Friday 18 November 2011

Can the Euro make Christmas?

I had written that headline a few weeks ago, I am pretty sure I would have ended up with no readers in short order. Today though, there is some (not much) plausibility to it.

As always lets review the day's news:

1. Spain and Italy bonds under 7% only due to ECB bond buying
2. ECB Finance chief points out that Germany has 82% Debt to GDP ration and is not safe
3. Reports that Japanese investors are liquidating Euro assets
4. Rumours in the City that Germany is preparing to exit the Euro
5. Realisation that Germany's funding commitments total nearly e500 billion and could sink the Country.
6. Cameron and Merkel meeting so that he can tell her the Financial Tobin tax is off.

So, another typical day in the Eurozone with each point being worthy of a crisis and yet this is just today's news. With no real plan the EFSF forgotten about already and continuing riots in the the new Authoritarian states of Italy and Spain, the clock ticks closer to midnight.

The worst issue is that the failure to grasp the nettle and move to a two speed euro or a managed set of defaults is going to make the end of the crisis even worse. Yesterday a senior Fund Manager at a major US institution remarked to me: 'It's all over and this is going to make 2008 look like a picnic.'

Oddly, the more people tell me that the more I think something will turn up - the general view is often wrong - but what that might be I can't see.


Nick Drew said...

the more I think something will turn up

an armoured Chinese truck to take delivery of Italy's gold reserves? (probably on the ferry as we speak)

dearieme said...

Italy should sell South Tyrol to Greater Krautia, sell de jure control of Sicily and the south to the gangsters who already have de facto control, sell the old Papal States to the Vatican, and declare independence for the former Cisalpine Gaul. That would leave Tuscany as the successor state, which could then default on its debts and sell itself to the English middle classes as the Republic of Chiantishire.

But I hesitate to tell you my plans for the rest of the PIIGS because they are rather radical.

Mark Wadsworth said...

It is very interesting to watch history being written like this. All the evidence suggests that Something Dramatic Will Happen*, but we know not what.

* Logic says that if there were a marginal advantage when two or more countries share a currency (and there are clearly advantages and disadvantages, the question is whether the former outweigh the latter), then buy now there would be a handful of currencies; USD/CAD would have merged, ASEAN would have theirs, the whole of Europe would use EUR and so on.

This has not happened to any great extent and/or currency zones have reached their optimal size (i.e. the UK is sort of four different countries with a single currency), and most currency unions have fallen apart again, so I'd expect to see history repeat itself.

Mark Wadsworth said...

Should read: "then by now there would only be a handful of currencies..."

Old BE said...

€500bn over what period? 2012? If so, how will leaving the Euro help Germany if the Bundesbank won't print money either?

andrew said...

As pointed out on R4 by a Eurocrat, you don't have free movement of Goods, Services, Labor if you don't have free movement of capital and that means the Euro. This seems to be a core belief.

I see two outcomes that are more likely than the Euro's demise

(a) Demise of national democracy (as we know it - govts of national unity - both right and left essentially enacting the same unpopular policies etc) whilst countries go through some years of austerity measures.

(b) Germany/France will not leave the Euro - but the Euro area may get rather smaller

If you were a v. large bond fund manager and 2 years ago you were getting 2.5% on an asset and now you could see a way of getting 6% wouldn't you work on doing just that - pushing up yields one country at a time at the first sign of weakness?

On this view, France is next.

Sean said...

the plan is sort off,

Ecb buys up bonds on the secondary market on a temp basis to hand over to the Ponzi efsf magic money pot.

Merkozy need the tobin tax desperately to leverage the pot, they also need no referendums to scupper the plan to create a single treasury, thus the Danes, Irish and Dave all called to Berlin to be read the riot act.

The problem with all this is not the markets, its public opinion so no more cuts in France till after the election. Spain as with Italy and Greece will be absolutely dumped on to go big on cuts.

Greece got big when the rioting started and we are beginning to see that in Italy. If the Italian street blows up then the Italian politicos will throw in the towel, Greece, Spain and Italy will give an ultimatum to the Germans and the ECB and it will all be over for next Christmas, maybe this.

Scan said...

"Rumours in the City that Germany is preparing to exit the Euro."

Not good news with the bovinous Cameron in Germany. Instead of telling them we're very sorry but it's nothing to do with us, he'll come back having signed us up to the new Euro with only Northern European countries in it (including the UK).

Save it for after the Olympics - it gives the police the time they need to build all the very many lovely "Tactical" training units they have in the pipeline.

Still, nothing that a good war with Iran won't put on the inside pages. :)

CityUnslicker said...

dearime - oh come on, that was rather good, do tell the rest.

ECB maybe will end up monetizing the debt. the world is crazy.

We said here months and months ago that a plan of hoping for the best was not going to be acceptable - and lo it has come to pass. Wish I had bet more on it!

Budgie said...

With Cameron in charge I think it more likely that the UK will end up in the euro, than that euro will disappear.

Electro-Kevin said...

I fear Budgie is right.

Tory back benchers should pull the rug from under Cameron if he does capitulate.

This should be put to the people.

Anonymous said...

UK joining the Euro with mother of all debts is hardly going to help is it? Osborne has already agreed that printing money is the only way out for the UK (and by extension the EU). Even Vince Cable is against the Tobin tax. We have already bailed out Ireland, so we are doing our bit.

Merkel is screwed. Is she sticks to hard-money ECB then a default will happen and we will be in Great Depression II - a sudden bursting of a huge credit bubble was what caused the depression the first time around. Germany's mercantilist economy will fall over. If she lets the ECB print money then all those fresh Euros will wash into Germany eventually causing hyperinflation. If she takes Germany out of the EZ then the DM with appreciate wildly and choke of exports leading to mass unemployment. But the ECB will print money because the national banks can just go ahead and do it if they want - in reality the EU can't really stop them. If the other choice is closing hospitals and watching pensioners starve they will definitely print the money they need to keep things moving.

Anonymous said...

State appropriation of private assets will be next. It's already been done by stealth with pension entitlements, now it'll be overt. All savings over £10K seized in return for 0.25% perpetuals. There's a war on, you know!

Mr Ecks said...

Camoron is a traitor.

There is however such a thing as a bridge too far and trying to put us in any kind of Euro now is that bridge.

Budgie said...

Anon 8:18pm: "UK joining the Euro with mother of all debts is hardly going to help is it?"

It will be a massive help to the EU.