Wednesday 17 November 2010

Political Crisis of the Euro will end in revolution

Sadly a long time ago now, I wrote my Master's thesis on what had then been a big macroeconomic event, the UK's withdrawal from the ERM in 1992. The focus of the paper was to study just how much the political decision making had NOT been influenced by economic reality. Perhaps unsurprisingly the conclusion was that the ignorance of the true economic reality of the UK joining the ERM by Michael Hesletine and others was a key driver in the crisis. Economically the UK was never going to survive in a fixed rate system against the D-Mark.

So too, today, 20 years later and we see a very similar story being played out. the Peripheral Euro Countries have been smashed by the economic costs of being tied to the D-mark; now known as the Euro. Germany in turn has decided enough is enough and there are noises about not bailing out Periphery Countries without them ceding political and economic policy to Germany.

The Euro was a political project in 2000 and has sailed serenely on the back of a nice boom that lasted for 8 years nearly. Now in the first crisis it is in big danger of collapse. The Politicians of Europe are not ready for true economic unity and this is what a single currency area demands. German taxpayers are not ready to subsidise Irish and Spanish ones despite them having the interest rates and overall fiscal policy set to suit the Germans themselves. In short, the politics is too selfish.

Due to my study of the the ERM I have always been very sceptical of the potential for the Euro to succeed and perhaps now it is coming to pass; the choice is economic union with political union or not. I very much doubt we can have true economic Union when the EU institutions are so unpopular.

What is the great shame is that is the EU had not become a bureaucratic leviathan and instead had followed a US model of democracy we might be ready for closer Political integration.

There will be a fudge today to smooth the markets, but the real crisis in Greece and Ireland won't go away, just as it did not after May and the last bout of crisis. Something really has to give eventually, I am interested to see just how many time the can will be kicked down the road before the revolution (this may be one way or the other in terms of greater or lesser EUnity).


Old BE said...

Putting ideologies aside for a minute, what is frustrating is that left to its own devices a European Single Market would probably have eventually integrated and the through specialisation and efficiencies countries would have come into line with each other economically.

Voters and businesses might have been crying out for a single currency in the future.

What has happened is that the politicians were too keen to push things ahead of themselves, too keen to have their names stamped into the history books. None of the Euro countries were really ready for a currency union. The EU was not ready politically. There are not yet enough ties that bind the different electorates together - unlike say in the US where Alaskans and Californians still regard themselves as American first and foremost.

The pro-integration lobby would have done well to chillax and let things take their course. Instead they have foisted a badly-constructed system on everyone which now looks like it will blow up hurting everyone.

Anonymous said...

Anonymous said...

In the early days of the Fed, the regional Feds were free to set interest rates for their own regions, as required locally.

Such advice was given to EUro politicians founders, but ignored.

Anonymous said...

I am no economist but just a sound money man. Some twenty years ago even i could see that one interest rate fits all was not going to work.

Different countries and different stages in the economic cycle.

How very sad. We are about to witness a very messy end game.

Bill Quango MP said...

It all takes time.
The 1776 founding fathers didn't resolve the question of federal vs state. It took the 1860 civil war to show that federal was boss.
Agree CU. It was rush,rush rush and get fully integrated before anyone really notices.

I expect the Euro to survive somehow.

Demetrius said...

Interesting, a decade or so ago when asked I used to argue that the Euro was like a car without a reverse gear or a hand brake.

Anonymous said...

It seems only a relatively few years ago California wanted to leave the United States because they had the highest GDP in the US, the greatest population, there was a strong voice for leaving, but Californy has had a few very embarassing financial colapses, maybe starting with Orange County, it is still in the US and still a state.

Anonymous said...

Anger at Germany boils over.

Anonymous said...

lilith said...

The revolution won't be the unemployed, it will be people like me, sick of handing over the fruits of my labour to prop up the EU when I can't afford a pension.

Nick Drew said...

anon @ 11:01 - thanks indeed for the link (which leads to a daisy-chain of other good sources)


Electro-Kevin said...

Couldn't have put it better, Lilith.

Wrinkled Weasel said...

I remember black Wednesday too.

A friend who was a partner at Cazenove at the time told me that it was like being offered free money. Which he took.

I simply do not accept that anything, including the Eurozone, is "too big to fail".

Command economies are inherently unstable and prone to long term failure, like pyramid selling; you can push a bit of money around and at first, the pioneers look good, but sooner or later, the pot runs dry.

Perhaps someone can tell me, what exactly is the difference between the EU economy and a Ponzi Scheme?

Anonymous said...



It is issued/updated every month (except during the summer hols months) on the 16/17th

I view the previous months bookmark around that time, and in the right hand column is the updated section.

Click on that and the new month is delivered.

I've got them all bookmarked since gawd knows when, and the accuracy is very good.

Given your field of ability, any chance of a comprehensive picture of UK energy future, and the reality behind oil - abiotic, or...? Peak oil, or....?

Budgie said...

It appears to be the nature of (some) human beings to imagine that all problems can be solved provided we go in for some grand scheme.

It is a sort of substitute religion: 'heaven' on earth instead of heaven in heaven. So we have had: Marxism, Socialism, Fascism - all encompassing ideologies that seem to suck out people's sense and humanity.

Then we have the lesser schemes - and the EU is one of them. The problems with the Euro were plain to see 10 years ago, and many of us pointed them out. But, oh no, the europhiles were sold on their cure-all and would listen to neither logic or pragmatism.

I do not know whether the Euro will (partly) fail in the near future or whether it will live on for a few more years, but it would be better all round to put it out of our (ie Europeans') misery.

Timbo614 said...

You seem a sensible (if humorously so) lot here. I read so many blogs and news articles that are forecasting doom and gloom all round :( Couple of questions if you don't mind...

Where would you look for or can I find upbeat forecasts excepting of course government output / propaganda)?

What would you consider to be "THE SIGNAL" that would give a few days or weeks notice that it all was, in fact, about to go bad all round? What will be the trigger?

I know that's a big ask, but I'm confused and or overwhelmed by too many signals! There is at moment in no particular order.


Energy Prices, 7% might just the start?

Oil, Ditto altho' steady at the moment.

Food prices, linked of course to the above.

Ireland: if they get the bailout (whether pushed or willing is irrelevant) what happens when the rest of the PIIGS come along with their begging bowls?? There cannot possible be enough Euro-cash.
US Foreclosure-Gate, is this bubbling and waiting to explode in the face of banks and pension funds? (The graph in Anon 11.01 Linked article for US debt make up is rather scary in relation to MBS!)

US- China/world reaction to QE2

US/European bank insolvency - this seems a real possibility and is my current favourite...

And that's just a few :(

Add in Environmental pressures such as water shortages, pesticide over use, dead zones, adverse weather events etc. etc.

I don't know WHAT to watch for "THE SIGNAL" or are they all there already? An extreme-complex-system that is out of balance and wobbling badly :(

Thanks for reading (if you got this far!)

Anonymous said...


Is the game plan with Ireland to get the European periphery fully on the hook to the ECB and the IMF, the way the IMF has repeatedly done in Africa? Is the idea to make sure no one ever entertains the thought of leaving the Euro or the EU, and that the paths to exit are blocked via indenture?


Contrary to the general thinking, Yes. Ireland will become a debt slave, with sinking GDP (austerity induced), and monstrous debt, denominated in Euros.

If she leaves when in a weakend state, reverting to her original currency, the Punt, the Punt devalues and the debt payable in Euros inflates to the extent of the Punt devaluation.


Can Ireland become strong again?


That is not the intention of the ECB/IMF.
The intention is to secure the indenture of all the periphery nations around a wealthy centre.


How far can the can be kicked down the road?


Until it can't. ie, the sheep wake up.

Gerry Adams is leaving Westminster to secure a seat in the Irish Parliament.

The IRA could well revive links with the Basques, and others.

There is a large meeting in Kilkenny,(the original capital of Ireland in the middle ages) with international speakers, that may well generate fireworks, or at least constitute a wake-up call for the population.


Is it strange that the EU, that has failed for many, many years to persuade, or bribe, auditors to sign off on its accounts, should now be demanding budgetary control of financially distressed nations in the EU. And do they have the legal authority to create debt bondage on the citizens IN ADVANCE of the completion of ongoing fraud investigations concerning individuals holding sums acquired, via fraudulent loans, offshore to the Irish Republic?


Yes! It shows the depths of corruption withing the EU political/banking elite!


Given that Peter Sutherland, director of GS, and ex attorney general of Ireland has spent time with senior Irish politicians recently, and that GS is a direct beneficiary should bond holders not face a haircut, and that the banks are bailed out onto taxpayers, do you consider that something smells like a fish market lacking refrigeration on an extremely hot day?


Nick Drew said...

Timbo - doubt if there is any one trigger: my experience is that dominos fall slowly (see this old post from 2008)

as regards energy specifically, watch for a sustained rise in oil price as denominated in Aussie $ (i.e. a commodity- based currency)

also, when food prices really take off again ... there will be more trouble next time around

(can't really help with an upbeat forecast - I'm the fighting-in-the-streets man ...) - but glad you like the humour anyway

Anon @ 8:20 - I may be moved to do an energy round-up shortly (a) when Huhne delivers himself of his ridiculous upcoming subsidy-fest (sorry - 'reforms')

and/or (b) when I get back from Germany & have a bit more time, watch this space but don't hold breath

Timbo614 said...

ND. Thanks for the reply. I will add Aussie priced oil to the list :(

Humour - Very important it keeps you sane. Gambling keeps you aware Drinking enhances one but ruins the other :)