A European Monetary Fallacy?

I was born in a Europe that was bankrupted fighting a war, it now looks like I will end my days in a Europe bankrupted enjoying a peace - it's a funny old world.

Stephanie,

'When the bomb squad doesn't think they can safely defuse a bomb, it finds a way to explode it in a contained environment.'

I like this analogy, a similar one I read recently is to think of soveriegn debt as a mouse trap in a room surrounded by mouse traps all ready and primed.

Once one goes....

'Economists of a historical bent who look at the public debt mountain weighing on the global economy are starting to wonder whether we should do the same with suspect sovereign debt.'

I am no fan of economists; if I have learned anything in the last 2 years it is that they are as useful as a brake light on a Toyota.

Restructuring debt is NOT solving the problem, only postponing it.

My prediction; the next recession/depression will be along pretty soon, possibly before this one ends, and we will still all be up to our necks in the brown stuff!

European Monetary Union is a work in progress for reasons that are parallel to the harmonisation of most European policies. And it has the crucial advantage that all 27 members want the entire European project to succeed. We each want to promote more intra-European trade and social exchanges. So that we can live more happily together than in our long dark histories. The keenest aspirants for closer human relationships are our German friends. So here's their opportunity.
Moreover, the idea of an outside body like the US dominated IMF helping out a potential defaulter like Greece is politically difficult. And you're right, an EMF is an incomplete institution.
A compromise must be struck between Germany's fanatical fiscal fiends and the lethargic loan lovers of the Med areas. As ever, the UK is in some sort of vague middle. But at least we're doing our best to keep the project on its wheels by doing what we do best: going shopping for the lovely stuff our neighbours make! Germany needs to loosen up a bit and go shopping too, as you imply. Perhaps even more of them should go to Rhodes for a long holiday? It all helps.

economists of a historical bent must be puzzled as interest rates are at an all time low. what we have is the blind leading the blind. the economy will collapse to a level that becomes sustainable and i fear when we find that level times will be vastly different from today.

The bottom line is that the eurozone is a too big and economically diverse area to be served successfully by a single currency. It needs either a federal government that can actually make decisions or to go back to multiple currencies.

#2. At 10:22am on 09 Mar 2010, newblogger wrote:

"I am no fan of economists; if I have learned anything in the last 2 years it is that they are as useful as a brake light on a Toyota."

Very useful analogy. Here's something similar:

I've just found I've been driving around with no brake lights on my car as the brake light switch was broken. A warning light came on in the car but was for the glow plug i.e. nothing to do with the brakes. When the garage ran diagnostics this morning their nice computer said this is used to show there may be a problem with the brake light!

I guess I could sue the car company for millions and retire to the Bahamas but they'll hide behind the standard 'not my fault guv - just following the rules'.

(And I would be blamed if there had been an accident!).

Kind of sums up the problems in the economy/govenment - we're in complete ignorance of the real problem (and probably breaking the law) and when something is obvioulsy wrong it's hidden behind a red herring and no one wants to take responsibility.

Back to work.........................

This is what I wrote in the Paul Mason blog - "What a mess! And to think I was oblivious to all this when tucked away in chic little traffic free Loutro a couple of years ago. What I say to the Greeks give two fingers to hard nose anal northern Europeans, make a drachma out of a crisis and get out of the Euro, devalue by 50% take control of the economy protect the poor, borrow from the IMF (or anyone) start a programme of public works to mop up youth unemployment, employ redundant/retiring HMRC staff to cheat proof the taxation system with swingeing penalties for abuse, fleece the tourists especially the teutons." It needs to be recognised that for countries like Greece continued membership of the Eurozone is incompatible with with a development path that suits the Greeks. May be this will suit the Portugese also.

Funny this. Bash Germany for their save and export model.Bash speculators for cashing in on Greece's troubles. Bash the EU Institutions for a failed ideal.

In fact, bash everyone barr the sovereign culprits of fiscal irresponsibility - just get them on the drip of bailout asap. Morally, is this right?

The Germans are sanctimonious (apparently) about Greek debt, saying that they should sell a few islands because the problems were brought on by the Greeks themselves.

Did they refuse Marshall Plan aid when rebuilding after WW2? I have a vauge recollection that they then brought on their problems themselves.

Thanks for your update on the European Monetary Fund and the problems you perceive with it. To this I would like to add one I saw yesterday on https://notayesmanseconomics.wordpress.com which is whether the German Constitutional Court would accept it which appears to be Germany's main problem at this time. I notice that today Chancellor Merkel has come out with similar concerns.
As to your plan of safely defusing southern European debt I am at a loss as to how you would do it without the existing holders catching wind of it and selling what they hold. Thus you would make things worse and not better. Again I am reminded of what I read yesterday on the extra costs this crisis has placed on Greece's most recent bond issue.Your proposed solution would in the short term have the danger of exacerbating these.

What has become clear through the P-I-I-G-S problem and the pound devaluation is that the German wealth model relies on low wage inflation which in time gives a hard currency that makes the country richer than devalueing countries in the long term. The problem of the P-I-I-G-S countries is that they continued with high wage inflation and seemed to become richer and richer when really they were becoming less and less competitive. The UK has the same problem but devalued. Does that solve it? No, it has become much poorer as a result. Bet it low wage increases or or devaluation, a loss of wealth is not avoidable. Which is the better route? The one advantage I see of low inflation is that it protects the weak workers and helps to keep the rich-poor-gap in balance. Wage rises are not automatic in a high inflation environment. If you have no bargaining power, you will lose out. So the strong are likely to gain more than the weak. In a low inflation environment, bargaining power is less important to guarantee standards of living.

This is not very pc but I do like the idea of Greeks selling off the Islands to the Germans (towels included)
From their command post on the beach they could then oversee an orderly reduction in the deficit.

It is good to learn that Ireland is in the process of restoring its lost competitiveness. What a shame that the Irish themselves cannot bring themselves to share this view.

https://www.independent.ie/opinion/analysis/the-836490bn-double-or-quits-gamble-2091277.html

The opening statement says it all: "This is a letter of hate to those men of my country who have defiled it, men with manic fingers that led the feeble body of my country to its death."

I look forward to reading more details of a view from London which is certain to be more accurate than anything emanating from Ireland itself.

Can anyone help me.
The government said nearly a year ago that they would 'halve the deficit over 4 years'. So that would be by early 2013 would it not? Only what they meant was, I suspect, that the 4 years would start in 2011. So that's six years, not four. And they won't achieve it anyway.

Can anyone enlighten me? 2013 or 2015 for that halving to have occurred?

There is more than a hint of PANIC in the air. Solving the debt built -up within the EU does not mean you can

wish or hide the problem away. It has to faced HEAD-ON, not contained or concealed. Denial achieves

NOTHING, accept a spiral decline.

Stephanie, you mention the issue of divergence between countries which was held up as one of Gordon Brown's 5 tests to join the Euro.

Perhaps it is just as well we didn't join the Euro as our current state would leave us not far behind Greece in the begging bowl stakes. I agree with you the increasing divergence between states will be the long term test and I personally don't think the Euro will pass it.

Also the current position with the Euro and the group of Mediterranean states in trouble could be compared with the UK economy where it appears only a percentage are actively contributing to the overall well being and that redistribution of income towards certain regions and the unwaged is causing increased friction not only in the Euro zone but also the UK.

Purely out of interest I wonder just how many member states of the Euro currently meet the initial standards for joining the Euro?

Stephanie,
Europe attempts to emulate the U.S.A. without 'federalism'. As other commentators have pointed out both here on the BBC and in other articles, it is almost impossible to have a single-currency without federal fiscal control.
The main reasons why so many countries bought into the idea of the European Union is not because of the fiscal discipline they needed, but simply because of what they could get out of it.
Greece did its best to milk the EU for all it could get, without having the discipline needed to go with that 'club membership'. I think that this is also true of many other member of the EU, other than the original core countries.
The other problem is the level of management sklls currently being employed in the offices of the EU, particularly in Brussel. It appears to be sadly lacking when it comes to providing a viable solution to the problems of the EU. They simply do not have the skills.

We interrupt this blog comment with news that UK's trade deficit worsened in January.

see: https://news.bbc.co.uk/1/hi/business/8557200.stm

Unexpected, surprising, at odds with expectation blah, blah, blah.

Reality despite sterling's depreciation, EXPORTS DOWN (the sharpest drop in more than 3 years), IMPORTS UP.

What was that about exporting our way out of trouble?

This doesn't augur well for 1st Qtr GDP, does it?

Ah well - back to the sideshow that is the EU..........

Steph - perhaps you can do a new blog on the data and what the implications are?

This is very interesting as there would need to be fundamental changes to the EU treaty if this idea was to become a reality. Also there would be a big split between the EU members and the Eurozone members. As it is the latter who are causing the concern. As it is these who will potentially bring down the Euro. The EU can and would survive if one or more of its members were to fail. However if one Eurozone members goes it would seriously damage the Euros standing and would bring it under further pressure.

So who would have to contribute to the fund, as unlike what has happened in the past the member states would have to stump up significant amount of cash upfront all be it in forms of guarantees if this is going to float. Well the first question, is it all member states who will stump up or will it only be the Eurozone members. If it is the first what is in it for them. A greater charge on their finances with no possible return. If it is the second, how long will the so called PIIGS have before they have to stand shoulder to shoulder with the other states. How could any of the other PIIGS give any such guarantees for the foreseeable future. In fact there could be a draw down from many of them if such a fund was to exist.

One must ask why the EU and its members do not want the IMF to step in. Well there are two main reasons :-

1. The IMF will make all findings public and this would critically harm the EU as it is very likely that there was more information known about the status of the PIIGS than we have been left to believe.
2. The IMF are very demanding in terms of setting goals and then monitoring their delivery. This would mean that there would be little wriggle room for the politicians. So no fudging or smoking mirrors.

There would also be a question of the EU's ability to manage such an enterprise. To date they have not demonstrated the ability to do so in any of their other agencies or bodies.

Finally if this did mean a radical change to the treaty would member states have to agree and as such would this mean that the voting public would have a chance to express their view in the form of a referendum? Just a thought as in many of the members own constitutions there has to be a referendum if such a change is to take place.

...with Greece, it is a bit like the Irishman who when asked directions said "to be sure, you wouldn't want to be starting from here".

Which is of course the great conundrum, how on earth did Greece manage to bluff it's way into the Eurozone in the first place? The country is a basketcase, making nothing, but trying to finance a standard of living that the Germans can only dream of. Now that the tide has gone out, we see who was swimming naked as the sage of Omaha would say, and what we find is a whole nudist colony on the beach trying to share one fig-leaf between them, which in this case is the EMF.

The difficulty of course is that a chain is only as strong as it's weakest link, so today we talk about containing Greece, but tomorrow it will be Ireland and then Portugal and then Spain and then Italy and of course by then the Germans will have long given up the ghost and driven their tanks off the lawn.

Sadly, the Eurozone is an ill-thought through game that allowed in most unsuitable players using rules of entry that weren't applied equally to each team and where the referee left his red and yellow cards back in the changing room. No amount of sticking plaster will fix the Eurozone problem. As Frazer would say "we're all doomed!".

Whether it be Europe, UK, US, the World the problem seems to be the same.

To keep all of us in the manner we have become accustomed needs consumer spending to continue growing year after year and the population of the world to also keep growing.

It does not take a genius to see that this is a badly flawed model and it is a question of whether we wait until the bomb explodes or are the world politicians of today brave enough to form a joint bomb disposal team and work together to see what can be done to diffuse the bomb.

These decisions needed are massive decisions - they are not about banking bonuses and currency but about wealth across the world, consumerism, sustainable population levels - my own view is that the bomb will go off without the politicians who lead our planet even admitting there is a bomb.

A mechanism to help deal with the debt crisis. You mean a bit like an insurance policy that you can take out after you have had a fire.

I like it! - You economists are smarter that i realised

All we need now is to find an insurer who requires no upfront premium but is happy and able to pay the losses.

Or maybe we could become one European superstate pooling resources and centralising power in Berlin. Then there will be no Greek debt or British Debt or Spanish debt, just sustainable European debt with a German Bank Manager. Its ugly but it might just work. We just need the better off countries to forget national interest and become Utilitarians. Now there is a philosophy.

Stephanie why not suggest to anyone with any assets left that they switch as many of them into something likely to maintain their value through the coming storm. - overseas assets, natural resources, emerging market currencies etc. Goldman Sachs may be full of greedy vultures but the job of a vulture is to pick clean the corpses of the dead. They are not repsonsible for the killing.

Greek 10 year bonds now yielding 6.37% in an 0.5% environment.

Were next. You do the maths. I wonder how this will effect UK base rates and the 400,000 already in mortgage arrears and millions of others already stretched. See Japan 1990. I think its called stagflation.

What really worries me is that no one has a clear idea of what is needed to sort out this worldwide financial mess. We know what caused it, we now have to make damn sure it does not recur. The UK public will soon know what hardships we will face once the General Election is out of the way. We are too reliant on financial services as opposed to the manufacturing sector. If you do not produce enough, you will always be dependent on the whims of others.

Stephanie,

You're not alone amoung commentators suggesting that Germany (and the Netherlands, Denmark etc) need to boost domestic demand to correct the imbalance between them the Eurozone laggards. However, I simply cannot for the life of me see how this is either feasible or could be effective.

- Germany & co. are not exactly swimming in cash either. Their deficits are merely 'not disastrous'. I can't see where they have room for a big fiscal easing to boost demand.

-Boosting demand in Germany & co. is surely a ridiculously inefficient means of 'tiding over' the laggards while they sort themselves out. The underlying problem is, after all, their relative lack of competitiveness. Put naively: why would a German with a few extra EUR in his pocket decided to spend them on an (still over-priced) Greek holiday rather an a better holiday in just-as-sunny Turkey or a shiny new (Chinese made) Flat-screen TV.

cheers,
Andrew

Can l whisper the S word (Sub prime) sorry.

People, stop whining and moaning JOIN the Zeitgeist Movement!
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At some stage the EU will have to make a stand, it is just a question as to whether it will be to support the defaulting states or the to expel them. They will have to jump one way or the other, the head in the sand policy will not continue to work as the markets have lost their patients and see a chance to move in for the kill. The weakest will go first and then the next and so on. So if the EU and the Euro are to survive then they will have to take action and soon.

Stephanie, you mention "everything but".

There is no solution to this problem within the eurozone. The gross mistake in the first place was to let basket case Greece into the eurozone. Now that it is in, it needs to leave. It cannot find a solution while it shares a currency with Germany.

Somehow, the diplomats and lawyers have to work out a way for Greece to reintroduce the Drachma and then devalue it by about 30%. That way they have possible salvation.

Within the eurozone there is only grotesque hardship for the unfortunate Greek people.

22. At 11:58am on 09 Mar 2010, Jeremy Silverstone wrote:

Only one point - you can get 5% for a five year investment with no risk with a number of the financial institutions so why take the risk on these countries who may well default. Pressure will surely continue to rise on all of the PIIGS!!!!!

An EMF will not happen. If it does come into existence, it will be a purely political facesaving organisation and completely toothless. What would be the point anyway? If an EMF existed and did what it was supposed to do, wouldn't it do exactly the same thing as the existing IMF?

#18 Rugbyprof

Although, the trade deficit is depressingly bad as per usual, I can't help think that the situation in Greece will potentially be much more significant. Watch closely the full effects of a sovereign debt crisis crisis being laid bare (increased debt servicing costs, loss of freedom over fiscal policy, cuts in government expenditure, etc, etc). It will be coming to a cinema near you very soon.

No.18 - Rugbyprof.

You hit the nail bang on the head. Anyone working in a business reselling product bought in Euroland, as do I, can easily see the problem. Our import bill from Euroland has risen by 15% in sterling terms over the last 18 months. Similar has happened against the US Dollar, and practically every other major manufacturing economy. The car scrappage scheme hasn't helped, as most of the smaller vehicles that it has atracted are built anywhere but in UK - we've scored an own goal by supporting the Slovakian and Korean motor industries, just to keep a sfew car salesmen in business - great!

If we only manufactured anything that the rest of the world actually needs (they don't NEED Rolls Royces, Burberry coats and the like - they WANT them) then our economy and trade balance wouldn't be quite so dire.

Why are highly paid economists and pundits so surprised - it's blindingly obvious!

The problem with global/macro economics is that states can create a "Looney Tunes cartoon" solution to running off a cliff... you know the scene where the Coyote continues to run through the air, before finally realising where it is, and then "splat" the act of gravity finally takes hold.

We know that the BofE programme of QE is one of these fictional actions, and they naively hope that during this gravity defying stage, someone will have built a bridge to land back on.

So we all sit on the edge of our seats... amazed that our nations are defying gravity. Amazed that Greece still hasn't imploded when things were looking so bad only a few weeks ago.

But we expect more from world leaders, surely they know that all the actions taken so far have not solved anything substantially.

All the numbers point to a massive depression in the West, requiring deflation of asset values and devaluation of currency. I have never heard any leader admit that it is inevitable, and a course of action based on this being undertaken.

Although the last thing I would want is a Federal Europe, I just cannot see independent actions of nation states doing anything other than making the richest survive (in the short term) followed by massive immigration problems, as even more flock from the failed states.

Beep beep!

26. At 12:27pm on 09 Mar 2010, plamski wrote:
People, stop whining and moaning JOIN the Zeitgeist Movement!
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Plamski I speed read it.
'Random Variation Acted Upon Cumulatively By Natural Selection'
Teach the real meaning of that to every kid and you have a good start.
I'm not sure about the rest of it though.

Selling off islands to pay off debt.

Great Idea. Can we start with the Isle of Thanet (better known as Bennefits-on-sea. Perhaps next the Isle of Sheppy and Canvey Island? How much would we get for the Isle of Westminster?

Shall we go the whole hog and just sell the Isle of Great Britain and Ireland for £1.4 trillion and start again?

Over time individuals, and nations, live within their means. Imbalances, irrational exuberances, caused by un-regulated monetary management mechanisms come and go as bubbles and crashes. The key to comprehending economics is balance needs to be restored. Anyone who could see could see that the measurements of inflation, GDP etc. were being manipulated and that we were all fooling ourselves that everything was wonderful. (The 'I have abolished boom and bust' fallacy.)

Now we are all bust - some of us don't know it such as the UK property market, but debt deflation will come and will deflate prices no matter what central bankers do. The skill is to take the hit quickly and keep going without too much loss of economic momentum. (The get sacked and get a new job quickly scenario.) The Bank of England (aka Mervyn King) does not understand this. They think that if they can delay the inevitable everything will be OK. They are wrong. We need to accept the inevitable crash. Have to sell the assets secured on overpriced mortgages in a fire sale and get back to work quickly. (See Irvin Fischer's analysis of the 1930s). What we are seeing is the prolongation of the crisis - which incidentally support my argument that there best surrogate for the present crash is the 1870's Long Depression.(1873-1896).

An EMF is a non-starter. No EU member or grouping of members is strong enough to undertake IMF style rescue operations. Stephanie concentrates upon Germany as the 'strongest' economic member. However, you must take a closer look at that supposed German economic strength.

Before 2008 Germany was alreday carrying a high level of unemployment. This along with an ageing population was already stretching Germay's social security budgetry systems. Top that up with a significant loss of export revenues and little likelyhood of global revovery in the near future. These factors and others form a dangerous cocktail for the future wellbeing of the German economy. However this is not news to the german politicians even if we are ill-informed.

To take matters further, what authority would an EMF have when at least two of it's leading members (France & Germany) have a history of not meeting the budgetry rules of the existing EMC. AND that the EMC itself has a history of lacking the power to bring its members into order?

However, Stephanie's bomb illustration is very pertinent. Problem is that we desperately need such a mechanism on a global rather than regional level.

Tell us something Stephanie - who has control of this :-

https://www.theice.com/ice_trust.jhtml

Could it be - 'Bank of America, Citi, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, Deutsche Bank, UBS, and Credit-Suisse' ?

And how does the regulatory control pan out ?

33. At 1:00pm on 09 Mar 2010, Alesha Soba wrote:
Plamski I speed read it.
'Random Variation Acted Upon Cumulatively By Natural Selection'
Teach the real meaning of that to every kid and you have a good start.
I'm not sure about the rest of it though.
-------------------

Alesha, thank you for reading, there's a lot more. Spread the word!

My view is that the more we tried to find reason and solutions based on the current frame, the more we fall into their nets and the confusion grows.

NEW radical approach is needed and the keyword is SUSTAINABILITY!

34. At 1:07pm on 09 Mar 2010, lilysmygirl wrote:

The weird thing is that we owe the debt to ourselves.
Why dont we all write it off ?

22. Geoff. Basketcase. Indeed. Not Greece.

What a sad thing it is to live in a city where the sun is a rare sight. it makes one sad, lonely, envious.

Enough with the silly moto "Greece does not produce anything"; for one most olive oils and olives you buy in the supermarkets are made from Greek olives exported and processed abroad, usually in Italy. This is simplistic but says a lot about the problem: lack of competitiveness, lack of decent marketing (and corruption). At least we do not suffer from idiocy, unlike others (an obvious example being, well...); or maybe we do, the one that has sent the brightest Greeks abroad.

The good thing is that at least we do not rely on Geoff for saving the country's finances..

Chris 29.

Only one point - you can get 5% for a five year investment with no risk with a number of the financial institutions so why take the risk on these countries who may well default. Pressure will surely continue to rise on all of the PIIGS!!!!!

Thanks for the suggestion Chris.

I presume 5% will be the gross return. Higher rate tax at 40% means net 3.0% or 50% higher rate tax come April for the £100k upwards incomes. Meaning 2.5% net. That will not even cover inflation. Then there is the risk of further sterling devaluation which means imported inflation here and everything overseas becoming much more expensive still and i cannot face another wet cold summer here. Also your plan involves money tied up for 5 years. That is not "no risk". These are multiple risks. You just do not see them in terms of pounds lost. Finally which banks. I hope that they are all covered by protection in case of going bust.

Also i said nothing about PIIGS. I was thinking in terms of Global Bond Funds focusing on emerging market currencies. Brazil, Mexico, Indonesia etc. Yields 10% + with natural currency hedge - yes a bit of risk of default but look at the last 10 years. In 2000 the Brazilian Rias to was 6.1 Rias to £1 now 2.8 Rias to £1. Where do you think things will be in 5 years time. At the end of the day Chris you must do what you feel comfortable with. Good luck.

Hi Dr D #30

Yes - I've already factored in your correct observations re Greece. I see all current talk on EU going round in circles as we slide towards that slow-happening car-crash.

ATN #31 - thanks for expanding.

Can't help but think that Stephanie's main blog comment is yet another bit of misdirection to take us away from the implications of today's worsening trade deficit announcement of the UK. Her blog is about economics - right?

Yet I find today's blog yet again all about hypothesising over foreign sovereign finance (even though it is the EU). This topic has already been blogged to death.

Which one is more about economics: (a) UK trade deficit or (b) Greece's well-washed sovereign debt problem?

I'll give you a clue - one is about economics whilst the other is primarily financial in nature.....

#40 Dimitris. Best olive oils in the world are Spanish - no surprise that the British major on Greek olive oils!!

Your mate Geoff might have done a better job than Goldman.

If you want a balanced view of Greece's recent history and how it relates to their current problems, then see Charlemagne' notebook blog in the economist. Thoughtful.

Surely simple economics would say that if a country can balance its budget than it is living within its means, and therefore a budget deficit means that it is living beyond its means. Looking at the budget deficits across the EU one would have to conclude that the EU is and has since monetary union, been living beyond its means. If this continues then Stein's Law will eventually kick in, which states basically that "things which obviously cannot go on forever won't".i.e. left to its own devices something will happen to bring what is out of balance back into balance.

You are likely starting to see that application of Stein's Law in the European dept crisis. The problem is that many of the European countries rely on budget deficits to fund bloated public service and generous social security. It is going to be a painful process for many countries adjusting back to budget balance across the EU.

I am thinking of taking a holiday in the sun.

I used to go to Greece and Spain which were cost efficient and warm.

Now they are too expensive. I suspect I am not the only potential source of foreign exchange for Greece (or jobs for Spain) thinking this way

They clearly need to devalue. They will then get more holiday makers, more foreign exchange, more taxes, less deficit etc. It will also encourage Germans to holiday there as well.

Oh dear they cant devalue.

It is so obvious I dont know why I am writing this. the Euro is the most assinine idea of all. An extremely important lever is removed from the system. This is like cars without springs, Ships without bulkheads. There is no way of sensibly relieving stresses in the financial arrangements between countries without them going SNAP. Any system with large forces needs mechanisms to allow any stresses to be relieved in manageable ways.

Thats exactly what currencies allow you to do. Tieing a load of ships together whilst allowing the captains to decide their own direction is not a recipe for success.

So somehow the med countries need to devalue so they can become more competitive.

HOW?

Never design a system without decoupling points. is this taught in economics?

mereEngineer

FREE TRADE and Banking is fantastic as long as all the Players agree with
and play by the rules ! Even well known trade partners have been shortchanging each other in recent years and our huge trade partners such
as China,India,Korea and Japan would prefer to maintain heavily onesided
relationships....forgetting that economically weak partners will be unable
one day to continue buying from them. Great Britain being a classic example !! A major problem in China are the great problems in the Legal
systems,letters of credit and sheer gangsterism in the Provinces when
payments & "agreements" go sour., And there are always plenty more Westernbusinesses ready to jump in for a fling !! China fixes it`s currency exchange rate on the pretext of still being a "developing country"...Strange.

#40- dimitris

......lovely missive, but in my defence, I didn't say that Greece doesn't produce anything, I said that it didn't make anything which kind of puts your assertion about Olives into context unless you now believe that Greece makes Olives as opposed to growing them, but there we are. Good luck by the way with your Olive-led export based recovery.

OK,. so the price of a shiney new Chinese-made HD 40" TV may go up a few Quid but all these huge Exporting nations with their Massive 100,000 ton Container Ships should be paying a "Shipping Green Tax" per Nautical mile. You see the huge clouds
of sulphurous effluent up the Channel and as they approach Felixstowe...as well as
the huge volume of bilge fluids and rubbish dumped at sea...yes those plastic clips
and polystyrene packs that end up in the coral seas and albatross nests !! Would it
not be greener to keep Corus open and our heavier industries of cars & aeroplanes
subsidised in lieu of paying massive Benefits to stay at home & jobless misery ??

#42
"Yet I find today's blog yet again all about hypothesising over foreign sovereign finance (even though it is the EU). This topic has already been blogged to death"

It's called burying bad news.

Short of creating another consumer bubble the UK has not got many options.

Another bubble would be disastrous.Re-balancing will take too long.

In short we are stuffed. Trying to reduce a deficit against a background of low growth and a devaluing currency that is sucking in inflation will only mean declining living standards and long-term unemployment.

Stagflation here we come.

Even the worst prognosis for Eurozone is still preferable to what is comong our way.

35. At 1:15pm on 09 Mar 2010, John_from_Hendon

The mention of the property market is a very good and real life example of bravado before a hurricane.

What most homeowners don't realise is the reposessions and foreclosures we've seen so far are nothing to do with the property crash that is expected. They were merely the people who were unable to continue managing their debt through lack of jobs, or maybe over-extension etc.

That knocked about 20% off prices.

The real crash will be when the interest rates inevitably rise and working people can no longer afford their repayments no matter what their employment status is

The stimulus of stamp duty and low interest rates merely took us to a higher place on the side of the mountain, from which to jump from.

41. At 1:41pm on 09 Mar 2010, Jeremy Silverstone wrote:

"Also your plan involves money tied up for 5 years. That is not "no risk". These are multiple risks. You just do not see them in terms of pounds lost."

....including the risk of 8% interest rates by 2012 and the opportunity cost of being tied up in an account for another 3 years @ 5%.

The fact that the only way you can get a half decent rate is with a 5yr commitment is testament to where the banks and building societies think the rates are heading...

#42 Rugbyprof.

Hugh!!!

"
Yet I find today's blog yet again all about hypothesising over foreign sovereign finance (even though it is the EU). This topic has already been blogged to death.

Which one is more about economics: (a) UK trade deficit or (b) Greece's well-washed sovereign debt problem?

I'll give you a clue - one is about economics whilst the other is primarily financial in nature....."

They are both aspects of the same thing! It is all economics and it is all inter-related. Focusing upon UK as though all the problems can be solved here, or insisting that politics and finance are not joined at the hip is a recipe for future economic disaster.

I cannot get out of my head that successive UK governments have pretended to be a part of Europe, whilst working flat-out to undermine the ethos of the EU.
If we were a full member of the Union - and I'm going to forget all that rubbish about sovereignty -we could have had a far greater say in EU affairs, and I suspect had far less impact from the American-generated Credit Crunch at the same time.
The pound is desperately alone, making it rife for the profiteers to skim any profit from a rising pound. We need to be part of the greater whole. I believe that our destiny is as an integral and important and influential member of the EU. Not as a sometime-friend of a mega-power which simply uses us as both an unsinkable aircraft carrier and a buffer to keep their interests alive in Europe.

The materialization of the EMF is inevitable, the powers that be in Brussels really want it. But let's make no bones about it, it's just an excuse to extort money from as many countries in the EU as possible. That is why the Germans are right to be wary of it - and we should be too. After all, who else is going to bankroll the EMF, in order to create a slush fund for the basket cases such as Greece and Italy? Sadly Stephanie, I think it will be the "wrong sort" of EMF we end up with.

I'm with Grim (20) all the way: the whole system is unsustainable. Talk of EMF and so forth is merely sticky plaster politics. We are living beyond our means and have being doing so for too long. Unfettered capitalism will destroy everything in time. A (non bloody) revolution must happen sooner or later. I'm for sooner...

EMF 1990 Had the song 'Unbelievable'...sure this is widely known..spooky though

Still people say we should join the Euro (see above)

From day one, it was pretty obvious to anyone that one currency only works with one taxation system and one federal government

Now the chickens come home to roost

The very people who are unable to run the EU properly, who invented the Euro, now talk of an EMF

This Franco-German alliance is unwinding....

They will either have to bail out the PIIGS or expel them..they now have to pay the price either way

The retail figures for Feb and trade defecit figures are woeful, so I will be very suspicious if the Q1 GDP don't reflect this

On a lighter note, the best olives I have tasted were from Palestine

#42 Rugbyprof. Not real misdirection here, you just need to connect the dots.

A sterling devaluation is supposed to make exports cheaper. But what is it being devalued against? The euro and the $US have their own terminal problems. Therefore devaulation is a race to nowhere.

The trade deficit figures can be viewed as a signpost. It will be ignored, so there will be no need to slow down to read the sign. We may yet arrive at nowhere ahead of all the others, but it is going to be close.

Given that the destination is nowhere how will we know if we have won? Will we care?

#46
"They clearly need to devalue. They will then get more holiday makers, more foreign exchange, more taxes, less deficit etc. It will also encourage Germans to holiday there as well."

Devaluation is no panacea as we will soon find out - it imports inflation and discourages capital flows.

Fiscal discipline is the only way for the PIGS - already working in Ireland.

Greece, and Spain et al, are expensive for us because sterling has depreciated sharply over the past 2 years with no benefit to exports (what do we make that the world actually needs - rather than desires).

Right now the Eurozone is facing some serious issues. But they are not as far up the proverbial creek as the UK.

Time will tell.

47. At 2:58pm on 09 Mar 2010, Peter wrote:

"FREE TRADE and Banking is fantastic as long as all the Players agree with
and play by the rules"


....and can you cite any point in history when this actually happened?

Good article, but I would note that the structural funds through the SGP require absorption by countries, and Greece has not absorbed those structural funds, so the threat of falling out with the SGP for countries like Greece is neither here nor there. They don't absorb 90% of the funds anyway, so losing out on funds they never received in the first place is not likely to pressure them.

Greece has the lowest private debt of any Eurozone nation. Half as much as the average. It was the state sector that overspent, so at best you can accuse Greeks of having a massively inflated form of workfare. Greece is basically a welfare state. Is that profligacy? is being poor profligacy? Greece, compared to Germany, is very poor. For a long while--well before Euro entry--it sustained its welfare state through profits brought in from external ventures such as shipping and tourism. It was in even worse shape in the early 1990s recession than it is now, but it got out by devaluing, which it isn't allowed to do now.

Lastly, Germany's banks dabbled in credit default swaps, and now they're on the hook. Germans are insulting Greeks looking for bailouts. It's funny, as a US taxpayer, I didn't complain when my tax money went to Germany last year. Over $20 billion came Germany's way because the state-owned bank KfW got into massive trouble with bad investments and bad bets. So the Greek gov't is profligate. But are Germans horrible gamblers who can't pay their debts? Why look to Americans when their banks lost their bets? Why did they go looking for handouts?

51

House prices have become very driven by where you are, far more than in the recent price

There are many places where they have not reduced by anywhere near 20%

Unless interest rates rise to a base rate in excess of 5% quickly, I do not think your scenario will play out at all

In fact quite the opposite, I see lowish interest rates for the foreseeable

#51
"The stimulus of stamp duty and low interest rates merely took us to a higher place on the side of the mountain, from which to jump from."

A good analogy.

Property is still some 25-35 per cent overvalued. Only a consumer boom (aka bubble) - no chance of that - can postpone the inevitable.

Incidentally a drop in property prices will be a positive step in re-balancing the economy and moving away from Casino UK.

Property - owned or rented - is for living in. It is not an investment, except in the very long term, or an ATM.

51. At 3:21pm on 09 Mar 2010, writingsonthewall wrote:
The real crash will be when the interest rates inevitably rise and working people can no longer afford their repayments no matter what their employment status is.
---------------------------------------
I have asked before what will happen when mortgage rates for all are back to 6% or more (this would double my repayments from the current position) but nobody has given an opinion: What happens when a million homes are repossessed? Could this happen, wouldn't the knock on effects kill some banks again, would the government have to "delay" repossession?

#47 & 49 Peter,

You can't go round having thoughts likie that, you'll be accused of being anti-free trade, and anti-capitalist and I don't know whatelse!

The simple truth is that none of the imported finished goods are impossible to make in Europe. Therefore why continue top play a rigged game? It will only lead to conflict in the end.

But if you dare say that by protecting your industries you can put back to work your increasing numbers of unemployed and under-employed and grow your econmies you will be labeled as being a war-mongerer.

Ah well shed loads of Chinese TV's aint worth anything when no matter how cheap they are when nobody has a penny with which to buy them!

We are all addicted to debt.
Households, students, credit card holders, mortgagees, banks, governments, nations.
Debt has replaced food, sex, lifestyle as the meaning of life.......debt is King.
And debt is the destroyer.....of everyone.
Live within your means.....or die broke.
(Are you listening, banks?)
National Debt is at catastrophic levels for many nations......so what's next?....war?
The Icelanders have got the right idea......bad luck, you can't have it, but you can have it later, much later....when we feel like paying.
The USA is in a different position....it runs on "protection money".
Without the USA half the wealthy nations of the world would be at the mercy of their enemies.
American debt is likely to be "excused".
But for us in the UK.....Joe Bloggs has been landed with all the debts of those banking ego-maniacs.
"Justice"?......forget it.

#57
"On a lighter note, the best olives I have tasted were from Palestine"

On an even lighter note, the worst olives I ever tasted were from Israel.

#52 WOTW - I'm a little outside my comfort zone from a knowledge point of view but I think the banks can give higher rates long terms for different reasons than that which you suggest ie they know rates are going higher (after all it wouldn't be like a bank to speculate would it.....)

1) By attracting long term money they presumably improve their gearing ratios and can then leverage on that ot give out more borrowing?
2) They can afford to give out higher interest rates on long term money because most have a credit card arm which is charging 16 - 20% interest.

From an investors point of view I agree that it is not sensible to tie up money for 5 years at the moment.

#57
"From day one, it was pretty obvious to anyone that one currency only works with one taxation system and one federal government"

Pretty obvious to the architects of the Euro too.

Remember what I said about a 'work in progress'. No one predicted the credit crunch - unless you count half the posters on this board :)

Fiscal union and federal government coming soon.

Don't you just love it whem a cunning plan comes together.

Stephanie, you make a good point about confused thinking, although the source might not always be to do with the way things are formulated. Take the vast amounts of ambiguity to wade through to reach the terra firma for solid decision-making for instance. Today's lead story highlights the case in point. We know that concerns about Greece's giant debt currently makes it more expensive for Greece to borrow money compared with most other European nations. This is rightly the conclusion drawn.

However, in contrast to that an anaysis is included in which the how and why it is more expensive for Greece to borrow money is spelled out. In it, credit default swaps linked to Greek government bonds are identified as having been bought up in vast quantities by speculators in the 'hope or belief' that the Greek government will either default on bond interest payments, or have its credit rating lowered, since in both cases the seller of the swaps, typically banks or insurance firms, would have to pay a penalty fee to the buyer of the contracts.

So, the analysis concludes, it is in the interest of hedge funds owning such swaps for the Greek economic situation to worsen, rather than to improve, and meaning that Greece has to offer higher interest rates on the actual bonds to make them attractive enough for to buy, as it costs banks more to insure their Greek bonds due to the higher risk of having to make a swaps payout.

So, do we still know that Greece's giant debt makes it more expensive for Greece to borrow money? Or should we understand it also in terms of unprincipled speculators making billions every day by 'trying to force' a Greek default?

So far this week's indecision has been nicely framed by both the German Chancellor stating that it could be up to the European Commission to decide if Europe should have tougher rules on financial speculators, and the US Secretary of State wanting to work with other nations to reform unregulated financial markets, offering long term tracks in response to an immediate demand.

58. At 4:12pm on 09 Mar 2010, armagediontimes wrote:

"A sterling devaluation is supposed to make exports cheaper. But what is it being devalued against? The euro and the $US have their own terminal problems. Therefore devaulation is a race to nowhere. "

GOLD

That is why an ounce is worth over 1000 of 'paper money' (dollar demonination) - and we're pegged somewhere off that amount!

#53 FDD

News: We're already in an economic disaster!

I say tomaato you say tomayto.

The point being this is a primarily economic blog to do with the UK as in Stephanie's intro up top - see above

'I'm Stephanie Flanders, the BBC's economics editor. This is my blog for discussion of the UK economy'

Whilst I appreciate that things are linked re EU at certain levels, I find it odd that we're not discussing something extremely important in the UK scheme of things - namely our exports (or lack of them) something that you have previously commented on yourself.

Why - as I say - are we continuing to go round in the wash over Greece - we already know the scenario. Greece has very little direct impact on our exports. We already know of the financial implications as we have discussed ad infinitum on previous blogs.

Why bring it up again when there is more pressing attention on today's announcement?

Richard Dingle articulated a reason #50......and didn't have to read my mind.......

#58
"A sterling devaluation is supposed to make exports cheaper"

Only if you make and export things that the rest of the world need and want.

Devaluation has never really helped UK exports for that reason. But it has always sucked in inflation.

Conversly, I remember when the DM/GBP rate went from 11 to 3 in the space of 30 years with no slowing down of german exports to the UK.

59. At 4:15pm on 09 Mar 2010, Richard Dingle wrote:

"Fiscal discipline is the only way for the PIGS - already working in Ireland."

mmmmm not so sure.....haven't they already had a General strike in Ireland?

It's one thing proposing fiscal discipline, it's another to actually see it through.
Don't be surprised if the strain sends Ireland back to the 'old ways' - people don't like change and they like rapid change even less.

Ireland has been given a moratorium by the markets because others are worse, not because they have cured anything yet.

#58 Arma

Sorry moderation is taking too long.

Just to reiterate on my last entry #73.

You're economics editor at the BBC (that I understand stands for British Broadcasting Corporation - there are other names...)

Given that exports have been hyped up as the white knight to help to get the UK to managing its future deficits/debt (notwithstanding the coming melttdown as you imply!); Do I:

(a) blog on the trade deficit announced this morning and its implications related to this, or (b) continue to pontificate over Greece and EU like we didn't already know the implications.

Tell me what have you gleaned from the blog comment today that you didn't already know?

Not even an update on the topic.........

#63
"In fact quite the opposite, I see lowish interest rates for the foreseeable"

What do you base this on.

Medium term bond yields will have a say.
Bond yields will be driven by deficit funding requirements, a falling pound and the fact that some 35 per cent of UK bonds are sold overseas.

We have been here before.

Even a rise to 5 per cent (historically an average UK BOE rate) will be a ten-fold increase on where we are.

#65
"I have asked before what will happen when mortgage rates for all are back to 6% or more (this would double my repayments from the current position) but nobody has given an opinion: What happens when a million homes are repossessed? Could this happen, wouldn't the knock on effects kill some banks again, would the government have to "delay" repossession?"

======================================================================

Unfortunately under the current system the banks reposess and sell at auction to recoup some money. Downwards spiral also known as 'panic'.

In any civilised society surely we need a 'Chapter 11 solution' for home owners - no reposeession for 12 months or a compulsory payment holiday built into all mortgages.

65

The only way rates will get any where near that in the next 5 years is with IMF intervention

BoE do not have to raise the Base Rate, even if Bond yield rise

Those that think they will, include the importing of higher inflation as part of the equation

You will also be able to find those who think deflation is the bigger threat

Rates will rise at some point, although I would like to know where this 8% figure has been plucked from

If you can afford to, make overpayments whilst the rates are where they are now

Dear Stephanie, is this where you, as a classical economist, run out of road ? The laws of economics you learned in Broad St, Oxford, were pretty much predicated on the assumption of a law-abiding, functioning society, where government possesses the levers of power. In a relatively anarchic society - and you can tell us just how anarchic Greece (or the other Club Med countries) are, the Finance Ministry can press the button - and not much happens. Doesn't take much to get the French out onto the streets, a fortiori the Greeks. When did we last see large-scale demonstrations in Germany ? When economies get out of kilter - Germany keeping a tight hold on labour costs, the PIIGS diverging by up to 20%, there is only one relatively foolproof means of re-setting the (effective) exchange rate - and that is devaluation. Because it kicks in fairly slowly, and is to an extent "hidden", it is - as far as I know - the only "rate re-setting" mechanism which people can be made to go along with. That is why I'd like to see cast in stone RULE 1. In countries with poor "civil discipline", labour costs will always outstrip those in well-disciplined countries. RULE 2. Devaluation is the only practical way of "re-setting the clock" in such countries.Brussels can make rules and regulations till it's blue in the face (as it has done)but without civil discipline, they won't stick. In about 6 months from now, we'll find out which type of country the UK is!

68 70

Like your style

#75
"It's one thing proposing fiscal discipline, it's another to actually see it through."

Yes it is very hard - belt tightening usually is.

But is the only way irrespective of whether you are in or outside the Eurozone.

Devaluation merely creates more problems - namely inflation.

Inflation might reduce debt in real terms but ultimately it is corrosive.

Of course workers will strike; you can't blame them, they are paying for the mistakes of others.

The logic is not screwy. The EU needs an EMF. Germany and France are leading the move for an EMF. The German Chancellor Angela Merkel has expressed cautious support for the plan. France and Germany have resisted "IMF" involvement in Greece, but note: this is "IMF" - with all its flaws & prohibitions.
Merkel has called an EMF "a good and interesting idea". Economic and Monetary Affairs Commissioner, Olli Rehn is working on an EMF now and will advise the full Commission Executive soon. Full details of the EMF, and how the 16 members of the eurozone would fund it, are expected to be ready by early June.
The so-called periphery of the eurozone is made up of the so-called STUPID countries; that is, those countries particularly taken in by American derivative trading, default swaps, toxic debt, etc - so convoluted that that the United States doesn’t even bother trying to regulate them. The STUPID countries are Spain, Turkey, UK, Portugal, Italy and Dubai + Greece. These countries have toxic bubbles; these countries should know that these toxic bubbles can blow anytime. The bubbles need to be identified, segregated, evaluated, assessed for what they really are, which is probably junk. Any of these countries, any day, could face the same financial dfifficulties as Greece.
The EU should not deal with the IMF. The IMF destroys economies by ordering them to comply with IMF rules like high interest rates, privitization, limited (or no) social spending and dictation on what can be done with the economy. IMF does not improve liquidity; it puts countries deeply into debt from which it is next to impossible to emerge. Just take a look at Latvia.
Diverging European competitiveness is not a problem. Greece is not really a problem, provided Brussels helps it surmount the American damage in toxic debt. Brussels knows finance; Brussels is a specialist in financial solutions. Brussels can help Greece.
Solvency is not a problem. The EU will not allow any country to go belly-up solely due to sovereign debt, especially when that sovereign debt was caused by American gambling in default swaps.
Yes, I agree – “sooner or later, we're going to have to come up with a mechanism for "safely" restructuring sovereign debt in Europe”. It's happening now, coming soon.
Momentum is spreading across Europe to regulate financial speculators; speculators who worsened Greece's position.
German Chancellor Angela Merkel says "quick action is needed" on this; EU President Jose Manuel Barroso also spoke out against speculation.
They say speculators, such as hedge funds, derivatives, default swaps are no more than gambling, gambling in which the United States of America passes along any and all defaults on loans to sucker countries.
Even now (this very minute) American speculators are betting against Greece defaulting on its government bonds by buying large quantities of a complex financial insurance instrument called a Credit Default Swap (CDS). If Greece defaults on its bonds (for example), then the owners of CDSs linked to the bonds will be eligible for penalty payments from the bond holders. Guess who benefits?
German Chancellor Angela Merkel has called on the US to stop the financial speculation. "The US” she said, “needs to make some gesture."
Mr. Barroso told the EU to look at banning "purely speculative" sales on credit default swaps of sovereign debt. Now we’re talking! Ban them outright. Get this stuff out of Europe and lock the door.
French President Nicolas Sarkozy has also joined his voice.
He met with Greek Prime Minister George Papandreou in Paris on Sunday to discuss Greece's austerity package. The meeting came amid growing belief that France and Germany will provide some sort of financial guarantee for the Greek economy – likely after Brussels takes a vacuum cleaner to all the American junk (derivatives, credit default swaps, CDS, etc.).
An EMF is not being created to prevent Europeans from being embarrassed by bringing in the IMF; the fact is Europeans don't want to dirty their hands with the IMF or have their economies disrupted.
Restucturing soverign debt is not as difficult as it seems, if the financial practitioners really know what they are doing and how to do it. The EU, the world, would not need a crisis response mechanism (except for natural-type disasters) if it weren’t for the total lack of regulation on financial instruments trading from the US.

#83

Excellent post.

One would have thought that if hedge funds and speculators had any common sense they would keep a low profile after recent behaviour.

The EU has the power and legislative wit to destroy these pariahs once and for all. Ideally this will be done with the cooperation of that fading superpower the USA. But it will be done.

The current problems facing the Eurozone are a massive argument for further EU integration on areas such as tax, legal system and defence.

The Greek Prime Minister likened speculators to arsonists and he was spot on; they destroy peoples lives.

34. At 1:07pm on 09 Mar 2010, lilysmygirl wrote:

Shall we go the whole hog and just sell the Isle of Great Britain and Ireland for £1.4 trillion and start again?

Me thinks any potential buyer will wait for the Liquidation Sale and offer a £1 (sorry €1)

I just read this headline in the Guardian:
"Europe bars Wall Street banks from government bond sales• Leading US banks blamed for triggering financial crisis • Policymakers propose a rival European monetary fund...
Yes! Way to go EU Commission!!

#85
"Me thinks any potential buyer will wait for the Liquidation Sale and offer a £1 (sorry €1)"

Would you waste your money. In Berlin you can get a Bratwurst for 1 Euro.

To quote Homer


mmmmmmmmm Bratwurst

#88

Perhaps thats the answer in the coming election.

Vote for Homer/Mr Burns to sort out the deficit - could they do a wurst job.

:)

Or Maggie? no Moe Gordon!...groan

Presumably the IMF was created in the same silly way as the proposed EMF, if the author is to be believed. The suggestions here are just plain nonsensical. New edicts from Brussels to move manufacturing or some other money earning plan from Germany or France to Greece or Ireland. Give us a break! As well as being impractical it just wouldn't be sustainable.

I do struggle with concept that the euro is in danger. As an ex-pat living in France with a sole source of income coming from the UK I have seen my income drop by 20% in 4 years despite having 4 pay rises!! And the good old pound continues to slide as I write. Perhaps we should stop gloating over a potential problem in the 'PIGS' countries and actually start sorting out our own. Clearly, most of today's economic problems are universal but, at the same time, the euro clearly has much more credibility than the pound.

63. At 4:42pm on 09 Mar 2010, Kevinb

"In fact quite the opposite, I see lowish interest rates for the foreseeable"

If that is the case then this will be a subsidised housing market - which although the value in sterling may increase / not fall, but the value of sterling will depriciate rapidly instead.

Even Governments aren't stupid enough to risk hyperinflation in order to keep the housing market off the slide...

....also, the Government will be paying more for it's lending in the foreseeable future - they cannot borrow themselves at 5% and lend to banks at 0.5% without printing more of it.

This is the dilemma facing those in power.

65. At 4:48pm on 09 Mar 2010, Kit Green

What frightens me is some 'spokesman' on the Northern Rock losses today mentioned that the good news is taxpayers will see a profit eventually......unless there is some 'unforseen' collapse in the mortgage market.

....well might I suggest higher interest rates being that 'unforseen' event?
Shame we've already seen it - only those banking with their eyes shut cannot.

My mother always said banking will make you go blind.