A Power Vacuum is Killing the Eurozone

by on May 27, 2012 at 8:06 am in Economics, Political Science, Uncategorized | Permalink

That is the title of my latest column, here is one excerpt:

We thus face the danger that the euro, the world’s No. 2 reserve currency, could implode.  Such an event wouldn’t be just another depreciation or collapse of a currency peg; instead, it would mean that one of the world’s major economic units doesn’t work as currently constituted.

We are realizing just how much international economic order depends on the role of a dominant country — sometimes known as a hegemon — that sets clear rules and accepts some responsibility for the consequences.  For historical reasons, Germany isn’t up to playing the role formerly held by Britain and, to some extent, still held today by the United States.  (But when it comes to the euro zone, the United States is on the sidelines.)

THERE appears to be a power vacuum, and the implications are alarming. We may be entering a new world where international cooperative arrangements, in environmental areas as well as finance, are commonly recognized as impossible.  If the core European nations cannot coordinate effectively, what can we expect in dealings with China, Russia and other countries that have less of a common background and understanding?

I consider this a big deal, even beyond its immediate macroeconomic ramifications, which of course are a big deal too.

There is a second, more technical point too:

…some of the banking systems in the periphery nations may be too broken for monetary policy to take hold.  Imagine the European Central Bank trying to infuse new money and credit into Spain, while bank deposits move quickly to Germany, Switzerland and other safer places.  Again, why would anyone want to keep money in the bank of a fiscally troubled nation?  That loss of confidence will not be easily repaired.

At this point, probably euro-wide deposit insurance is needed before monetary policy can help in Greece or Spain (that wasn’t true two years ago).  Yet creating a eurozone-guaranteed safe asset in those economies ultimately boils down to the eurobond idea, which of course the Germans are reluctant to do.

Here is a related Op-Ed from Mark Mazower, focusing on the theme of a collapse of European and international cooperation.  Here is a good article on why plans for tighter political union in Europe will not easily work.  There is talk the UK will cut off migrants if the euro collapses.  Switzerland may introduce capital controls.  What else?  I do not see this turning out well.

1 Sam May 27, 2012 at 8:54 am

I think it’s a little much to parallel this collective action problem with the impotence of any future supranational cooperation. Fiscal sovereignty is 9/10th of what being sovereign gains you, at least perceptually. I believe most issues which demand a high level of international parallel action don’t necessitate such a take over. The eurosone crisis will either lead to partial breakup or the beginnings of fiscal union. What makes this crisis different from all thr others that confront us is that the advantages of fiscal union and common electorate aren’t immediately obvious, suspect even, when the loss of self-determination is factored in.

2 chuck martel May 27, 2012 at 9:33 am

How does the failure of Greek, and even Spanish banks, make the euro “implode”? Why would sane people want to put their own money into a failing bank? Why wouldn’t they either put their funds into a bank that appears to be solvent or hide them under the mattress? If a major Spanish bank goes belly up, will a Belgian no longer be able to buy a bottle of beer and order of frites in Antwerp with euros?

The global fixation with the health of banks and government finance, two closely related things, demonstrates a societal evolution that has taken the wrong fork in the road. Central banking, originally conceived as a method of financing European wars of dynastic succession, has metastisized, with its nation/state brother, into the supposed foundation of life on earth. This is ridiculous. Neither makes the sun shine or flowers bloom and humans will continue to make voluntary exchanges if both the EU and the euro disappear.

3 NormD May 27, 2012 at 11:03 am

Isn’t the problem that the Belgian will not be able to import the potatoes for the frites? (and cellphones and …)

4 Anne May 27, 2012 at 9:17 pm

Makes sense. Thank you for pointing out the funny money – endless war connection. Still, I don’t care to think about what a transition from the present economic system to a more decentralized one would look like. Can’t imagine it will be pretty.

5 Tom May 28, 2012 at 3:52 am

Great note–the farmers and manufacturers, those who make things (i.e. production), will still be producing, even without the oversized banks selling “products” most of which, more or less, are sold to spread risk to “somebody else”.

Power in the Eurozone means ability to spend Euros. There’s too much spending, not too little.

There’s no power vacuum — there’s a mass delusion in support of socialistic “spreading the wealth”, rather than creating new wealth.

It’s a crisis in gov’t spending, based on current and previous gov’t promises, as made by politicians to voters who, in a majority of cases, supported the politicians with the biggest spending of Other People’s Money.

The addiction to spending OPM is the moral and economic problem (to which most Christian churches, especially the dominant Catholicism in Europe, too often indirectly support).

6 msgkings May 28, 2012 at 12:24 pm

Correct, chuck. The world functioned pretty well prior to 1999…when there was no such thing as a Euro. If we get to a different eurozone or none at all, it will be chaotic for a bit, but far from the end of the world.

7 Rahul May 27, 2012 at 9:34 am

Is hegemony a pre-requisite for international co-operation? Is a single nation with enormous power a good thing? Is the problem here the fact that Germany was not dominant enough; or was one single high-performing nation shouldering too much of the burden?

I think this article draws dangerous conclusions.

8 Roping Down May 27, 2012 at 10:07 pm

Rahul: I absolutely agree. I find it beyond loose to refer to the North’s, Germany’s, unwillingness to hand its credit and wealth to the periphery as “inability to coordinate.” Coordination is not the problem. Free Riding is the problem in the EZ, in the attempted global warming treaties, and in most international cooperation attempts. Intensely familiar with life on the ground in Spain, it particular its politics, I would run the other way if I were Germany. Portugal and Greece are no better.

9 Bill May 27, 2012 at 9:36 am

No man differs more from another than he does from himself at a different time.

In comparing today’s post with previous your previous comments, I am drawn to some writings from Modeled Behaviour commenting, and quoting, your previous views:
From Modeled Behaviour last November:

“I pick on Tyler because he is probably one the sharpest voices for what I see as a deep misunderstanding of the issue. Though, I think this misunderstanding is incredibly widespread – as holiday gatherings make clear.

Tyler says

‘Maybe these markets simply will shut down soon. There is so much talk about what the Germans should do, but I don’t see the viable options. With Germany’s own credit status now in doubt, eighty percent debt to gdp ratio, massive welfare state, and unfavorable demographics, are they supposed to endorse — going to endorse — ten or fifteen percent price inflation for a few years’ time, all with no guarantee of reforms in the economically weaker countries? And is that inflation then followed by a subsequent deflation? Or does it continue forever? And would Germany have to move to a regime of wage flexibility for the professions too? How politically feasible is that? I don’t see how the Germans benefit from going down this road, even if you think, as I do, that the alternatives are quite dire.’

Germany doesn’t need to experience any of these things. Germany only needs to agree to letting the ECB stand as Lender of Last Resort.”

10 Bill May 27, 2012 at 9:38 am
11 Tyler Cowen May 27, 2012 at 9:49 am

ECB just lent over a trillion euros, doesn’t seem to have helped much…for some countries it is a solvency problem.

12 Bill May 27, 2012 at 10:24 am

I guess Germany is not going to be, or wants to be, Herr Hegemon. Other than Greece, these countries “solvency” problems have been due to their banks solvency, as the countries have had to step in and backstop their banks which lent into housing bubbles.

We’ll see whether there will be some type of EU bond mechanism for banks or countries emerges, since the solvency issue of countries has been (other than Greece) caused by the lending practices of their banks, which then have be “nationalized” to protect depositors and creditors. Since German banks have been creditors, perhaps we’ll see if Germany wants to see its banks take a greater hit than if it had worked out a long term bond program.

We’ll see.

Game of Chicken.

13 Doc Merlin May 27, 2012 at 12:24 pm

“as the countries have had to step in and backstop their banks which lent into housing bubbles.”

They didn’t have to. They chose to, because banks are politically connected.

14 Bill May 27, 2012 at 12:35 pm

Doc, Sounds like you are in favor of tighter regulation. (By the way, I don’t buy the argument that the politicians caused it; bankers lent to construction companies and developers, unless you are arguing that lack of regulation is the political act.)

A rudderless boat without an anchor crashes on the rocks.

15 Doc Merlin May 28, 2012 at 3:02 am

“Doc, Sounds like you are in favor of tighter regulation.”
Nope, regulation is just another word for protecting incumbents.

16 Bill May 28, 2012 at 7:39 am

Doc, You mean the kind of “regulation” they had it Ireland and Iceland, ie, none at all?

17 TallDave May 28, 2012 at 8:18 pm

No, they’re fiscally insolvent, irrespective of any bank issues..

18 ptuomov May 27, 2012 at 11:38 am

How do you know that the LTRO hasn’t “helped much”? Nobody knows what would have happened without the LTROs. I suspect that we would have already seen a large number of banks unable to fund themselves and taken over by national governments.

More generally, I think that most observers suffer from the illusion that the solution must come in form of some “big bazooka” “bolshoi packet” grand solution. In my opinion, if the crisis is solved at some point, it is solved by a number of steps and patches that in isolation look too small to have any impact yet together amount to a solution.

19 msgkings May 28, 2012 at 12:44 pm


Among the steps are Greece leaving the Euro and Eurobonds.

20 Olaf May 27, 2012 at 10:32 am

Niall Ferguson’s take is the opposite (all quotes via John Mauldin/Sunday Times): “…the euro will survive; the European Union will become a federal state…The national politics of continental Europe is collapsing and that’s paving the way towards a federal solution in ways that aren’t fully understood in Britain…There has got to be a possibility that this will all go horribly wrong with a Greek exit, but it has got to be in the 10% to 20% range [of probability] because this would be so costly to everybody. It would be a massive act of self­immolation and I don’t think they’re that crazy….So, according to his thesis, a break­up of the eurozone is possible but unlikely. And we shouldn’t fret too much about the threat of right­ wing xenophobes coming into power across the Channel or around the Mediterranean….Also, although the German political elite appears slow­moving and plodding, it wasn’t slow­moving and plodding in 1989­90 when the opportunity presented itself to reunite Germany: monetary union with East Germany was the product of political thinking, not economic logic. But the point is, I think you might be surprised by how quickly they move when the chips are down….They [the euro enthusiasts] have achieved what they wanted in that the level of financial integration has gone so far, it’s almost impossible to undo. And it was always meant to be undoable, which is why there never was an exit clause. You were never going to get federalism by any other means.”

I agree more with Tyler’s (and others’) take, but think it perhaps more caused by “fragility”, as thematized by Taleb, rather than lack of hegemony…a bit of Taleb’s “anti-fragility” in the European financial system would be great right now…but probably it isn’t even “robust”.

21 ptuomov May 27, 2012 at 10:33 am

The European crisis is first a banking crisis and only second a sovereign debt crisis. The sovereign debt is the tail, and the banks are the dog (in multiple meanings).

I agree that the euro zone wide deposit insurance scheme backed by ECB would stop the deposit flow away from PIIS. This will not happen, however, before EZ wide bank regulation and resolution authority. Furthermore, it will never, I repeat never, happen in a form that would allow Greek banks to participate in it. There is no chance, no chance at all, that Finland, the Netherlands, or Germany will agree to any additional scheme where the “failed state” and “bottomless pit” that is Greece will be able to defraud any more money from the north. If and when Greece exits the monetary union, then there will multiple forces pushing towards a EZ deposit insurance scheme and the main obstacle (the bottomless pit) is removed.

Really, Germans don’t mind guaranteeing Spanish bank debt at fair terms, but it’s impossible to make any agreements with the Greeks that would be both fair and in which the Greek side wouldn’t at least attempt to defraud the partners.

22 msgkings May 28, 2012 at 12:47 pm

+100 see my comment above. Get the biggest mess out of there (Greece never should have been included in the first place) and the rest is pretty doable.

23 Edward Burke May 27, 2012 at 10:38 am

A touchy subject for the Greeks which I’ve heard no one adduce of late, but: what are the chances that the colonels could get an outright invitation to manage state functions through whatever interim looms beyond June 2012? How could unrest in Greece (whether it even came close to internal military intervention) play across the Balkans and/or other Eurozone peripheries? What is Russia’s position in this “time of troubles”? How are prices of Russian fuel exports to Europe contributing to Eurozone and Greek circumstances?

24 8 May 27, 2012 at 11:04 am

“The empire, long divided, must unite; long united, must divide.”

The peak of European unity was around 2000 just before the euro launched. People need a common language and common culture to pull them through the periods of conflict. The political establishment of Europe is trying to force a political union on people who do not want it and will not accept it. Europe is forcing political union on states with less in common than American states in 1800.

International cooperation is down because the global social mood is down, the people of the world are increasingly looking for conflict rather than cooperation. It is cyclical; in the 1990s there was a desire to cooperate and China joined the WTO, the euro was launched, the U.S. led a global coalition against Iraq. Now, countries seek tariffs on China, the euro is falling apart, and the U.S. finds far fewer allies. It’s inconvenient for politicians and economic models when the people don’t behave as expected, and trying to force the model onto the people only ends in greater failure.

25 NormD May 27, 2012 at 11:24 am

I am constantly amazed that the world’s economists seem so unprepared to deal with these issues. Isn’t modeling economic systems what you guys are supposed to do?

Talk of the rise of militancy seems fanciful. Do people really expect Europe’s retirees or iPhone-obsessed kids to put on uniforms and head across a border?

Why do economists ignore sites like zerohedge? They point out things like LTRO loans to banks have the effect of subordinating the debt of existing debtholders, devaluing it and causing all kinds of knock-on effects. True? False?

Why do economists ignore people like Peter Schiff? He can be odd, but his question of what is going to happen when interest rates rise seems ignored by economists? If interest rates rise then won’t government debt payments rise, housing values fall and existing bond prices fall? Won’t this create a mess. Can ZIR go on forever?

26 Doc Merlin May 27, 2012 at 12:32 pm

They are ignored because politics subordinates all other fields.

27 msgkings May 28, 2012 at 12:54 pm

They are ignored because they say the same damn thing over and over year after year. Eventually they will be partially right, though the magnitude of disaster they predict will be far less in reality. For example, Schiff has been shouting ‘hyperinflation!’ for about 10 years now.

What’s the point of checking in on Zero Hedge or Peter Schiff, I already know what they are saying.

28 Peter Surda May 27, 2012 at 11:46 am

Dear professor Cowen,

you are mistaken in your interpretation of the distrust of citizens in the EU periphery countries in their banks. It’s not a problem of liquidity, but control. The people do not fear that they won’t be able to withdraw their money. They fear that one day they wake up and their euro deposits will have been redenominated in drachmas/pesetas/liras, worth a fraction of the same number of units of Euros.

There is only one working solution to the problem. Abolish all legal tender laws, financial regulations and central banks. Let the money be provided by the market and people to freely choose what they want, without the fear of being persecuted, harassed or otherwise punished.

29 Doc Merlin May 27, 2012 at 12:33 pm


It isn’t a fear of broken markets, its a fear of governments.

30 Rahul May 27, 2012 at 1:10 pm

How is not being able to withdraw money very different from being handed worthless drachmas? It’s a difference between loosing all your wealth and 90% of your wealth.

31 Peter Surda May 27, 2012 at 2:41 pm

The difference is that providing deposit insurance does not help the depositors in case of a redenomination. Withdrawals would still proceed. Cowen’s recommended cure is a fail.

32 TallDave May 27, 2012 at 11:48 am

Interesting, thanks for sharing.

BTW, when you look at U.S. 2007-2010 budgets and Greece’s last few before the crisis, there are some disturbing similarities — borrowing at low interest rates to increase spending by ~10% per year. In 2009 the US deficit was so large seizing 100% of the taxable income over $100K would not have closed (even assuming that was remotely possible).

If the euro zone cannot summon enough cooperation now, how is any union requiring tighter cooperation supposed to work? How would national budgets be set and approved?

That’s the crux. People in Mississippi and Alaska are will to accept a federal government in which people in California and New York have a larger say. People in Greece are probably not willing to give up as much sovereignty to Germans and Poles.

I think perhaps there’s a minimum “productivity gap” that a fiscal or monetary union will freely tolerate. We saw this dynamic in the mid-1880s in the U.S., when the industrialized North developed very different attitudes about human rights than the labor-dependent South, and so the latter seceded and then 400K people were killed largely over the question of whether 3.5M people could continue to be treated as property by 9M other people.

33 chuck martel May 27, 2012 at 12:43 pm

Actually, over 600K were killed, millions of dollars in wealth destroyed and the economic development of half the country arrested for a hundred years. And it wasn’t “largely over” slavery but rather the question of whether or not states that had voluntarily joined a union should be able to voluntarily leave it. Slavery became extinct in other places, Brazil for instance, without an incredible loss of life amongst people who had no stake in the matter.

34 Edward Burke May 27, 2012 at 1:14 pm

After all, “Mr. Lincoln’s war” yielded “Mr. Lincoln’s Federal government”, too. (An amazing political genealogy: given that Yankee disavowals of slavery in the South led directly to a considered genocidal campaign against the Plains Indians c. 1860 to 1890 ff. To this day, of course, Americans regularly hear of the legacies of dread slavery but hardly anyone, and I mean hardly anyone, complains that Native Americans had to be herded and/or killed by the hundreds and the thousands to make American happiness complete. Someone can poll Minnesotans today to learn whether in the aftermath of the Sioux Uprising of 1862 much public sentiment exists for returning lands to Native Americans displaced by that unrest.) The expansionary era of American Federal statism began with Lincoln, well before either of the Roosevelts; and not simply ironically (and not entirely unjustly) is Lincoln yet regarded in some quarters as “the tyrant of Springfield”.

35 Rahul May 27, 2012 at 1:28 pm

“economic development of half the country arrested for a hundred years.”

Is that really true? Was there a 100-year impact of the War on American productivity? And how big was the impact? Any estimates?

36 TallDave May 28, 2012 at 8:22 pm

Circa 1900 we were the the most productive country in the world, so probably not.

37 Hoosier May 27, 2012 at 2:15 pm

And why was it exactly that the south wanted to leave the union? Your telling me it had nothing to do with slavery possibly being abolished in the near future?

38 chuck martel May 27, 2012 at 3:09 pm

It doesn’t matter why the south, or any portion thereof, wanted to disassociate with the other states, although there were certainly a number of reasons, many of which were economic. The idea that “you stay in our club, or we’ll kill you” doesn’t have any logical validity. It wasn’t like the Spanish Civil War, the South wasn’t trying to take over the whole country, which, in fact, the North was. If the North was so opposed to slavery, why didn’t they invade Brazil or the Ottoman Empire after Appomattox?

The WSJ published an article on the anniversary of the Homestead Act and what an impetus it was to the economic development of the country. Giving away free land is a great deal, especially when you can steal it from stone age tribes.

39 MSL May 27, 2012 at 7:48 pm

“It doesn’t matter why the south, or any portion thereof, wanted to disassociate with the other states, although there were certainly a number of reasons, many of which were economic.”

Suppose that instead of merely holding black people in bondage, Southerners planned to build concentration camps. Would this statement hold true?

The answer is obvious and so is the falsity of your claim.

40 chuck martel May 27, 2012 at 8:27 pm

If you’re intimating that the US War of Northern Aggression was solely, or even principally, over slavery, you’ve got an MA in naivete’. If Lincoln and his New England allies had a recipe that would have made things better for the South they certainly should have been able to convince them of it with a logical argument. But they didn’t. So they felt it was necessary to kill over half a million men and boys, some in the service of the union were as young as 14, in order to make their point. After accomplishing this, as Edward Burke points out, they then moved on to the literal extermination of the native American population while they swindled them out of their property. Of course the victorious Yankees made sure that newly freed black slaves had everything they needed to take their place in American society, too. What a shameful, shameful episode in world history, and it’s not over yet.

41 Rahul May 27, 2012 at 11:24 pm


I wonder what alternative course of history you’d imagine had there not been that war? North convinces South to free slaves via diplomacy? Or had Southern slavery existed for another 50 years; you think even that might have been a better outcome than a war?

42 Edward Burke May 28, 2012 at 10:49 am

Although this thread strays: Jeffrey Rogers Hummel’s account Emancipating Slaves, Enslaving Free Men (which even includes Tyler and Alex in one of its many bibliographies) does a fine job of interweaving the political aspirations and the economic realities of the period, though working as an historian, Hummel does not venture the conjecture I am willing to advance: that just as the mechanism of the cotton gin made cotton the cash crop it became for the antebellum South, the advent of the mechinization of agriculture was sure to have rendered slave labor completely obsolete within a matter of decades after 1860. Slavery, contemptible heinous odious and peculiar an institution as it was, was seen properly as a matter of property rights in the antebellum period, and no amount of anachronistic moralizing on this score will ever change that sturdy reality. (I don’t recall that Fogel and Engerman treated the advent of agricultural mechanization/industrialization at great length in Time on the Cross, either.)

43 TallDave May 28, 2012 at 12:01 pm

There were of course selfish reasons for the North wanting to industrialize the South and replace slave labor.

The foreign slave trade was abolished in Brazil in 1850, so they were already moving in the right direction, though slavery was still practiced there for some decades with different groups of slaves being freed at different times. And of course invading Brazil or the Ottoman Empire would have been logistically much more difficult in any case. No carrier groups in those days!

44 Popeye May 29, 2012 at 1:43 pm

The idea that “you stay in our club, or we’ll kill you” doesn’t have any logical validity.

LOL. How dare the north interfere with my God-given right to own other human beings? FREEDOM BABY!

45 sort_of_knowledgable May 27, 2012 at 2:55 pm

And the reason why most of the states wanted to leave the union was largely over slavery. If say oppressive tariffs were a major reason for secession, slaves would have been allowed to fight for freedom as they were in Brazil during the Paraguayan war. Granted four of the states joined the Confederacy after Fort Sumter and Lincoln’s call for soldiers to put down the rebellion.

46 Careless May 27, 2012 at 11:05 pm

The South’s reasons for fighting the war do not justify the North’s. The North’s reasons have to be judged on their own merits.

Killing half a million people to keep some people from leaving your country is an awful thing to do.

47 Careless May 27, 2012 at 11:06 pm

Even if (though) we’re all better off now because they did that horrible thing 150 years ago.

48 Anne May 27, 2012 at 9:25 pm

Chuck is correct on all points. The Civil War was a horror and not fought over slavery.

49 TallDave May 28, 2012 at 11:54 am

Heh, it’s funny, I had a sentence in there originally about how whether the North was justified in invading the South because of slavery is rarely questioned even by the people who oppose virtually all post-WWII U.S. military interventions, but I figured no one would be interested in that aspect so I took it out.

I think it is very hard to argue the Civil War was not largely about slavery. It seems unlikely a non-industrialized North would have pushed for abolition to the point that the South saw secession as necessary, or that an industrialized South that was not largely dependent on slave labor would have tried to secede.

50 Urso May 29, 2012 at 11:37 am

Saying “slavery didn’t cause the Civil War, the dispute over secession did” is analogous to saying “he didn’t die because I pushed him out of the window, he dies because he hit the sidewalk at high velocity.” Both statements are technically accurate, given a sufficiently narrow definition of “cause,” but both completely miss the point (and are offered only for self-serving reasons).

51 msgkings May 29, 2012 at 1:36 pm

Outstanding, +1

52 TallDave May 27, 2012 at 11:49 am


53 Yancey Ward May 27, 2012 at 11:50 am

At this point, probably euro-wide deposit insurance is needed before monetary policy can help in Greece or Spain (that wasn’t true two years ago). Yet creating a eurozone-guaranteed safe asset in those economies ultimately boils down to the eurobond idea, which of course the Germans are reluctant to do.

Exactly. What they will apparently do is institute Euro-wide deposit insurance but without full conversion insurance, but until such insurance actually means that a Greek/Portuguese/Spanish Euro deposit is absolutely and convincingly insured to be equivalent to a German Euro, you will continue to see deposit flight from the periphery to the core, or outside the union to the Swiss Conferation or to the US.

I simply don’t see how Eurobonds are going to be sold to the richer countries without a true political union that dissolves the national borders completely. All this nonsense about how all that has to happen is for Germany to allow the ECB to function as lender of last resort is just that- nonsense. If Germany acquiesces to that demand, it will be a race to see which country can stuff the ECB with the most worthless debt.

54 Jon May 27, 2012 at 12:00 pm

Whats needed is to recharter European banks under EU institutions directly. Centrally establish deposit insurance and bank supervision rules. Give these banks the backing of the ecb as lender of last resort and require that the banks hold capital on all assets (have an absolute requirement in addition to the risk ratings). Back the deposit insurance fund with euro bonds if you have to but require it to collect risk weighted premiums for sure.

55 Doc Merlin May 27, 2012 at 12:09 pm

The problem isn’t that the nations are fiscally troubled, but that they can’t be trusted not to confiscate from their people if the feces hits the fan.

56 Bill May 27, 2012 at 12:20 pm

Confiscate from their people FOR their banks, bank bondholders and shareholders, and bank creditors, you mean.

57 Doc Merlin May 28, 2012 at 3:09 am

Doesn’t matter FOR who the confiscation is in this senario. Its the confiscation thats the problem.

58 Bill May 28, 2012 at 7:43 am

Doc, Oh, it doesn’t? So, in your mind, its not confiscation if a bank, without regulation, goes belly up in lending depositor money to real estate developers in a bubble, wiping out depositors.

59 Yancey Ward May 28, 2012 at 11:05 am

Bill once again demonstrating he can’t read simple declarative English.

60 Alex Godofsky May 27, 2012 at 12:28 pm

Why would Greek banks need to exist for monetary policy to work in Greece? If the euro devalues then the actual euros in Greece also devalues.

For that matter, why do Greeks even need Greek banks? Why not just use German ones?

61 Very Serious Sam May 27, 2012 at 12:37 pm

W/o exception every proposal for eurobonds, means that at the end of the day, it would be German taxpayers who are on the hook for further follies of the GIPSIFs since Germany funds 28% of the EFSF, the ESM and the ECB.

BTW, eurobonds were already stopped by the German Constitutional Court. It ruled:

“Es dürfen keine dauerhaften völkervertragsrechtlichen Mechanismen begründet werden, die auf eine Haftungsübernahme für Willensentscheidungen anderer Staaten hinauslaufen, vor allem wenn sie mit schwer kalkulierbaren Folgewirkungen verbunden sind”

which translates to:

“There may not any permanent international juridical mechanisms be established which amount to a guarantee to cover the decisions of other nations, especially if they are associated with unpredictable consequences”


“Jede ausgabenwirksame solidarische Hilfsmaßnahme des Bundes größeren Umfangs im internationalen oder unionalen Bereich muss vom Bundestag im Einzelnen bewilligt werden”

which translates to

“Each cost effective act of solidarity in large-scale international or european area must be approved by the Bundestag in detail”

Each of this sentences deem any form of eurobonds, as against the German constitution. Of course, eurobonds are also against the EU treaties, but the political ‘elite’ of all member nations never cared abot that. Not so easy not to care about the German Constitution. Be assured that any German political party who attempts to change the constitution in this respect, would be thrown out of power immediately and forever.

62 Bill May 27, 2012 at 2:17 pm

Guess its goin to be a cold winter as hell freezes over.

What does it mean to have a common currency. Is it all gain and no pain?

63 derek May 27, 2012 at 1:12 pm

The rationale behind a common currency is that it gives smaller nations a stable base upon which it can structure it’s economy. Swings in exchange rates are profoundly destructive to manufacturers. It would also necessarily provide a discipline; productivity, overhead cost of government etc could not be masked by a falling exchange rate.

The euro seems to have been purposefully designed to avoid any such meanness. What happened was Greece and Spain could borrow at the same low cost as Germany. The vendor finance model purposely encouraged profligate spending. There was no discipline, no rationalizing. It was designed as a windfall of seemingly unlimited cash for everyone.

The obvious problem is that the idiots who dreamt up and implemented this scheme don’t have enough power.

So the saga continues. Private sector debt becomes so unstable that sovereigns step in. Small sovereigns can’t bear the burden so the obvious solution is for a trans soveriegn entity to take on the liabilities. Each of these escalations ease the situation for a short time, lasting until questions arise about the solvency of the larger body.

Simply put, very large amounts of debt will have to be written off. Large amounts of money will be lost. Holders of debt will become insolvent. The longer that reality is put off, the more the continental economy as a whole is put up as collateral, (what do you think a Eurobond is but that) the worse the consequences will be when the writedown occurs.

64 Bill May 27, 2012 at 3:59 pm

Even though you have a common currency, are a creditoryou, as a German bank, are not forced to lend to Spanish banks, open branch offices in Spain, and lend to Spanish real estate developers.

At the end of the day, it was a decision of French and German banks. They chased yield.

If you Are a creditor, you do a work out.

I don’t know how to say that in German.

65 Neal May 27, 2012 at 1:27 pm

Can we say something similar about internal US politics?

Do the core nations of the Eurozone have all that much in common? I recall a recent post which indicated that the nations of the Eurozone actually have less in common than an arbitrary sample of nations (e.g., nations starting with the letter “M”).

66 dearieme May 27, 2012 at 2:56 pm

“I do not see this turning out well.” The problem is that the Euro was introduced by people who were intellectually frivolous. That’s the second most damning description in my vocabulary.

67 dearieme May 27, 2012 at 3:09 pm

I’m not sure that I accept this “hegemony” theory. Britain in 1815-1914 had a contemptibly small army, and though its navy was large it spent much of its energies suppressing the Atlantic slave trade. I’ll grant you that the latter was a case of throwing their weight around and interfering in other nations’ business, but it surely didn’t amount to all that much? It was a tiny effort when you compare it with the current US array of bases around the world. Perhaps hegemony is meant in a much wider sense than military might and political bullying?

68 Woj May 27, 2012 at 3:54 pm

“At this point, probably euro-wide deposit insurance is needed before monetary policy can help in Greece or Spain (that wasn’t true two years ago).”

I don’t think normal deposit insurance will work in this instance. The fear of periphery deposit holders is not that the bank won’t honor their nominal deposits, but rather that the bank will honor those deposits in a heavily devalued currency rather than euros. The ECB/EU may therefore have to guarantee all deposits in Euros, which could be extremely costly if any nation still ultimately chose to leave the Euro.

69 Steven Kopits May 27, 2012 at 4:06 pm

I have no great synpathy for this article (although I am impressed that Tyler appears to have achieved a market share approximating 10% of anything published in economics).

The Euro Zone problems were foreseeable and foreseen. Anyone who lived through Britain’s ERM crisis must surely have known that a similar crisis was likely for the EZ.

The critical issue, then, is not a periphery crisis. It is that the northern countries have spent too much dry powder on Greece, and possibly Spain and Portugal. By the time the dust is settled, a couple of outcomes are possible:

i) The EZ stops the rot at Greece–and probably Spain and Portugal. These countries depart, default and devalue, and–surprise–do much better than people thought they would. Life goes on without the Euro. However, for the remaining core, admission to the Euro in the future becomes a much bigger deal, and fiscal integration proceeds. Greece, Spain and Portugal remain outside the Euro for thirty years, and the EZ adds no new members for more than a decade.

ii) Greece exits, and the Euro Zone tries to retain Spain and Portugal. In this effort, all the dry powder is effectively consumed, and the ECB turns to the explicit printing of money to maintain liquidity. This in turn leads to a bout of substantial inflation and the association of the Euro as a Weimar type of currency. Whether the Euro can sustain such a bout of inflation remains to be seen. If not, currency unions will be off the table for more than a generation.

The Euro Zone should have evicted Greece–and possibly Spain and Portugal–two years ago and taken its lumps. It would be in better shape now, I think, to deal with Italy and France.

70 Michael G Heller May 27, 2012 at 4:46 pm

I too reckon the ‘dry powder’ could get really scarce. The northern countries are too nice. Look around the world and you can hardly think of any country less hegemonic in intent than those good people in Germany, Finland, Netherlands, and… I forget the other one with AAA credit ratings (Denmark?). To the southern countries the world should say “sign the paper NOW damn it”. All will be solved if they sign up to the rules that have been on the table for 2 years. The northern countries can be relied on to keep their side of a money-for-rules bargain. A major obstacle to solutions has not been mentioned here. Why are wealthy non-European countries not supporting the good guys? Why does Obama always pooh-pooh Merkel? If the other wealthy non-Euro countries (and the captured-IMF) told France and the southern Euro countries to sign up to the rules that northern countries demand as the condition for eurobonds and assorted financial charity the southern countries could not resist the pressure. Absence of that external pressure is in my humble opinion the reason why Tyler may be right in saying the eurozone fails.

71 Floccina May 27, 2012 at 5:57 pm

It looks to me like central banking is prone to crisis.
1. Central banking appears to have feedback problems.
2. It is not easy for the central banks to get the money into the economy where it is needed.
3. People trust the central banks so much that they prefer money assets to real assets in times of crisis. It seems to me that it would be better if they mistrusted money and so bought real assents instead.

72 zbicyclist May 27, 2012 at 7:43 pm

“If the core European nations cannot coordinate effectively, what can we expect in dealings with China, Russia and other countries that have less of a common background and understanding?”

That “common background and understanding” has led to millions of people being killed in a large number of European wars. Maybe negotiations are easier if we don’t share a not-quite-common culture.

73 Doc Merlin May 28, 2012 at 3:12 am

Negotiations are unnecessary, I would go so far as to say they are counterproductive. Unilaterally allowing people to trade is by far the best policy.

74 Tom May 28, 2012 at 4:19 am

The way for Greece to stay in the Eurozone is to stop borrowing euros on the market to pay it’s bills.
Either a) balance their budget, or
b) print up IOUs to pay their bills — borrow from those to whom they owe money.

I suggest 1 year 0% Bearer bonds, issued to gov’t employees, those receiving gov’t pensions, those with gov’t contracts, in the amount equal to (or greater than?) their Euro deficit. These bonds would NOT be legal tender, thus companies would not be forced to accept them as payment of private debt, BUT the Greek gov’t would accept them at 100% value as tax payments.

This would allow Greeks to stay in the euro, as they want to, and to stop needing international finance borrowings to pay their bills, which is their solvency problem.

Germany could, and should, do the same — and by ending their private sector borrowing, there would be far more capital available for higher return on investment investments.

There is no mechanism to kick Greece out of the Eurozone — there is a “sanctions” clause which, I think, has still not yet been activated. How to financially punish the poor, even if they have been irresponsible?

75 Tom May 28, 2012 at 4:31 am

Finally, Tyler, you conclude:
What is most disturbing is that the euro-zone nations are democratic, protective of basic liberties, and have advanced intellectual and research communities. The final lesson of this debacle is that smart nations with noble motives can make very big mistakes.

This “noble motives” is the key, false assertion. Using gov’t force to collect, and spend, Other People’s Money, is not now, and has never been, noble. Too many great writers (like Dickens), with big hearts, fail to see the difference between genuine charity (people voluntarily giving to the poor), and gov’t programs to help the poor.

No program based on force is charity.

I am disturbed, and disappointed, but not surprised, that you consider it to be noble to support irresponsible, ever-expanding gov’t spending, which is what Paul Krugman and so many other NYT and Dem Party supported intellectuals seem to do, in practice.

But that’s partly why the NYT prints you. The End Justifies the Means–gov’t spending justifies force based tax collection. Your support for Machiavelli is not noble, but Democrats are always looking for those with plausible rationalizations.

76 Stephen May 28, 2012 at 6:48 pm

Imagine the European Central Bank trying to infuse new money and credit into Spain, while bank deposits move quickly to Germany, Switzerland and other safer places

I don’t get it, the Euro is trans-national and banking is trans-national, so who cares if people move funds from Bank A to Bank B? Bank A might go under but Bank B is an instantaneous 100% substitute for it.

Isn’t all of this fuss just another case of the big end of town pushing for their private losses to be socialised?

77 ukoilman May 29, 2012 at 3:59 am

Some very good points here, but this is a typical stance taken by the other side of the pond, where with blinkers off they try and find another scapegoat for the US led financial downturn in 2008 / 2009. The rest of the world of course is blaming the US (quite rightly so) for the collapse for passing bad mortgage paper around the world. The Euro as a currency has been de-stabilised because of thee effects of the downturn and currencies take a longer time to recover. It has not been helped either by the not so developed nations in Europe and taking a leaf out of their “allies” books and trying to borrow their way out of a bad position. The best thing we ever did was not join the Euro. Maybe, we should try and de-stabilise the dollar more by asking the Arabs and the Chinese to perform all oil transactions in Euros!!!!!

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