Simple thoughts on Europe

by on May 10, 2010 at 7:30 am in Current Affairs, Economics | Permalink

1. The fundamental cause of the financial crisis has been people and institutions thinking they are more wealthy than they are; this spread to Europe as well and now we are seeing the comeuppance.

2. Although accounting conventions differ, and numbers should not be shifted out of context, many major European banks are highly leveraged.  The mechanics of the so-called "shadow banking system" — namely the ability of short-term creditors to flee on a moment's notice – remain in place.

3. The major European powers would not have come up with a nearly $1 trillion bailout, also involving de facto loss of ECB independence, unless they were scared ****less.

4. They are trying to do a version of TARP-in-advance-of-the-panic and in my view that panic would have come today.

5. Here is one view, consistent with my own: "My quick thoughts on markets are as follows: great for risk assets, terrible news for bonds, great news for southern European bonds, bad news for the flight to quality UST trade, and ultimately terrible news for the EUR. Maybe the EUR tries to rally on this, but it the end this bailout has done nothing positive for the EUR. The market will inevitably look at the ECB as being forced by the EU to monetize the debts of EU rogue nations…"

6. Basically the ECB is monetizing bad government debt claims.

7. The Fed has reactivated its dollar swap lines to Europe.

8. "Greece’s 10-year borrowing costs plunged by almost half – an astonishing 5.9 percentage points – to 6.5 percent."  And Deutsche Bank is up ten percent

9. This doesn't solve any of the basic fiscal problems, so ultimately it raises the stakes and creates a chance of even greater financial failure.  Simon Johnson comments.

10. Question: does this sentence sounds scary or non-scary?: "”We shall defend the euro whatever it takes,” Mr. Rehn said."

11. Felix Salmon writes: "They’re not all partners together anymore: now they’re bifurcating into the rich lenders, on the one hand, and the formerly-profligate debtors, on the other. The mind-boggling sums involved are only going to increase resentments both of the south in the north and of the north in the south."

12. How much time has the EU bought itself?

Addendum: Paul Krugman comments.  And Arnold Kling comments.  Ezra Klein comments.  Matt Yglesias comments.

Oriol Andres May 10, 2010 at 7:58 am

great analysis. Has the amount of public debt gone down? No. Is there an improvement in gdp growth prospectives? No. Are the french and germans bailing Greece out? Yes. Do they want to do that? No.

step21 May 10, 2010 at 8:11 am

the only logical next step if they want this to succeed lin the long run is more political integration and fiscal union.

T. Shaw May 10, 2010 at 8:48 am

Anybody out there know how many Monolopy games ECB will need to buy to “come up with” nearly $750 billion euros?

Bob Knaus May 10, 2010 at 9:01 am

13. Monetary union is impossible without fiscal union.

Bernard Yomtov May 10, 2010 at 9:44 am

Interesting comments, thanks.

Tomasz Wegrzanowski May 10, 2010 at 9:57 am

EU always had richer and poorer parts, and it has been remarkably successful at facilitating economic convergence. Some of the poor areas like South Italy and East Germany were in monetary union with richer areas, others like Ireland, Spain, and Poland were not. It worked either way, for surprisingly little money. (if someone ran the numbers I’d guess it went better without monetary union before convergence, but I won’t bet on this)

farmer May 10, 2010 at 10:18 am

“Germany” is described as a monolith in these discussions, but i wonder if Osties have a different view re: bailing out failed, 2nd world economies.

NC May 10, 2010 at 10:43 am

Dear me, the fear-mongers from across the pond are out in force. Reminds me when the Euro was first introduced.

charlie May 10, 2010 at 11:08 am

What I don’t understand is the Chinese car market. The same car costs far more in China than it does here. Look at a Honda CRV. Close to 40K USD in China. We know they are being pain in cash. They are selling like hotcakes. Yet the average income in Beijing is still only 1/4 of the US. For PPP purposes it may be higher, but not for cars. How do people afford them?

jorod May 10, 2010 at 2:36 pm

The ECU could buy PIIGS and sell good Bonds to offset the monetary effects. But basic cause is spending above revenues.

step21 May 10, 2010 at 3:28 pm

But bretton woods failed. And some developing country (or which countries are you refering to?) switching to the dollar because their own currency failed or because its easier is not currency union at all.
Also, it is possible without if the members are very much alike in the structure of their economy, labour markets etc. but this is not the case.

Mark May 10, 2010 at 4:42 pm

Great points – thanks for this.

One thought: Which scares you more: Al-Qaida or “the Greece/Eurozone situation”?

I personally am far, far more worried about Greece and this whole situation than about terrorism…

DanC May 10, 2010 at 10:22 pm

Previous comments from Krugman.

“Even calmer conservatives have been issuing dire warnings that Obamacare will turn America into a European-style social democracy. And everyone knows that Europe has lost all its economic dynamism.

Strange to say, however, what everyone knows isn’t true. Europe has its economic troubles; who doesn’t? But the story you hear all the time — of a stagnant economy in which high taxes and generous social benefits have undermined incentives, stalling growth and innovation — bears little resemblance to the surprisingly positive facts. “

The Hedonist May 11, 2010 at 4:41 am

Good God! How many US-centric posts do I have to read before I find one that admits us being all in this puddle of mud? The errors that started this crisis originated not in the United States of Europe. :)

I’ve read a comment that says “industrialization was a modernizing project led by the state that did not spring up spontaneously as it did in the United States”. This is such a gross nonsense that I won’t even bother insulting its initiator.

Anyways, you seem to be forgetting that the same financial and social pressures that seem to disrupt the EU integrity are in action in the US too. The question is not how much time does the EU have, but how much time does the federative system have?

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