"If euro fails then Europe fails" - Angela Merkel

Discussion in 'Politics' started by Jason, May 20, 2010.

  1. Jason

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    Angela Merkel's grim warning comes as the euro is battered with the currency falling sharply and sharp falls on European stock exchanges. What do we all make of this? My thoughts:

    * The biggest bailout in history hasn't worked. The markets are not soothed.
    * The Greek finance ministry now says that Greece leaving the euro is "possible" though "not likely". I read this as probable but not quite certain.
    * There is enormous financial and legal thought going into a managed default (for Greece and others) which involves leaving the euro, and Merkel indeed alluded to this. Options seem to be big bang (a country crashes out overnight) or a planned exit including a period on a temporary currency which is not freely traded.
    * The "big bang" would become essential if there was a run on the banks. While strictly it would happen at a fixed time (midnight or 1am) it would help a lot if the next day were Sunday (less activity) or even a bank holiday weekend (when is the next bank holiday in Greece?) The "planned exit" appears to envisage an electronic only currency, with shop transactions taking place in some form of coupon.
    * The Lisbon Treaty has a legal framework which means that if a country leaves the Euro it also leaves the EU. Merkel's logic seems inescapable. If the Euro goes all Eurozone countries de jure leave the EU.
    * Market worries about Italy have grown in the last few days. Realistically if Greece goes so too do Portugal, Spain and Italy. Ireland may have problems also.
    * Merkel's comments could be interpreted as "we must do everything to save the Euro". But we all know - and certainly she knows - that we've already done everything. Rather she seems to be warning "When the euro fails then Europe fails". Surely she is giving a first warning of an imminent collapse of the EU. We need to manage that collapse.
    * That less than a year after the Lisbon Treaty we are contemplating the demise of the EU shows that the Lisbon Treaty has failed. Political hubris created the Euro in defiance of basic economics and imposed Lisbon against the will of the people. Now we need political humility as a way of managing the inevitable collapse. It is going to be dire.
     
  2. sargon20

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    It seems inescapable that some countries will have to leave. How that happens we shall see. I'm sure the UK is happy they didn't jump on board.
     
  3. sbat

    sbat New Member

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    Could you post some links to the articles from where you got these tidbits? This is worth a thorough read.
     
  4. Jason

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  5. bigmec2001

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    Interesting thoughts brought forward in a nutshell. But then we should not forget that the € was at about the same level 4 years back and the whole [€] world was happy with that level. Let's keep in mind that attacking the € means attacking the financial behaviour of the individual states (Greece in first place) who borrowed tons of cheap money and then got stuck in uncontrolable debts during the so-called financial crisis 2008/2009. Now the debt limits cannot be respected, sufficient national growth is not in sight, taxes can hardly by increased => confidence is gone => markets slain the €.
    Somewhat logical for me.
     
  6. sbat

    sbat New Member

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    Third Law of Thermodynamics at world in the world of finance
     
  7. TomCat84

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    I'm no expert in world economics, but this seems like decent news for the US$. What other currency is going to step up as a legit alternative to the dollar other than the euro?
     
  8. Joll

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    It's very interesting. They're calling for Brussels to have new powers to co-ordinate national economies (first step to a single economic government?). I sincerely hope this is confined to eurozone countries though.

    Seems if they don't take emergency measures, things could unravel for the euro. Greece leaving seems more of a possibility now, too. Oddly though - isn't another country still due to join the single currency next year...Estonia or Slovakia or something?
     
  9. alx

    alx
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    Europe won't fail, the EU will fail. of course it will effect the whole of Europe though.

    As the saying goes, "the bigger you are, the harder you fall"
     
  10. Jason

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    Estonia is due to join the Euro in 2011. The final, irrevocable decision is due to be taken July 2010. This is going to be an important moment for Euro confidence. The economy of Estonia is in better shape than any of those in the Eurozone (now that's a statement worth reading twice!) so there is no doubt that Estonia is fit to join. But does Estonia now want to join? If the Euro is going pear-shaped it would be absurd to join. Prudence might suggest a delay, but this would be seen as a monumental vote of no confidence in the Euro. So I daresay the thumbscrews are being applied. Latvia is not quite as far ahead. Their currency is pegged to the Euro, but they are asking for IMF support. Almost certainly this support would be linked with decoupling, again a vote of no confidence in the Euro.

    The proposed economic government would be the Eurocrats' solution to the present crisis (which they would then rewrite as a "beneficial crisis" supporting European integration). But there are two key points:
    * It would be for those countries in the Euro and planning to join - ie all except the UK and possibly Sweden.
    * The UK Coalition has stated that in the next 5 years it will neither join the Euro nor make any preparations to join the Euro. The lack of preparations is the key issue - this pushes potential Euro membership into the next decade at the earliest. If the EU goes for economic governance then the UK will be on the outside, which puts the UK outside a possible United States of Europe. This is significant.

    The EU is rattled that the UK government has made this statement on the Euro, which is in effect a vote of no confidence. The UK government has also called for an end to the peripatetic EU parliament, which brings to the fore the absurdity of the Brussels gravy train. Therefore Sarkozy has said "we need the UK in Europe".

    There is a Euro crisis meeting tomorrow. The idea of the Eurozone breaking up is now being talked about. It is now a possibility. There are demonstrations in Germany demanding the return of the DM. Curiously the legal ramifications of a complete disintegration are easier to handle than those of one single country breaking away. My personal view is that this is what will happen, but note my view is a pretty extreme view (I used to think Greece would leave, or Club Med, or even Germany, but I'm now thinking a complete break up). A more measured view is that the Eurozone will be plagued by endemic structural problems and underperform for years, but that the Euro will continue with a new level of economic governance, ie the politicians stepping in to shore up a failing currency with a raft of regulations which diminish the competitiveness of the Eurozone.
     
  11. dandelion

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    I have to say that if the euro dissolves in successive government defaults, the UK and US wont be far behind. This isnt about the euro but about every country in the world with a budget deficit. I think I disagree, alx: its the entire european economy we are talking about and it will be affected as one beast.

    I dont see any prospect of treaty renegotiaitions. It took how long last time? It just isnt going to happen. The rules are set, and we play the game. The rumblings of the last few days are because Merkel is declaring war on traders. So they are fighting back and giving the market a shake. Some may be scared away and go play elsewhere, but trading currrency and lending it is what they do, so they cant leave really.

    Merkel is probably right that the crux of the matter is what to do about Greece. At the moment there is a lot of grandstanding. Greece wont do what is necessary, maybe cannot do it. So the only choices are keep underwriting them or let them go bust. A number of people said they ought to be allowed to go bust. If ity eventually becomes inevitable, then better sooner than later, but everyone hopes an escape will be found. Im afraid I still dont see what all this has to do with the continuation of the euro, let alone the EU. Greece would be daft to leave either.
     
  12. Jason

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    The consequencies of a straightforward Euro collapse could well be a worldwide depression - therefore a bad thing for everyone. A managed break-up or substantial weakening of the Euro are different matters. Yes probably the dollar would be seen as the only real reserve currency. Whether that is good for the USA is a complex question.

    Our EU politicians got us into this mess by thinking that politics somehow trumped basic economics. We need real leadership to get us out. The big decisions are going to have to be taken behind closed doors so as not to spook the markets. Merkel and Sarkozy are the key players.
     
  13. dandelion

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    Well my debates on here lead me to think that what is needed is exactly some reconsideration of what really constitutes basic economics. The logic of the current situation is for Greece to default. Germany is trying to prevent traders exploiting the situation and making loads of money on inflated debt prices and this may succeed, but the central problem remains. It is interesting that the IMF solution is a balanced budget yet this is contrary to basic economic theories which argue you should spend your way out of any crisis. This is a curious contradiction at the heart of modern national financing.
     
  14. TomCat84

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    There has never been a US government default on debt in the entire history of this country. It would be political suicide to allow such a thing, and it isn't going to happen in the forseeable future.
     
  15. Jason

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    Lots of agreement here. Certainly I don't see any possibility of treaty renegotiation on the timescale needed. I think we now have two parallel processes:

    1) GREECE
    * Greece is in a tailspin. Even if it managed to enforce its austerity package it still would not work - rather it would cause years of recession and reduced prosperity. There are ethical issues around whether it should even try - my view is it is morally wrong to inflict purposeless austerity on a people.
    * Subsidy would work. De facto that is what we have now - the loans won't be repaid so they are a subsidy. But subsidy is needed for at least a decade. And politically this is unacceptable to Germany et al. So we have the pretence of loans and the pretence of an austerity programme - a grudging, inadequate subsidy justified by a painful and failing austerity programme.
    * Default will happen (unless there is a miracle). If within the Euro then the markets will instantly dump the Euro - a Greek default within the Euro ends the Euro. So we're left with default outside the Euro. Greece will be kicked out, and Merkel is now talking about a mechanism for this.
    * If the Eurozone survives a Greek default (in or out) the contagion will spread very quickly. Soros reckons Spain is the pivotal country which will bring down the Euro.

    2) EUROZONE.
    * Confidence is dented. The markets are moving the wrong way. The problem is not so much the level of the Euro but that it is established in a long and downward slide. The biggest bailout in history has failed to stabilise the markets. So the Eurozone lurches to another crisis meeting tomorrow. We can all write the outcome: statement of support, 48hr market rally, more falls.
    * The underlying problem is of course the debts. But without economic government there is not an adequate structure in place to handle the instabilities the debts are causing. Additionally the one size fits all fiscal policy isn't fitting any country properly. And we cannot get true economic government (ie fiscal union within a Eurozone sovereign state) on the markets' timetable.
    * The markets are likely to move against the Eurozone. Merkel's restrictions on short selling is (as Cameron points out ) treating a sympton not the underlying cause.

    It is a matter of speculation which process happens fastest. But both end in Eurozone disaster. The tipping point for our politicians is when they take to heart what is happening (rather than what they want to happen) and start taking the actions needed to deal with it. Merkel seems to be doing this. If Sarkozy is on-board then maybe there is a way forward - but the way forward is to end the Euro. Economics 101 is that you cannot make a currency union work (for more than a few years) without a full fiscal union. The Euro seems set to be the latest currency union of a very long list to demonstrate this basic economic concept.
     
  16. dandelion

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    It is acceptable if it resolves the problem. Germany would be willing to pay quite a bit more if it has to and if it was certain it would fix matters. 10 years subsidy would be acceptable as a solution, but although Greece is the most urgent case, it is isnt the only one.


    Now there my own reasoning and even some of the people,you have quoted in the past disagree. They see that it is perfectly possible for Greece to default continuing to use euro. Just embarassing. people in the Uk are just beginning to grumble about price inflation due to the sinking pound. A new Greek currency would not float so much as sink.


    Your article suggested more she wanted a third option, to be able to intervene in Greece's economy: more powers not kicking anyone out.


    But it isnt a specifically euro problem and frankly the non-defaulting countries will carry on regardless. The situation now is that countries which if they had their own currencies would already have gone under are being propped up because they are euro members and Germanies economy is stabilising the currency.

    The euro will only fall if Germany gives up on it. Nothing else matters.

    Because Greece's specific problems never were the real issue. Having dealt with Greece attention moves on to the next weak point. Be happy. It could have been us next. it may yet be. In fact, if we dont do something collectively, which would include the Uk taking part in international financial fixes, it is very likely markets will pick off countries one by one. People are making money from bankrupting countries, so obviously they will try to do it. It is immoral we let that happen.

    I suggest we all join one international currency. The debates here are exactly like those in the uk over coalition government. It is simply a different way of doing things with some advantages and some disadvantages. The euro is founded on an agreement never to get grossly into debt. That went out the window, so I suppose something has to give. Either let Greece (etc) default, or act collectively to prevent it, which means the richer countries bailing out the poorer. It is not essential to the system to do this, but people may feel that in the long run it will pay off. But if they dont, life inside an independantly viable currency is just different to life inside one which rises or falls with that country.

    That remains to be seen. The EU is highly integrated fiscally. That's what has kept Greece afloat thus far.
     
  17. Jason

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    The IMF is right in that a balanced budget is a fundamental. By the way Germany's decision to legislate against short selling is close to irrelevant and of course it is for their home consumption. It has somewhat upset volatile markets for no better reason than making voters in Germany feel a bit better about their government.

    Spending your way out of a recession is only justified when you are spending money that you have tucked away for a rainy day, or engaging in modest and prudent borrowing. There is certainly a place for such spending in a recession where it is prudent. But politicians can easily borrow too much, and the electorate loves it (jam today!) Too much spending leads at best to a nasty shock a few years down the line (which is the British problem - Labour have saddled future parliaments with a horrific and crippling time-bomb debt when their bonds mature) and at worst to a loss of confidence from the ratings agencies and markets (a fate Britain will now probably avoid, but if right now we had either a Labour government or a truly hung parliament most probably it would already have happened).

    Basic economics hasn't changed. By the way The Times today has said that the way forward for France and Germany is to enact Thatcherite economic policies. And while Thatcherite is a boo word in Britain and won't cross the lips of our poiticians, this is pretty much the economics Cameron and Clegg are proposing for the UK. There is no alternative. True socialism in the USSR and China failed. Euro-Socialism is failing in the Euro catastrophe. Unbridled capitalism doesn't work (curiously Labour gave us an example of the failure of unbridled capitalism with inadequate bank regulations). We are left with regulated capitalism - Thatcherism - as the only policy left.
     
  18. Joll

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    Interesting and informative post, Jase - thanks. :smile:
    I personally see them pursuing the economic government option - possibly without Greece. Failing that, a redrawing of the eurozone, with a smallish number of economically integrated states.
     
  19. D_Andreas Sukov

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    Note that alot of the talk surrounding this and the "Neuro" have come from British Financial papers. A failing Euro is good for the British Pound. Just Sayin'...
     
  20. BigDallasDick8x6

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    Buy milk and bread!!
     
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