Sentences to ponder

Bernard Connolly, a long and persistent critic of Europe, estimates that it would cost Germany, as the main surplus country in the euro area, about seven percent of its gross domestic product per year to transfer sufficient funds to bail out the deficit countries, including France.

That amount, he has argued, would far surpass the $400 billion World War I reparations bill forced upon Germany by the victorious western powers — the last payment of which Germany made just last year.

The article is here.  I would not regard that as a very exact estimate, the point is that the correct estimate (which in any case still depends on choices to come) is not small.  The consistently insightful Wolfgang Münchau (FT) tells us tonight that the Eurozone has ten days at most.  Scott Sumner has a very good post on related matters.  I still believe that “Germany isn’t just bluffing,” of course we’ll see soon enough.  (This is not the NBA!)  Best prediction is a “too little, too late lame partial eurobond” which won’t change anything.  Welcome to the age of the perpetual financial crisis.

If I were “the eurozone” I would really, really, really want to have something ready before trading starts Monday morning.  They don’t.


I hear the ringing holiday bell of the Salvation Army (aka IMF) in the distance. Of course, if I were Germany, I would be saying the same thing: I won't contribute. But, as a creditor nation, and as a nation which would have to backstop its 44:1 leveraged banks (are you listening Deutsche Bank), I would be careful about playing this game of chicken, because if there is a crash, there will be bigger clean up costs than the costs of prevention. Just as Germany asks why it should aid other members of our currency union, we should ask: why should the US pay through the IMF for Europe if its members are unwilling to help themselves first.

You first, Alfonse Merkel, no you first, Gascone IMF.

Bill, your comment about crash vs prevention reminds me of Benjamin Franklin's advice: "an ounce of prevention is worth a pound of cure." Sadly it may take a crisis to make real progress (whatever that will mean)..."extraordinary" measures are not trotted out in "ordinary" times. This post gives me one more reason to dread going back to work tomorrow. Danke.

With a bit of effort, one can probably find a Franklin proverb to support any position from save-the-eurozone-at-all-costs ("we must all hang together, or assuredly we shall all hang separately") to national-interest-first ("love your neighbour, yet don't pull down your hedge"), etc. The one that seems most pertinent to me right now is "necessity never made a good bargain".

It it too late for "prevention". Prevention would have been stopping the debt from reaching these levels. Now any choice is potentially catastrophic. I don't think it is clear that a massive German bailout would be less damaging than a crash.

Bloomberg just reported that Santa IMF has a present for Italy.

Excellent. It's the IMF that's supposed to provide liquidity to solvent but illiquid national governments, and they're supposed to enforce draconian austerity as the price of that help. I'm not sure they'll be draconian enough, but I give them a better chance than other European states.

Some unnamed source in Italy?? Yeah, I believe that one for sure.

There has been two rumours a week like this for the last couple of months.

Time to hunt out our old Belgian Francs and other shrapnel.

It strikes me as odd that the solution to the problems of Europe revolve around Merkel, as if she is the answer to everything, goes to show the world the true power structure of the EU, Atlas personified I guess.

Bismerckel. Just be thankful that's she's not Angeladolf.

Tyler seems to be a little bit back in his overly alarmist mode, IMO. Remember how we were all doomed to die of swine flu, according to this blog?

European markets look to open fairly decently in a few hours.

Just sayin'.

The markets looking good at opening means little. Let's see how they do over a 5 day period. A whole week of good news and a good market would be a change from the past year.

I hear ya but the October markets were very strong most of the month.

And I was just highlighting the panicky tone of the post...

Perpetual financial crisis: We really do appreciate your sense of humor. Such small felicities make the web worth surfing.

Who'd have thought that lashing yourself to Greek productivity and efficiency was such a bad idea?

Completely unforeseeable, in my opinion. Anyone who said otherwise was a racist.

I decided to check what Krugman is saying about this (yes, I am a masochist) and it is funny how he completely ignores the source of the problem - i.e., debt - and focus 100% on the EU lack of currency manipulation.

I wonder when he will wake up and identify that his dream of welfare is dying.

Krugman does focus too little on the debt, but the PIIGS crisis does not show that the "dream of welfare is dying." ALL European states have generous welfare states, including many ones with no fiscal issues such as Sweden. In general, most countries are indeed moving away from old-school socialism with its rigid employment laws and fully nationalized industries, but they still all have generous safety nets.

There is also the issue that only Italy and Greece neatly fit the "socialists running out of other people's money" theory for the crisis. Both Spain and Ireland, on the other hand, were very fiscally responsible during the bubble. For them, it was property bubbles inflated by deregulated finance. Even for Italy and Greece, they also mostly funded their fiscal deficits through deregulated banks leveraging their balance sheets through Basel II rules. In either case, financial deregulation is arguably more to blame than mere fiscal irresponsibility or property speculation. If Greece or Italy's fiscal deficits, Spain or Ireland's property speculation or America's subprime mortgages had to actually get funding through investors spending their own money instead of banks spending other people's deposits (or deposit-like instruments like money market funds and repos), then none of these bubbles would have come close to this catastrophic level.


Well yes, we did have groups finding many different ways to fund government debt. But you are falling for the same fallacy here! I mean, even if banks were irresponsible (and they probably were) you got to see that without government debt we would have no crises at all... or at least not anything like we do now.

This is like saying that the problem with alcoholics is that wine is too cheap. No, the problem with alcoholics is that they drink too much...

"even if banks were irresponsible (and they probably were) you got to see that without government debt we would have no crises at all… or at least not anything like we do now."

You think that it was just an odd coincidence or accident that the entire economic system has been debt-financed for the last 30 years? That it just kind of happened by monetary osmosis or maybe at random? There's a Farmer's Daughter joke or two that cover that storyline.

The world economic system settled into financialization to deal with the prior major crisis, whose shape was determined by the measures aimed at the prior one, and so on, at least back to 1750 or so.

Live by capital, die by capital - though I suspect not quite yet for the latter, at least from the systemic point of view.

Trying to ascribe specific reasons to the sheep like behaviour of the market merely reflects one's own prejudices.

According to Yglesias, Germany just needs to import more!!/mattyglesias/status/140978047573700609

I still think the market is gullible enough to believe one more late-night summit plan. As you said, the optimists have been consistently wrong, but then again the pessimists have consistently underestimated Europe's ability to prolong the situation. So days? No. But the year? That's a different story....lots and lots of bonds coming due before the year is out.

I'm curious Tyler, why does Yglesias think that if Germans bought more, they would buy more goods from Southern Europe? I would imagine it would be safe to assume the Germans would buy the best goods at the best price, and those kind of goods aren't coming from the Mediterranean.

Or am I missing something.

How much would it cost the ECB the print the same amount of money?

Can anyone link to a map of who owes what to whom?

Look in the NYTimes. They have been doing flow maps on this subject. You can also check

Do not go. Repeat. Do not go to the website that I listed above. That's what you get for using your memory of a similar name to get to a website that collects charts and used a similar name. Will follow up with the correct site.

The correct site is If you go to the other one, don't do it at work.

ha, thanks for the warning!

Do you have a time machine, Bill?

Not the most recent model.

It is surprising that Tyler, usually such a quiet and reasoned, moderate commentator, is now completely panicking. The comments of the blog (once known for being careful and subtle) also show herding at its best - repeating in a loop some exaggerated statements (no growth in italy forever! france defaulting!).

The irony of course, is that this is just the same herding that goes on in the real world. It is sad that people have convinced themselves that all these countries are insolvent - yes, they are insolvent: like all the US banks, car companies etc. were insolvent in Oct 2008 without a backstop of the US gov't. The US gov't gave the backstop, didn't cost anything, panic stopped, and these "insolvent" companies are now worth a lot.

There's a ton of money to be made by Germany and the ECB now if they are smart.

Who are they going to make this money off of?

Your second paragraph makes absolutely no sense and has no relevance to the topic at hand

Tyler got a bit too personally involved on this one, put his reputation on the line, and now it's become extremely hard for him to backdown. In reality that's not only him: lots of investors have done the same but with real money, The panic is more about the realization that the bounty will not be there than anything else.
I wonder if he'll admit that he was wrong with a big headline 9.5 days from now.

What really bothers me is that everybody keeps looking at the debtors and not the creditors stupid enough to lend to them. No, it was not "the Germans" or "the French." We say that the Germans and the French lent to the PIIGS and subprime CDO's like somebody sitting on a bunch of money in Hamburg or Nice decided to wake up one day and buy Greek bonds.

Instead, French and German banks lent retail deposits, as well as the working capital of insurance companies, pensions and all sorts of European businesses, to such debt with very little of their own equity. There would have been no issue if Greece or Italy only sold bonds straight to customers investing their own money or only to local banks. But that would have stopped the current account deficits in their tracks. To keep the Greek and Italian fiscal deficits going, as well as the Irish and Spanish property markets, they had go to banks investing other people's money.

I'm not one of those crazy people who think we should get rid of fractional reserve banking. That's nonsense. We should, however, completely rethink the banking system from top to bottom and make sure that other people's money (either short-term deposits or taxpayer-backed insurance/pensions) is ONLY invested in proven assets with near-certain payback. Nothing else will ultimately work.

Matt, I don't necessarily disagree with the last paragraph, but here is the thing- sovereign debt of the Eurozone was considered extremely safe by regulators bond raters as recently as 2 years ago. It wasn't like pension plans and insurance companies were reaching for risky debt to garner significantly higher yields, it is just that the risk was misrecognized by most people. Personally, I think demand deposits should be 100% reserved in cash, and those having such accounts should be paying net fees to have them. As for pensions, you will probably have to have significantly higher contributions up front if you really do want to make them invest in such "near certain" assets.

That is why I think the current crisis is the end of welfare, even though not all welfare states are in crisis. How much Sweden's debt is sustained by these same fiscal instruments? How much would it cost for Sweden to support its pensions if we did reform the system? They already pay high taxes, so where would the additional money come from?

That is why this crisis is spreading so quickly! Every european country, no matter how prosperous, is using the same tricks. That will not continue for long.

'Every european country, no matter how prosperous, is using the same tricks'

Man, Bismarck really did dominate not only Europe, but the entire world, didn't he?
'Bismarck implemented the world's first welfare state in the 1880s. He worked closely with big industry and aimed to stimulate German economic growth by giving workers greater security.[56] A secondary concern was trumping the Socialists, who had no welfare proposals of their own and opposed Bismarck's. Bismarck especially listened to Hermann Wagener and Theodor Lohmann, advisers who persuaded Bismarck to give workers a corporate status in the legal and political structures of the new German state.[57] On 20 March 1884, Bismarck declared:

The real grievance of the worker is the insecurity of his existence; he is not sure that he will always have work, he is not sure that he will always be healthy, and he foresees that he will one day be old and unfit to work. If he falls into poverty, even if only through a prolonged illness, he is then completely helpless, left to his own devices, and society does not currently recognize any real obligation towards him beyond the usual help for the poor, even if he has been working all the time ever so faithfully and diligently. The usual help for the poor, however, leaves a lot to be desired, especially in large cities, where it is very much worse than in the country.'

And let's look at just the headlines -
Health Insurance Bill of 1883

Accident Insurance Bill of 1884

Old Age and Disability Insurance Bill of 1889
The Old Age Pension program, an insurance equally financed by employers and workers,[62] was designed to provide a pension annuity for workers who reached the age of 70 years.

Yep, those pensions systems will be collapsing any century now, since they are still using the same tricks that Bismarck, radical that he was, introduced.

Do read about Bismarck - quite a fascinating radical, he was. Though in modern American discourse, maybe Bismarck is even more of a leftist than Obama.

Yes. If only the rest of the world were a Prussian anthill or a Scandinavian co-op.

It's really too bad those Prussians and Scandinavians aren't having little Prussians and little Scandinavians, so they have to import Turks and North Africans and pretend that they're Prussians and Scandinavians instead. And it's sure going to be funny when all those Turkish and North African nurses are going thru the geriatric wards, yanking out the feeding tubes and turning off the respirators to free up resources for pediatric care. I bet all those old, childless Europeans' eyes will get wide then!

'And it’s sure going to be funny when all those Turkish and North African nurses are going thru the geriatric wards'
Cute - except the nurses tend to be Eastern European, being part of the EU. But keep ranting - it is a lot of fun. Oh, by the way - most of Prussia is now Poland - and the Poles too have social security, workmen's comp, and universal health care. That Bismarck was a true radical, after all. His ideas seem much better suited at world domination than his military ever was.

Matt, That is a good question.

If you go back and look at the sovereign interest rates before and after the currency union, you would see that the rates converged, but there were no differences in the fiscal behaviour of the sovereigns. Banks made money purchasing B risks and having them rise in value to A. They were still B risks.

Germany and France (and probably others) pressured the banks to maintain lines of credit to Greece in 2009 - while the first bailout was being engineered. It was OK, you see, because the Greeks were passing austerity measures (they still haven't implemented what they promised to do in 2009/2010). They would fix their budget problems. So all would be well.

So when it came time to give up 21% on the Greek loans, the banks were furious. When that 21% morphed into 50% the banks were about to close down.

And when the technocrats said "Banks, you have to increase capitalization rates in case of any future sovereign-debt bankruptcies," everyone decided that there were more problems coming. Right now, banks, insurance companies, mutual funds, bond funds, and everyone except the Fed and the ECB are selling European Sovereign bonds. Even Germany is being hammered, because they can't bailout the rest of Europe. Nor are they willing to.

So who is to blame? The "gullible" bankers, who believed the politicians and their technocrats. or the politicians and technocrats who can't seem to keep a promise, or tell the truth?

The clock is ticking to eurogeddon - only 9.5 days left.

Maybe we can all count down together.

And this is a handy page to see the euro slide into oblivion in less than 10 days -

Ok, so first stocks were up due to the IMF rumor. Now the rumor is squashed and stocks are soaring. Narrative fallacy, check.

The fallacy is trying to give one simple reason why stocks are up or down on a given day. There's plenty more reasons for stocks to be up today besides the Eurorumor du jour.

Very strong retail sales after Thanksgiving, oversold market (short covering), good housing number, etc.

That is the level of our "news media." The average reporter can't read a financial statement, doesn't know what "the net present value of a stream of payments" means, but they feel confident enough to talk about "the one thing that influenced markets today."

NPR's *This American Life* had a segment on money recently. They were amazed to find out how central banking worked. They were mystified at the idea of a fiat currency. They were surprised that when the value of the housing market fell, that money "didn't go anywhere.". It is sad really, considering that they are probably as educated about money as anyone. (or not educated as anyone.)

What about this idea ?

Munchau is no amateur, but 10 days? What kind of arbitrary number is that? Is that 10 working days or business days? I guess kudos for a commentator to be bold enough to put a date to his prediction unlike the easy to mold ex-post facto explanations."

should read: "10 working days or calendar days!" facepalm!

"If I were “the eurozone” I would really, really, really want to have something ready before trading starts Monday morning. They don’t."
France's CAC40, +5% at close on Monday plus euro +1% up. I hope nobody here sold on Tyler's advice.

Countdown at 9 days - euro up 1.1 cent against the dollar -

The market must have loved what it heard - though strangely, there didn't seem to be anything worth reporting on the German news about staving off eurogeddon.

Comments for this post are closed