall Street. Support for establishing a national bank grew — however, there was strong opposition to a federal bank with politicians in Washington appointing the main board. Note that the term central bank was avoided.

It took another depression for federal bank deposit insurance to be introduced.

Whatever the terminology, unlike in the US, member states can leave EMU — it would be messy and there would have be an agreed process. Italy would be a big risk but what we see so far is that since the Aug 2007 credit crunch six states have joined the system of 19 states today — Cyprus and Malta in 2008, Slovakia in 2009, Estonia in 2011, Latvia in 2014 and Lithuania in 2015, and no state has voted to leave.

The EMU will evolve slowly while in the US there is an enduring battle about the balance of state and federal rights.

The so-called red states in the US which generally get the most federal dollars per capita tend to be anti-Washington. There is a bloc also in the EU which would like solidarity without strings.

Last week I came across again a claim about how the EU stole our fish resources and I decided to do some research on it:

The EU is threatening to kick Greece out of Schengen. EZ member but border controls would be the result. EDIS in Wonderland.

@James Alexander

Ireland does publish quarterly GDP data. Its usually published 2 and 1/2 months after the end of the quarter. So, the GDP data for Q2 2015 was published in mid-September. And the GDP data for Q3 2015 will be published in mid-December. In the table you link to approximately 15 out of 28 countries have by now reported their GDP data for Q3 2015. Based on the first 2 quarters of 2015 it looks like Ireland will have by far the highest growth in GDP/GNP in 2015.


Michael Noonan has apparently leaked in advance the Exchequer figures due to be published officially later today (a hanging offence in the eyes of many Dublin 4 liberals concerned with why Ireland doesn’t behave Nordic). But, I can see why. Tax receipts massively overshooting in November. Deficit for 2015 revised down to 1.7% (from 2.1% at budget time and 2.7% at start of year). Projected deficit for 2016 revised down to 0.7%. A massive contrast with the U. Kingdom where the budget deficit is stuck at 5%-6%. Where does this leave the IFAC and their recent scaremongering?


“This would have been an insightful piece in early 2011. The policy landscape has changed but Mr McCarthy’s stock article on the eurozone has not!”

…but everyone keeps calling it a monetary union…so long may Mr McCarty attempt to unravel the lie/fantasy/misuse of language. The fact that the ECB has failed abysmally to achieve its sole purpose of an inflation target shows just how anemic an organisation it is. That Germany pursued a policy of aggressive internal devaluation while the periphery inflation bombed ahead in the noughties went unchecked by the ECB because in the aggregate all was adding up to what was required. When the periphery imploded/exploded (take your linguistic pick) the solution, decreed by German was that everyone else needed to undertake aggressive internal devaluation programs to bring themselves back in sync…Germany was never going to choose the path of inflating its way out of its deliberate malaise (designed to add fuel to its glutenous export ambitions).

Ireland should not have moved its Budget to mid-October. The q3 GDP data is not available till mid-December and November is a huge month for tax receipts, which can make redundant forecasts for the budget outturn as well as calling projections for the following year into question, not only for the exchequer balance but also for GDP growth and the output gap ( and hence the structural budget balance). In 2015 receipts will be spectacularly stronger than initially forecast (albeit largely due to corporation tax), as per @JTO above, but in other years the reverse can be true.
A preliminary Budget is required under EU rules so the government should announce some broad fiscal targets in October but leave the detail till December, as in the past.
Ireland’s GDP is already one of the most volatile in the developed world and the early Budget is adding to the risk of substantial forecast errors

I respectfully suggest that this entire thread is based on a false premise i.e. that EMU is somehow being presented as if existed as a completed institutional arrangement when it is crystal clear from the the treaty language “shall establish” that it is still both an objective and an obligation. It is the operative clauses in the associated Treaty on the Functioning of the European Union that constitute the substance of how this is to be brought about and it is still a work in progress.

If some believe the situation is otherwise, they might advance some facts to support the contention. Quoting Orwell will not do.

For Orwellian language, incidentally, the letter from Cameron to Tusk really fits the bill.

Such is the chutzpah of this particular leader, he seems to think that a major negotiation can be finalised on the basis of vague wish list, between the bigger countries, and without reference to set procedural arrangements or consideration for the interests of the medium and smaller ones.

He may well succeed, including undermining the integrity of the efforts to achieve EMU to date, as creditor countries must, by now, be beginning to see the advantage of a less heterogeneous membership. That would be a real topic of substance.

Peter Bofinger, who is a member of the German Council of Economic Experts, shows how Germany with its perhaps unique ability to perform an internal devaluation while retaining broad popular consent scuppered the ability of the ECB, with just an inflation rate policy target, to pursue a sensible monetary policy:

When the credit crunch hit it was forced to make up policy on the hoof. And it wasn’t helped by the failures of Ireland and Spain to apply prudential regulation of their banks, by fiscal incontinence in Greece (accompanied by fraudulent statistics) and in Portugal and, as grumpy points out, by Ireland’s solo run with the Bank Guarantee.

But, before everyone starts bashing Germany, it is important to remember that Germany, as the dominant economic (and political) power in the EU, has long being conflicted by being forced to address the economic and stategic positioning of the EU relative to the US and the BRICS (and other emerging economies) simultaneously with a broadening and deepening of the EU project. Frequently the former has dominated at the expense of the latter. The economies in Germany’s orbit either understood or learned the hard way the implications of the strategic conflict Germany has been dealing with and continues to deal with. The ignornat and greedy elites in the PIIGS choose to ignore all of this. They thought the free lunch had been invented and elbowed furiously to get their snouts in the trough.

But this not absolve Germany of its failure to modify its mercantalism, its continued protection of its sheltered sectors, its distortionary promotion and subsidisation of its export sector and its anally retentive fiscal deficit fetishism.

@ PH

The article by Bofinger coincides with the extensive coverage in the German media of the fact that one in ten of the German workforce now depend on state support under Hartz IV, a reform which made no contribution to reducing unemployment but a lot to increasing poverty and reducing, of course, the overall level of domestic demand.

The cost of the huge influx of refugees has now to be factored in while Scaeuble continues with his obstinate commitment to the schwarze null or balanced budget.

However, as you point out, the picture is a complex one and seizing on any one element of the behaviour by any one government as the source of all the woes of the euro simply does not stand up to serious examination. The paper by Aidan Regan to which I have drawn attention covers the many other elements, including the fact that regional make-up of the Continental economy does not coincide with national borders, and the degree of industrial integration that has taken place. Defenders of the current policy, designed in the interests of the classic major German industries (vehicles, chemicals/pharma and arms production) and mittelstand (SME’s) and their workers, point to the amount of imported elements in German products.

To be continued!

@Michael Hennigan.
845 M euro in lost revenue a year is 845 M euro in lost revenue a year. It doesn’t matter if we would have been too stupid to explot it properly or not. You sound like a colonialists … sure the Africans aren’t using their Uranium anyway, that gives us the right to it. Interesting logic.

@ PH

The MIP (Macroeconomic Imbalance Pocedure) will be part of that continuation;

The key extract (page 7);

“The euro area is currently posting one of the world’s largest current account surpluses in value terms. In 2015, it is expected to amount to approximately EUR 390bn, or 3.7% of GDP. The bulk of the surplus is accounted for by Germany and the Netherlands, whose contribution represents 2.5% and 0.7% of the euro area GDP respectively, and by Italy (0.4% of euro area GDP). (Graph 1) Former deficit countries are now also recording balanced or surplus positions, which are needed in order to ensure the sustainability of their external positions. In a context of low growth and nearly zero inflation, the persistence of very high surpluses in countries with relatively low deleveraging needs points to a lack of domestic sources of growth. Once oil prices rise again, domestic demand strengthens, the effect of the lower euro fades away and export growth slows, the trade balance surpluses of the euro area and the EU should stop widening and eventually decline slightly in 2017. The continuous accumulation of net foreign assets may also imply growing exposure to exchange rate risk and reduced room for national authorities to manage macro-financial risks (e.g. via prudential or regulatory measures) as the share of assets in domestic portfolios originating in foreign countries grows larger”.

The message to Germany could hardly be less subtle.

N.B. The performance of Italy.


“I respectfully suggest that this entire thread is based on a false premise i.e. that EMU is somehow being presented as if existed as a completed institutional arrangement when it is crystal clear from the the treaty language “shall establish” that it is still both an objective and an obligation.”

The use of the present tense in “is somehow being presented”, very significant.

There has been a recent tacking-on to the project the new emphasis that it is incomplete – after it became embarrassingly clear it was, in some important aspects, a bit rubbish.

I think Colm’s point, and certainly mine, is that it was generally presented as “Economic and Monetary Union”, states would accede to EMU – not to “A Work in Progress Which One Day May Lead To An Economic and Monetary Union”.

“Third stage:
the euro is launched
On 31 December 1998, the conversion rates between the euro and the currencies of the participating Member States were irrevocably fixed. On 1 January 1999, the euro was introduced and the Eurosystem, comprising the ECB and the national central banks of the euro-area Member States, took over responsibility for monetary policy in the new euro area. This was the beginning of a transitional period that was to last three years and end with the introduction of euro banknotes and coins, and the withdrawal of national banknotes and coins. In 2000, the Council decided that Greece fulfilled the necessary conditions for the adoption of the single currency, and the country joined the euro area on 1 January 2001.”

Note in the presentation there were 3 stages to EMU, not 5 or 6, 2 or 3 still to be reached.

Enlargement and reform are tacked-on as extras, not fundamental, missing elements.

EMU was not heralded as a possibly dangerously incomplete partial step towards a monetary union back in 1999.

Some people have got into the habit of describing it as “a monetary union” in addition to using the name EMU when it might be more accurate for them to downgrade it a bit. Eurozone would do.

@ Nocense

I would suggest that from afar few commentators or economists understand the Irish economy. So we should be cautious regarding the received wisdom on other places.

In the 1990s German firms began investing in neighbouring former communist countries where labour costs were low creating jobs like the ones Ireland has been getting from overseas since the 1950s.

By 1998 the huge post-unification spending boom had ended and the unemployment rate rose above 12%. In 2005 it hit a 70-year high and exceeded 5m.

Christian Noyer, Banque de France governor, said in May 2013 that GDP in Germany “contracted almost twice as much as in France in 2009.” But Germany’s greater labour-market flexibility allowed for a much faster rebound.” France lost 500,000 jobs in that period, while German unemployment “remained stable,” in part because businesses could cut working hours when growth slowed.

The low wage growth and non-existent house price inflation at a time when Spain was building more housing units annually than Germany, UK and France combined, was not a conspiracy.

In a historical context, it is paradoxical that Germans are risk averse with a low direct investment in shares and a high percentage of savings in deposit accounts. It could have spent more but it may be a surprise that Germany and France in 2010 had the same gross public debt ratios at 80% and 81% of GDP having risen 15% and 13% since 2008.

France had pushed for the creation of the euro but it’s better to let countries sink or swim on their own steam as foreigners are invariably blamed for all the bad outcomes (I’m not implying that outsiders do not make mistakes) — it is interesting too how the IMF liked to present itself as the good cop, when operating alone it is not always the Santa Claus — it had an option of not participating in the troika or working alone.

@ grumpy

To be blunt, I think the debate on this topic is a complete waste of time and a distraction from what a useful debate might be. There never was a fairy godmother out there to whistle up a pristine functioning EMU from the start and none of those involved were, or now are, under any illusion about that. They also knew that there was an inherent contradiction between limiting action in economic and social policy to that simply of coordination (see the section in the TFEU detailing the “Categories and Areas of Union Competence” Articles 2 to 6 of the TFEU) – Delors left them under no illusion on that – but there was a collective decision to proceed anyway; without the UK. (The Danes do not know whether they are in or out).

A semantic discussion about the presentation of the term EMU, and basically offering the well-known Irish set of directions “if I were you, I would not have started from here” does not advance matters much. It is a sideline occupation. Ireland is on the pitch!

“I would suggest that from afar few commentators or economists understand the Irish economy. So we should be cautious regarding the received wisdom on other places.”

The problem is if the monetary union was functioning as it ought to then it would not/could not allow allow “all politics to be local”. So notwithstanding the internal political pressure in Germany that you imply to address its peak unemployment issue, the fact is that it was able to accelerate from that undesirable position by adopting policies that were anathema to the ECB price policy. As a result Germany acted as a counter weight to the rest of Europe, particularly the periphery (who were in rude employment health), that gorged on an inappropriate exchange rate regime that severely overheating their economies while at the same time only bringing Germany itself slowly and in control to the boil. Lest we forget – if “the people” (German or of any hue) could collectively exercise constraint when economies were overheating we would have no need for Central banks at all.

Germany’s labour market flexibility that your refer to (internal devaluation) significantly complimented by a undervalued currency and the interest rates enjoyed by their “partners” essentially resulted in one boat rising above the rest and sinking many.

Its not about motive here – so I don’t need to be cautious about what happened in Germany – that fact is that because we don’t have proper a monetary union that these things were allowed to happen WITH the consequences that we have seen came with that eventuality i.e. some within the union must pay for the consequences, others not so – unlike McCarthy’s illinois banks scenario. But when this storm came together we learned it is not in fact a monetary union – internal union rent-seeking was the order of the day – “we worked hard to achieve our position of strength notwithstanding your contribution to that, our own internal devaluation strategy that ran counter to the ECB price policy and notwithstanding the benefit to exports from a devalued currency….we are holding what we have….because this is NOT a monetary union – its a survival of the fittest (and largest) common currency area”.

Design Failures in the Eurozone; Can they be fixed? by Paul De Grauwe;

Abuse of language awards:

Gold Medal: “OUR” debt

Silver Medal: “Our” debt

Bronze Medal: “our” debt

According to the Irish Times AJ Chopra regards the task of perfecting Europe’s monetary union as incomplete.

‘Mr Chopra warned that post-crisis reforms in Europe had not gone far enough to protect the public from another banking disaster.

Until a pan-European centrally funded insurance scheme for bank deposits was created, the “doom loop” that would impose the cost of banking collapses on national governments would not be cut, he said.
“Have the changes that the euro area has put in place made it a more resilient monetary union that can withstand further shocks? My answer to that is no,” he said, describing the euro area as “fragile”.’

Plenty of time to fix things after the next shock?

@ CMcC

AJ Chopra may be an outstanding IMF ex-staffer but he appears still not to have grasped the essential difference between the EU and a sovereign state (no more than Ashoka Mody although the latter has been reading up on it). Nevertheless, his comment does address the central conundrum. What will make for a more “resilient” monetary union in the view of its anchor country is recognition by the countries that have adopted it, or may decide to do so, that they individually carry the political responsibility – as a matter of legal fact – for the sound management of their economies, notably in the matter of prudent and appropriate fiscal policies, which include micro-prudential action in relation to their banks. What the crisis has actually demonstrated to this point is that there may be no viable alternative to this approach. After all, the US is still at this stage in terms of the states that make it up.

The Next meltdown Will feature Banks carrying overpriced piggy debt and a Central Bank That can’t cut rates or recap Banks.

@ CMcC

On the issue of deposit insurance, before the example of Illinois comes up again, this somewhat dated paper from the FDIC, culled from the Web, is informative.


“In addition to the funding advantage, other dimensions of deposit insurance allow a gross subsidy to accrue to insured depository institutions. This is because deposit insurance differs from market-provided insurance
in two important ways. First, the premium is not set by the market. As we discuss below, it is very difficult to measure what a market rate for deposit insurance should be. Second, there are two parts to deposit insurance: the insurance funds administered by the Federal Deposit Insurance Corporation (FDIC),3 and a call on the full faith and credit of the U.S. government. This call is similar to a standby letter of credit provided by the government. There has never been an explicit charge for this call. But measuring the value of this call is also quite difficult, since the call is in the
money only if one of the insurance funds becomes insolvent. Hence its value varies over time with the health of the banking industry and the strength of the insurance funds. In the more than 60-year history of
deposit insurance, reliance on the full faith and credit of the U.S. Treasury has been necessary only once to clean up the savings-and-loan (S&L) debacle of the 1980s. Nevertheless, the fact that credit from the U.S. government is available for deposit insurance purposes enables insured institutions to borrow in the marketplace at lower interest rates than uninsured financial institutions.

Footnote 2 One example of an implicit government guarantee is the so-called too-big-to-fail policy, under which it is believed that the government would protect extremely large money-center banks from failure in order to maintain the stability of the U.S. financial system.”

The Germans are not ready to have the EU, in its far from federal state, have the possibility of a call on its “full faith and credit”. They suspect, rightly, that it would apply mainly to them. A good measure of the risk is the level of EU collective “federal spending” of about 2% of GDP, equating to the level of federal spending of the US in 1900 (!). In net terms i.e. in terms of what is put into the EU budget against what countries take out, the Germans are, of course, already the biggest contributors.

“What the crisis has actually demonstrated to this point is that there may be no viable alternative to this approach.” – ie: “… the sound management of their economies …”

Depends on one’s political definition and ideosyncratic interpretation of “sound”. Seems to be flexibly flexible.

“After all, the US is still at this stage in terms of the states that make it up.”

The US started life as a group of colonies with a central government (Westminster) and a common currency (the Pound): a monetary union. They still have a central government, The United States Congress and a common currency, the US dollar. The process seems to have been, State first, then the government, then the currency.

The EU wallahs would wish to establish a monetary union – only working in reverse. Currency first, then government, then the state. Well now, good luck with that one. Even the Romans had a few problems with Gaul, Germania and other barbarians. So what’s new then?

@ Nocense

The popular mantras have some truth in them but Europe had a growth crisis long before the launch of the euro. As for the nonsense about the exchange rate, Germany has posted a goods trade surplus every year since 1952, whether the DM was strong or weak

Germany, France and Italy account for 65% of Euro Area GDP. Italy grew as fast as Germany in 1950-73 and Greece grew faster than both of them.

The quadrupling of oil prices and double digit inflation marked the end of the post-war catch-up period and neither France, Italy, or Greece have balanced their national accounts in any year in the past 40 years.

A state does not need to handle its finances like a household but decades of red ink eventually takes a toll.

The division within Italy is the starkest of any country in the EU28. The Mezzogiorno accounts for 36% of Italy’s population and it has the lowest employment rate in Europe.

Europe had a growth crisis long before launch of euro in 1999

The FT’s Martin Wolf wrote in 2011:

Nor, as so many suggest, is some sort of fiscal union the answer. True, if creditworthy members were to transfer resources to the uncreditworthy on a large enough scale, the eurozone might be kept together. But, even if such a policy could be sustained (which is unlikely), it would turn southern Europe into a greater Mezzogiorno. That would be a calamitous outcome of European monetary integration.

The US is not immune to austerity even in its biggest state:

In 2012 welfare payments, healthcare for the poor, and benefits for elderly and disabled Californians were immediately cut by around $8.3bn — 17% of Governor Jerry Brown’s entire discretionary budget. And state offices, which employed roughly 200,000 people, were forced to operate on a four-day, 38-hour work week.

San José, the biggest urban area in Northern California in the midst of Silicon Valley, one of America’s richest regions, had been struggling with its budget for a decade.

Key differences between US States and Member States of the European Union are that Member States are sovereign and can repudiate debt, and that US States have no major role in handling failed banks.

An actual monetary union, with a bank bailout fund consisting of more than pocket change, would be a stable solution, but it is not the only possible one. An alternative is that Member States refuse any responsibility for the wider stability of European banking when making decisions on failing banks, and European bailouts come only with IMF-style levels of debt write-down. Where the discipline of politics fails, the discipline of the market can be allowed to work.

The state of play with regard to Brexit, “confessionals” included.

“George Osborne, the UK chancellor, has demanded that the EU be defined as a “multi-currency” union, putting the pound on a par with the euro. This has been rejected by everyone else, senior sources said.”

Quelle surprise!

With the destiny of our large neighbour in the hands of such masters of the universe, why worry?

If you are comparing bank failures in the US to Greece, Greece experienced multiple problems. Bank Failures, Pension failure, taxation failure, and more. My guess is without the other problems the ECB would have immediately bailed out the Greek banks. In the US the FDIC usually arranges for an insolvent bank to be sold or merged. This seems to be more difficult in Europe.

The US federal government under Pres Ford refused to bail out New York City, search on “Ford to city drop dead” (1975).

More recently a number of cities had financial problems. Detroit, Vallejo, Flint, and many others. Search on Chapter 9 bankruptcy, municipal bankruptcy.

If I understand it correctly Flint’s emergency financial manager thought pumping water out of a nearby river was a good way to save money.

Flint water still unsafe without lead filters, professor says

There is a slow boil of a state and local pensions crisis in the USA. See and (mostly NJ) as a start. Let’s see what happens.

Search on Puerto Rico.

FT Wednesday
“So far the ECB has taken the radical step of cutting its deposit rate below zero ….and has purchased more than half a billion euros of assets…
According to the policymakers the plan is having an effect and credit markets are loosening encouraging more of the sort of lending that should lead to investment, job creation and economic growth. But with inflation still at 0.1% the move obviously has not had the fully desired effect”.

Are they just taking the p***? The ECB has ONE target. It doesn’t care about unemployment. It just has to deliver 2% inflation. And it can’t.

@ CMcC

You will have seen this comment by Chris Johns in the IT.

This needed to be said. But what also needs to be recognised, and driven home in any debate, is that international organisations are the creature of ALL of the countries that make them up, the bigger economies, by their very nature, having the biggest say. If Johns had added this, and cited the opposition of Trichet to the involvement of the IMF, and Germans insistence on it, a really objective and comprehensive narrative would have emerged.

As to why Berlin was so insistent, some obvious reasons suggest themselves (i) Germany did not wish to be left alone to deal with an IMF type situation, if not a classic one (ii) Wall Street had had a big role in instigating the crisis and the involvement of Washington was, for that reason, essential (iii) the skills of the IMF staffers in dealing with bailout situations.

On the basis of the pronouncements of Chopra and Mody since they left the IMF, that level of skill was no greater than that available to other organisations.

Odd developments yesterday at the ECB. Indicators such as the PMI’s imply that growth in the zone is running around 0.4% per quarter which is probably above potential (the unemployment rate is falling modestly) and the Staff forecast actually revised up GDP projections, albeit marginally. Yet the rhetoric prior to the meeting had been very bearish, inflating market expectations about policy action, and there was a deal of disappointment at what emerged.

The inflation forecast was revised marginally lower, reflecting weaker oil prices, and QE was extended by €360bn. although it remains unclear how a policy which affects bond yields can stimulate inflation in a zone where three quarters of credit is created by the banking system, and where many firms and households are still deleveraging from debt levels that were deemed to be the cause of the crisis.
It is interesting though that Draghi has taken to urging a fiscal response where there is fiscal space and I wonder how long it will be before others follow France and ignore the admonitions of the Commission.


“As for the nonsense about the exchange rate, Germany has posted a goods trade surplus every year since 1952, whether the DM was strong or weak”

In fairness you deserve kudos for your downright obstinance on this point over the time I’ve been reading these threads.

On a scale of 1 to 10 you can run a goods surplus on a scale from small to significant…but a surplus nonetheless. To deny the relevance of exchange rates is to deny the relevance of price in a demand equation. Since the joining the Euro Germany has moved up that scale from a 2 or 3 to a 9 or 10 in terms of its trade surplus and the move was not gradual but very rapid and in particular during the Euro crisis.

You hypothesis is that if we want to test if exchange rates have an impact on whether there is a surplus or deficit then we first have a binary examination of whether there is a surplus or a deficit. If we observe that there is always a surplus but that exchange rate are both weak and strong over the period under review, it must follow that exchange rates have no impact on whether there is a surplus or deficit. Surely you can appreciate at some level this is flawed analysis.

Would you put Irelands current mini-economic miracle on any level down to exchange rates at all?

I take it you put none of Irelands current rebound and mini growth miracle down to exchange rates then?


Markets were expecting more but maybe the ECB wanted to hold something in reserve for future action. There is a lot hanging on t he Fed raising rates and potentially a lot of volatility to come. Markets are completely dependent on the judgement of less than 30 people.

Odd developments at the ECB? More par for the course with the representative of the Bundesbank clearly having voted against.

Draghi is viewed, in the German media at least, as having made his first major tactical error vis-a-vis the markets (and, probably, to have fired his last arrow).

The patient may be recovering largely on his own while the medical team and the drug suppliers squabble over further treatment.


Blind Biddy is sending you a copy of The Brothers GRIMM FAIRY TALES this festive season. Should add to your well spun algorithmic vocabulary ….


‘I wonder how long it will be before others follow France and ignore the admonitions of the Commission ….

Not long. Nonsense is Nonsense. Hibernia, for example, has been starved of societal investment for too long … and it shows. A high infant graduate could figure out the medium to long term benefits on 50 Billion at present interest rates. [p.s. could always bill the ECB later on …. and tie them up the ECJ for the next millenium ….




Draghi..first tactical mistake vis a vis the markets..

Are you serious? The markets are addicted to ECB largesse. They are like Pavlov’s dogs and gave up on price discovery about 7 years ago. QE junkies. Draghi is with them, not against. It is a big panto.Waiting for inflation.Fail again.

@ seafóid

Why not read the material? I was relaying the view of the German media. Sandbu gives an alternative view which I would consider, on the basis of my non-expert reading of the subject matter, to be correct. His view on how QE works, incidentally, coincides with that of the BOE, and the data seem to bear him out cf. link to speech by Constancio linked to in his article. I think that the latter may be the second expert in the emergency room, backed up by the technical resources of the ECB.

One other thought. Were the Germans exercised about the matter where it really matters i.e. in the Chancellery and the finance ministry, the reaction would have been a good deal less muted. Maybe they share the second analysis?

QE doesn’t appear to work. ZIRP doesn’t generate inflation and neither, it would appear, does QE. There is just too much debt in the system. The FT puts in a good effort but the CBs don’t seem to be able to do much, which is a pity. Inflation would reduce the value of debt. It is not really complicated.

“Sandbu gives an alternative view …”

DOCM, I’m reading some of his ‘stuff’. Its hardly sufficiently well crafted to be labelled “Bullshit”. If the KGB, CIA or similar were to behave like this – we would consider it a form of brain-washing propaganda.

“QE doesn’t appear to work.”

It does – if’n ‘they’ say so and ‘wish it’ so, and their spokesrobots regularly repeat the pre-recorded message. Hari Krishna chanting – without the prayer wheels.


I saw something about debt issuance since Lehman and economic growth generated . The ratio was 4:1. There Is a massive credit bubble brewing in the US. Fake Alpha Is a huge issue. Markets can’t Price tail risk.

The financial institutions (thru their PR spinners) and the usual sychophantic camp followers have craftily sold the neo-liberal economic, social and political paradigm that; “Credit is good, but debt is better!” – and a phisable public has been led along to this belief. Its gives a chilling three-dimensional perspective to the term delusional. I don’t think those bozoes will get that ‎Royal Swedish Academy Award for‎: ‎Outstanding contributions in Economic Sciences – ie: The Sveriges Riksbank Prize in Economic Sciences in honour of Alfred Nobel – but you never can tell these days: its been awarded for worse.

Perhaps its the realization that investment in productive enterprise (except in Chindia and some other SE Asian areas) is a dead loss, so just take the free credit from Mario and gamble with it in speculative paper. Afterall, its simply ‘free money’ and someones else are paying for the ‘lunch’. A no-brainer!


It seems a lot of the gambling is done by algorithms taking advantage of micro second differences between competitors. The worst possible risk management. When the wolf comes back there won’t be any arbitrage.

This weekend’s FT page 1

“No Limit” to ECB action, vows Draghi

He’ll go to minus 6% , will he, to guarantee 2% inflation ?
Why not give everyone a cheque for 5 million ?
Or give every refugee 10 million.

“there cannot be any limit to how far we are willing to deploy our instruments within our mandate and to achieve our mandate ”

But what if the instruments and the mandate are incompatible ?

Larry Summers’ monthly column in the FT and Washington Post deals with the next recession and while Draghi may do a lot of bond buying to bring headline inflation to 2%, would he have ammunition to deal with a recession?

The stock of Euro Area government bonds trading at negative yields at the end of November, was valued at more than €1.9tn — or approximately one third of the total market — according to the latest Bank for International Settlements (BIS) quarterly report.

More here:

The next recession, low interest rates, the Fed and ECB’s Draghi

@ grumpy

Finland has a net government debt of -41.5% of GDP — that’s a minus!

The Finns did provide well for the rainy day when things were good.

grumpy: I do not know why the logic of the above should have escaped folk.

The Bible opines, “Man cannot live on bread alone.” True. But the modern economic equivalent might be; “Man cannot live on credit alone.” Well, not for long, anyhows.

This put me in mind of The Lord Dragi.

“I cannot imagine any condition which would cause this ship to founder. I cannot conceive of any vital disaster happening to this vessle. Modern shipbuilding has gone beyond that.” [Capt. Ed J Smith: RMS Titanic]

Nary a smidgin of self-doubt on display: pure 3-D delusion.

From my scrap-book. “Don’t blame luck when your models misfire.” David Kay: FT 03/03/2011


Yes, but I think the general scenario is more interesting than any single fact at play there.

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