What will happen to Greece?

[Drifterwood]

Economic necessity ultimately trumps everything else.

 

[798686]

Yup - which was what the original idea when introducing the euro. 'A single currency will necessitate a single economic goverment...'

 

[Jason]

Took the Eurocrats a while to get round to this, but they've got there. What is almost comic is the hedging. This isn't actually being presented as a bailout, just as a package that has been put together on the chance that Greece may need it.

Both the EU and the IMF are involved in the package - probably 2/3rds EU and 1/3 IMF. This is a great fudge to save EU blushes - but the key point remains that a Eurozone country looks like getting an IMF bailout. The markets will note this, and yes the Euro is tarnished. I strongly suspect that the IMF share of responsibility will increase substantially. The IMF would usually manage a devaluation as part of the exit package - this isn't possible. I haven't seen any coherent plan as to how a bailout without a devaluation could work. Nor have I seen proper thought about what will happen when Greece fails to meet austerity targets. So far we have a fudge that won't work (and everyone knows it won't work) but which buys time.

The EU are of course talking of more centralisation. Yet even the most committed Europhiles cannot believe that even with more centralisation countries of the former Eastern Europe can be brought into the Euro and not have problems comparable to Greece. They are certainly talking the Euro talk of centralisation and a new treaty, but it isn't going to happen. Yes the Eurozone might talk of European financial government/governance (they really are arguing over the translation) and France, Germany, BeNeLux might decide to reconstruct Charlemagne's empire, but this is an issue for them. Maybe we really are starting to look at a two speed EU.

The real financial battleground now switches to Spain - with interesting sideshows in Portugal, Italy and Ireland. Soros thinks it is Spain that will crack. Probably he is right. Of course if Spain cracks other countries in Club Med also crack.

That a third of Germans want to leave the Euro is fascinating! If their politicians suggested this was a realistic possibility I suspect the support would shoot up.

The UK election is going to be important. A Eurosceptic, Conservative UK would have impact in an EU which is in retreat from the high water mark of the Lisbon Treaty. The wildcard is just how the Conservatives are going to play this. Their election plan seems set to be last minute announcement of policies and seeking a ground swell of popular support to lift their share of the vote (the magic figure is about 42%, and right now they probably have 39%). There is a view that they will make a statement that under no circumstances will they work with the Lib Dems (so that if they are the largest party but do not have an overall majority Gordon Brown will remain in power). With such a clear burning of their boats they can then be Eurosceptic, and so take the UKIP vote, which was 12% in the last EU election and likely to be around 6% in a General Election. My thought is that in the days before an election we are going to hear Conservative views on Europe that will be pretty extreme.

 

[798686]

Guess we'll have to see what happens. My guess is they'll go ahead with more economic centralisation - could see a two-speed Europe eventually, as you say.

Quite interesting at the moment - feel a bit sorry for the PIIGS, even if it is partly their own doing (like our problems are also, lol).

 

[D_Tully Tunnelrat]

If the US has done such a good job in Iraq, maybe they will join first. Another oil producer inside the eu might be handy.

What a bizarre twist of fate that would be, given how badly the US handled the war/occupation.

Isn't necessity, aka economic survival, the mother of invention?

No surprise that the IMF is involved, presently calculated at 1/3 of the bailout, which will no doubt increase, as the stipulations/new treaties for additional loans from other EU states are either going to be so restrictive as to cancel participation, or some of the other states will have so much internal economic stress (PIIGS) that they cannot afford to contribute to Greece's bailout.

The German participation in this plan almost guarantees Axel Weber will be the new Head of the ECB. The notion being that he will be bring Bundesbank discipline to the institution, but it's an apples and oranges comparison.

There has been speculation about creating two classes of the euro. A Noro, and Sudo, with each having it's own fiscal policy, but I can't see how parity between the two currencies could be maintained on that basis.

 

[Jason]

There has been speculation about creating two classes of the euro. A Noro, and Sudo, with each having it's own fiscal policy, but I can't see how parity between the two currencies could be maintained on that basis.

This idea is presently at the whacky fringe and there isn't much about it in the press even if you look hard - I've not actually heard the terms Noro and Sudo, but they are neat.

As I understand it the idea is that the Euro remains as a single currency. However assuming we do get as far as an IMF-supported bailout for Greece (and perhaps others) the Euro will weaken significantly. It has to - no one can see how problems of the magnitute faced by Greece and elsewhere in Club Med can be solved by austerity alone. A weak Euro is an enormous problem for northern economies that need a strong Euro to avoid overheat. The idea is that they float some form of government bond denominated in Euros but trading at face + say 20%. In effect countries like Germany would have two currencies circulating, one official currency (the Euro) and a de facto national currency, the German Euro Bond. The concept favours national solutions (as they would be bonds, and it is nation states not the EU that can issue bonds). However it may be that Germany, France and others would try for bonds at the same % above the Euro, so that in effect they would trade at parity.

In effect we could be looking at Club Med keeping the Euro, and the north running with dual currency, both Euro and national bonds, with the latter being used for most internal transactions and transactions within the northern countries. I suspect most overseas countries would prefer to deal in the new bonds, so there would be pressure for further appreciation (perhaps a new issue, say at Euro +25%). Arguably this whacky solution is the only one that truly works. Depreciating out of the Euro is messy and there are legal blocks. Appreciating out is far tidier, and the legal issues far less problematic.

The idea is seriously, seriously whacky - let me say this before anyone jumps. But as Drifterwood points out above, economic necessity trumps just about everything else. And economic necessity says that the Euro absolutely has to split.

On the day the Lisbon Treaty was ratified, how many people imagined that within a year the EU would have agreed a framework to call the IMF into a Eurozone nation? Now we have this IMF framework (and expectation that it will be used) can we doubt that the Euro is holed beneath the waterline?

 

[D_Tully Tunnelrat]

This idea is presently at the whacky fringe and there isn't much about it in the press even if you look hard - I've not actually heard the terms Noro and Sudo, but they are neat.

The idea as I read it, espoused taking a euro, and breaking it into two equal parts creating essentially two versions of one currency. In this way you could have different fiscal policies as befits the two differing economic realities. Whether they could trade at parity would be the issue; perhaps it's better if they do not.

Your bond idea is also intriguing, it's out there, but let's face, it's a crisis, and all options should be explored. In many way your bond theory sounds similar to German Bearer Bunds, which, if I recall correctly used to be same as cash. Part of the dilemma with any additional currency solution be it bond or otherwise, is the additional trading costs, the savings of which was one of the best things about the euro for the EU. I can well recall trading guilders for marks, which then became franks, etc, and paying commissions all the way.

Today Trichet came out and said that categorically the IMF should not be part of any rescue plan, contradicting Merkle, and the political reality in Germany, without whom nothing moves forward. Personally, I would like to see the EU speak with one voice here. The cacophony is becoming a din.

Another "out there" way the EU could make the euro work, as it's presently constructed, is to come up with an internal mechanism to re-balance the savers and the spenders. Similar to the way China has been snapping up US debt for the last decade (which works as they are pegged to the dollar), Germany could directly buy Greek debt, which could be priced at at a slightly higher than normal rate, to offset risk, and enforce savings, which could then be used to offset the spending nation's deficit.

 

[hud01]

People need to understand that when we say Greece is bankrupt you must look at the reasons for the huge deficit. A primary causeof the deficit has been the infrastructure works that Greece put into play for hosting the Athens Olympics. Which not only saw a host of stadia be built, but state sponsored refurbishments of hotels, brand spanking new yacht marinas, and not to mention a european state of the art metro link - all of which can be argued validly are one time expenses which were worth the debt (especially in the case of the metro).

The olympics are one of the biggest scams in the world and have been for over 40 years. it has screwed every city except LA

 

[Drifterwood]

It's an extremely clever move and a very good reminder of why Germany is so successfull, and why we should be working with them.

It's the banking equivalent of "come and have a go if you think you're hard enough."

 

[798686]

It's an extremely clever move and a very good reminder of why Germany is so successfull, and why we should be working with them.

It's the banking equivalent of "come and have a go if you think you're hard enough."

I do admire their ruthless practicality and pragmatism. They do seem to put common sense ahead of emotional considerations. It works - but does mean ppl get left in the shit sometimes. :/

As an aside - given Germany's detached nature and sometimes hard-hearted self-interest, I wonder if they would've instituted a Marshall Plan equivalent to re-build a relatively free US and UK, had the war outcome been reversed?

(Perhaps I'm being a bit hard on them, tho?).

 

[Drifterwood]

(Perhaps I'm being a bit hard on them, tho?).

You are, and not at all germane to the current situation.

 

[Jason]

As an aside - given Germany's detached nature and sometimes hard-hearted self-interest, I wonder if they would've instituted a Marshall Plan equivalent to re-build a relatively free US and UK, had the war outcome been reversed?

(Perhaps I'm being a bit hard on them, tho?)

Don't mention the war!

Yet in a way it is the key to understanding the present difficulties. The undoubted success of the European project has been to stop the nations of the EEC and now the EU knocking seven bells out of each other. The sort of laudable thinking that went into the creation of the first European Communities - binding the industry of nations together so that war is impossible - has developed into the Eurocrats' desire for ever closer union in all things. In the last decade we've welcomed the nations of Eastern Europe plus three nations submerged in the old USSR into the EU - thus healing the rift of the iron curtain. This is real achievement. Yet the very model that has produced such achievements is now not working. We need to develop a new European mindset which respects diversity and respects the will of the people of Europe.

Greece has now had months of what they will see as public humiliation, and is facing dire austerity cuts. There is some sort of EU/IMF bailout, which in the long run presumably means an IMF bailout - but to be done without devaluation. It is like telling a sick patient that you will perform the lifesaving operation, but you will do it without anaesthetic. The Greek problems are showing a need for a fundamental rethink on what the EU is all about. We need to move out of the post-war thinking and come up with a positive statement of a Europe of nations with their diversity resppected.

 

[798686]

I agree - a Europe of nations is what I think would work far better. However - the current generation of Eurocrats has been so schooled in the mantra that 'more integration is the answer to everything', that they won't easily stop the empire-building.

Interestingly...every time a Europe-wide Empire has been attempted since the fall of the original Roman one (under Justinian/Charlemagne/Otto/Charles V/Napolean/Hitler), it's ended in factional infighting. There's no reason to believe this one will end any differently.

I do agree the rapprochement between the European nations since the war has been a huge success, in terms of peace and also prosperity. But pushing the member states into a federal union/single state seems like the wrong way to go from now on...

 

[798686]

You are, and not at all germane to the current situation.

Oh well. :tongue:

 

[D_Tully Tunnelrat]

Don't mention the war!

I had deliberately steered clear of this topic, for obvious reasons. Part of the 60 year post-war tranquility, on the continent, seems attributable to having a common enemy: the Communist Bloc. I recall how grateful all the cousins were to the US for our military presence in keeping away what was then the Russian Bear. It's ironic, though appropriate, given their euro-centric history, that 6 members of that 9 nation bloc are now in the EU.

It is like telling a sick patient that you will perform the lifesaving operation, but you will do it without anesthetic. We need to move out of the post-war thinking and come up with a positive statement of a Europe of nations with their diversity resppected.

The first is a funny line. The second relevant. To wit: the four academics who filed a suit against Germany joining the euro, and lost, are now, despite the on/off/on bailout, publicly clamoring for a Greek exit from the euro, and a 40% deval for a new Drachma. It's classic econ thinking, but shoving under the economic bus one of your oldest members would only reignite resentment towards Germany, and palpably strain the political union. When reaction is this strong from retired academia, it makes you wonder what it is like in the Halls of Power...

BTW - there is speculation on the new electronic euro bond desk, which is to be based in Paris, as there is a perceived need to move trading from London to a eurozone location. Although not a member of the euro, isn't the UK is part of the EU? And is this not the type of turf wars the EU was designed to avoid?

And Joll, watch your gerrymandering...

 

[798686]

BTW - there is speculation on the new electronic euro bond desk, which is to be based in Paris, as there is a perceived need to move trading from London to a eurozone location. Although not a member of the euro, isn't the UK is part of the EU? And is this not the type of turf wars the EU was designed to avoid?

Yes...there is also some concern that the recent Financial Instruments directives (MIFID) plus possible new hedge fund regulation etc, might dilute the City of London's influence as a world class financial centre.

A Frenchman, Michel Barnier, as Internal Markets Commissioner (accounting/financial services/company law) has rung alarm bells too, altho he seems to be making the right noises so far (unlike Sarkozy).

And Joll, watch your gerrymandering...

Yeh, sorry. :redface:

 

[Jason]

ITo wit: the four academics who filed a suit against Germany joining the euro, and lost, are now, despite the on/off/on bailout, publicly clamoring for a Greek exit from the euro, and a 40% deval for a new Drachma.

The figure of 40% puts a level on the extent of the Greek problem.

Assuming these economists have got their maths right (and in fact I don't think it is that hard a calculation, so they probably have) this is jaw-droppingly shocking. Greece joined the Euro in 2001. Had they remained on the drachma it would have devalued by 40% over 9 years (against the Euro), or ballpark 4% pa. I haven't hunted for figures, but this is pretty much the norm for Club Med currencies (falling say against the DM, often by more than this) prior to joining the Euro. It is actually perfectly credible that this has happened. But the logic of the Euro is that it shouldn't have happened.

The German economy needs some form of currency revaluation. The figure I've heard is around 20%. The difference between Germany and Greece is therefore something like 60%.

These issues are beyond resolution by adjusting the internal fiscal policies of the countries of the EU. You cannot solve an overvaluation of your currency of anything like this magnitude by austerity alone. Curiously even the idea of the northern countries breaking away with their own currency doesn't solve a problem as extreme as that of Greece. Nor does subsidy from the north work - the subsidies would have to be so enormous and for so long.

The "solution" we have in place is the muddled bailout plan - which means no Eurozone state will ever be allowed to fail, and which requires a European economic government. But such an economic government needs a treaty of the 27 and will take ages. The Euro doesn't have this long. I don't doubt that many politicians would like an economic government, but they can't deliver, and we are going to see the IMF bailing out one or more Eurozone countries within a few months, before such a plan is even off the drawing board.

Of course the European financial boffins will have a plan up their sleeve, and they are not going to chatter about it in advance. There is some talk if you look hard enough about the possible issue of bonds as a de facto second currency (see posts above). Thinking today about the extent of the Greek problem and the realisation that others are not far behind I'm wondering if the solution that will be proposed is issuing such national bonds in all Eurozone countries while keeping the Euro. They would be presented as a temporary measure until economic government is established. While filling most of the roles of a currency they would not technically be currencies, and the idea would be that they are fazed out and the Euro resurfaces. It would be a Eurocratic solution!

Politically this has the potential to run during the UK election. If the EU is now proposing a new "economic government" treaty - the next treaty after Lisbon - Cameron has already pledged a referendum on such a treaty, while Brown has said "economic governance" was his idea. I think Cameron could coherently argue that Conservatives would oppose further transfer of power to the EU. He could also argue that the need for a new treaty shows that Lisbon is deeply flawed and must be modified. He could even argue that when a new treaty is presented the UK would be given a multi-option referendum including leaving the EU. I think in this he has the issue he needs to grab the UKIP vote, and that as far as Cameron is concerned it is just a case of hoping the EU "economic government" story hots up in time. He needs 44% for a comfortable win, might scrape in with 41%, is presently on maybe 37%-39%. UKIP polled 12% in the last EU election and are likely to get around 6% at the General Election. If he could pinch this 6% he would be smiling. And I don't see how he can not try.

 

[798686]

The 'economic government' proposals have certainly made things more interesting, and gifted the Tories with an ideal vote-winning issue, imo (if anyone picks up on it, much...).

 

[Drifterwood]

You don't need to revalue or devalue anything. You need a market lead disparity in spending power. It may be unPC but Greece and others need to be cheaper places than Germany and others to a lesser extent. It should be perfectly possible to have a similar standard of living on half the wages in Greece as double in Germany.

I keep saying it, but the UK is a working example of this.

 

[798686]

Sounds sensible, Drift.