My eurozone podcast with Russ Roberts

You will find it here, I was happy with how it turned out.

Wolfgang Münchau has a nice update:

Contrary to what is being reported, Ms Merkel is not proposing a fiscal union. She is proposing an austerity club, a stability pact on steroids. The goal is to enforce life-long austerity, with balanced budget rules enshrined in every national constitution. She also proposes automatic sanctions with a judicially administered regime of compliance. She rejects eurobonds on the grounds that they reduce pressure on fiscal discipline.

That is another absurd “solution” that has no chance of working, unless of course the critical countries simply recover on their own.  (Why does it remind me of “Don’t mistreat the Abos! (if anybody’s watching)”?  Don’t forget this:

Andrew Duff, a member of the European Parliament, last week provided a very useful guide to the distance the eurozone is from where it would have to be if it were a proper fiscal union. He drew up a list of all the changes in the European Treaties that would need to be amended to achieve that. It includes changes to 23 articles and five protocols.

And this is from MR comments, Ryan Cooper:

Thinking in the short term, obviously the solution involving the least collective misery for everyone is for Germany to bite the bullet and backstop the whole continent’s debt in one way or another. But just past the immediate crisis I don’t see any reason for optimism. If recession really does hit, how are the SPIIG crowd going to get out of the “debt -> austerity -> crap growth -> more debt (or at least not much extra money to pay down the principal) -> more austerity” cycle? It seems like a 1918-style suicide pact.

The SPIIG governments have to be weighing the costs of cutting their losses and getting out. (Right?) People seem to agree that would be another devastating financial crisis, and thinking selfishly that would be bad, but if I were Spain and it’s a choice between 2-3 years of total chaos and 20-30 years of grinding hopeless misery, I think I’d go with the first option.

Solve for the equilibrium…

Addendum: Ezra Klein offers observations from Germany; they focus on the real side of the economies!

Comments

On Ryan's point, the masses may prefer 2-3 years of chaos over 20 years of misery. But the relevant point is that the ruling classes/elite much prefer 20 years of misery. Chaos increases the risk that there will be a fundamental rearrangement in power dynamics during which the current power elite may be displaced. This explain why the people hate the plans being discussed but the politicians/technocrats love them - pure and simple self-preservation. The complaints from the opposition parties around Europe are mostly political theatre - the left and the right are united in their desire to preserve the status quo, even at the expense of everyone else.

Ryan (and Tyler to some extent) are presenting a false dichotomy. What if they get 3 years of chaos *and* 20 years of misery? The short-come and long-term solutions aren't neatly bundled.

I agree, the German gov't is much more willing to entertain the notion of financing SPIIG deficits through ECB euro inflation than German citizens.

By the same token though, it doesn't look like the SPIIG voters are willing to live within their means.

Is it too soon to start collecting Euros for their historical value?

"Thinking in the short term, obviously the solution involving the least collective misery for everyone is for Germany to bite the bullet and backstop the whole continent’s debt in one way or another"

1) this 'solution' would impose all the misery solely on the German taxpayers, therefore: forget it, like all the other 'solutions' which come down to the same bottomline
2) besides, not even the German taxpayers can convincingly guarantee the whole continent's debt, please do the maths
3) instead of inventing more and more creative ways to let the Greman taxpayers fund the bill: tap the deep pockets of the GIPSIF-populations. They have savings several times higher than the nation's debts. So, compulsory bonds in the GIPSIFs are the obvious way to go

Austerity pacts are stupid. Members of the Eurozone are growing at different rates, and have different capacities to absorb debt. You can balance budgets by raising taxes just as much as by cutting spending and to say that something gets enshrined in your constitution is just as silly: catastrophic events, such as fiscal crises and even run ups to possible wars, happen, and only your enemy would be happy you were so bound.

Some type of Eurobond does make sense; this is a diverse portfolio of states and it may actually have value to make the entire Eurozone grow. That doesn't mean it can't be superior to other sovereign debt; in fact, you could make it a superior form of debt, with first dibs on revenue or dedicated revenue, etc.

You could even have a Eurowide tax that would serve as a backstop to Eurobonds.

But, don't expect sovereigns to give their sovereignity to Germany.

The other thing about austerity is that it doesn't measure risk.

A country could be austere, but have banks, which, if they failed, would tank the country.

Like Germany.

I am still trying to figure why it is better for Germany to bail out everyone else rather than just their own banks.

Here's a hint: imagine for a moment it was defense spending instead of entitlements and nondefense public sector compensation driving this problem...

I don't really need the hint, my question is rhetorical in nature, but some should consider your point and actually think about it.

I was pretty sure you didn't, as you say I just thought it would be fun to think about;

Yancey, If you export your capital--ie, are a very large creditor--you are at risk, so that efforts you can take to avoid a catastrophe are less expensive than experiencing it. When you phrase the question as bailing out someone, you are really just overstating what will be done.

Based on what evidence, Bill? Loaning your debtors money to pay you back and to spend more, or to pay your banks back, is basically what Germany is being urged to do, with the assertion, unsupported to date, that the present crisis can actually be permanently solved by the methods being advocated. This is what the Germans no longer believe and I have never believed- that these are solutions to the problem. If, for example, the PIIGS were offering to balance their budgets immediately, then extending terms of previous loans makes sense since one is no longer adding to sunk costs as a creditor, but this is exactly what is being criticized by people like yourself on a consistent basis.

Yancey, Banks, as creditors, work out loan repayment schedules, for example.

Exactly, what they're asking is to have the ECB print their way out of this with bonds that will likely never be paid back. That's why the markets don't want to lend them the money.

We should really stop calling the alternative "austerity" and start calling it what it is: solvency.

Tyler,

Münchau is entitled to his opinion. But no one else is calling it a “life long austerity club” (that would be a bit silly wouldn’t it?).

Since when is an equilibrium a “solution”? The turning points in economic history are all disequilibriums. You won’t find innovation by staying grumpily stuck with your arms crossed at the fork in the road:

http://www.abc.net.au/reslib/201102/r720930_5726194.JPG

Memory can be a short thing. It must be high time you reread those books on Public Choice:

http://marginalrevolution.com/marginalrevolution/2011/01/public-choice.html

For a little enthusiasm (something your recent posts lack) try this one in particular:

http://www.cato-unbound.org/2005/12/05/james-m-buchanan/three-amendments/

It was the institutional connection with James M. Buchanan that first led me to ponder the ideological significance of the MR blog. But this pom will continue to trust James M. Buchanan’s wisdom rather than MR's when it comes to choosing the right fork!

Dear God, if Andrew Duff comes across as a beacon of sanity, all is lost. Sell, sell, sell, and head for the hills.

James M. Buchanan said:
“My own fear at century’s end is that the extended commitments of modern welfare democracies may have created conditions where ruling coalitions will be tempted to resolve apparent fiscal crises by moving away from, rather than toward, generality.”

Constitutional generality, advocated by both Buchanan and Hayek, is exactly what Germany is proposing at the negotiating table. Unfortunately it will probably have to compromise on that. But the goal is good.

Excitement over. Merkel has climbed down. Each polity’s discretionary interpretation of the golden rule guarantees a repeat of fiscal crisis. It’s not really the Kantian cosmopolitan ideal. But it *was* an interesting moment in world history.

“Mr Sarkozy has agreed to more “automaticity” in the process of punishing states that breach the EU’s 3 per cent public deficit limits. A move to fine a country will in future only be over-turned if a qualified majority of eurozone countries agrees to overturn it.

Ms Merkel has watered down her demand that the European Court of Justice adjudicate on breaches of fiscal rules. Under their compromise, each eurozone government will have to adopt in its constitution a “golden rule” that prevents it from persistently running budget deficits. These rules will be harmonised under a new treaty. The ECJ will merely rule as to whether each eurozone country’s “golden rule” complies with the new treaty.”

http://blogs.ft.com/the-world/2011/12/rolling-blog-eurozone-crisis/#ixzz1ffqMLTOi

"I would worry the most about Hungary"--Thanks for the "vote of confidence". haha...I agree with you completely.

Countdown to eurogeddon at 4.5 (more or less) days – euro down a half cent or so against the dollar since Friday, and up roughly 1 cents since the countdown began – http://www.ecb.int/stats/exchange/eurofxref/html/eurofxref-graph-usd.en.html

What nobody seems to get is the one possibility that makes actually sense:

Germany is NOT hesistant or timid or afraid or anything of that kind.

It is WINNING.

The Plan behind the Euro was, from the very beginning, to introduce exactly the economic crisis that we have now.
To force the weaker economies (in the EU every economy is weaker) on their knees. So that they may have no choice but to swallow
the creation of the new EU Superstate, New Holy Roman Empire, Fourth Reich or whatever you call it. Once there is a political union
(and who doubts under whose leadership?) every goal of WWII will finally be achieved. Without firing a single Shot.

So I am asking you:
Why should Germany agree to bailouts now ?
Why should Germany agree to end this crisis now ?

It makes no sense, because as far as Germany is concerned ... EVERYTHING IS GOING EXACTLY ACCORDING TO PLAN!

This crisis will be ended when its goal is completed, when the last of the reluctant states are begging on their knees for help.
When they are willing to surrender their sovereignty to be spared further economic mayhem.

BTW. I am not an eurosceptic englishman. I am german and everything is going according to plan.
Little cogs in a big machine, turning round and round, axactly as they should.

"I am german and everything is going according to plan"

I am a german and I don't believe such plot exists at all in the real world.

Maybe in the imagination of fans of conspiracy theories and secret master plans, but that's another story alltogether.

That was actually a humouristic note.
As I said its a possibility. But of all the BS theories that are out there its not the least viable. Not by a long shot.

Amazing - an American actually went to Germany to do some reporting on what Germans think? And then comes up with this on the scene observation -
'They seem serenely confident that it will all work out, and this will end in a stronger, more united, Europe. There's less panic than you would expect. Less panic, certainly, then there is among American economists and policymakers.'

So many potential observations to be made by the fact that America and Americans seem dominated by their fears in yet another one of those crisis situations that the people actually experiencing perceive in another way, possessing confidence in the future and the ability to influence it. Doesn't make the Germans right, of course - but it certainly would seem to provide them with a better ability to actually master the difficulties without panicking.

'In America, we tend to think of the Eurozone as an economic entity. In Germany, it's also spoken of as an ideological entity -- a political project intended as an answer to centuries of wars and decades of uneasy peace. Giving up on it thus risks much more than mere economic chaos. It risks everything Europe in general, and the Germans in particular, have been working towards since the end of World War II.'
And to think that has been true since ca 1957 - maybe Americans should stop reading the British press for insight into the EU?

What I keep waiting for is when some American journalist will finally report what Germans think about another sourthern basket case, with apparently runaway budget deficits, an unwieldy military thoroughly unsuited for the modern world, a seemingly no longer functional system of governance, and laws which are not applied against even the most blatant criminal frauds. But that would be hitting too close to home, so let's just concentrate on eurogeddon.

The euro is just another currency, in the end - every single German Klein talked to has handled at least 2, and possibly 3, different 'domestic' currencies in the last 25 years, and all of them likely don't expect the euro to be the last one they will ever use. This is a major part of their 'serenity' - it's just paper, in the end. The people who seem most scared of this fundamental truth are Americans, it appears. Which might provide a clue about something.

"maybe Americans should stop reading the British press for insight into the EU?"

Most defenitely.
Today the british press is flooded with eurosceptics that get never tired of making the EU look bad or saying that "nobody wnats the EU" or "The british people wnat out" while they fail to get near any majority in the elections? How come when supposedly all britains are against the EU, pro-EU parties get the majority votes ?

Because the british press is posting a bunch of bullshit.

On a less serious Note:
Do you honestly believe btw. that you find enlightened articles in the mddle of Prinz Harrys Nude Photos and the boobjob of the week ?

"Do you honestly believe btw. that you find enlightened articles in the mddle of Prinz Harrys Nude Photos and the boobjob of the week ?"

What, Prince Harry had a boobjob?

SCNR

Too bad the incredible, much-better-than-America Germans will be non-existent in a few generations (fertility rate 1.36). But then I guess the Green party can declare success.

Not to worry, they'll still be a vital component of Germanistan's rich Infidel Studies curriculum.

As will the Japanese, the Italians, the Spanish, the Dutch, the Swedes ... and the Americans, at least if immigration stops, as non-immigrant Americans are also essentially below replacement fertility rates.

Or for that matter, like every country rich enough to no longer be forced to ensure a growing population.

Strangely (or not), the countries with the highest birth rates are not considered desirable places to live - it is almost as if there was some reason for that, a correlation/causation connection.

I think that declining fertility rates are, broadly speaking, a good thing over the longer term. I don't think the world will be a worse place if we return to the population levels of say 1800, but with all the advantages of 21st century technology - and if we don't do it voluntarily, as the industrial nations are, it is likely that the causes of a future decline in population will ensure that even the technology of the 1800s will look like paradise.

Oddly, the one nation that has for a generation been by far and away the most concerned about population and restricting its growth is now considered to a leading contender for superpower status. Personally, I much prefer the way population is declining in the West compared to the methods the Chinese use.

Nope, we're still going to be around saying "Hey, remember the Germans? Whatever happened to them, anyway?"

http://en.wikipedia.org/wiki/Sub-replacement_fertility

Cases of fertility rate increases in individual countries[edit] United States This section does not cite any references or sources. Please help improve this section by adding citations to reliable sources. Unsourced material may be challenged and removed. (October 2008)
This article may contain original research. Please improve it by verifying the claims made and adding references. Statements consisting only of original research may be removed. More details may be available on the talk page. (October 2008)

While almost all of the developed world, and many other nations, have seen plummeting fertility rates over the last twenty years, the United States' rates have remained stable and even slightly increased. This is largely due to the high fertility rate among communities such as Hispanics, but it is also because the fertility rate among non-Hispanic whites in the US, after falling to about 1.6 in the 1970s and early 1980s, had increased and is now around 1.9, or slightly below replacement level, rather than collapsing to the 1.3-1.5 level common in Europe.

This is also quite good:
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8934363/Fiskalunion-is-worst-of-all-worlds-for-Europe.html

You mentioned on the podcast that Greece would be helped if it were a wealthy nation, but Greece's GDP/capita is not that far behind that of France: $28,000 v. $32,000

It will be fine. It is not about whether the austerity pact is a good or workable idea. The austerity pact is all about getting the German voter on side for ECB monetization of the southern med debt. German voters won't support monetization unless they believe that there is some pain and attempt to reform in the troubled countries. This has to be a credible signal - prime ministers leaving, street rioting, austerity bills, pension age rising, these are the kind of things that they want to see. Once the ECB announces debt support, the yield in the Southern Med countries will fall to a level easily affordable levels for the bigger countries (Greece will default pour encourager les autres), and debt monetization can cease. The monetary easing resulting from lower rates and general relief will create enough growth in the medium term, enough to put off the longer term demographic crisis for many years and keep the Euro/EU rolling along.

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