Ryan Avent is correct about Draghi and the eurozone

I find it shocking how readily we all seem to be accepting the European Central Bank’s inaction on euro-zone economic weakness. Some perspective is in order. Real euro-area output is at roughly the level of the end of 2006 and it is declining. The euro-area economy hasn’t grown since the third quarter of 2011. Total employment is below the level first attained in the second quarter of 2006 and it is declining. The unemployment rate is of course at a record high 11.8%. And inflation—both core and headline—was virtually nil in the second half of 2012.

I would stress that it is even worse than Ryan is suggesting.  Countries such as Greece, Portugal, and Spain have consumed remarkable amounts of political capital.  Britain is considering leaving the EU.  Credit channels are still either in tatters or on life support, relying on ECB guarantees.  More countries are seeing zero or negative growth.  Eurogeddon is here, as a variety of countries have situations worse, in relative terms, than the Great Depression of the 1930s.  It seems the bailout funds, especially the ESM, have given up on the notion of detaching sovereign and bank liabilities from each other.  The so-called banking union is at best a common supervisor rather than real risk-sharing for deposit liabilities.  The fact that we don’t have daily bond market crises, filling up my Twitter feed, is certainly welcome but constitutes a remarkable lowering of the bar for what success means.  Just how would one, these days, articulate why the eurozone should be considered a success and worth preserving going forward?  Is this case no better than the (possibly correct) claim that dissolution would bring economic anarchy?  In my rather (currently) unfashionable view, the eurozone crisis is still getting worse, not better.


But don't we need to know first why "the eurozone crisis is still getting worse, not better" before we recommend breaking up of the eurozone. Breaking it up suggests that its very existence in the problem, but I do not see you make the case. (At least not here; perhaps you have somewhere else). In any event, your recommendation almost seems Krugman-like. Is this one instance where there is a meeting of the minds between Cowen and Krugman?

I'd have thought that pretty obvious. Target ngdp. Even having targeted the price level would have helped.

The politics, even from the left, of many of the member states never really accepted the idea of monetary management of the business cycle. There's no Greenback Party equivalent.

+1. In France at least, the public as well as the commentariat seem completely clueless w.r.t. this issue.

To: Not true, at least with respect to French commentators. There are major ones who make clear cases for rational monetary policy and macroeconomic management at a European level. Just one, who has significant sway, is Jean-Pisani Ferry. Another example: France's major newspaper Le Monde regularly republishes Martin Wolf's Financial Times column.

I didn't hear Pisani-Ferry argue explicitly for monetary stimulus. I'll check le Monde, thanks, but these seem more like exceptions (i might even add Nicolas Goetzmann at Atlantico, but how many readers does that cover ?).

One blatant example of the total lack of debate on the matter in euro circles: when Yves Mersch, a Luxembourgish apparatchik and convinced hard-money austerian, was nominated at the ECB, the finance commission at the European Parliament tried to block him. The reason: his gender. They were unanimous and vocal in making clear that his competence was not in any way questioned.

What killed Europe was the Eurozone. We all knew it. Now, Sports.

The incompetence of the Euroelites just proves that more power must be turned over to the Euroelites.

Steve Sailer;
if it turns out in a few years that you are totally wrong on the EU/ECB, I wonder will you question whether your racial theories may be wrong also.

A big problem is that most US commentators get their Euro news from London sources. (FT/economist etc) that cannot put aside hundreds of years of feeling superior to their European neighbours. They simply cannot see there are many positive signs in the EU much more than the triumvirate of doom (BoE, Fed, BoJ).

Draghi's job is to keep EU inflation at two percent.
That is what he is doing.
This is of course very, very painful painful for Greece, ireland etc, but these countries needed brutal restructuring.
They are getting brutal restructuring, unlike UK, US and Japan.

In November 2012 the Euro area international trade in goods surplus was 13.7 bn euro..

The ECb is truly independent of all those crappy EU governments and is forcing them to take the bitter medicine (unlike UK,US, Japan etc).

Sorry Mex, but the report card is already in.

The Euro has already failed in the sense that it was supposed to make life better for European citizens; instead it's made things worse.

In Greece, Spain, Italy and Portugal an entire generation has been sacrificed for the "Euro Project". It is a senseless and shameful waste, and one that will haunt Europe for decades to come.

Actually you are mistaken.

The Euro was designed to free the global economy from the 'exhorbitant privilige' of the dollar (the dollar is also a dreadful store of value). Look at Rueff/Duisenbergs/Lamalfussy and others through the 1960s/70s

The Euro has two structural innovations;

(1) a separation of central banking from national governments. This is a good thing (apart from places Scandinavia etc.).

(2) splitting the main monetary functions in two (a) the Euro as a Medium of Exchange (Draghi has promised the Chinese/Oil producing that he will keep inflation at 2% max - getting their support.) Oil will be priced/sold in Euro within 5-10 years.
(b) Using gold as the main currency reserve, BUTmarked-to-market at a floating rate (NOT a gold standard).
The ECB quarterly Consolidated financial statement states in its top line the market value of all EU Zone central banks' "gold and gold receivables (asset item 1)". Marked to market prices.
Has never happened before.

The next global monetary system is creeping up on us and the US/UK has missed it completely.

The poverty, massive unemployment, thousands of beggars in the street and mass emigration are a price we should be willing to pay in order to free the world from the clutches of the dollar.

Frankly I don't know why the Greeks aren't more grateful.


I am merely reporting the path the ECB is on.
The morality is another question,

But does Greece need to restructure or not?
They will better off for it eventually.

Sorry. I am not hoover. I just wrote his name in the wrong box


"The Euro was designed to free the global economy from the ‘exhorbitant privilige’ of the dollar"

Every source shows that the Euro was designed to (help) create a 'United States of Europe' (with or without the consent of the people of Europe). Just as NAFTA was planned as a first step towards a NAU (North American Union), the Euro was imposed (without a hint of democracy) to force the unification of Europe by Europe's delusional elites. The Euro was structured with no safety values (exit mechanisms) so that when it failed, the failure could be used to force policies that would never be accepted any other way.

"Draghi has promised the Chinese/Oil producing that he will keep inflation at 2% max – getting their support."

Given that the Euro probably can't survive without higher inflation rates, Draghi is either lying to the oil producers or planning for failure of the Euro.

"Oil will be priced/sold in Euro within 5-10 years"

What exactly does that mean and why would anyone care? The Euro and the dollar are convertible currencies.

"Using gold as the main currency reserve"

Inevitable after Europe retrieves 16 Psyche and extracts the gold from it.

"The next global monetary system is creeping up on us and the US/UK has missed it completely."

History shows that 'global monetary systems' are like the Titanic. Great sailing until you hit an iceberg. Better not to buy the ticket.


There is plenty of Euro news in the U.S. from non-UK sources. Try reading Der Spiegel and Kantoos for a German perspective. VoxEU has opinion from all over Europe.

Greece and Ireland may or may not need restructuring (yes and probably no). However, they aren't getting it via the ECB, the IMF, the Troika, etc. Club Med is simply foundering, floundering, and failing. Ireland is drifting. History shows that regaining competitiveness via internal devaluation is very hard. Only the Nordic states are actually recovering (via deep devaluation in the case of Iceland).

Any assertion of ECB independence is a sad joke at this point. The ECB mandate specifically excluded a debt union. The ECB succumbed to political pressure to bailout Club Med years ago. So much for an independent central bank.

I guess you don't see it. Understandable. You wouldn't be here debating food and bolivian housing-policy etc if you did.

The ECB/BIS and Fed/IMF are on different side of a giant power struggle behind the scenes.
Europe will leave the IMF.

Do you think it would be better if Greece had it's own CB and followed Fed/BoE-like policies? Really?

Tyler and the US macro guys totally missed 2008 and now they are missing an amazing event in our times; a transition to a new monetary system to be implemented by the BIS.

I wish you all the best

What gave it away? Was it Junker saying the euro is "extremely high" at $1.34? Well at least everyone is finally talking about maybe closing the barn doors after the horses left three years ago.

Wrong. They are talking about MAKING a barn door, a necessary first step to eventually being able to close it. Perhaps they hope to prevent the hay bales from escaping?

"The ECB have one mandate and one mandate only:
Price stability

This means inflation will not be left to run unchecked. It also means deflation absolutely will not be allowed to unfold.

In a past age of mega-leverage, where general prices naturally felt the pressure to rise, the only thing the Central Banks could do to act against that tendancy was to intervene in the market for gold and suppress it's price, hoping that this would be noticed in other markets and put a brake on the rises within those also.

In an age of deleveraging today, where prices naturally would fall as the deflationists rightly determine, but where the Central Banks positively will not allow general prices to fall without taking some action to prevent it … what else can they do but actively support gold and hope the other markets, which they can only passively monitor, take their cues from this signal and see their own falls arrested?"


What's with that (mostly) useless yellow metal, for Hell's sake ?


Makes good fillings for cavities. Girls like it.

Girls also seem to love teddy-bears.
You know, if the USA adopted a bear-backed currency...

The Chinese Communist seems desperate for some too.

Bundesbank board member Carl-Ludwig Thiele: "To hold gold as a central bank creates confidence."

Watch what the big Central Banks are doing.

“To hold gold as a central bank creates confidence.”

Above all, it entertains a popular myth that makes a rational discussion on the subject of monetary policy impossible.

'Britain is considering leaving the EU'

No, the Conservatives are hoping to leave something they never wanted to join, and think this is a fine time to do it.

And why not a comparison of the UK pound 'zone' to the eurozone? It could be enlightening.

'Eurogeddon is here, as a variety of countries have situations worse, in relative terms, than the Great Depression of the 1930s.'

And yet strangely, the news report on German radio this morning was about the World Bank Global
Economic Prospects report, with passages like this - 'Financial market conditions have improved dramatically since June. The cumulative effect of national- and EU-wide measures to improve fiscal sustainability, and the augmentation of measures that the European Central Bank (ECB) would be willing to take in defense of the Euro have resulted in a significant improvement in global financial markets. Unlike past episodes of reduced tensions, when market conditions improved only partially, many market risk indicators have fallen back to levels last seen in early 2010 – before concerns about Euro Area fiscal sustainability took the fore.'


But hey, who cares about what the World Bank writes - eurogeddon isn't just coming, it has finally arrived. And unlike a certain center's general director, all of those World Bank professionals simply continue to not realize it. Not that they are rosy tinted forecasters - lots of gloom and doom for everyone in the report. And I do recommend reading the report - it is chock full of actual facts and numbers.

What exactly is the European Central Bank supposed to do that could counteract the effects of Europe's changing dependency ratios? http://www.economicshelp.org/blog/5066/economics/implications-of-higher-dependency-ratio-2/ Europeans (like Japanese people) are living for ever longer and having ever fewer children. The population is in physical decline, so the economy is as well. The current political and economic situation is largely a natural consequence of these demographic facts. I think that if people start dealing with the current situation in terms of this reality they are more likely to provide useful suggestions for change. Tyler has frequently tried to move the debate in this direction and I agree with him.

The could mint a trillion euro coin.

Gad dang it! You beat me to it!

They could try, but the pensioners won't like it.

....aaaand what does this have to do with unemployment ?

In terms of political economy, a lot. Pensioners are more likely to vote than non-penioners are, giving them greater political weight than their numbers would merit alone. These voting pensioners are more likely to prioritize protecting their pensions (thereby reducing the share of state revenue available for other projects) and protecting their savings (by pumping state revenues into failed banks) than they are to prioritize reducing taxes or using tax revenue to encourage long-term economic growth and associated job creation. Why invest in the future if you're going to be dead in 10 years?

What exactly is the European Central Bank supposed to do ?

Target NGDP, pray, or both?

Europe is still in a critical position, but as the World Bank report (mentioned above in a comment) highlights, there are many signs of significant improvement in the European financial markets. Take for example the Target 2 balances everyone loved talking about half a year ago. They have improved significantly, meaning that people are putting money back in some peripheral banking systems:

e.g.: http://www.spiegel.de/international/europe/confidence-in-southern-european-banks-rising-in-sign-of-crisis-hope-a-876577.html

More sheep to the slaughter.

I'd say that there has been no bond crisis yet because the countries in the Eurozone are propping each other up. Each country is buying up the other countries bonds like crazy. They are hoping that the bond 'stability' will encourage hedge funds and non-Euro countries to jump in and buy these toxic Greek, Spanish, Italian, and Irish bonds held by the French. (Oh wait...now the French bonds are toxic!)

The next shoe to drop will be Switzerland's decision to stop keeping the Swiss Franc stable against the Euro. That will be the sign that the jig is up for the Euro as a currency.

"The next shoe to drop will be Switzerland’s decision to stop keeping the Swiss Franc stable against the Euro."

Do they feel suicidal lately ?

It's a small country with a giant banking sector. They've been luring businesses to move their headquarters there with 10 year tax breaks.

Swiss short term and 2-yr bonds have been returning a negative interest rate for over a year now. They're juggling chainsaws and throwing them higher and higher. The SNB is hoping that the Eurozone will not be irrational longer than they can keep the printing presses running.

Most of the expansion of their balance sheet came before they set an explicit exchange rate limit. Overall, they made a profit on the operation. The policy saved their export industry (the Swiss economy is not entirely made of banks) and as long as the CHF stays overvalued in PPP terms (it still is), there shouldn't be much inflationary pressure.

Where's the problem ?

"a variety of countries have situations worse, in relative terms, than the Great Depression of the 1930s."

I'm trying to understand what this could possibly mean. Seriously.

Yes, I'd like an explanation of this too. I don't see by which metrics (that really matter to people) that a variety of counties are worse in relative terms than the Great Depression.


“a variety of countries have situations worse, in relative terms, than the Great Depression of the 1930s.”

The fall in GDP and increase in unemployment in several countries is much worse than the Great Depression. Check the GDP statistics for the Club Med countries in the 1930s versus the current downturn. The current situation is vastly worse.

What many folks don't know, is that the Great Depression wasn't all that deep in much of the world. It hit the U.S. very hard along with a few other countries. For much of the world, it was really the 'Great and Long Recession'. In Europe, Germany was the hardest hit country...

The trend has been the other way. Banks are stuffed with their own sovereign's bonds.

The big problem is Spain, where the banks convinced depositors that buying bank equity was a safe way to increase yield, to the tune of 60 Billion Euros. Spain has been told that to get money to recapitalize the banks, the stockholders have to be shafted (debt is senior to equity in bankruptcy/liquidation). So not only will be people be unemployed and indebted, but they will get their savings confiscated.

The politics of this are lethal, and Spain has been looking for a fudge, but the bond markets aren't likely to gobble up 60 Billion Euros of debt on top of what Spain already has to roll over, which is considerable.

Of course, the latest Greek bailout is failing. There's no political support in the north for the cost a real bailout, so we just get death of a thousand cuts fake ones. Meanwhile the Greek politicians have exempted themselves from the national austerity.


Greece has a long history of political division, and this foolishness could soon turn ugly.


What people don't realize is that Germany's financial situation isn't all that great either. This is financial net worth: financial assets - total debt as a percent of GDP -

US -5%
Australia -83%
Italy -88%
Germany -90%
France -158%
Canada -189%
Spain -199%
Japan -200%
UK -219%

not pretty.

"US -5%"
Excuse me?

Heh. I get > 300% for the USA (2012 Q3.)

I thought Germany had an unusual number of small, privately-owned businesses, which may be undervalued here.

Correction. I get 210% for the US (305% if you include nonfinancial assets.)

US Data ($ trillions)

Total financial assets: $53.6
Total liabilities: $13.4*
Federal government debt: $16.4
US GDP: $15.8

* This includes $9.5 trillion in home mortgages, which I reckon we would exclude since we're ignoring nonfinancial assets, includng real estate ($24.6 trillion.)

Those liabilities look to be way low.

FRED shows
Debt Outstanding Domestic Nonfinancial Sectors - Total Domestic Nonfinancial Sectors (TODNS) at around $40 trillion
Debt Outstanding Domestic Financial Sectors (DODFS) at around $16 trillion
adding in federal debt gives $70 trillion then excluding mortgages gives around -30% GDP but since I used a different source and given the convoluted way flow of funds numbers are calculated, this is a coincidence..

I'll have to find my original source, which was using world bank or OECD figures IIR..

I think the general flavor/ranking of it is right - that the US is in better shape than we think; Germany is in worse shape; and we should organize a prayer vigil for the UK. A great deal of the UK debt is in their bloated financial sector. UK has much better demographics than Germany or especially Italy, which looks a lot like Japan.

Countries have other assets, of course, but their value fluctuates and their liquidity is low.

Intensity of the economic crisis by country expressed as a value from 0 to 100
(0 = null level of the crisis 100 = maximum level)
Orlando Bisegna Index
For more information visit http://www.orlandobisegna.org/

1) Greece 39.54
2) Portugal 31.12
3) Ireland 29.08
4) Spain 25.22
5) Italy 23.68
6) Argentina 15.72
7) France 15.45
8) Japan 15.11
9) Netherlands 14.79
10) United Kingdom 14.53
11) United States 13.19
12) South Africa 11.37
13) Canada 11.21
14) Saudi Arabia 10.85
15) Brazil 10.63
16) Germany 10.15
17) Russia 9.87
18) Mexico 9.81
19) Sweden 9.40
20) Turkey 9.19
21) South Korea 9.06
22) Indonesia 8.76
23) Australia 8.43
24) India 8.10
25) China 6.14

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