Friday, 11 November 2011

Euro-Meltdown: Hands on the Levers of Power

We've suggested that only the grown-ups get to play when the chips are down: and also that the big players have big levers to hand - Which They Will Use. Careful if you're in the way when it happens.

Well, the euro-chips are down all right. Who are the grown-ups now? The Germans are in no doubt: its themselves, them and a few of their trusties. That was the thrust of the Bagehot piece last week, and here's an interesting article from the Speccy consistent with that view. Many of us will doubtless have had lectures over the years from German acquaintances along the same lines: you Anglo-Saxons (oh the irony) and your irresponsible, short-termist market games - someone needs to be planning for the future !

Then again, perhaps they are kidding themselves. Is it inevitably to be the real Big Boys to sort out the mess ? Evans-Pritchard thinks it is.

And does Britain get heard in all this ? I'm afraid that to my ear the noises from the Westminster play-pen sound just a bit plaintive.

ND

22 comments:

CityUnslicker said...

Agree re the UK - we cahsed our chips in in 1945. but to some extent we have never lookeed back. This global player thing is ratehr expensive after all.

Actually, the whole world is in the hole now - big players or not.

China has 200% credit to GDP that is going to have a nasty work out. The US has zombie banks just like us. The only thing making the Europeans look worse is the euro currency crisis.

Its a tough choice this picking winners bit. Oddly, probably the arabs right now as producing cash out of the ground is a surefire winner.

Britian may well get her referendum though - not on the terms the Euroscpetics thought though!

dearieme said...

Get the troops home now. They are just potential targets scattered around in a vulnerable way. If the Yanks get into really serious financial trouble, they are hardly going to make any effort to help get our troops safely out of Afghanistan. Get 'em home now.

Ditto the boys in Germany: hostages to fortune. Get them the hell out of the way. Home now.

This policy would have the added advantage of reducing the chances of the gung-ho, all-too-Blair-like Cameron using them easily to launch new, aggressive wars like that on Libya. Cut the temptation: get 'em home now.

Anyway, if things get bad enough, we may need them at home.

Anonymous said...

Actually, its beginning to look like Keynsian Britain will be sitting pretty "relatively", free to monetise its debts. Lets take a look at the details:-

PIIGS: All screwed as predicted. Only way out short term is to print money. Longer term, exit from the Euro is the only way to regain competitiveness. What nobody in the financial world wants to admit is that these countries lost competitiveness being in a hard currency, but used the Eurozone low interest rates to continually paper over the cracks until the market itself ran out of cash. Fraser Nelson doesn't understand that 7% yield on a 10yr bond means Italy is saying it will roll-over its 2trillion Euro-debt and pay back with 4trillion credit in ten years time - that was a long, long way from being credible, and no Fraser you can't just dump it on prudent Italian savers overnight and expect to get away with it. Greece et al. doesn't seem to have realised that they haven't actually had a bail-out - just more loans at ever higher interest rates to roll-over the debt they already have. And how long can that go on if Italy makes a grab for the finite source of funding?

France and Belgium: Collateral damage from the Latin countries. Yields spiking as we speak. Probably won't suffer the real pain until Q1 2012 when Europe officially announces it is in recession and they can't raise cash to paper over budget shortfalls. Sarkozy everywhere during Greek crisis, but has vanished now that Italy has sunk. Presumably has given up in despair.

Eastern European countries: Using Eurosubsidies to build up their industry to take jobs from other EU nations. How long do you think that can go on during an EU recession?

Germany: mercantilist economic policy that always gets hit hard during a recession. It is more or less the only large nation in the EU that wants Austrian school hard-currency EU - everyone else needs QE. Still a long slump could change that as the markets are currently ignoring German corporate debt which is in fact massive. All those great German companies are actually owned by the banks. At some point the Germans will be forced to let the ECB print its way out of the crisis. How will they feel about the EU then?

ECB/EFSF/EU: Barosso has dissappeared from the stage after "doing a Prescott" in the early days. Incapable of real leadership - should tell the Germans to go to hell and fire up the printing presses at the ECB. He's just sitting on the sidelines while Merkozy makes all the decisions. EFSF is laughable - 20% cash (some promised by EU nations that don't have any money) and 80% Europe's worst toxic debt. No wonder the only banks buying EFSF bonds are the ones that stand to benefit from any bail-out! ECB not free to print money so needs to use cash parked with it by other banks (wonder how long they will be able to do that?) consequently ECB market intervention is weak. Italian 5bn Euro debt roll-over this week was actually bought by Italian banks (in for a penny, in for a pound - got a bit of a gun to their heads haven't they?). Italy needs 6billion Euros of debt roll-over EVERY WEEK from now (until the higher yields kick in then it will start to rise towards 12billion a week).


What somebody needs to say is "fire up the ECB printing presses NOW". The fact that nobody in the EU has the balls to speak truth unto Germany speaks volumes. If we go on like this, rudderless, then what will happen is sometime in early 2012 the EU will go into recession, there will be a market failure for EU sovereign bonds from France, Belgium, Italy and Spain. This will lead to a disorderly default and forced government budget cuts which in turn will lead to the soup kitchen. Print money and the real economy will emerge relatively unscathed.

Blue Eyes said...

Anon - yup.

Sebastian Weetabix said...

Once upon a time I worked for a German company. It soon became clear to me that they really didn't like markets... too many irrational outcomes, and it was just too.... uncontrolled. Yes, uncontrolled with unacceptable, unforseen outcomes. Two things stick in my mind:

1. Having to provide a detailed explanation to the operations director as to why we had sold 342 machines that year instead of the planned amount of 330. This was a catastrophe and indicated poor planning and forecasting.

2. HR held an anonymous feedback exercise across the entire global company, encouraging open & full responses to the recently published strategic plan. The boss was very perturbed: "some of this feedback is outside acceptable limits!"

The Germans, along with everyone else, have simply forgotten that debts that cannot be paid will not be paid. So they'd better start monetising it p.d.q.

Mr Ecks said...

Fire up the printing press?
Crap
Deflation is not good but hyperinflation is worse. Remember the little nazi twat with the bad moustache?.

No way out lads. The state's nose must be smashed out of the market place and out of ordinary peoples business. Only then can forward progress be resumed.Big Daddy is broke and it is his own doing.

Sebastian Weetabix said...

Mild inflation combined with retrenchment of government spending, exit from the Euro, and economic growth is the only way out. Right now the money supply is collapsing across Europe. They need to fire up the presses.

The Austrian hard money school will doom us all.

Sean said...

I think the euro crisis as once again shown public debt to be far more toxic than private debt can be.

At the end of the day private debts are much easier to resolve, either through bankruptcy or restructuring. Wisdom of crowds, lots of lenders and lots of borrowers, more individual workouts to balance the picture out.

The German attitude to the tobin tax is illuminating, they to a man cannot grasp that the more trades made produces a more solid truthful price, and thus more stability. so too with short selling)

As the old saying goes, at your feet or at your throat. And they regard us as the monkeys on the island.

Anonymous said...

@Mr Ecks:

"Deflation is not good but hyperinflation is worse. Remember the little nazi twat with the bad moustache?. "

A common misconception. Hyperinflation in Germany was not caused by printing money per se. It was caused by printing about a millions times too much money.

I would say 50% of GDP over a 10 year period should do the trick.

Anonymous said...

I expect productive asset owners (i.e. BTL landlords ) will get a 'one off' 5% tax in 2012 based on the market value of the assets. All to be frittered away on the PIIGS, of course.

2013, all home owners will get a 5% tax on the asset value.

Anonymous said...

Or anyone with savings over £18,000 will be 'invited' to convert them to Perpetuals paying 0.25%

Anonymous said...

China can't easily bail out the EU. It has $3trillion but in bonds. It would need to liquidate these before bailing out the EU and this would cause problems of its own. Why would it bail the EU out anyway? Better to wait for it all to go tits up and then come along and buy all the land at fire-sale prices.

Easy-money ECB would bring an end to the Eurozone in time. Imagine the ECB printed the cash and gave it to Greece. This would solve Greek debt problems, but because Greece is so small it won't cause inflation as the extra Euros would be limited. Its a get out of gaol free card and thus chock full of moral hazard where those flaky Latin countries are concerned. Then its obviously unfair to just hand the Greeks printed cash - you would need to print the same amount of cash per capita so everyone had the same bite of the cherry. That would be a lot of fresh cash.

Seems like break up of the Euro then printing money in local currency is the only real way forward.

Germans don't want to print money anyway - they're using the crisis as a power-grab in Europe, telling everyone that there will be more EU control not less. Crunch time for those against a USofEurope. Can't see many going along with it, especially as the Germans aren't ponying up the dosh.

Looks like the EU itself is in the end-game, not just the Euro.

Nick Drew said...

Anon @ 11:15 - another great contribution, you can come again

SW - yes, the one I endlessly tell about German & failure to grasp markets is their complete incomprehension that under the EU emissions trading scheme the price of a CO2 allowance (as we told them beforehand) would go straight onto the price of electricity even though the power generators were given their allowances for free: when it duly happened, they were so astounded that they held a parliamentary commission to find out why

as to "feedback is outside acceptable limits": you'd get the same in many a US company. Someone suggested to me recently that the way to understand America is to realise it has been run by Germans for a very long time

Nick Drew said...

Sean - yes, German attitude to the tobin tax is another great example of the above

Anonymous said...

I wonder if the Germans will tell the rest of the EU "Here's the deal: We'll let you print your way out of the mess you're in, but when you are done WE will be running Europe, our way!"

James Higham said...

We could all save ourselves a job and ask the guys at 5, rue de Téhéran, 75008 Paris, telephone: 33-1: 45 61 42 80, telefax: 33-1/ 45 61 42 87

... how it's all going to turn out in Europe. They know.

Jim said...

Why can't the Germans just leave the euro, and re-introduce the DM?

Its a win-win all round as far as I can see. Germany gets to issue loads of new DM debt (which everybody wants), pays off lots of euro denominated debt, and as the euro will fall a lot with no Germany in it, they'll save a lot of money right there. They'll also be able to fund the recapitalisation of their banks with newly issued debt, which will be necessary due the fall in the value of euro denominated debt.

Meanwhile France and the rest of the euro can take over the ECB and start serious printing to try and get out of their hole too. No defaults necessary, the good old printing press solves that problem. And as the euro will have fallen substantially, they will be more economically competitive vs Germany.

Other than damage to pro European integration political pride, what is wrong with this scenario?

James Higham said...

Jim:

http://www.moneynews.com/StreetTalk/Ex-BushAdviserGermanyPrintsOldCurrencyinCaseEuroDitched/2011/10/04/id/413225

Anonymous said...

"Other than damage to pro European integration political pride, what is wrong with this scenario?"

Nothing. But there are an awful lot of politicos and Eurocrats for whom the Project is everything. I think when push comes to shove Merkel will agree to printing - which is exactly what the German people were told would never, ever happen if they joined the euro.

But the British were told when the 1967 Abortion Act was signed that it would be really rare, and only ever be used in exceptional circumstances - and now we have 200,000 a year with nary a murmur ...



Laban

Anonymous said...

And Britain's were told that abolishing the rope was OK as life sentences would be draconian. Now 'life' is 10 years in a holiday camp.

Anonymous said...

Merkel won't give money printing the go ahead until after the next election which is end of 2013. So, we'll have several years of severe trauma to go through.

Anonymous said...

"the 1967 Abortion Act was signed that it would be really rare, and only ever be used in exceptional circumstances - and now we have 200,000 a year"

And curiously we still have 100,000 children in care, just as we did in 1901.