Tuesday 30 November 2010

Next steps in the Euro Crisis

As said here many times previously, the euro is a currency union that was never going to survive its first real crisis. Well today, here we are right in the eye of the storm. People like William Buiter are feeling free to chuck around assertions that the periphery countries of Europe are all insolvent.

The crisis, which I fully expected to subside with the irish bailout until Q1, is continuing. Goldman Sachs' intervention suggests that the US is keen to keep the Euro area in focus for a while and see what damage it can inflict on Germany and France. German bonds are now tracking the perphery bonds, the crisis is everywhere.

There are though only 2 real options left now:

1. Massive Quantitative easing from the European Central Bank. The bailout funds are not big enough or accessible quickly enough so a one off debasement will really help here. Of course, this is great for German exports and less good for the US where it is itself using quantitative easing to try and devalue its currency.

2. Full Fiscal Union - the other approach is to end nation state soveriengty over their own fiscal affairs. Bonds issued centrally would be of better able to finance the periphery and only marginally more costly to Germany and France.

However, which of these is easier to implement politically and practically. Number one by a mile; more QE it is then....


Budgie said...

With Germans overseeing the finance ministries of both Greece and Eire, we already have a de facto part fiscal union.

More to come on that front as Portugal and Spain with Greece and Eire become the west European subsidiaries to add to the Germans stranglehold on east Europe.

There is also brinkmanship here as the Germans try to outmanoeuvre the Yanks. Much though I would love to see the euro crumble away - not least because it will be the best for us all in the long run - I fear the Germans will pull it off this time. I hope I am wrong.

BrianSJ said...

As Budgie says, the Germans are fighting the Fed. Not good for anybody, that.

Old BE said...

Agree with Budgie, fiscal union won't happen with a grand new treaty, it will happen by the French and Germans standing behind the peripheral debt in return for a say in how the debtor countries arrange themselves in the future. Ultimately it will be formalised in a kind of rubber-stamping exercise.

People keep mentioning that overall the Eurozone national debt is "only" 80% of Eurozone GDP. That surely means that the Euro can hold together in the short term despite what Buiter and his friends at Alphaville hope.

Why are so many people rubbing their hands in glee at the Euro's potential demise? Do they think the UK would somehow benefit from all our closest trading partners going pop?

Glad you agree with me that EuroQE is the obvious way forward!

Budgie said...

The reason that so many people are rubbing their hands with glee at the prospect of the demise of the euro is that it would spike the EU. That in turn would make the EU into a trading bloc, sans pretensions. Something we British have been after for some time.

Old BE said...

That might happen. It might also happen that the collapsed countries turn inwards and resort to beggar-thy-neighbour. And what use would free trade with dead countries be?

I am no EU-phile, but if half of Europe does an Argentina the result for Britain would hardly be a street party.

CityUnslicker said...

BE - you may have a point there. In the long term a price worth paying. The Euro can't exist as it is there has to be massive change through either integration or separation - a choice will have to be made soon. Although QE really just pushes this into next year which will be good for my long equities portfolio.

Anonymous said...

What makes you think the politicians in charge even have the possibility to affect the inevitable outcome? Notwithstanding the dangerous game Bernanke is playing, it looks like the genie is out of the bottle and they might be able to fluff around for a little while, but events, dear boy, events.

The Germans have been wedded to the strong deutschemark for decades (did not do them much harm re-exportations by the way), and it did not seem to make them worse off all these years, did it? Now that the wheels are coming off, when what a majority of Germans were thinking, ie the euro will mean a weaker currency, is about to happen, you think they will just say "oh, its ok, never mind, let's devalue, why don't we"? Maybe thats what Merkel will say, but I'll bet that she won't be around for long after that.

Also, lets not forget that there was a life before the euro. It will be the end of the world as we have known it for only 10 years.

A simple truth is just being demonstrated, again, that denying reality (in this case, the euro can work without fiscal union) will only last for a while.

The question is whether the tipping point has been reached.

Elby the Beserk said...


Pedant on - Eire is the old name for ALL of Ireland. Conversely, Northern Ireland is NOT part of Great Britain. But is of the United Kingdom.

You know it makes sense...

Pedant off

Elby the Beserk said...

Bottom line - anything that fucks up the EU is - long term - just the ticket. They have only just started on the true emptying of our pockets.

Electro-Kevin said...

I'm with Elby.

Not only is he erudite but he makes the best fry-up ever.

Old BE said...

Elby, Budgie, CU, you are right in the long term, but I won't be particularly happy if the Euro goes bang and I lose my job, savings and home.

CityUnslicker said...

BE - UK maybe a safe haven of sorts in the short term, funny how things work out.

Anon - Lovely post and points well made abouthe germans wanting a strong currency. Germans versus Common Purpose and the Eurocrats. Should be fun to watch.

Budgie said...

Elby, to return the pedantry - the name on Eire's euro coins is ... eire. So if the Irish republic wish to put 'eire' on their coins, then by courtesy and convenience I will go along with it.

Also Eire is not the "old" name for Ireland but the Irish language name for all Ireland. Also the island of Ireland (the English name) is the second largest island in the British Isles (Great Britain being the largest).

Anonymous said...

Yep, having the EU Commission and it's army of Eurocrats stagger on by running the ECB printing presses will inevitably ruin Britain.

Inevitably, they'll rob-out what remains of our pension pot, then they'll force conversion of privately held bullion to fiat paper, then they'll seize any remaining private assets from those surely denounced as 'hoarders'.

James Higham said...

3. Leave the EU now, with immediate effect.

Spanner Monkey said...

I suspect the powers that be have a two pronged approach in mind:

1) Intermediate measures like some form of QE to delay the Euro tanking to buy enough time to..

2) Split off the northern more 'responsible' countries to form a new common market currency with added clout with the likes of Sweden and Norway to better ride out the coming storm.

Why would Merkel and others be prepared to relinquish control over the whole EU collective? Human nature.

If the Euro uncontrollably collapses, all those lovely executive EU salaries, perks and pension pots would be compromised so they'll need something to evacuate their loot into.

Also leading a collective of debt junkies isn't much of an empire to relinquish if there is the possibility of running a new Super Euro group of like minded nations.

Anonymous said...

The eu was founded because the large eu countries wanted to make sure there would not be another war.

The question is :- what are the large EU countries currently most afraid of

Is it the reaction of their own electorates when they start to pay for another countries / banks errors

Or is it the fear of what may happen if the EU project starts to fragment.

The effective halting of the Turkish progress gives the answer.

This is not to say that the Euro is going to die.

It is to say that debtors will be made to pay either by money, or effective loss of sovriegnity

Budgie said...

"The eu was founded because the large eu countries wanted to make sure there would not be another war."

Rubbish. You don't need a 'union' to avoid war, you just need democracies. The 'no more war' claim is a fake justification after the event. The EU was founded by and for statists, and power crazed statists at that.

The EU is not just undemocratic, it is anti-democratic. We have not just lost sovereignty, but democratic accountability too. Money, power, democracy, even sense, the EU devours the lot.

Weekend Yachtsman said...

What Budgie just said.

Anything that slows or destroys the EU project is fine by me, although undoubtedly there will be pain in the short term.

We'll just have to concentrate on being a world-wide trading power again - it worked OK last time, iirc.

But actually I believe the EU elites will try quite a few more things before they throw in the towel; they haven't schemed, plotted, deceived, and dissembled for fifty years and more, just to give up at the first whiff of grapeshot.

We're a way off the fat lady's spot yet.