Last chance saloon for the Euro - Just make a decision will you

Malbekh

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Funny how you can make comparisons with Ireland and the EU in terms of handling the financial crisis. Ineptitude, laziness, naiveness, incomprehension and an inability to act in a coherent fashion. Now that may be OK for Ireland in the scale of things (other than our banks), but it's definitely not OK on a European dimension, so even from an inexperienced eye like mine, it's become pretty obvious that the EU/ECB have a limited amount of choices that they need to make - now - before the whole Eurozone project falls apart in chaos and apathy.

I'd be interested in what more experienced and learned posters feel about this, but for my tuppence, here are the limited choices that can be made before the dominoes reach Spain and Italy.

Choice no1: Amputation. Basically this involves cutting off the weaker members of the Eurozone to preserve the core members. So we would have Greece, then Ireland, then Portugal and Spain with the added possibility of Italy. This is like an amputation of a limb to preserve the body politic. Te question is how deep you have to cut to preserve the patient.

Consequences for Ireland. This depends on whether we generate our own currency (Hello Punt) or whether we join the rest of the NOBU (not good enough to be in the Euro) in some sort of bastardised and permanently sick younger sibling. The consequences will be massive deflation and some sort of debt forgiveness as we won't be able to fund our debt in Euro with our new crap version. We'll be printing Cheuros and be massively deflating the currency whilst inflation and high interest rates become the norm. The positives are that our economy will become incredibly competitive, particularly with the UK.

You can expect to see the return of a domestic manufacturing industry as imports will become very expensive resulting in large scale job creation. Exports will power on based on currency rates and comparatively cheap labour costs. In fact, we'll start turning the screw on Central European countries as all the advantages we previously had, in conjunction with our low corporation tax, conspire to ensure we remain the destination of choice for FDI. From a domestic point of view however, the crippling interest rates will ensure some sort of domestic debt forgiveness as those in negative equity cannot afford to pay their mortgages. The enduring problem of funnelling endless wheelbarrows of cash into the banks will cripple the economy for a generation to come.

Choice No2: This is a lot simpler. In order to preserve the Euro they will have to announce an enormous increase in the funding available in the Stability Fund. From €750bn to €1.5tn. Not only that, they're going to have to agree an interest rate that the periphery countries can afford, like 3%. The advantage is that this is a strategy that the markets can understand and accept, not the moronic political dogma as currently advocated by the ECB. Of course, the only way that the ECB can afford to run with such a program is by quantitative easing, that is, printing more money. This throws into the wind everything the Euro was based on, inflationary policies with comparatively high interest rates.

Consequences for Ireland: Pretty good to be honest. Not only do we get loads of comparatively cheap moolah from the Stability Fund, the modest increases in interest rates means that our banks can stabilise themselves far quicker as the burden of tracker mortgages are removed from the corpse, Lazarus-like. Furthermore, with an effective devaluation of the Euro we suddenly become ultra competitive with Sterling and Dollar orientated countries. It's win-win-win.

The bottom line is that we all know the Euro is falling apart much like a giant glacier crashes into the sea in slo-mo. It's time to piss or get off the pot for the ECB, Germany and France. Make a decision and make it fast, before it's too late.
 


McDave

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Interesting post.

I have a question though. Isn't it possible that your second scenario is the ultimate fallback Eurozone position? And that in the meantime, PIGS, and whoever else is perceived to be overborrowing, are being forced to balance their books, thereby reducing the actual need to borrow.

If that's the case, why should the Eurozone rush into precipitate action.
 

Malbekh

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Interesting post.

I have a question though. Isn't it possible that your second scenario is the ultimate fallback Eurozone position? And that in the meantime, PIGS, and whoever else is perceived to be overborrowing, are being forced to balance their books, thereby reducing the actual need to borrow.

If that's the case, why should the Eurozone rush into precipitate action.
Hello McDave. No, I don't agree. The only thing I agree on with the nonsense that comes from our government and the various economical and political institutions in the EU, is that the markets require one thing, and that is certainty. The contagion from Greece through Ireland and then Portugal starts a momentum that can be impossible to stop once we get to Spain and Italy.

It needs to be stopped. Now.

Funny though, the markets are almost equally to blame. Because they are a collective and yet fractured community, they are currently undermining the entire system they depend on. They are actually eroding the institution they require to stand on, it's a mutual destruction that both parties need to work together to avoid.
 

king5494

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The markets are making lots of mullagh out of this and in the end that's Capitalism .I don't think the Germans will take too kindly to inflation and they might prefer self preservation at all costs.
 

McDave

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Hello McDave. No, I don't agree. The only thing I agree on with the nonsense that comes from our government and the various economical and political institutions in the EU, is that the markets require one thing, and that is certainty. The contagion from Greece through Ireland and then Portugal starts a momentum that can be impossible to stop once we get to Spain and Italy.

It needs to be stopped. Now.

Funny though, the markets are almost equally to blame. Because they are a collective and yet fractured community, they are currently undermining the entire system they depend on. They are actually eroding the institution they require to stand on, it's a mutual destruction that both parties need to work together to avoid.
If the Eurozone presses the nuclear option now (e.g. QE), will countries that haven't changed their profligate ways just carry on without correcting their behaviour? What's another month or two putting the pressure on the remaining (BI-)PIGS if the solution is in the ECB's hands ready and waiting for deployment at a time of its choosing.

I agree with your last point. There is a point at which the "market" reaction jumps the shark from forcing ill-disciplined states to pull up their fiscal socks to shooting themselves in the foot. There is after all a lot of business to be done in the (dare I say it, relatively stable) Eurozone.
 

Absurdo

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Bankers and their friends

Interesting discussion point. I think a lot will have to do with how close banking interests have intertwined themselves inside the EU structures. The great EU architects are all gone and more "normal" politicians have taken their place. Also most Germans now have forgotten WW2. At this point it looks like the vested interests decide policy and the only policy is profit. But that could go 2 ways - perhaps the blood sucking vampires need to stabalise the host so more blood can be extracted. Recent statements from bond holders might suggest that some temporary relief is as much in their interests as ours.

We are not seeing a surge in democracy so that is out for now. More a nationalistic me feinism. My one wonder is that the EU institutions have not seen the threat this poses to their positions - laziness, lassitude ? The binding with the IMF suggests weakness.

The solution is print cash. It even makes sense in a currency war. It could also be coupled with fiscal reform (read : co-sharing). Whatever it is the markets are accelerating this process faster than the 2013 timetable would suggest.
 

Tea Party Patriot

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Good well thought out OP.

Just a couple of things to point though.

1. The dollar is going to head south with the Euro, it is currently rising as a safe haven on thret of war in Korea but this will only be temporary. The Fed led by Ben the printer is big on QE at the moment so there will be no competitive advantage for Europe.

2. Can't see the dropping of the periphery countries working because France's exposure to Italy is massive at around 20% of French GDP owed by Italian banks so if Italy goes France is going down as well.

3. The big question for the future of the Euro is will the Germans accept QE or just let the Euro go. That is the real crux of the matter as the current debt levels are not sustainable QE is going to become an inevitable reality within the next 12 months, if not in practice theoretically in Ireland already. So if the Germans accept QE then a much devalued Euro will survive; but I could also see them saying no and just leaving altogether. Much will depend on how badly exposed to all of this German banks are when the domino effect reaches their door, the jury hasn’t yet fully decided on this yet.
 

Magror14

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This is a good thread I think there are a lot of people out there who think that keeping the Euro (coins in our pockets) is a goal in itself even if the original hard currency concept has to be abandoned. Presumably any decision to devalue the Euro would have to be taken in conjunction with the rest of the world.

Anyway, the time now is for bold action.

I don't think the abandonment of the Euro is necessarily the end of the EU. So what if we end up taking steps back and lurching along from one crisis to another. The torch is still kept alight. Nothing has changed. Europe has been around for a long time and it is less easy to ignore history now.
 

Absurdo

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The Ethel Mermans

Doesn't the German position rely strongly on the PIGS reimbursing the German bondholders. All this financing via the ECB etc. is a round robin system that collapses if there is disorderly default. Tolerable if you think you are targeting trade in Asia instead of EU but really leads to war on its borders in about 10 years. I think the Germans are in a bind and are having leadership problems in discovering a solution path.

There used to be serious policy houses in the EU - did they all succumb to Friedmanists ?
 

Tea Party Patriot

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Doesn't the German position rely strongly on the PIGS reimbursing the German bondholders. All this financing via the ECB etc. is a round robin system that collapses if there is disorderly default. Tolerable if you think you are targeting trade in Asia instead of EU but really leads to war on its borders in about 10 years. I think the Germans are in a bind and are having leadership problems in discovering a solution path.

There used to be serious policy houses in the EU - did they all succumb to Friedmanists ?
The problem is that the Fractional Reserve Banking system has totally and utterly failed. The same is proving the case in the United States. Eventually when this gets bad enough we will have to see a return to real backed money the supply of which reflects actual growth and is independent from the banking system.

The money needed to repay the loans created under the Fractional Reserve system has to be generated by further loans. When the banks stop lending the money supply constricts and the system is begining to cave in on itself. Quantative Easing which will lead to high inflation is the only mechanism available to solve the problem, that or default. Personally I would prefer default and start over with a new well backed currency. Inflation will only create further problems down the road and doesn't solve the root problem which is the Fractional Reserve method of money creation.
 

Absurdo

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Alternatives

Might be wishful thinking and i don't want to move too far away from the substantive but............

Does anyone get the feeling that the crisis is quite far away from main street finance and perhaps hides massive Derivative Trading losses. If we didn't have to recover these then it would just be a boring crisis instead of a gigantic one. Could the EU cut the finance houses adrift and establish main street activities (bit like a state bank). It would be a wonderful way to restablish the sovereign as sovereign and retake monetary control off the finance industry. Or have we gone too far down that road already ?
 
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I think a lot will have to do with how close banking interests have intertwined themselves inside the EU structures.

At this point it looks like the vested interests decide policy and the only policy is profit.
Now you said it...
Europes politicians practically work for global megabanks.
All Hail bondholders.
 

Absurdo

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Technical issues

And another thing. I don't think the dual currency will work. It would take too long to get it operational. I remember converting systems for the Euro - we had a 9 month lead in. People had to recognise the new notes. ATM's had to be filled - yadda, yadda, yadda. Do you think the markets would idly stand by and be nice and facilitate the transition ?

Whatever puts the markets and financiers in pole position is the likely outcome. Generating a whopper transnational debt that they can leech interest off sounds like the most likely option. My best bet would be a EU wide interest tax. No one else seems strong enough to stop them. We are all euro serfs now. Remember when we were all euro smurfs.
 

Squire Allworthy

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Option 1 will not work as the PIIGS would have to default and the scale of that would crash the banks in Germany, France and elsewhere.


The only orderly way out of this is QE on a massive scale. It needs to be enough to get liquidity back into the banking sector across the EuroZone. Countries would still have their normal liabilities and some may need bailouts, but at least there would be an ability to move forward and grow. The Euro may or may not drop in value as just about everyone seems hell bent on undermining their own currency.

Germany is doing fine at the minute, unemployment falling etc, but if the countries around it go into recession the recovery will stall.

A lot hangs on this and they are currently making a right mess of it.



On the 'Has the Run on Ireland Begun' thread I posted my thoughts on this subject this morning.

http://www.politics.ie/3233743-post4344.html
 

Absurdo

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Selective crash

I actually think they will let a certain number of banks crash. This has a positive effect - as the domino falls deposits migrate to perceived stronger banks thus giving them a free recap as it were. Fewer players leads to a more profitable platform and a tighter bind between the institutions (EU and financial).
 

Squire Allworthy

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I actually think they will let a certain number of banks crash. This has a positive effect - as the domino falls deposits migrate to perceived stronger banks thus giving them a free recap as it were. Fewer players leads to a more profitable platform and a tighter bind between the institutions (EU and financial).

It is a house of cards pull one out and you risk bringing down the lot.
 

Magror14

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Option 1 will not work as the PIIGS would have to default and the scale of that would crash the banks in Germany, France and elsewhere.


The only orderly way out of this is QE on a massive scale. It needs to be enough to get liquidity back into the banking sector across the EuroZone. Countries would still have their normal liabilities and some may need bailouts, but at least there would be an ability to move forward and grow. The Euro may or may not drop in value as just about everyone seems hell bent on undermining their own currency.

Germany is doing fine at the minute, unemployment falling etc, but if the countries around it go into recession the recovery will stall.

A lot hangs on this and they are currently making a right mess of it.



On the 'Has the Run on Ireland Begun' thread I posted my thoughts on this subject this morning.

http://www.politics.ie/3233743-post4344.html
Awesome post, Squire (I mean the one on the other thread)

"Quantitative easing for the entire banking system coupled with financial reform, but still leaving states with their proper budgets to sort out"

I'm sold but will the Germans go for it?
 

Ulster-Lad

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Interesting post.

I have a question though. Isn't it possible that your second scenario is the ultimate fallback Eurozone position? And that in the meantime, PIGS, and whoever else is perceived to be overborrowing, are being forced to balance their books, thereby reducing the actual need to borrow.

If that's the case, why should the Eurozone rush into precipitate action.
Why do you think the over-borrowing exists? Could it possibly be that the economy of the PIIGS is not sustaining their respective countries outgoings? And if so what reasons can you give for this?
 

McDave

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Why do you think the over-borrowing exists? Could it possibly be that the economy of the PIIGS is not sustaining their respective countries outgoings? And if so what reasons can you give for this?
PIGS have to learn to live within their means, and move away from speculative to productive activities. Can they? I don't know for sure. However they have a chance to show they can get their house on order by reducing their borrowing towards the original Maastricht criteria, as Greece, Ireland and Portugal have agreed to do in recent in months.
 

Ulster-Lad

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PIGS have to learn to live within their means, and move away from speculative to productive activities. Can they? I don't know for sure. However they have a chance to show they can get their house on order by reducing their borrowing towards the original Maastricht criteria, as Greece, Ireland and Portugal have agreed to do in recent in months.
The question remains however, how do they get their house in order? Ireland and the other PIIGS nations have instituted draconian measures to try to effect this. The effect of these measures will be to suppress these economies and not stimulate them them. That is the problem unless you can provide another alternative.
 


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