Will the new eurodeal work?

Sarkozy and Merkel are already prepping their electorates for a pending deal, the usual media sources give some varying summaries of what is up, plus it will evolve anyway.  A few of you have written in and asked me if it will work.

I have a simple formula for assessing euro-deals, and it goes as follows:

1. Can Italy grow at two percent a year, more or less sustainably?

2. Will/can the market regard the actions of the seventeen eurozone nations as more or less unified?

If you can add up those two questions to about 1.7 worth of “yes,” then the deal can work.  Otherwise not.

You might also wonder, if the answers to those two questions come in at 1.8, is the deal needed in the first place?  Probably, to get #2 up to a quasi-yes.  (By the way, the Irish seem to think a treaty change and thus a referendum is on the way.)

It is my best judgment — and I stress that word — that the sum answer to those two questions, even with an announced deal by Dec.9, and looser monetary policy, comes in at about 1.16.  Which isn’t enough.

Asking for 1.7 worth of yes seems quite modest, doesn’t it?

Addendum: Do not think that Germany has merely to waive a magic wand, or incur a one-time cost, to set things right in the eurozone.  Any “set things right” action on Germany’s part is, one way or another, a form of doubling down.  If it fails it means a bigger eurozone implosion in the future than would happen now, including much higher costs for Germany.  The choice is not “German action vs. doom now,” it is “German action and some chance of even bigger doom later on vs. doom now.”  That’s a tough call.  The Germans understand that one better than do most of the bloggers I’ve been reading on the topic.

By the way, here is an interesting article on German geopolitics, though I don’t agree with much of it I recommend giving it a read.


Why do you write this nonsense? How is it the whole word knows worst than the "germans"?
Their collective IQ is astronomical!

'Germany has merely to waive a magic wand'
Spell checking is an art, not a science.

What? The very best wands can be picked up off of waivers.

Wow - that linked article is just a treat. Edward Luttwak as a modern day Friedrich List? Oh wait, this article sources CSIS's Washington Quarterly? And Luttwak just happens to be a CSIS senior associate?

Much insight into something, but Germany and its 'elites' isn't it. Though I didn't recognize any Lyndon LaRouche/Helga Zepp-LaRouche front groups (I admit to no longer really keeping up in that fantasy world), so this probably counts as being serious, by some definitions. (The ones that don't consider CSIS a joke, for example.)

And this is where the absurd creeps in -
'The third component of German irrationality has to do with the future. Even as the country was spending more than 2 trillion dollars rebuilding the East, Germany has managed to remain the world’s second-largest exporter after China.'
And how does Tony Corn think Germany paid that cool 2 trillion? By printing little pieces of paper? This is the real rift going on - between a world where spending 2 trillion and having a successful export economy are seen as irrational in terms of the future, and one where the future is now, in George Allen's immortal phrasing.

Sorry, this article manages to trump itself -
'Far from solving anything, the reunification of Germany in 1989 has re-opened the German Question'
Almost as if the entire collapse of the Soviet Empire is just a footnote too trivial to mention, and how Europe has developed since that minor event.

Just wondering how you can possibly come up with 3 significant digits of precision on questions that are so hard to predict (growth) and so highly subjective (perception of unity)?

That's just Tyler being cute.

A prognostication with numbers...finally a language I can understand. Look out for that pesky third decimal place...1.65 could be a near miss or a big problem. :)

Just spent some time looking at Tony Corn's writing - it seems as if he is capable of dashing off these sorts of essays in a neverending stream.

Like this one from 2007, with the following nugget near the top -
'The year 2001 could have been an eye-opener but the West, too traumatized by the Islamist attack on America, failed to notice an equally important, if less spectacular, development: the creation by China of a coalition, the Shanghai Cooperation Organization, including Russia and Central Asia as members, Iran as a silent partner, and India and Pakistan as observers. It took another five years for Western foreign policy experts to realize that this emerging SCO was, for all practical purposes, an OPEC with nukes, which had the potential to develop, over time, into a full-fledged "NATO of the East."'

But in just 4 years, why worry about 'OPEC with nukes' when the German Question needs to be dealt with? As a matter of fact, why even mention the SCO when talking about Russia's energy policy in terms of 'Finlandisation' or China's manipulation of trade relations? I can think of a good reason, but being factual, it probably won't appeal much to Corn.

However, the people mocking him seem a tad less self-inflated, so here is another passage providing some insight into Corn's expertise -
'A very great deal of what Corn says about dysfunctional thinking in America is, of course, quite true. Unfortunately, none of the annoyances he describes have much to do with the putative object of his attack. Clausewitz, who—NEWSFLASH!—has been dead for 175 years, is hardly responsible for the scientific, historical, and anthropological ignorance, or the political naiveté, that underlie our dysfunctional national strategic culture. The Clausewitzian observation that "war is a continuation of politics…" is nice and all that, but, if you have no viable definition of your own for what really constitutes "politics"; know nothing either of On War's historical context or of your own; have a delusory, social-science understanding (if that) of human nature; and know nothing of the specific politics in which a particular war is embedded (say, the politics of the Islamic world or, perhaps, the internal politics of Iraq), Clausewitz's input isn't going to prove very enlightening or useful. For strategists suffering from these debilities, "Clausewitzian war" serves only as a way to continue bad policy by other means.'

Can Italy grow 2 percent a year? Heck no, their population is dropping.

Any “set things right” action on Germany’s part is, one way or another, a form of doubling down

Thank you, way too many people don't seem to understand that there is a huge risk in bailing out the periphery.

There is no way a referendum will pass in Ireland. It would be like your boyfriend beating you up then asking you to marry him with the threat you'll be thrown out on the street if you say no

Um... irl, that very often works.

The usual International Relations fluff. Bunch o' woids.

Here's what I don't understand -- the new agreement is basically "keep your budgets in line with revenue or we'll penalize you." But this is exactly the same as the original Euro agreement. Various countries did NOT keep their budgets in line and have NOT been penalized. The EU won't kick out any country, even Greece, because it makes it look like other countries could leave in the future (plus, it kills the grand vision of unified Europe.) They CAN'T kick out Italy or Spain, since they are both in the "too big to fail" category.

So this agreement is just a repeat of the same toothless agreement that's already being ignored. Is anyone going to be convinced by this "we really mean it this time" talk?

Good luck getting anyone to actually see the idiocy of it all.

Is this is yet another of many pre-announcements for the pre-meetings for the pre-negotiations for the n+1 years long treaty change or will this be a surprise announcement of elevating Merkel's position to EU Chancellor with Sarkozy as her Deputy? At the least the consolation to the EUphiles and their perpetual horse race for who has the lowest common denominator is that the US debt committee is just as effective and diluted.

The way I see it, it bils down to this: there are three stable outcomes thinkable.
1. a closer, converged union. Everybody is fiscally disciplined, productivity and wages are in balance everywhere, no explicit or implicit transfers, etc.

2. a smaller eurozone (Germany, Netherlands, Austria, Finland, Luxemburg, maybe Estonia and Slovakia, perhaps some new members (Denmark, Sweden?), France and Belgium both doutbful), or no eurozone at all. This can be achieved by the periphery leaving the euro, or, perhaps easier, by the countries mentioned above leaving the euro.

3. a transfer union, in which "the north" (Germany etq.) permanently transfers money to "the south". Those transfers can consist of inflation, explicit subsidies, etc.

The problem is that the road to 1 (convergence) is via 3 (transfer union). Even the road to an orderly breakup of the euro is through a transfer union. And transfer union have a couple of perverse incentives attached to them, and therefore tend to become permanent, no matter how temporary they were meant to be (see Italy and Belgium).

I think this is seen more clearly today in Germany, the Netherlands, etc. The problem of course is France. If it would be possible to make a plan for a breakup in which France is on the "right" side of the line, this would happen. But France is more a southern country in this respect than a northern one. The reasonable thing to do would be cutting France loos from Germany, but of course the french are clamping themselves to the legs of the german mother.

Well, I hope the plan of Ms. Merkel and mr Sarkozy include a way to exit the euro, but I am not optimistic.

I disagree,
3) will guarantee 1) doesn't happen

I agree with you. Maybe that was not clear from my post. Because a transfer union tends to become permanent, the convergence will not become reality. Apart from that, a convergence is rather improbable, at least in the time frame needed.

1. Can Italy grow at two percent a year, more or less sustainably?

Italy's total fertility rate is one of the lowest in Europe and well below replacement, so it needs substantial immigration to avoid a declining labor force, and if it doesn't avoid a declining a labor force, it needs substantial increases in productivity, from now on, to achieve any sort of growth, and if it achieves any sort of growth, it must channel enough of the fruits of this growth through its state sector to service the entitlement to tax revenue it has already sold, and to channel enough of these fruits through its state sector, it must tax the people entitled to the fruits, including the people who dominate the state sector, who sold the entitlement to tax revenue and skimmed much of the revenue in the process.

None of these events seem likely to occur, and all of them seem mostly unlikely to occur, so I'd say the answer is much closer to "no" than to "yes". 0.5 seems a very generous likelihood.

2. Will/can the market regard the actions of the seventeen eurozone nations as more or less unified?

I won't even venture a guess. Worship of the state has a very long history.

Ok I don't have anything of substance to say. It's just that this article made me wish my German was good enough to follow actual German news reporting. So I decided to start reading a Wikipedia article every day to practice my reading. And todays article is: http://de.wikipedia.org/wiki/Goldmark

When you read conspiracy theories like Corn's don't forget two basic facts:
- Germans are just 80 million people inside the 340 million Eurozone and 500 million EU.
- Nowadays Germans have no interest whatever in "leading" Europe. At the same time, they don't want to become its one and only paymaster. Pls note that it's always other nations which demand that Germany should lead and pay (more than it already does as the EU's main financial contributor). If this is some kind of political war, it should be obvious who are the aggressors. It's not the Germans, who don't either demand power nor money from the others.

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