A single currency is a stupid idea

[Humodour]

http://www.washingtonpost.com/wp-dyn/conte...0052005278.html

 

Ground zero of Europe's debt-currency-banking crisis isn't in Greece, or Portugal, or Ireland or even Spain. It's in Germany.

 

So says Martin Wolf, the estimable economics columnist of the Financial Times, who this week offered this wonderfully concise, if somewhat mischievous, description of how the vaunted German economic machine really works:

 

At one end is a powerful and highly efficient industrial export engine that generates a large trade surplus with the rest of the world, including most other countries in the eurozone. Instead of spending this new export wealth on a higher standard of living, however, parsimonious Germans prefer to save it, handing it over to thinly capitalized German banks that have proved equally efficient in destroying said wealth by investing it in risky securities issued, not coincidentally, by trading partners that need the capital to finance their trade deficits with Germany. To prevent the collapse of those banks, German taxpayers are dragooned into using what remains of their hard-earned savings either to bail out their hapless banks or their profligate trading partners.

 

We Americans, of course, know all about this rather perverse form of economic recycling. It describes what happened in the 1980s with Japan and more recently with China. And to a lesser degree, it describes our economic relationship with Germany, whose banks and insurance companies were big buyers of American subprime mortgage securities and commercial property. It's what inevitably happens when a large, productive country tries to run a "mercantilist" economic policy predicated on running large and persistent trade surpluses.

 

 

ormally, what should happen to such a country is that, as a result of its trade surplus, wages rise, along with the value of its currency, to reflect its new wealth and productivity. That has the effect of making those exports less competitive while encouraging workers to spend their increased income on cheaper imports. And in that way, the system brings imports and exports more into balance.

 

That rebalancing, however, hasn't happened in Germany. It hasn't happened because much of Germany's trade surplus is with other European countries with which it shares a common currency, so the currency can't adjust. It hasn't happened because Germans, by their nature, are eager to save and reluctant to spend their newfound wealth on imported goods and services. And it hasn't happened because the European Central Bank, driven largely by German economic rectitude and fear of inflation, has followed a tight monetary policy that has reduced growth and discouraged domestic consumption and investment.

 

But that's not how most Germans see things. They look at the current crisis and blame their spendthrift Mediterranean neighbors for using the cover of the euro to rack up public and private debts that they now cannot support. They blame hedge funds and other speculators for making a bad situation worse and profiting from other people's misery. And they are furious that they are being told by their leaders that they have no choice but to bail everyone out.

 

What Germans won't accept is that they wouldn't have been able to sell all those beautifully designed cars and well-engineered machine tools if Greeks and Spaniards and Americans hadn't been willing to buy those goods and German banks hadn't been so willing to lend them the money to do so. Nor will they accept that German industry was able to thrive over the past decade because of a common currency and a common monetary policy that, over time, rendered industry in some neighboring countries uncompetitive while generating huge real estate bubbles in others.

 

The danger of Germans misunderstanding the causes of the current crisis is that it leads them, and the rest of Europe, to the wrong solutions.

 

While European governments surely have long-term structural budget problems, the immediate fiscal challenge comes from the decline in tax revenues and the increase in transfer payments that result from slow growth and high unemployment. The right policy response to that -- along with the very real threat of price deflation in Europe -- isn't to put the entire continent in a fiscal straitjacket that makes the recession even worse. The immediate need is for the European Central Bank to deliver additional monetary stimulus in the form of lower interest rates and direct purchases of government bonds. The reality is that the price of avoiding a dangerous deflationary spiral in Greece and Spain is allowing inflation in Germany to rise to 3 or 4 percent.

 

It's also time to give up the fiction that Greece can avoid a default. It can't -- nor should taxpayer money be used to prevent banks and other private-sector bondholders from suffering losses on their unwise investments. If public money is used, it should be as a sweetener for a "voluntary" restructuring in which bondholders are invited to swap old bonds for new ones that have a lower face value but are insured against default by the European Union. The same tack could be used with the bonds of other countries facing insolvency.

 

Such a restructuring not only reduces the problem of moral hazard, but it also avoids forcing countries into the kind of grinding depression and deflation that, as with Greece, would inevitably result in a default. And if it turns out that losses from the restructuring threaten the solvency of some European banks, as is feared, then the E.U. could use proceeds from its new bank tax to inject fresh capital into failing banks in way that dilutes existing shareholders and gives taxpayers the chance to earn a profit if and when the banks recover. That strategy worked in the United States, and there's no reason it can't work in Europe.

 

In the long run, the eurozone won't be fixed until Germany figures out how to generate growth and wealth without beggaring its neighbors and its trading partners. As Finance Minister Wolfgang Schauble acknowledged this week in an interview with the Financial Times, Germany has become so prosperous "because it has more advantages from European integration than any other country." Unless Germans can find a way to share that prosperity, other countries may conclude that the price of membership to its club is just too high.

 

Discuss. Personally I'm a big fan of the EU. But the Eurozone seems like an economically ludicrous idea, especially for such a big and diverse array of nations.

[Monte Carlo]

Why are you such a big fan of the EU living in, er, Australia?

 

Unelected, unaccountable and unstoppable the EU isn't very popular with those of us living under it. As for the Euro, the current crisis was predicted ten years ago. When political dogma bashes economic reality then you get the mess we're in. I reiterate - the Euro was designed specifically as an integrationist tool.

 

The EU was forged by men scarred by memories of WW2. It was a noble aspiration but has become a joke. In the UK we've had no popular vote on it since 1974 when we were asked if we should join a free trade agreement. The sooner it collapses, the better.

[Orogun01]

Why are you such a big fan of the EU living in, er, Australia?

 

Unelected, unaccountable and unstoppable the EU isn't very popular with those of us living under it. As for the Euro, the current crisis was predicted ten years ago. When political dogma bashes economic reality then you get the mess we're in. I reiterate - the Euro was designed specifically as an integrationist tool.

 

The EU was forged by men scarred by memories of WW2. It was a noble aspiration but has become a joke. In the UK we've had no popular vote on it since 1974 when we were asked if we should join a free trade agreement. The sooner it collapses, the better.

Will it though? Who then takes the first step and decides not to run with it anymore? Seems to me that your hated Euro is going to remain for a little while longer. Plus the more it drops the better, I've been meaning to take a vacation in Europe anyways.

[Monte Carlo]

This is the beginning of the end --- already there is talk of the Northern European countries creating a twin-track currency (i.e. Germany and Benelux + Austria). The Northern European countries and economies are drastically different from the South, but the likes of Greece and Portugal were let in for reasons of political expediency.

 

Now Chancellor Merkel has created a self-defeating turnip-ghost by banning short-selling, and speculators smell blood.

 

Like I say, this is the beginning of the end. Why should hard-working, prudent Germans subsidise the openly corrupt and profligate Greek economic system? Answer = it shouldn't. Roll back the EU to the 1970s (i.e. the EEC) when free trade helped the struggling economies of the day.

 

As a Briton I could be smug and say the devaluation of Sterling has been tough but it allowed us to rescue our economy, unlike those bound in the Euro. But a massive amount of our trade is with Europe so our fate is bound to theirs. The Euro was a folly. I wish economic apocalypse on no nation, but in the case of the Euro the political machinations of arrogant, economically illiterate old men looking to do deals is leaving a bitter legacy.

Edited May 21, 2010 by Monte Carlo

[Moose]

I think the German's should just roll up their sleeves and take over these smaller economies, then the single currency would work just fine and everyone would be happy.

[Monte Carlo]

I think the German's should just roll up their sleeves and take over these smaller economies, then the single currency would work just fine and everyone would be happy.

 

Moose, the German propensity to do this a couple of times every hundred years or so has caused Europe no end of trouble . Hopefully they'll stick to worrying about Germany from now on.

[Meshugger]

My opinions:

 

- Euro: should stay but in a completely different form, but with each country having their own monetary policy. This means that while the member states trade with the Euro with each other and even price according to euro domestically, the prices in each country is still reflected to the local currency in form of price index. There would not be any drachmas for practical use in any other way than to define pricing. Greece can for example devaluate for all that it cares within its borders, and its value against the euro would plummet. No other countries would be affected by it, and the ordinary greek wouldn't afford to import anything, but tourists and exporting industry would boom.

 

Maybe there's a big flaw there, but i am too lazy to pick it out.

 

- Power: The commission should be abolished with the EU-presidency and Foreign minister. No common standing army either. The parliament should stay and be able to veto anything that the european council of ministers decides. There should also be a european constitution where the powers of the parliament, council and states are clearly defined. Everyone in the seat of power in the parliament and council are elected through the democratic process. The supreme court, or european court, will work as the last protector when the council, parliament or soverign state implements laws that go against the charter of human rights against the individual. Corporations will be defined as a corporate entity and not individuals in the eyes of the law. The emphasis of the courts, councils and parliament should be on human rights, liberty, and free commerce between the member states.

 

Back to work.

Edited May 21, 2010 by Meshugger

[Moose]

I think the German's should just roll up their sleeves and take over these smaller economies, then the single currency would work just fine and everyone would be happy.

 

Moose, the German propensity to do this a couple of times every hundred years or so has caused Europe no end of trouble . Hopefully they'll stick to worrying about Germany from now on.

 

I jest. More hyperbole needed next time, noted.

[Meshugger]

Oh, i forgot. No federal tax should be levied from the individual to the EU. It should have a separate charter in the constitution. The EU should be funded by the governments in the member states.

[Enoch]

Pearlstein is one of the sharper business columnists out there, and that's a pretty good piece. The bargain that was offered to the peripherial Euro nations was essentially this: Cede control of your monetary policy to the (mostly German and French controlled) ECB, and get the ECB's liberal lending practices in exchange. (The lending worked like this: governments sell debt to private banks, banks use that debt as collateral for 'repo' transactions with the ECB lending window, the whole of which made it very easy for these governments to keep issuing debt beyond the point where a cautious investor would start demanding a higher risk premium.) The central nations, on the other hand, got the benefit of having markets for their exports whose monetary policy they control, which, as Pearlstein describes, is essentially old-as-the-hills mercantilism. The cost is what they're paying now-- creating the atmosphere in which the peripherial nations could issue too much cheap debt.

 

The other key insight here is that this really isn't a bailout of profligate governments-- it's mostly a bailout of the German banks, French insurance companies, Dutch pension funds, etc., that are holding all of that Greek (and Portuguese, Irish, etc.) debt. I don't expect the current bailout to actually prevent default. What it will do is delay it until Greece, et al., can "rollover" their debt-- pay off their current bonds (mostly held by big players in the Euro financial industry) at face value with the bonds backed by the ECB and IMF. It's taking the risk that these financial institutions assumed when they bought the debt and shifting it onto the taxpayers of Europe (and, via the IMF, the rest of the developed world, too).

[213374U]

In the long run, the eurozone won't be fixed until Germany figures out how to generate growth and wealth without beggaring its neighbors and its trading partners.

 

Discuss. Personally I'm a big fan of the EU. But the Eurozone seems like an economically ludicrous idea, especially for such a big and diverse array of nations.

I guess that guy hasn't heard about the Structural Funds? That's precisely how Germany intended to share its growth and wealth with its neighbours, without making them economic slaves. Those were meant to be used as investments into infrastructure and restructuring/conversion of economic sectors that were rendered uncompetitive by integration.

 

Instead, and aided by political and administrative ineffectiveness and corruption, people just took the money and spent it to continue financing businesses that were unprofitable in their current forms, defeating the whole point and failing to make the recipient economies cope with the changes. And now Germans are pissed. Shocking, I know.

 

 

The EU was forged by men scarred by memories of WW2. It was a noble aspiration but has become a joke.

The road to hell is paved with good intentions. Not even ol' Adolf intended for Grossdeutschland to comprise the vast amounts of people and land the EU holds today, and he was quite mad. Functional multinational states are a fantasy. Especially when the people in them have a say, and EU bureaucrats know this all too well. Edited May 21, 2010 by 213374U

[Monte Carlo]

My opinions:

 

- Euro: should stay but in a completely different form, but with each country having their own monetary policy.

 

Maybe there's a big flaw there, but i am too lazy to pick it out.

 

Let me do that for you - you can't have one currency and twenty-odd different monetary policies, just like you can't have an automobile moving in the same direction with twenty-odd steering wheels.

[Morgoth]

Hey, as long as we have the same currency as Germany, I'm fine. I do all my ebaying there.

[Monte Carlo]

Yeah, and now you can pay online you won't have to fill up a wheelbarrow with banknotes to pay for a loaf of bread

[Walsingham]

So if I understand you, Enoch, you're saying that the 'failure' was shared by a cycle of taking on debt and giving debt out cheap? And that the people giving the debt out cheap were the decision makers at the private banks?

[Enoch]

So if I understand you, Enoch, you're saying that the 'failure' was shared by a cycle of taking on debt and giving debt out cheap? And that the people giving the debt out cheap were the decision makers at the private banks?

The private banks certainly had a role-- they had little reason to bid up the yeild on the government debts they were buying because they knew that the ECB would accept it as collateral. But, in the end, private financial companies are like gasses-- they expand to fill the container they're in. If Bank Y wasn't going to abuse the ECB's lending practices, Bank Z would've stepped in and done it instead. I'd say that the 'failure' lies with the design of the overall system. Simon Johnson explains it better than I can:

 

The underlying problem is the rule for printing money: in the eurozone, any government can finance itself by issuing bonds directly (or indirectly) to commercial banks, and then having those banks

Edited May 21, 2010 by Enoch

[Walsingham]

Thanks for explaining.

[Monte Carlo]

An interesting article from the ever-readable Christopher Meyer, ex-UK ambassador to Germany and the USA. Here he discusses the German attitude to the Euro in the late 90's, i.e. as an overtly political vehicle for closer integration. Helmut Kohl saw the internal contradictions and the threat to the German economy but was driven, like Adenauer before him, the banish the spectre of war (and selling this as a way for Germany to be top-dog nation within a united Europe without resorting to arms... dontcha love politicians).

 

Now the whole thing is unravelling, I feel sorry for the German man in the street who has been let down by mealy-mouthed coalition governments and Euro-fantasists.

[Meshugger]

My opinions:

 

- Euro: should stay but in a completely different form, but with each country having their own monetary policy.

 

Maybe there's a big flaw there, but i am too lazy to pick it out.

 

Let me do that for you - you can't have one currency and twenty-odd different monetary policies, just like you can't have an automobile moving in the same direction with twenty-odd steering wheels.

 

Thank you. I knew that it was somehow a too simplistic idea.

Edited May 25, 2010 by Meshugger