Translate

Wednesday, January 21, 2009

The Collapse Of The Euro Area


Cries of pain are emanating from all corners of the highly indebted eurozone, as governments in Ireland, Spain, Italy and Greece career ever closer to default. The euro is a common currency between 'our' countries, they say, and so those countries' governments should all stand or fall together, and issue debt linked together, guaranteed by all governments of the eurozone acting as one.

The Irish economist David McWilliams (see HERE) has stated recently that unless such a trans-EU debt issuance is carried out, then Ireland would do better to default and simulaneously quit the Euro, triggering a domino effect of defaults and euro secessions across Southern Europe. Such an event is said to be impossible as the economic crisis it would cause would be unparallelled in the human history. But is it impossible?

Germany, the only country which has the ability to stitch together such a joint debt issuance across all eurozone governments ain't gonna play ball, and so collapse of the eurozone is going to be the only possible outcome eventually. So why don't countries like Ireland get on with it, before the eurozone experience drags them through more and more trauma?

This report from Open Europe tells the story simply enough -

Germany rejects common issuance of debt by eurozone governments;
Almunia rejects talk of a split in the eurozone
FT Deutschland reports that Germany's Finance Minister Peer Steinbruck yesterday rejected proposals supported by Italy and some other European countries in favour of the common issuance of debt by eurozone governments, saying "I will not accept any deterioration in Germany's financing conditions". The newspaper writes that the plan to counter intra-eurozone tensions is now therefore dead.

Commenting on whether the Euro was a mistake, economist Barry Eichengreen writes on the Vox website, "The euro area will hang together, in other words, because the decision to enter is essentially irreversible. Getting out is impossible without precipitating the most serious imaginable financial crisis - something that no government is prepared to risk."

EU Commissioner for Economic and Monetary Affairs Joaquin Almunia has rejected any suggestion of a split of the eurozone. Le Monde notes that the current economic crisis is however putting the monetary union under severe strain and that certain states are asking for lower rates of borrowing than those currently in place. The paper highlights that this growing and persistent pressure could bring about the eventual demise of the monetary union.


Poor old Ireland. It looks like each Eurozone country will have to find its own solutions to its own problems. On the other hand, won't that be so much simpler?

The funny thing about Professor Barry Eichengreen saying that the collapse of the eurozone is impossible is that it was him who was giving seminars as recently as last year saying that collapse of the Euro was inevitable. I guess he's finding that telling the truth to 500 million people that they've made an almighty cock-up hasn't made his career much easier, or himself too popular.

But make no mistake, Barry Eichengreen is simply terrified of the consequences of the inevitable break-up which he's been predicting, and is running scared of the accuracy of his predictions.

PICTURED - Professor Barry Eichengreen of Berkeley University California, thinking 'Oh Shit - what have I done!!' Just to remember the old 'Euro is dead' Barry Eichengreen rather than the newly created 'The Euro cannot possibly collapse' version, see the banner for his seminar in Stanford University exactly a year ago titled boldly The Collapse Of The Euro Area. No recantation last year - why the change now, Barry?

See the same picture of Professor Barry Eichengreen not web-blocked i.e. full size HERE

SOROS

George Soros and his Quantum Fund are making headlines yesterday predicting Sterling/Dollar parity, but are they missing a trick? Maybe the big story of 2009 is going to hit George a lot closer to home. The Euro's collapse will make Sterling's fall seem like a cake walk. And the Sterling position is being misrepresented in any case. See FT HERE.

George should give Barry a call, I think.

AND REMEMBER SIR ALAN WALTERS, GEORGE.

Going back and reading this link from 2005 shows that Eichengreen was not the first to see the Euro was destined for failure.

Sir Alan Walters, Mrs Thatcher's economic guru who stood up against Geoffrey Howe's and Nigel Lawson's attempts to ram Sterling into the common European currency, could see clearly over 20 years ago in the late 1980s. the kind of problems that are becoming Euro-critical today

EXTRACT - Sir Alan Walters was Margaret Thatcher’s personal economic adviser when she was prime minister. In May 2002 he said that the euro would collapse under its own internal contradictions and strains by May 2007.

“We’re already seeing real problems for the euro,” he said. “I don’t know precisely how it will break up, but I know it will break up.”

Walters explained that euro-member countries had different growth and inflation rates, persistent high unemployment and some had severe budget deficits which would cause the instability which would lead to the collapse of the euro.

“People who think it will go on forever should think again,” he said. “Nothing lasts forever in monetary economics.”

Although the accepted wisom is that the euro is permanent, particularly since the conversion from national currencies to euro notes and coins at the start of the year, the history of monetary unions suggests a high failure rate. Any country leaving the euro would have to reissue its former currency and face significant economic dislocation.

Walters maintains that the only way that monetary unions can work is if they are preceded by political union.

In the early 1980s he helped to persuade Thatcher to push through the tough 1981 budget, which turned conventional wisdom on its head by raising taxes sharply despite the fact that the economy was in a deep recession. Many in the Treasury objected, as did 364 British economists who signed a celebrated letter predicting that the budget would condemn the economy to a prolonged depression.

The 364 economists were discredited when the budget led the way to the long economic upturn of the 1980s. Walters’s critics had missed the reason to raise taxes - to allow interest rates to be cut sharply. Interest rates are a key driver of UK economic performance because of the huge amount of debt - including mortgage borrowings for houses - dependent on short-term interest rates.

In the late 1980s, Walters, who described the ERM as “half baked”, advised Thatcher to resist pressure from Nigel Lawson, the finance minister, and Sir Geoffrey Howe, the foreign minister, to take Britain in. In 1989, Lawson insisted that Thatcher sack Walters. She refused, he resigned, and Walters went too.

A film about Sir Alan called Sir Alan Walters: An Intellectual Portrait reveals the extent of Walters’s predictive skills. In 1971-72, as an adviser to Sir Edward Heath, he told the then prime minister that within a couple of years he would be faced with 15% inflation, a record current-account deficit and the return of prices-and-incomes policies. Heath told him he was talking nonsense and that none of his other advisers were predicting anything of the sort, suggesting that he should leave. All three predictions were correct and the resulting chaos brought down the Heath government.

In 1990 Walters predicted that the ERM, which Britain was on the point of joining, was heading for a crisis. Two years later, in September 1992, there was Black Wednesday and the near-collapse of the ERM.

As in 1981, Walters is in a minority as few economists believe Europe’s monetary union will collapse outright. But many believe that strains could develop if the left wing governments of the past are replaced by governments of the right and after new and weaker economies are added to the group of countries in the euro.


I guess Sir Alan never imagined the economic boom of the last 16 years could be maintained as long as it was, which is why he predicted 2007. One reason the boom was continually recharged by world governments was to keep the impossible Euro experiment going, and hide from the consequences of its collapse. Had people listened to Sir Alan twenty years ago, the Euro might have been shelved, but after so much time, its collapse will be a worldwide crisis of unimaginable proportions. That doesn't mean its collapse won't happen. In fact, the signs are that the coming events are simply unstoppable.

And as key events turn at the point where the political and economic crises are greatest, the history of the world might yet be transformed by the independent spirit of the tiniest member of the eurozone, as pictured at the top of this post.

10 comments:

Anonymous said...

With German elections looming it will be impossible for the German government (CDU & SPD) to (openly) accept a common EU debt. It would mean a possible break-up of the CDU/CSU union and a huge win for the FDP and possibly also the German Left. The result in Hesse the other day shows that none of the government parties are doing well at the moment.

Could they come up with a "stealth" common EU debt? Maybe, but in these worried times, the markets would probably not be satisfied. But that seems to the only possible solution.

/Mikgen

tapestry said...

So Mikgen, the question is a. can Germany carry all the other countries? The answer is clearly no. Germany cannot endlessly provide a safety net to carry countries like Italy, Greece and Spain. Germany wanted the Euro to be the Deutchmark. It's becoming the Drachma.

and b. would it be willing? Mikgen's knowledge of German politics indicates that such an outcome is unlikely before the elections, and even after.

and c. will the markets see a joint issuance as politically enforceable? Germany might insist on fiscal rectitiude for example. Yet in the middle of the banking crisis, it is more likely the Club Meds and Ireland will need to increase spend than reduce.

Soros should get his calculator out and start shorting the Euro by the trillion. Sometime short-sellers and speculators do the world a favour by bringing false markets to an end.

The Euro is just such a false market and will not be able to become a real single currency. It is political aspiration run riot.

The whole facade should be ripped away and the currency brought down to a size that people can cope with.

How many countries would be left in a reduced euro? Germany, France, Holland.........

Reality time is arriving.

Anonymous said...

What do you think will happen to Britain while all this is going on. Will we be any better off being out? surely we will be massively affected regardless?

The way Brown is spending money we haven't got, how are we going to recover? it seems like the well is poisoned.

tapestry said...

Anon, remember the East India Company. India wasn't conquered by the British government, but by traders. Only when the vast Jewel became so big that it was the key to Britain's economic survival was it taken 'inhouse' and became a government concern.

Britain's international banking businesses are very similar today. They are so big and spread out around the globe that they have become an integral part of the Sterling economy, bigger than Britain's economy. When trouble strikes, as it is doing now, the government acnnot afford to let them go to the wall. The cost of rescue is high but so too will be the rewards.

As for the Euro, please. The Euro is a mess. Sterling a solid well-respected currency which was highly valued until recently. Don't buy into Soros' Sterling chanting. He's a euro-politician. Sterling is close to a low from where it will retrace much of its fall. The Euro has only just started its descent and has a long way to fall.

As it (euro) loses fringe countries, there will be pandemonium.

Sterling is a blessed island which we must hang on to at all costs. Any idea that the Euro is a stable currency can be allayed by looking at the charts of its continual zig-zgging against other currencies. It is a highly unstable currency to be a part of. Sterling has its problems with the Stering economy being so vast, but don't make the mistake of buying into the Euro.

Sterling will be around long after the Euro is gone.

kerdasi amaq said...

The Irish political parties are 'good european' cargo-cultists. This is one god that mustn't fail them.

The idea of leaving the European Community(or the Euro) is anathema. Absolute and total heresy.

I think Ireland is one country that should never have been allowed to join the Common Market.

Anonymous said...

Cannot afford to let them go to the wall?
So you are in-favor of the bail-out?

Perhaps to a limit extent it would be possible, but it seems clear Gordon Brown is spending so much he risks bankruptcy, no?

tapestry said...

Brown's problem will be cash. He lets it slip through his finders so fast, wasting 90% of it, that anyone lending moey to the UK feels nervous. And that's before the banking crisis.

There is no doubt that banks of the size of RBS cannot be allowed to go to the wall unless we want an overnight depression.

The point is though that they will be worth saving longterm as businesses, and they do have value. Banking is a crucial business in the devloping world and all the British banks have huge growth prospects in the decades ahead as the developing countries advance.

One industry they lack is credible international banks, and Britain can provide that...that is unless Gordon Brown wrecks it all which he is quite capable of doing, with his Leninist instincts.

Britains banks dwarf the British economy and have to be saved, but the payback in privatisation proceeds looking ahead will be huge. If Brown hndles things right, the government will make a fortune from the bank nationalisation.

But to be honest I don't think he's got a clue, and he needs voting out at the earliest opportunity so that Britain can reestablish its credibility as a country.

suprises for the next decade said...

Big suprises for the next decade
The Collapse Of The Euro- With Germany having such a different economy than the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) the weaker economies of the Euro region had a choice- to leave the Euro or to suffer massive deflation (since prices where too high and devaluation impossible due to the fact that they didn’t have control on the currency). Massive deflation meant budget deficits north of 10% of GDP and with no monetization possible the sovereign debt market of the PIIGS started to collapse. Some countries tried to cut the budget, which brought severe civil unrest while the economy continued to detoriate. Others refused to physically reform which resulted in further revolts in their sovereign bond markets. The first domino to fall was Greece- when the yield on the 10 year government bond reached 8% percent it was clear that without a bailout from Germany they where bust, and bust they went. Like after the collapse of Lehman Brothers, the collapse of Greece caused a general panic in the markets, with government bonds of the rest of the PIIGS collapsing since it was clear that Germany will not bail them out. European banks refused to lend to each other and the havoc was over only when the rest of the PIIGS left the currency.
http://israelfinancialexpert.blogspot.com/2010/01/11-big-surprises-for-next-decade.html

Euro Crisis said...

If Greece was to default on its debt the banks of the country will collapse immediately. At that event their will be no way for the government to save the depositors of the banks since will not be able to print or borrow money. The implications to the credit markets for such an event will be enormous since no bank will want to lend to any bank in Portugal, Italy, Ireland, Spain and maybe others. Since this will be the first time since the crisis began in 2007 that depositors lost money it will cause a panic and it is very likely that there will be an immediate run on the banks of Portugal, Italy, Spain and Ireland at a time when the countries themselves are unable to raise capital and cause a
euro collaspe

tapestry said...

The IMF and the world bank would rescue these countries, but they would have to go back to their own currencies for that to make sense. Until they do that, the Euro will be falling. I,d give it six months.