Here is Willem Buiter, trying to make a case that the euro will survive. It’s an interesting piece, but in contrast I have focused my attention on two issues:
1. In my view, the survival of the eurozone is not simply a matter of adding up the current solvency deficits and comparing them to the available quantity of aid. Rather I see the aid recipients as leaky vessels. Pumping more money into those countries won’t recapitalize their banking systems. In fact, once leaving the euro is seen as an option, those banking systems will systematically lose both deposits and capital. Depositors are afraid to wake up one morning and have lost their euros. The banks in those countries can’t ever be sound, at least not until something gives.
Imagine if the FDIC weakened or eliminated its deposit guarantees to regional banks, once those regions started experiencing some economic troubles. That’s the parallel situation in Europe. If sovereign debt isn’t secure, how can the guarantees of those sovereign states to their banking systems be secure? And then why should non-guaranteed banking systems recover?
2. The best shot at patchwork regulation is to introduce a common resolution authority and a common bank deposit guarantee mechanism for the eurozone; Buiter discusses a related option. But ultimately that leads to full fiscal union or at least a eurobond. If you guarantee all of a country’s banking deposits, you are creating/guaranteeing a riskless security for that country. In the limiting case, imagine the government itself opening a bank and suddenly having guaranteed liabilities. You may or may not favor eurobonds and fiscal union, but I feel on safe ground predicting that they won’t happen. Nothing in the partial bailouts up until now has led me to change or weaken that opinion.
I do not so much see people denying #1 or #2, but I also do not see them starting with these as the main problems to solve. And thus I am more pessimistic than they are. But I am pessimistic about the survival of the full eurozone, which is not the same as being pessimistic about Europe. By the way, the latest news update is here and it isn’t good.
Many decisions are tricky – they call for expertise or knowledge that you don’t have, for unavailable hindsight, for luck. But forming a view of the Euro was, from the beginning, dead easy – anyone who supported it was manifestly stupid, reckless, malevolent or woefully ignorant. (These categories are not mutually exclusive.)
‘But forming a view of the Euro was, from the beginning, dead easy – anyone who supported it was manifestly stupid, reckless, malevolent or woefully ignorant’
Or someone interested in intra-European trade – never forget about them. For example, VW, Renault, and Fiat. Or tourists, and not just those living within the eurozone. Or people who live in one euro country, and work in another.
Or someone interested in actual European integration – as a way to prevent war, for example. Sometimes, people forget why the EU actually exists when criticizing it, though if there is any safe prediction to make in regards to European history, it is that any interlude in murderous warfare is just an interlude. The EU will certainly end – and the wars will equally certain resume afterwards.
Anyone who thinks otherwise is manifestly stupid, reckless, idealisitic or woefully ignorant.
Taking this line of thought to the extreme, the whole banking system will be seen by a growing proportion as in some way infected leading to the remonetisation in all but name of gold.
Does this mean you might change your mind on gold or are you still bearish?
You’d have to be clueless insane to save money in dollars or euros right now with all the money printing going on. . .
Neither Buiter nor you provides an assessment of the political context EU’s economic policies. Both prefer to discuss the euro policy options in economic terms (btw, hope you agree with me that Buiter knows much better than you what is going on in Europe and in particular in the Eurozone) without any reference to the political objectives of EU’s fraudulent clowns with respect to the Union’s constitutional powers. I still believe that the clowns are fully committed to a strong union, although well before the crisis, they had to accept that member countries were not willing to delegate more power to the EU’s system of government. They are willing to pay a huge price for consolidating the gains of the past 20 years, although for the time being they have abandoned any idea of expanding their gains. In this context, Buiter’s ideas make sense.
I go with social mood. The eurozone was launched right at the peak in 2000 and tension has been building ever since as the mood turns more negative. The diehards in Brussels will try to keep the euro alive and maybe a core group of Germanic (+France?) economies can keep it alive, but the peripheral nations will get out. If they try to push harder on a grand political union, they will collapse the entire project as nationalism rises up. Recall that the foremost immigration critic in Germany is a socialist…True Finns won in Finland, a socialist/culturally conservative party. Politically the euro is dead because Europeans are in the mood to be Germans, French and Greeks, the economics flows from this…
‘Recall that the foremost immigration critic in Germany is a socialist’
Of a certain variety, that is. He is also a fairly straight out racist, exactly in the style of that same certain variety of socialist.
Godwin’s law.
Let’s assume greece and/or ireland leaves the euro.
New currencies are issued. But aren’t most of the economies euroized by stealth? Would a new currency really work? Yes, for paying taxes and for government workers. But everybody else?
Rather like Argentina, where most middle class families had 50K in dollars sitting in a bank overseas, trying to decide when to bring it back.
The question is how Goldman Sacks bankers can convince German banks that lending to the Greek government to be repaid in drachma is as safe as German banks lending to Greece to be repaid in Euros, which was sold as AAA.
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I’m wondering if the post could instead be re-titled
“Why I am more pessimistic
about the eurothan are most people”Regular MR reading hints that Tyler’s pessimism is not just euro specific.
If Tyler were truly pessimistic about the money and financial system, he would understand why he needs to own gold. A few more days like today and everyone will. . .
Hey, there’s a similar ‘leaky aid’ mechanism going on here in the US!
I’m talking about aid to states; federal transfers to states and local governments have been declining, especially with the withdrawal of stimulus. A couple of states are still struggling with high unemployment, and the Fed’s policy thus far has only really been ideal for the median state, not so much the ones whose economies tanked over the last few years. I think it’s a common accord that one of the necessities for a functioning monetary union is to establish fiscal union as well (or fiscal federalism, call it what you will). That facility has been weakened in the US over the past few years though.
Clearly, there’s huge differences between the United States and the European Monetary Union. How long though before states in big trouble (Nevada, Florida) find bypassing the Fed and establishing their own monetary facilities appealing?
You may or may not favor eurobonds and fiscal union, but I feel on safe ground predicting that they won’t happen.
I don’t feel so safe. Eurobonds seem impossible because if they were to be used, creditor polities will insist that those rescued give up much of their budgetary independence, whereas debtor polities will balk at this quid pro quo.
The trouble is timing, Eurobonds will be used before the quid pro quo is fully consummated and debtors will be able to wriggle out of it. In this way Euro-federalists will achieve an American style transfer union, and only half by accident.
Commitment to a currency cannot be measure by the standards of oversimplified economic models. Brazil experienced very high inflation and fragile banking for decades, and yet its own currency was never abandoned. China enjoys less capital and labor mobility than Europe and is a dysfunctional fiscal union, and yet only a fool would argue that the yuan will collapse anytime soon.
I took my money out of an American bank account that was clearly in trouble (and I was right: it was later bought by a Canadian bank), but can only chuckle at the suggestion that I should take my money out of an European bank account, To start with, saving accounts in Euro are among the few ones in the developed world that yet pay decent interest rates, so the incentive to hold to your account (instead of cash) is not negligible. Besides, opening foreign accounts has tax implications, can be very costly, and moving money to accounts in other countries is mildly costly per transaction, even in financially integrated Europe.
Barandiaran is right–the question is whether the elites of Europe are willing to have the masses of Europe pay the price for the dream of European unity. I see no evidence that they are not.
To borrow a phrase from the ’60s, they will destroy the village to save it. If they can.
At some point, the fear of the unknown, of leaving the Euro is going to be outweighed by the absolute pain of the voters. Until then, we will witness the most creative financial shenanigans in history.
What I have yet to see explained is how Greece or Germany not being on the Euro over the past decade would have helped the German and French banks one damn bit in getting their loans to Greece repaid. Add in Spain, Italy, Iceland in the above and what do you have?
Oh, wait, Iceland wasn’t on the Euro!
Obvious the German government and other Euro zone government had zero problems dealing with the Icelandic bank failures, and Iceland has quickly recovered after a minor revaluation of its currency.
Clearly Iceland proves not being in the Euro zone eliminates all risk for German banks and the German taxpayers….
Right???
Why is Iceland’s economy in the tank? Why did the German taxpayers take a hit?
Didn’t anyone pay attention to Tyler who correctly predicts having independent floating currencies eliminates the problems of default in a single currency union for both borrower and lender alike??
Tyler’s homegrown prejudices are showing again, as they so often do when he writes about Europe. The American belief in a new Manifest Destiny, the ever-after superpower, is so ingrained in his writing I’m sure he doesn’t even recognise it. It is likely reinforced by his admiration for his Russian wife, as the Russians see themselves as infinitely superior to Europe (despite being part of Europe).
A handful of US states, and the US federal government, are or just were as close to default as any member of PIIGS. The top 10 countries for quality of life are all in Europe. The US sets the global standard for ridiculously high deficit spending with no end in sight. When will Tyler begin predicting the collapse of the US empire? Oh, that’s right – America is exceptional in all things.
The stubborn belief that all that is good and noble is based in the New World infects nearly all Tyler’s postings and is really tiresome. Try escaping the thought bubble sometime.
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