"If euro fails then Europe fails" - Angela Merkel

[midlifebear]

Milk and bread?! Hell, if a real crisis happens, I'm ready to more apartments in Barcelona and possibly expand to and Sitges and Ibiza. However, I doubt I'll be that lucky.

 

[798686]

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'...

Yeh, kinda, in terms of exchange rates - unless there's another full-blown crisis over there which damages demand for our exports, I guess.

Definitely seems to have solidified British opinion against joining the euro for the time being.

 

[Jason]

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'...

The German press right now is generally far more anti-Euro than anything in the UK press. For France I've just had a look at Le Figaro which is reporting that the Euro is not under threat. Now if pro Euro Le Figaro has denied it, then it really must be true! I saw a Spanish paper earlier in the week which was generally anti-EU in its reporting.

A failing Euro would hurt the UK. A volatile Eurozone - now that's risky but interesting. If the UK is perceived as safer than the Eurozone a lot of money would flood into the UK markets.

 

[Sergeant_Torpedo]

Merkel is an opportunist. Her family milked the East German communist systems and now she is a paragon for state capitalism. She goes to the highest bidder.

 

[Drifterwood]

BBC News - EU finance ministers' taskforce to meet in Brussels

Big day today.

 

[dandelion]

it was quite odd seeing cameron visiting europe yesterday without Clegg bouncing along at his side. I though they did everything together now. Maybe theyll go one by one and do good cop bad cop to those europeans.

 

[Jason]

An editorial piece in today's Daily Telegraph (UK broadsheet) says that failure of the Euro is "inevitable". It talks of the Euro project being a project for a boom time that is totally unable to withstand a downturn. The speculation is around the manner in which the Euro will fail. It may be one or more Club Med countries kicked out or withdrawing (a situation that would traumatise the Euro). It may be a "hard Euro" breaking away (possibly Germany plus Austria plus Benelux).

The meeting today is for the EU to say life is rosy and request the markets to be confident. They might at best manage to create a few days of stability.

Of course it is possible that the Daily Telegraph and lots of other commentators have got it wrong. But lets assume for a moment they are right.

* Both scenarios now lead to the fragmentation of the Euro. If Greece goes so will the rest of Club Med, and the tensions between the German and French economies will become more starkly exposed. If Germany leads a "hard Euro" out of the Euro then France is pretty much obliged to lead a "medium Euro".

* The legal existence of the EU is now predicated on the Lisbon Treaty which states that any country that leaves the Euro also leaves the EU. At the time of a comprehensive breakdown of the Euro we would de jure have a cessation of the EU. Merkel is right that if the Euro goes then the EU goes. It is hard to see how a treaty to create a new EU could be got through quickly - or whether countries would want to sign up to it.

* If the Lisbon Treaty were due for ratification this year rather than last not a single country would ratify it, so fundamental and so catastrophically damaging are the flaws in it that have now been revealed. Curiously the best thing that the Eurocrats could do now to save the EU would be to get ratified by all member states a one-sentence treaty: "The Lisbon Treaty is repealed". I haven't heard a whisper about this in the press but surely it would work. With Lisbon repealed it would be possible for the Euro to fragment without the chaos of a de jure break-up of the EU.

 

[TomCat84]

So we go back to francs, marks, and pesetas?

 

[dong20]

This is surely Jason's ultimate wet dream ... :wink:

 

[Jason]

This from today's Daily Telegraph. I need to point out that the Daily Telegraph is a UK quality broadsheet. It is right-of-centre in its politics (nicknames the "Torygraph") but it is not sensational. And yes I know this is in the end the writing of a single political commentator. But that ANY serious newspaper can publish this and not be a laughing stock demonstrates the seriousness of the problem.

The article sets out that the Euro is a "zombie currency", that it "was never a real currency", that it is "monopoly money". It also disputes the assessment that the financial position facing the Eurozone is the worst since WW2 or even WW1 - rather it is the worst since 1789. And it points out that Merkel is right that a failure of the Euro is the failure of the EU, but suggests she is wrong in saying if it fails - rather the key word is when.

Read and weep:
The EU is as doomed as its currency – let's get out from under this collapsing monstrosity – Telegraph Blogs
Dong20 is right that I think the EU project is wrong - morally, culturally, socially, economically, theologically - and that I would be ecstatic to see it rolled back. But not this way. This is disaster.

We're less than a year from the Lisbon Treaty. I've had a lot of ribbing on this board for my views expressed in many threads that the Euro is in problems (I started posting well before there was much media interest). My personal views now are:
1) The Euro must now fail - it is past the point of saving. It is just a matter of how long the process will take, and how well or badly it is managed.
2) The EU as we know it is over bar the shouting. Another treaty is not possible (Cameron has stated that the UK would veto, and so would others). The challenge is to manage the unravelling. A logical first step is to repeal Lisbon (which locks in membership of the Euro to membership of the EU).

 

[dandelion]

It would be rather naive to say Cameron will veto a new treaty. The tory party WANTS a new treaty. Just one which loosens UK involvement in the EU, rather than tightens it. This is exactly what Thatcher fought for with considerable success. There is an obvious solution of two-track Europe once again, with some countries increasing integration while the UK gets an opt out and even concessions on the current position. A crisis is a golden opportunity for this. Though what precisely would Cameron ask for?

But this ignores the question of what the public or politicians might want in other countries. If we are going to look at this from the point of view of grand political schemes, is this whole business a CIA inspired plot to destroy the threat to the US which the EU represents (having cut the USSR down to size), or from the other side a plot to generate further EU integration as the solution to a perceived crisis? Probably it is neither, though it could be both, or yet another example that the world banking system is out of control. Not that Greece didnt ask for it, and hand them the ammunition by false accounting and unsustainable deficit. Yet the Greek situation was not so bad had the banks not intervened by engineering a world recession. Quite a few governments live on the edge of what is sustainable and have been presented with immense difficulties now there is an unanticipated problem. It is the nature of governments to live dangerously. It is economic orthodoxy to do so.

I take it from the article blog that Warner has a track record of being anti-EU and euro. He seems to have entirely the wrong view of the euro, considering its greatest asset, that it is not a national currency but an independant unit of financial value, as its greatest weakness, because it does not pander to the needs of any one government. And it is the needs of governments we are talking about, not of their people. It is the Greek government which is bankrupt and has failed, not by all accounts the Greek economy or individual people. The problem is a need for governments to adjust to life within a currency which protects the value of money rather than being a handy tool to bail out financially incompetent rulers. In the UK we are seeing the first difficulties due to the collapse of sterling: inflation is on the rise. A falling euro will inevitably introduce this little difficulty into the Greek situation soon enough. A falling currency is a way to enforce taxation on the people to bail out a government which would not formally introduce that taxation.

There was a fascinating TV film yesterday from the US arguing the golden days of US life had 90% tax on high earners, and it was not least removing this which brought about the collapse of US government finances and the national lifestyle. Governments today must provide services. Even more important, they must tax those people and organisations which are holding the money enough to balance their books (which means tax the rich). This is the greatest risk with the new conservative administration, that they will not tax enough.

 

[798686]

The papers today hint that Cameron wouldn't ask for a referendum if the new economic governance powers applied only to eurozone countries, which seems fair enough.

Also...ironic time, economically, for the ECB to lay the foundation of its 700m+ euro new building in Frankfurt.

 

[Jason]

The situation is moving so fast that we are all running to keep up. Probably Cameron will make up his mind when something happens - but he made very Euro-sceptic comments in his presentation with Angela Merkel. I very much doubt he would agree economic governnment/governance even if it doesn't directly involve the UK. Such a split (Eurozone plus aspiring Eurozone v UK + Sweden) would be a virtual exit from the EU for the UK, and not on the exit terms the UK would want.

Dandelion - the Euro is indeed intended as a trans-national currency with a single value throughout the eurozone. The politicians saw this as its great strength; the economists as its fatal weakness. The Euro is based on the perceived worth of the Eurozone economies. If they were united within a fiscal union it would be the average worth of those economies. However they are not. The risk is that the markets value all Euros according to the weakest economy or economies. They might just discount Greece (it isn't that big as an economy) but they are not going to discount Spain and Italy. If they really get upset we can anticipate Asian banks selling Euros and investors everywhere selling Euro-denominated stocks and shares.

 

[dandelion]

Dandelion - the Euro is indeed intended as a trans-national currency with a single value throughout the eurozone. The politicians saw this as its great strength; the economists as its fatal weakness. The Euro is based on the perceived worth of the Eurozone economies. If they were united within a fiscal union it would be the average worth of those economies. However they are not. The risk is that the markets value all Euros according to the weakest economy or economies. They might just discount Greece (it isn't that big as an economy) but they are not going to discount Spain and Italy. If they really get upset we can anticipate Asian banks selling Euros and investors everywhere selling Euro-denominated stocks and shares.

All youre saying is that the currency will reflect its average value across members, not really surprising. The EU IS a fiscal union, just not one which reacts quickly. Id agree the members have a choice, whether closer fiscal union so that all member economies become completely linked, or accept that some will inevitably do better than others. I do not see any problem with the latter, but the logic of it is that if Greece or anyone else goes bust, so be it. The situation right now is half hearted propping up, which in many ways is the worst of both worlds. No one is quite certain whether when push comes to shove someone will stump up the money, or not. If a definite decision had been made to help the people of Greece rather than the government of Greece, that might have been a very good thing.

 

[Jason]

The approach to the Greek problem has been a disaster - too little, too late and no true leadership.

Fiscal union means a union of all significant tax and expenditure decisions along with the ability of a central bank to issue bonds. We don't have anything like this in the EU. And without a fiscal union the problem is that the single currency does NOT necessarily represent the average strength of the Eurozone economies. It did in the boom years, but we are now seeing a trend towards it representing an average of the weakest few economies.

If Greece goes bust within the Euro it will take the Euro with it. The markets will go into panic and will dump Euros and Euro denominated assets. The problem is that if Greece is now kicked out or leaves the result is likely to be similar (maybe marginally better). We had more options two or three months ago. What we are doing is delaying the inevitable with expensive treatment. But the Euro is terminally ill. The life support system uniquely hurts Greece, so the well being of the Greek people is being sacrificed for the temporary defense of a political ideal.

The present measures to help Greece are indeed half hearted. I'm not aware of anyone saying they think they will work - of course they won't. I think this is behind the Telegraph's "zombie currency" quip. We have a forthcoming disaster that logic says must happen - but the political class are in denial, and none of the bankers, economists or speculators wants to tell the world that Emperor Euro is in his birthday suit, naked.

Today's Observer advises Brits going on their hols to Euroland not to buy Euros until just before they go. If I'm a British business trading with the Eurozone I now want either the contract in sterling or a premium for my risk. Many Asian economies are reducing their Euro reserves. We need leadership from the Eurocrats. They need their heads knocked together, to be pulled out of their lavish offices and made to realise that it is all going pear shaped. And they need to act. Markets need certainty. The only solution I can see is to begin the process of decoupling the national currencies over say 12 months.

 

[798686]

Interesting commentary by Anatole Kaletsky in today's Times, on the potential dangers of allowing Greece to default or leave the euro...

 

[Jason]

Anatole Kaletsky surely tells it as it is - a default by Greece spells catastrophe.

But I don't agree his comparison with the Lehman default. In the case of Lehman the US government had the ability to intervene and support the bank. Leaving aside the rights and wrongs of such action it was something that was at least possible. The legal framework permitted it. However within the Eurozone there is no such legal possibility of subsidy to a country - indeed the Lisbon Treaty specifically excludes it. There is an exception in the case of a natural disaster, but that is it.

Therefore the Eurozone cannot subsidise Greece. It has stretched matters to the limit with loans which we all know will become subsidies, but it has exhausted what it can do in this direction. In order to subsidise Greece a treaty would be needed of the Eurozone sixteen (and arguably of the whole EU 27). Each country would need to take the issue back to their national parliaments, a process at best slow and realistically one that is going to be blocked by at least some nations.

So what are we left with?
1) There is the solution that some Eurocrats might even believe possible - you hold lots of meetings in swanky conference centres bedecked with the EU flag, play Ode to Joy a lot, declare your support for Greece and the Euro and the EU - and the markets will be good and listen. The great worry is that a lot of high ranking Eurocrats are in this mindset. But realistically it won't happen. At best this is the buy time solution.
2) Inspirational leadership. Frightening isn't it - this is what we need to avoid catastrophe. Solutions might include the following:
a) Greek suspension from the Euro - and perhaps others also. It may be possible to do this without the markets going crazy. In effect Greece would not float competely free but have a back-stop at a certain level where the ECB would step in to buy the New Drachma.
b) Germany revalues out of the Euro. And having seen in the last few days the willingness of Germany to go it alone I think this looks more and more likely. Probably Germany+Austria+Benelux as one currency. Then France+most of the rest. Perhaps Greece, Portugal, Spain, Italy left on the Euro which devalues very substantially.

 

[798686]

Will be very interesting to watch - and cheers for the analysis, Jase.

Inspirational leadership would be needed (hopefully they won't wheel Blair in at some point, lol) - I can definitely see a scenario with a number of the stronger countries in a closer monetary union and leaving the rest behind. Not quite sure how it will happen tho.

 

[dandelion]

However within the Eurozone there is no such legal possibility of subsidy to a country - indeed the Lisbon Treaty specifically excludes it.

Youre thinking inside the box. The EU is just an organisation set up to administer an international treaty agreement between several nations. They are all sovereign states and there is nothing to prevent any or all of them acting independantly or together.

. Each country would need to take the issue back to their national parliaments, a process at best slow and realistically one that is going to be blocked by at least some nations.

Obviously if they do decide to act in this way only those governments willing and able will do so: it would be interesting to see just how fast they could do such a thing.

If you want an example, we bailed out the iceland banks didnt we? still bickering about who will finally pay.

What Kaletsky says is that it would be disastrous to allow Greece to go bust and it would be disastrous for any country to leave the euro. The only course therefor eis to prevent either happening.

 

[Jason]

Youre thinking inside the box. The EU is just an organisation set up to administer an international treaty agreement between several nations. They are all sovereign states and there is nothing to prevent any or all of them acting independantly or together.

True.

As I see it Greece can be subsidised for the next decade or so by any of the following:
1) The whole EU. But Lisbon doesn't allow this, and all 27 won't agree.
2) The Eurozone. But Lisbon doesn't allow this and all 16 won't agree.
3) By a "coalition of the willing" from within the Eurozone. Presumably Germany and France. Perhaps with others also (but not Spain, Portugal, Italy, Ireland and probably not Belgium).
4) By countries outside the EU.

I take it (4) just isn't going to happen. The mechanism we have is the IMF, but that doesn't do subsidy - rather it is devaluation plus austerity plus loans.

So we're left with a Franco-German subsidy programme. The project is comparable in scale to the reunification of Germany with the subsidies to the former DDR. This was carried out through what were generally boom years and with a lot of support from Germans in the former West Germany. Additionally there was EEC/EU support. Now problems include the following:
1) Could German and French politicians sell such a programme to their own people? It would mean very substantial changes in both countries, including big tax rises and spending cuts.
2) Could the German and French economies withstand the strain? Both are better than many in Europe though neither is within the EU guidelines for deficit to GDP.
3) Would it work? If Greece is subsidised the country that then looks most vulnerable is Portugal. The markets would test the strength of Portugal and it is likely that Portugal would just replace Greece as the weakest link.

If France and Germany want to subsidise Greece then great - if it works (big if) it would help the world. But I don't think they can sell it to their people, I think it risks taking them with it (though in fairness I don't rank their chances high whatever they do) and I really doubt it would do more than shift the spotlight to Portugal.

My view is that the Euro (and the EU) is failing. The challenge for the UK is to insulate itself as far as is possible. Within this context Conservative Euro-scepticism is important, as is the statement that the relationship with the USA is an "unbreakable alliance". With our own currency, with financial markets somewhat pacified by the realisation that the UK has now abandoned its recent policies of politically motivated financial illiteracy and with US support the UK can hope to remain solvent. But the Eurozone has had it.