The European rescue plan that dare not speak its name

If Germany leaves the Euro , the Euro will be dead .

It won't happen, as Germany will be the big winner in this Euro crisis.

So we are finally talking about the unthinkable - a 2-tier Europe.

There is no doubt that there is a fatigue about the Euro and the debt problems. Many Europeans have lost faith in the Eurozone, and see little future for it.

If Germany leaves then it is almost without doubt that France and the Netherlands would leave. Perhaps there would also be other countries with more stable economies. The result of this would be a strong Euro, and then the rest (PIIGS).

It would also certainly herald the end of the European Union and the great EU experiment. Brussels would become more and more irrelevant.

If Germany leaves the Euro , the Euro will be dead...

It won't happen , Germany will be the winner at the end of the crisis.

The Euro is dead. Nothing to see here except a failed experiment.

Given the ever widening unit labour costs, trade imbalances and government debt position between Germany (and a few smaller northern economies) and the rest of the Euro zone its merely a question of when, not if, there will be some sort of divorce. It is going to cost too much pain, misery and money, with no apparent end in sight, for it to be otherwise. The existing leadership can bluster all they like but the numbers always win in the end. Even if it means the current crop of politicos have to go first. Retired or pushed gets to be the next question.

Germany, Austria, Netherlands, Sweden, Denmark, Finland, Czech Republic, and maybe Poland given a little time. These nations share similar fiscal cultures and could be formed into a strong central core (Mitteleuropa). The western and southern Europeans (excluding Greece, a 'special' case) basicallly have 'boom & bust' mentalities on the Anglo-American model. Perhaps it would be in the long-term interest of both groups to go their serarate ways?

Hi Steph,
There is no chance of Germany leaving the Euro. With more than 33% of German GDP coming from exports and the Germans running a trade surplus, a weaker Euro is extremely good news for them.
Germany won't leave, the Euro was the brainchild of the Germans and French and 3 major defeats within 100 years would be unthinkable, now that Germany is finally dominating Europe again.

Since money does not grow on trees, and no-one in the eurozone periphery has enough to pay back the debts accumulated during the low-interest rate fuelled Celtic Tiger years, it all comes down to who else pays, and when. The answer should depend on who was to blame.

If it is the IMF then the whole world pays, which is not fair on the innocent. If it is private-sector banks then their depositors pay and the real culprits escape. The blame here lies squarely with a political class in Europe which sacrificed economic stability on the altar of euro-federalism. And Angela Merkel is the high-priestess of that political class who personally revised the EU Constitution after its rejection in multiple referendums and forced it through in the thinly-disguised veneer of the Lisbon Treaty. It is only fair that Germany pays the costs of subordinating sound economics to the political vanity project of super-state construction.

Whether German voters pay once (by leaving the euro now) or indefinitely by repeating the Celtic Tiger to Bust phenomina indefinitely in every economic cycle to come, is up to a new generation of German voters. But make no mistake; that Germans taxpayers pay for the sins of their political class is only justice. Ireland is a fully-worked example of the ‘Walters critique’ of EMU so it was clear from the beginning that Ireland, Spain and other eurozone members with high domestic inflation would likely go bust in the euro straight-jacket. Gordon Brown saw in and kept Britain out of the euro; and Merkel and previous German chancellors must have been aware of it too.

If the Euro splits in two it is just a matter of time to complete disintigration. I think the politicians will stick it out come hell or high water and irrespective of what is sensible, rather than face the unknown territory of having their currencies back.

Once the legal stuff of a split starts to be looked at (and that may take years to formulate) the Euro would be a dead duck which investors would avoid like the plague.

The Euro may be in life support, but that does not mean countries leaving would be in a better position. The grass may not be very green at all..

If Germany leaves the Euro , the Euro will be dead...

Not an option by any stretch of ones imagination. However, a unified banking system (German) where all European sovereign debt is serviced by a single Euro Bond issued from said bank.

Now that is not beyond ones imagination.

Adam Posen, February 19 2010, "Though the political relations within the European Union could not be more different today from during the 1920s—thankfully and by conscious European design—the economic dynamic is much the same as then, but with the German role reversed. Seen in this light, the hostile emotional response of many German—and for that matter Austrian, Dutch, and French—politicians and their constituents to prospects of a "bailout" for troubled Southern European economies must be overcome. In fact, the idea of showing political solidarity is not contrary to economic sense, but is a means to achieving the euro core's economic self-interest for the long term.
Keynes suggested the way out in his proposals for the postwar economic system at Bretton Woods. Euro area economies running recurrent or large-scale surpluses should be required to pay back to the system some share of their trade proceeds. This would be a way of stimulating demand abroad, thereby mitigating the transfer problem. So long as the amount taxed was a fraction of the trade surplus run by Germany or other intra-euro area surplus economies, it would not even be felt as a real burden, though it would pay for itself in terms of the long-run."

This was all entirely predictable

In all currency union where you have different parts of the union operating at different speeds you need to employ economic shock absorbers. When the currency union was split into separate currencies the shock absorber were interest rate and exchange rates remove those (as happens in all currency unions) and you need to employ different shock absorbers.

We see this in the UK (a politicial and currency union with Wales, N Ireland and Scotland) and the USA so why should the Eurozone be any different?

In a currency union the 2 main replacement shock absorbers are mass movement of people and transfers of wealth from rich to poor. On the basis that mass movement of people is not happening that means Germany has to accept, if it wants the Euro to survive, that a lot of money has to be transferred from it to others

Germany to leave the Euro!!

What complete twaddle!! The Germans se the big picture in europ, not like us 'little Englanders', no matter what is written about the Euro crisis it is still stronger than the £ or $. 40% stronger than it was 4 years ago.

Also I'm still waiting for someone to give me a legitimate argument on why we are not in the Euro. I think the main answer (as with every other financial one) is that the banks would loose out!!!

Stephanie,

You have been duped by the bankers.

This story is rubbish. It is a non story. It is a dead parrot.

Just exactly who are "looking at the eurozone debt crisis unfold, many economists are warming to the idea". Who are these many economists? Who do they work for, and whose agenda are they following?

Here is a story on similar lines 'Scotland to leave the Sterling area' - I heard that in a pub last night!

All this user's posts have been removed.Why?

Let's just imagine that Germany does leave the Euro. How exactly could that happen? They could of course start printing and accepting Deutchmarks again, but the tricky thing is what happens to savings. It would be a one-way bet that the Deutchmark would immediately appreciate relative to the Euro. Would there not be a stampede for everyone to convert their Euros to Deutchmarks before this happened, thus guaranteeing a complete collapse in the Euro?

And even if some form of restriction were placed on conversion from Euros to Deutchmarks, then everyone would get out of the Euro (into Dollars/Yen/Sterling/etc) before the Deutchmark split away, planning to convert to Deutchmark as soon as this was allowed. Which would again cause a complete collapse of the Euro.

The only idea I can think of which might work is to allow Germans to leave, but not to allow the new Deutchmark to float. Rather pin the Deutchmark and Euro to each other, and gradually devalue the Euro over time until stability was achieved.

dear stephanie,

after 50 years of paying over the odds for every failure in each economic crisis it seems to me, that most of my fellow Germans are quite happy with hiding behind the Belgian and Dutch, Spaniards and Portuguese. A single currency will bring the pressure back to do good. The German savers have lost a lot during this crisis because the are net creditors and not net debtors like the English and as you know, the bailout only worked out for the debtors. So don't insult our intelligence.

cheers Deumark

I propose that Central London should leave the Pound Sterling.
That would allow we in the porcine periphery (Scotland, Wales, NI, North England, Brum, Cornwall, Kent/Essex/Bromley etc) to devalue our currency and rebalance our economies.
Who's with me?

The departure of Central London from the pound, would swiftly be followed by Guildford, Cheshire and Brighton, all of whom would set up their own currencies (oh - they already did)

To those who say it is impossible for the eurozone to split in two, for the strongest member(s) to leave to issue their own currency, or for weaker members to leave, devalue, and even later re-join, there is another such currency in the world that shows all this is possible.

14 African countries currently use the CFA franc, which is actually two currency blocs (Central African Franc, and West African franc) pegged 1:1 with one another and formerly pegged to the French franc. Economic tension between relatively affluent French-speaking countries such as Reunion led to them abandoning the CFA to issue their own currency, and for the least economically strong such as Mali to leave, devalue and later rejoin at a lower rate.

https://en.wikipedia.org/wiki/CFA_franc

Merkels's plan is to honour the promise to protect senior creditors "in the breach". The current rules & protections will stand until 2013, but if there are individual bank failures before that time, she is going to try very hard to force private senior creditors to take a hit.
As one person put it: "the more this is about banks, the cheaper it is for Germany."
This is beginning to sound like an EU bank levy which I would very much like to see. The investment banks "too big to fail" failed, causing all this financial duress; therefore, the investment banks "too big to fail" should bailout the taxpayers.
Banks must be split between commercial and investment. Commercial banks would not be significantly "hit" by a tax on all foreighn transactions because they are...well...local i.e. commercial. The primary "hit" would be against thr investment banks "too big to fail" who are now using front-end loading (i.e. computers) to do a percentage of their "trading". I consider this cheating.
Germany, if my interpretation on Merkel'sd words is correct, is on the right track. Why leave her? Why encourage Germany to leave the EU?
Forget the condition of the various countries, especially the STUPID LITTLE PIIGS, of which by the way, the United Kingdom is one.
Germany's trade surplus has nothing to do with having the same currency as Greece, Italy and Spain. The debts, the austerity programs, which hurt the common taxpayer, have nothing to do with the common taxpayer. It is only fair that investments banks "too big to fail" pay for what they have done.
Impose a bank levy on all foreign transactions across the EU.
Split commercial and investment banking.
These are two very important methods to make it more attractive for businesses and banks to focus on the markets at home. It's called re-balancing the economy.
However, if the Euro continues in its current form, the chances are there will be need to be either a series of bail-outs, or a much expanded system of fiscal transfers between states, as the countries on the periphery discover that they can't make life in a single currency pay.
Impose a bank levy on all foreign transactions across the EU.
Split commercial and investment banking.
Germany is keen to have private creditors - banks too big to fail(???)pay for the austerity.
Impose a bank levy on all foreign transactions across the EU.
Split commercial and investment banking.

Yesterday I asked if the Eurozone could afford the Euro. Today it seems the answer is No.

Germany will not leave the Euro. The Euro is political not economic.

Back to work serfs.

Actually, the prospect of Germany leaving the EU is closer than many realize. Germany has bled capital, particularly between 1995 and 2008 when it invested 76% of it's corporate, governmental and private savings wealth outside of Germany. These savings were mainly invested in the European Southern Rim countries such as Spain, Portugal and Greece. Ireland, and to a lesser extent France also got a piece of the pie. During this same period, Germany suffered the second lowest growth rate of any European country and the lowest net investment of any OECD country. Germany slowed to a crawl and its real estate values crashed! This 12 year period had seen a real internal devaluation of 18% for Germany, compared to it's EU partners! In turn, this made Germany's present export trade surpluses possible. Many people believe these surpluses are a sign of German strength, in fact they are the result of weakness created by 12 years of exporting it's capital investments abroad!
Today, Germany faces the reality of losing this exported capital investment as one after another of it's "EU creditor countries" fall into deep recession and financial oblivion. What is worse, they are Eurozone countries and Germany is once again called upon to stump up the lions share of bail outs to nations that already owe Germany returns on it's earlier investments! This of course is a nightmare scenario for Germany!
With savings and investment now being made at home again, the 5 year wage freeze will slowly unravel and lead to higher wages and prices. This will decrease the Export surpluses as German competitiveness weakens but will allow for a sustainable strong economy to flourish with continued investment at home.
The only thing that can upset this real economic growth, is if Germany is forced into round 2 of bail outs of the PIGS or others, in order to support the Euro currency!
Germany has no choice but to say enough is enough! If bail outs continue beyond the value of the existing EU bail out fund, and this looks more and more likely by the day, Germany may actually have no other choice but to leave the Euro and possibly even the EU!
I believe Germany has considered this already and has found that countries such as France the UK and many others would be happy to go back to the brilliant and safe original idea of Sovereign Nations in a Common Market for free trade and free trade alone!

Richard and I had a little conversation about this last week...

195. At 11:03am on 24 Nov 2010, Richard Dingle wrote:

Germany's problem is not one of an instinct to dominate militarily but one of insecurity.

This why the EU is vital and the very political Euro also.

Domination through trade and commerce is perfectly legit and suited to Germanys exposed geographical position, wars are not.
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202. At 12:33pm on 24 Nov 2010, stillpuzzled replied:

Well, at least we are agreed on the fundamentals, then.

Germany still retains its self-image as a nation-state, and views the EU and the Euro as a vital and legitimate mechanism to alleviate its national insecurity and dominate the rest of Europe through trade and commerce.
===========================
Until that situation changes, I doubt there will be any "leaving of the euro". Whatever solution is proposed will probably involve bad debts being traded for overvalued assets or political concessions.

The Euro is a complete mess, but the reason for this is due to the fact that there are no rules (or rules that are ignored) governing what individual countries are allowed to do. This calamity is more down to mis-management of the economy by various governments. Greece spent to much and lied about it. Ireland and Spain let property bubbles expand to gigantic proportions without even the slightest intervention. What did they think was going to happen. Some people in Bangkom are worried that a property bubble is forming there, so the government are bringing in a law that means anyone buying a condo can only have a maximum 90% LTV mortgage. See, something can be done to slow down these bubbles. But Ireland, UK and others knew that their whole growth was based on this ponzi scheme, so no-one dared stop it. Better to enjoy the good times and worry about the consequences later. Well now is the time to start worrying about them. So to re-iterate, this isn't about the Euro, it's about profligate governments. Until people realise that they won't be able to fix the problem.

How did economists and politicians, suposedly wiser than me ever think that so many disparate economies could be tied together by a single currency with the constraints on interest and exchange rates that it would entail. I may sound wise after the event but I was against the idea from the start and am so glad that the UK did not join. If I could see it how couldn't they.

Why are they referred to as the PIIGS, the order they are set to fall in is GIPSI.

As long as all decisions concerning the Euroland are based on politics,then German will never leave it.
The Germans have not saved Ireland, quite the reverse, Ireland has saved Germany (and France). The Irish TS should be throughly ashamed of himself or to stupid to realise what he has done,(which I doubt)
Next to save Germany will be the Iberian Peninsula, then Flanders,and so.
Leaving Central Europe (de facto a Greater Germany)with France holding on for dear life and Italy split in two.
Gemany will be feasting at the table and all the rest (except France) will catch the crumbs (which at times will be quite nourishing)

As far as I can see, all the information in the article, as to national variations in performance being reasons for the memberships of the Eurozone possibly to change, are not significantly more relevant than similar comparisons between regions in the UK would be to their remaining in Sterling.

It makes me wonder what the purpose of the piece is.

No. 16 random_thought

On the face of it, I think your idea has a lot of merit.

The markets, not politicians, will determine whether Germany leaves or not. The Euro dream seemed credible when the so-called 'Boom Decade' existed. Now that it has been exposed as being nothing more than financial alchemy, the EU and it's currency are in turmoil.

Given the sheer scale of debt within the EU and the US, and the volume of money being printed, the short/medium-term outlook is bleak to say the least! German exports in 2011 must surely suffer.

I think Germany will leave within the next 12 months.

All the talk of the "weakness" of the Euro vs the dollar is bizarre when you consider the rate of exchange a few years ago.

The pound is very weak vs the Euro (10 francs(benchmark) to the £ equals 1.52 Euros) Rate today 1.19+. Remind me again of the debt Britain is carrying !

Euro bashing seems to be a past time of most BBC pundits and editors(is there a difference).

The Euro will not die nor will Germany or France leave the Euro or the EEC.

The Euro is turning out to be the disaster many predicted.

It has ruined the weaker economies of Europe, again just as predicted.

Now the stronger economies like Germany face the choice of watching their precious project die, or spend ever greater sums in keeping the weaker economies afloat.

I never thought I'd say a good word about Gordon Brown, but full credit on him keeping the UK out of the Euro!

@14 John_from_Hendon

The only 'dead parrot' I've clapped eyes on recently is the Euro!

The People who are attacking the Euro are Individuals within banks and "investors" who are after bonuses and short-term gain.

The people who will get damaged and hurt in this episode of events are the actual banks, small investors, pension holders and depositors. 2nd level, bond holders would loose the investment, banks would loose vast sums of the balance sheet. I think Germany has given a clue as to what it thinks about Markets “praying” and “punishing” weak members and if the market caused the collapse of the Euro and the cost to Germany, I think Bond holders would see a lot of pain.

Germany benefits from a weak Euro as does any country that Exports goods, however, that is not the UK. The fall of the Euro would be the single most damaging thing to happen to us for decades and would release an unrestricted and enriched Germany to compete with us and the Pound “head on”, think about that!

Finally, why do people think the Market is “correct” and “wise” it is not! Most people in the market are greedy, self centred, gamblers, I know a few of them and I think we have the evidence and are suffering from the pain of that statement. Investing in and devising “sub-prime” mortgages and other products for people who have no chance of paying it back is lunacy, We are in this dreadful mess “because” of these people and then they have the nerve to pass judgement on others!! We must be mad if we ever listen to the market ever again.

#33. TonyH wrote:

"@14 John_from_Hendon

The only 'dead parrot' I've clapped eyes on recently is the Euro!"

Caution your xenophobia is showing!!!!

@34 MarkGV

I think the majority of sensible people would agree with your sentiments.

The problem is that politicians have allowed this creature (the market) to grow to such an extent that it can no longer be controlled. This stampeding herd of greedy players just moves on from corpse to corpse. And we are dumb enough to award it the sobriquet of 'investment'.

Sad as it may be, I think this mindless throng will do for the Euro.

I wish it were otherwise but, unfortunately, you can't hide from reality.

Stephanie asks whether this German offensive on debt is any more successful than the last one.

As the last one was resolved via the Rentenmark, we can be assured that ultimately; Germany will triumph once again.

Germany is the major player of the EU and effectively controls the ECB, which in turn, will generate enough digital Euros to cover any eventuality.

In the meantime, PIIGS and other fiscally incontinent creatures will be bought to heel as there is no point in letting a good crisis go to waste, especially when it presents an opportunity for real reform which results in a more cohesive EU.

In terms of hearts and minds, many Germans have already left the Euro. I assert this after many discussions with all types of Germans, including businessmen, academics, and bank regulators.

Ms Flanders and Mr Hague are at last furthering a more realistic debate : how to have an orderly dismantling of the currency union, taking care of all countries in Europe. It is a time not only of economic and political turmoil but emotional significance as well.

As Financial Leader of the Great Exporting Republic, I have a plan.

Ein: Instruct the Economists that they should warm to the idea that we should leave the Euro

Zwei: Instruct the Journalists that they should publicise this to the plebs.

Drei: Watch the Euro go down, and watch our Exports go up.

Vier: Watch the Technological side of the Global Economic Machine become entirely dependent on us, while our friends on the other side of the planet have developed a yen for designing silly consumer electronic gadgets.

Sechs: Watch the Bond Holders sweat, and when gold prices are finally beyond ridiculous, we announce that we are taking hold of all Euro-issuing banks by directly capitalising them, and directly regulating them from Frankfurt, instead of making silly loan facilities to them.

Sieben: Watch the Chinese Government dither about buying gold instead of Euros or Dollars, until finally someone in China has the brains to let the Yuan rocket, and stuff everyone else.

Acht: Develop a sub-Euro currency for introduction to Eurozone member states who voluntarily are failing.

@35 John_from_Hendon

Don't be puerile - read my post @36 before you start flinging your insults.

Just because I disagree with you is no excuse. Either persuade through rational argument or remain silent!

'In the meantime, what about the rest of the eurozone? Could it benefit from getting rid of Germany, and maybe some of its neighbours?'
..................
Mutual benefits of getting rid of each other! Fantastic! ...
Crash that Euro!
Crash that Eurocrat party!
Let's have a new EU Treaty ... properly respecting inalienable sovereign rights with proper mechanisms for 'national referenda/voting rights' ... when needed.

Now let me get this straight!

When the topic of some weaker countries pulling out of the Euro was discussed the difficulties were so great that the likelihood of it happening was deemed so remote as to be unworthy of consideration.

The main reasons were that everyone in those countries would dump their euros and/or get them out and into German or French banks because their re-instated currencies would drop in value, and this would cause a banking collapse etc.etc.

So now, Germany leaving the Euro and going back to the Deutchmark would not prompt anyone to dump their Euros and convert them into Deutchmarks, which would inevitably appreciate in value- even if the Germans were stupid enough to re-convert at a silly rate.

Crassness beyond words!!

"The market speculator knows that he will have to break us in the European Union or lose lots of money. If we can stand up to him, all Europe may be free, and life of the world may move forward into broad, sunlit uplands. But if we fall, then the whole world, including the United States, including all that we have known and cared for, will sink into the abyss of a new Dark Age... Let us therefore brace ourselves to our duties, and so bear ourselves that, if the European Union lasts for a thousand years, men will still say, 'This was their finest hour.'"

With apologies to Winston S. Churchill (who was rather keen on the EU).

Passing bad debt from the banks to the people was only ever going to work if the people had the capacity to pay it.

So if the price to be paid for the uncontrolled creation of money as debt, is going to be destitution and misery on an individual level and the financial collapse on a national one – we really should be asking yourself – is it worth it?

What beggars my belief is why no one in the ‘media’ is prepared to even discuss the rights and wrongs of the debt based money creation system.

It’s been left to people like https://www.positivemoney.org.uk/ to show that there are other ways of operating a monetary system, other than being enslaved into never ending debt.

Come on Ms Flanders, you’re into ‘economics’ which presumably includes how money is created, and given that the debt based money creation system is wholly responsible for everything that is happening, surely it’s time it was at least mentioned.

Could the great and the good really not see an economic disaster happening? I remember talking with my then boss in the City in 1998 about how the euro was likely to be a fiasco.

22. At 2:58pm on 30 Nov 2010, truths33k3r wrote:

Back to work serfs
~~~~~~~~~~~~~~~~~~~~
You reminded me...

In the wee small hours, it began to dawn on me that we are, in fact, returning to feudalism.

If any government protects "senior credit holders", but lets "subordinated creditors" take the hit, what does that say about the voice of the ordinary man?

There was a false dawn, when we genuinely thought that democracy meant that the interests of the people would be represented by government.

But the current process of government appears to serve the interests of the barons, not the peasants.

That appears to me to be true whether we talk of Ireland, Germany, England or the EU.

In respect of the "crisis" in the eurozone, mushroom thinks there would be no continual printing of more and more money if the senior creditors faced the reality of the risks they took which went bad. The value of the currency would be sustained, but the value of the assets against which bad loans were made would readjust to match the value of the currency in which those assets were originally valued.

It looks to me like a fairly simple equation...deflate asset values, or inflate the currency. i.e. rob the barons, or rob the poor.

See above for which option will (I suspect) be chosen. Still no retreat from the Euro, but a lot more printing paper money to come.

After all, all that Offshore Investment that Germany engaged in over the last 20 years...presumably means they bought a load of assets all over Europe. And we can't have those "investments" devalued now, can we?

===================
The fly in the ointment of all this is still those speculators who see any political stand as a fulcrum against which to leverage an attack on national reserves (e.g. Ireland's bank guarantee or the Euro's political will to survive.) Until the governments claim the power to deal with this financial terrorism and seize the assets of the perpetrators, sovereign default will still be a profit-making threat for such people.

Thanks heavens the BBC is a major broadcaster in the UK only, and not really EU wide.

It does seem an odd muddle the euro has got in to. Germany refuses to believe that massive trade surpluses or lack of domestic demand are problems, but laments the deficits of others. Someone should tell them that they are two sides of the same coin!

Equally, Germany refuses to acknowledge that their strength as exporters is directly linked to the difficulties of their partners (to some extent) and their involvement makes the problems in those countries worse. The strategy of punishing economies you're in a monetary union with (and have invested heavily in) is a bizarre strategy.

We need a solution to the euro problem for everyone's sakes. Although I can understand the German point of view, I don't think there will be progress until they see the big picture. Europe needs to put the crisis behind it, not keep it going!

A single currency shared by individual countries whose economies are not aligned, doesn't work.

A set of floating currencies where exchange rates vary wildly at the whim of speculators, and where currencies end up permanently over-valued despite continual balance of payments deficits (eg the UK in the two decades preceding the current crisis), doesn't seem to work either.

A better system might be individual currencies pegged to each other (say at purchasing power parity), continually adjusted to take account of relative levels of inflation. That would give the stability of a single currency but allow for the extra degree of freedom that each country could have different inflation rates.

That would be a big improvement, though it would not prevent the key problem here that some countries are continual net exporters and some are continual net importers, with the net exporters lending more and more money to the net importers so they can keep on importing.

Perhaps we really need to think the unthinkable on this one. Stephanie suggests "a much expanded system of fiscal transfers between states" as a solution. Maybe we just need to realise that our blind belief in the god of Free Trade isn't necessarily such a good idea, and some system of trade tariffs and/or exchange controls may actually be a better way of managing things? Perhaps taxing exports or limiting outward "investment" from persistant net-exporters like Germany could even be carried out within a single currency, and would be a more efficient system than letting imbalances build up then paying them back via "fiscal transers" or inevitable debt write-offs?

You are probably the best parody of British anti-continental sentiments since Fawlty Towers.

#40. TonyH wrote:

I consider your one line condemnation of the Euro as crass, stupid and auto-destructive to the UK - and why shouldn't I condemn you for seeking to damage the country and to do so in the strongest possible terms?

@43. JohnConstable wrote: "if the European Union lasts for a thousand years, men will still say, 'This was their finest hour.'"

With apologies to Winston S. Churchill (who was rather keen on the EU).
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Yes John, Winston was keen on the idea of a type of United States of Europe. A Europe that traded equally together, controlled coal, steel and weapons supplies, equally together. A Europe of Sovereign Nations working freely together as equal partners for prosperity and peace.
Had he been around to see today's EU, he would have been horrified at the bastardization of such a seemingly worthy cause!
That great Nationalist had no desire to see his cherished homeland become the underdog of any country, let alone one that he gave his all to defeat!

49. At 5:23pm on 30 Nov 2010, random_thought wrote:
"...Perhaps we really need to think the unthinkable on this one. Stephanie suggests "a much expanded system of fiscal transfers between states"..."
+++++++++++++++++++++++++++++++++++++++++++
What's unthinkable about that? The USA doesn't have a problem with it.

#26. At 3:04pm on 30 Nov 2010, AG wrote:
"How did economists and politicians, suposedly wiser than me ever think that so many disparate economies could be tied together by a single currency with the constraints on interest and exchange rates that it would entail. I may sound wise after the event but I was against the idea from the start and am so glad that the UK did not join. If I could see it how couldn't they".

You weren't alone. There was considerable opposition to the Euro in the UK, both political and economic, so much so that Tony Blair had to promise a referendum when he was elected in 1997, if his Govt ever proposed that we should join the Euro. Blair also ensured that he would not split the Labour party by promising a referendum. The economic tests that Gordon Brown devised were intended (a) to placate his european friends and (b) to push the idea of joining the Euro into the long grass because Labour knew they could never win a referendum on joining the Euro.

The Irish bailout has not reassured the markets. On the contrary, bond prices for Spain, Italy and Belgium continue to increase. Both Portugal and Sapin are selling Govt bonds this week - Portugal is scheduled to sell bonds to the value of 500 million Euros. That will be an interesting auction!

The next bailout is only a matter of time and could be very soon indeed. For all the bluster of the politicians and the bankers in the EU, it can hardly have escaped their notice that the markets have lost faith in the PIIGS and that the ranks of the PIIGS will soon include other countries like Belgium. Even France has come under pressure in the bond market.

It is not a question of whether the Euro will survive but a question of just how soon it will die.

Good Article Stephanie, whatever a few detractors might say.

Freeborn John and Justin 150 have it about right I think, and I would give the last word to Crystal Ball when he (or she) says that we should focus on being a common market and drop other grandiose notions. The serious matter is now to find a way out of what, as many have observed, was a very silly idea in the first place.

By the way, for all those always banging on about 'greed' being to blame I have the following observations. First it is a relative term: one man's greed is another's ambition. Second it is human nature; anyone who thinks that it can be abolished would be well advised to join the Tea Party in their campaign to do away with extra-marital sex and masturbation.

#49 and #53 why is it unthinkeable? As I posted in #12 (and on previous blogs) it is an inevitable consequence of a currency union that either mass movement of labour or mass transfers of wealth from rich to poor are required (usually both).

EUzone's problem is that politically our lords and masters are not prepared to allow either or both to the level necessary to be effective.

Oh dear the Little Englanders have found the thread.

Crystal Ball @ 52

The Europe that has come to be is certainly not, as you point out, in the image of a Europe of Sovereign Nations as envisaged by Churchill.

He was thinking along American* lines but broadly speaking Europe seems more inclined towards an authoritian socialistic model, which is possibly partly due to the influence (now waning) of the Catholic Church.

Maybe this fiscal shock to the EU system will bring forth reforms that ultimately make Europe more competitive, in world terms, but maybe slightly less paternalistic.

* Naturally as he was half-American, did Churchill have a US passport?

56. At 6:04pm on 30 Nov 2010, Justin150 wrote:
"...EUzone's problem is that politically our lords and masters are not prepared to allow either or both to the level necessary to be effective..."
++++++++++++++++++++++++++++++++++++++++++++++++
Our lords and masters in this respect would appear to be the readers of nationalistic narrow-minded newspapers that mirror their views, and whose votes would ensure the necessary politicians could not hold office.

There is no reason why the poor and the rich cannot live together within the same currency zone. We all do it all the time. All that is needed is a political system that can make decisions about how the monetary system is managed. The Eurozone's problems have arisen because of its failure to establish such a system. The pressure of events will probably cause such a system to be created, if necessary on an ad hoc basis.

The decision foolishly made by the Irish government to convert the private debts of the Irish banks into public debts is having serious consequences for other Eurozone countries. This decision should only have been made by a body representing all of the members.

The advantages of a common currency are considerable for both rich and poor alike. It is unlikely that members of the Eurozone would, on reflection, wish to return to multiple currencies and the expense and inconvenience of money changing, which British travelers and traders still have to put up with.

To say the Euro will fail because of the disparate nature of the economies involved is an error. The economic fortunes of the USA vary just as wildly from state to state, town to town and beyond. The binding glue of the USA is a generally common language, heritage and set of ideals. This is what the Eurozone and the EU to a larger extent lack. Our common purpose is the prevention of conflict between European states. It has no higher purpose as enshrined in the US constitution, it is built on chaining different peoples together economically and politically, often against their will, for good or ill. That is why the project will fail. A continent-wide single currency is perfectly reasonable as the $US proves.

The current crisis has revealed just how tethered together the members of the Euro actually are.
It is difficult to see the route out of each others grasp. If the Germans want to go independent then the remaining users are left with paper of no value. It can't happen; the only way forward is either devaluation or default, either option is a disaster.
This political construct called the Euro has served its primary purpose which was to lock European nations together.
The ongoing forced federalisation of Europe moves forward at a pace, I wonder how many involved thought they would be subservient to a new Kaiser in the 21st century.

@51 John_from_Hendon:

There you go again - flinging the insults!

When, if ever, will you debate the issue in a mature way.

I really cannot spare the time to indulge children. I'll probably ignore your response - unless of course you surprise me!

Forget about a two-tier Euro. How about a sixteen-tier Euro where each member state gets it’s own version of the currency, and is able to set local interest rates and print money, all administered by a local central bank accountable to it's own national government ….. hold on a minute!!!!!

For those who are thinking Gordon Brown should be in any way thanked for keeping the UK out of the Euro, I would point out he would have gone in but Blair had promised a referendum should such a situation arise. This left him no choice he knew the public would reject it and he would rather stay out than give the electorate any say what so ever on matters he considered his private domain.
Brown was part of the world’s economic problem, he unwittingly orchestrated many of the city banks excesses, they played him like a fool and he didn’t disappoint them. We are still suffering today because of his lack of economic stewardship.

This comment was removed because the moderators found it broke the house rules. Explain.

Some posters have suggested a USE would have more difficulty in cohering than the USA does.

I'd have thought that if the urbane New Yorkers, Californians etc. can rub along with redneck Southern Baptists, then the like good burghers of Paris, Rome, Copenhagen, Barcelona etc. could just about manage to share a union with, Yorkshiremen, say. After all, Londoners do.

Precisely because everyone is addled by football and league tables they will come up with a two tier Euro...it 'preserves' the experiment and also the tens of thousands of jobs for the boys & girls, and the expense accounts.

It will let countries devalue (the bottom tier will drop to the level of the weakest link), enjoy the benefits of a strong currency as France, Holland gets the D-markeuro---and even allow plucky over-acheivers and struggling underacheivers get promoted or relagated.

Never underestimate the power of the bureauocracy to cling to it's rock under pounding from the strongest wave--look at Russia now being run by the same old faces but far better dressed.

In fact even a 3 or 4 tier Euro could work (just copying the football league here) and we could outsource call centre jobs to Eastern Europe instead of the old Empire.

Mind for NE England, Scotland and Wales opting to low tiered Euros could be a good competitive move for these Regions... devolution and European monetary flexibility--- dissolving nation states while inflating the problems away--what's not to like?!!

re 61 ,, I agree a continent wide Currency will work

Step ONE: Like the USA first eliminate the 500 other nations occupying the continent.

The M.O. used in the example wasn't persuasion--- so with genocide of different nations it can work...with persuasion; the jury is still out

In all of this debate, I feel sorry for the Germans - not their bankers or their government but the average man in the street. They are facing the ultimate dilema. By doing nothing wrong (as far as they are concerned) they are about to get right royally shafted.

If they stay in the Euro then the costs of successive bailouts is going to arrive at their door. Each successive bailout costing more than the last one. If they pull out then their banks are at risk of collapse as former Euro friends default. There goes their savings, pensions and businesses. It's one hell of a dilema.

Now many, like Stephanie in her piece, focus upon Germany's engineering exports as a sign of economic strength. However, if we actually look at the sum of Germany's exports we find a far more mundane picture. One of the main 'export' sectors in the German economy is the transportation of processed foodstuffs. What happens to that when the German currency is too strong for their European neighbours? A similar picture appears and the same kind of questions can be posed when we look at other sectors.

Some have mooted a tie-in with Austria. Have a look at their banking exposure to both East and Southern Europe. Holland maybe a willing partner and I don't know enough about the other partnership countries to speculate.

Finally, I find it very interesting that the French voice appears to be very muted. Are they scared or are they keeping their powder dry?

#67
"Some posters have suggested a USE would have more difficulty in cohering than the USA does.

I'd have thought that if the urbane New Yorkers, Californians etc. can rub along with redneck Southern Baptists, then the like good burghers of Paris, Rome, Copenhagen, Barcelona etc. could just about manage to share a union with, Yorkshiremen, say. After all, Londoners do."

The difference being, a man from Yorkshire can communicate with a Londoner, and feels a common, shared history in the buildings, monuments and museum exhibits he will see there, not to mention the face on the banknotes he has brought from home is the same one he will receive in change. This is the same for a "redneck" as you so rudely called them visiting New York, Philly or LA. Putting your hapless Yorkshireman into say, Bratislava on the other hand would not be quite the smooth transition that you believe in by and large. In fact, your argument is the best one I have seen for a universal adoption of the $US in the UK and if your theory is correct, Europe too.

This comment was removed because the moderators found it broke the house rules. Explain.

Surely part of the point of a single currency is that the countries within it become part of a single economic model and however painful have to change their economic strategies in order to compete with the strongest part. This ultimately will lead to a more efficient and economically vibrant euro zone whereas competitive devaluation without structural improvements would just lead to the downward spiral of unproductive inflation. Far from leaving the euro these countries have only just joined!!

#56 Justin150

"it is an inevitable consequence of a currency union that either mass movement of labour or mass transfers of wealth from rich to poor are required (usually both)."

I agree with your point (and I think it may also be true even outside currency union). I was really trying to look for the least painful and most efficient way of achieving this. Mass transfer of population is always painful. Mass transfer of wealth can be done in a number of ways. Some kind of gargantuan EEC regional policy taxing the rich countries and handing it out to poor countries in some fairly arbitrary way is one option. I think simply taxing the exports of the rich countries or limiting capital transfers between countries would be more efficient in terms of allowing the markets to run more optimally.

I must live in a parrallel universe. Why is anybody bothered what economists warm to. Oh politicans, yes because they use economists to validate their policy so its not their decision. How about a new reality show. Economists on a desert island. I'm an economist get me outta here. Nope.

Germany. Debt. Opportunity. I thought we had been through this with the Irish non-event and the idea there was choice when there was no choice. Or listening to a man who clearly is not in control pretending he still is in control.

Politicans pointing one way and moving the other, essentially posturing to voters and trying to limit liability. Or is this deja vu.

70 foredeckdave:

'Finally, I find it very interesting that the French voice appears to be very muted. Are they scared or are they keeping their powder dry?'

Why bark if there is somebody barking already. Anyway Merkel is making mistakes, reducing options. Does not come across as confident, twitchy.

@70 foredeckdave:

If you were a German citizen, which would you prefer:-

Estimable pain now, or unknown and potentially unlimited future costs? I agree that is a tough call but it's what Germany is confronting.

Me? - I'd go for the known cost.

There's a disturbing virulence about the current decline in the world economy that I find alarming - it has the odour of inevitability about it. Maybe it's time to call a halt.

Like you, I feel sorry for the man/woman in the street - what did they do wrong?

#74 I have posted in the past saying that the only efficient way is to allow mass movement of people although the downside is that where a region is economically uncompetitive because of inherent geographical issues (poor transport and being a long way from any large population centres being the most common) the downside is you can end up with regions which are essentially deserted and in the economic backwater for centuries (Scottish highlands?). It is certainly the case that the UK has shown that mass movements can work to alleviate the strains of a currency union (USA may be a better example).

I have in the past suggested that mass transfer of wealth is not particularly efficient because a lot gets lost in administration (UK civil service administered system certainly shows that). However, I think this requires more thought. Are there any German posters who can comment on how Germany coped with integrating East Germany and how well govt transfers of cash worked?

71. At 7:57pm on 30 Nov 2010, TurnipCruncher wrote:
"...The difference being, a man from Yorkshire can communicate with a Londoner..."
+++++++++++++++++++++++++++++++++++++++++++
You're not from round here, are you? (Are you???).

@71 TurnipCruncher:

That's a wind up - right?

The $US as currency in the UK would not go down at all well. Such a measure would bring consumer spending to an immediate halt.

After all, there are limits ...

Justin150 you look to me like one of the few to understand what is going on but I think that you have it the wrong way around.

Migrations and fiscal transfers happen all the time in the world even without monetary unions. You need only to look at the meretricious US and UK who tend to buy everything they need until there is a problem with supply or social unrest as a result of migrations. As for fiscal transfers the most obvious are the various aid programmes and the proportion of economies that give not directly linked to Governments.

The EU has the four freedoms and once a country is signed up then there is no escape from losing sovereignty even with taxation issues. The four freedoms drive integration, even monetary integration. Mrs T understood that and didnt like it very much but there was nothing she could do about it. My view is that we should accept it as a fact of living together in a globalised world.

The Rep of Ireland has coped with migration for centuries. It was lucky that it reversed but the reasons for its reverse caused the current mess. The Rep now needs to cut its cloth etc.

As for the rest of you who seem to think that flexible exchange rates solve everything : dont you think that you are a little old fashioned with your beliefs? In today's integrated Europe no country and not even the UK can expect variations in exchange rates to do anything other than complicate the issue and to postpone real and needed change to get an economy back on track.

And a last point for the accountants amongst you : yes you are correct that a surplus for Germany means a deficit for others but that ignores the dynamics behind the accounting result. There is an account minus a day just as there is an account plus a day.

Happy to explain for any interested even for Madam Flanders who, and forgive me for saying this, seems to have got the wrong end of the stick.

I see on The G site that M. Trichet who tends to say sensible things and knows what the score is recommending today in a speech in Brussels more integration not less.

I agree.

Hi Stephanie

I would tend to agree with the hypothesis that the German export strength does not depend upon their use of the same currency as €uro, but on the attractiveness of the products their firms produce to overseas buyers.

This is a lesson, which the UK has repeatedly failed to learn. Journalists repeatedly see currency devaluation as the route to economic nirvana for exports. Each devaluation is hailed, even in the broadsheet and business newspapers as a massive fillip for UK competitiveness.

It has no positive impact on UK competitiveness, it just means goods are cheaper for buyers from abroad for the usually short time that the favourable currency fluctuation lasts. Currency devaluations are fools gold. They make you feel better in the short term, but the long term lack of desirability of our products remains; with the continued negative impact on UK industry, increasing with each devaluationary iteration. Its been going on for 30 years now.

Happy to provide the academic reference if you wish.

"The European rescue plan that dare not speak its name"

Would that be the creation of a Greater Germany or it's euphemism 'more integration'.

A good plan would be massive transfers from the centre to the periphery in exchange for sovereign privileges moving the other way.

I look forward to it.

Given that the Euro is essentially a political construct should not thought be given to what Germany will become after her withdrawal from the EU as this is very likely if the Euro fails.

Perhaps once out of the bottle the Genie will become the sweetest natured Genie of them all.

Or, perhaps not.

@79 Eddy from Waring:

I reckon he's an IMF stooge trying it on!

70. At 7:37pm on 30 Nov 2010, foredeckdave wrote:
In all of this debate, I feel sorry for the Germans - not their bankers or their government but the average man in the street. They are facing the ultimate dilema. By doing nothing wrong (as far as they are concerned) they are about to get right royally shafted

Come on FDD, you are loving it, on cloud 9.


' they are about to get right royally shafted'

Trouble is they shaft back with interest.

Imagine no EU to contain Germany.

Imagine a long shadow falling over Poland. The shadow of a Russian - German handshake.

(Apologies to John Lennon)

Only one sensible choice - full steam ahead to a fully integrated Europe.

Is this the moment that Germany can achieve, by default, and not as a planned goal, what they failed to do in a world war, domination of Europe? Either way Germany has the only economy big and capable enough to make the difference. If they stay in the Euro the German Taxpayer will end up drip feeding the rest and will extract a heavy price for doing so or leaving it thereby saving the indebted nations at a great cost to themselves. Undoubtedly they would look to recoup the billions already lent to the others in whatever way they could and having the industrial clout to make life extremely uncomfortable for those who didn't go along.

The ain't all that many things that Gordon Brown did for this country which now seem sensible but resolutely staying out of the misbegotten Euro counts as one.

Gentlemen,

considering the scenario whereby a two-tier currency is introduced - and in an effort to inject a modicum of humour my colleagues have been trying to define a name for the lower tier currency - so far we have come up with a choice of three; the Pooro, the broko or the skinto

Thoughts please

Deumark wrote:
“After 50 years of paying over the odds for every failure in each economic crisis it seems to me, that most of my fellow Germans are quite happy with hiding behind the Belgian and Dutch, Spaniards and Portuguese. The German savers have lost a lot during this crisis because they are net creditors and not net debtors like the English and as you know, the bailout only worked out for the debtors. So don't insult our intelligence.”
Deumark could I respectfully remind you that Britain suffered two severe economic setbacks in the last century both due to German aggression. The economic consequences suffered by German savers now, are trivial in comparison to those imposed on the UK economy by two world wars.

Lets just break the whole lot up,restore our borders,regain our powers and laws,put the iron curtain back up and go back to the cold war status quo.Atleast we knew where we were back then.Simplezzzzz

83 fleche_dor,
"It has no positive impact on UK competitiveness, it just means goods are cheaper for buyers from abroad for the usually short time that the favourable currency fluctuation lasts. Currency devaluations are fools gold. They make you feel better in the short term, but the long term lack of desirability of our products remains; with the continued negative impact on UK industry, increasing with each devaluationary iteration. Its been going on for 30 years now."
======

I agree that devaluation in the UK has only a limited positive effect on exports, but then historians have mischaracterised what has happened in the past. Both in the Gold Standard and under Bretton Woods, the UK government had to borrow money to deficit spend otherwise inflation would (and did) take hold. When BW collapsed and the UK floated its currency, the need to issue government debt in response to a deficit was no longer necessary, meaning the government could maintain high employment without an automatic rise in inflation - the hit though was that the currency devalued.

Currency devaluation sould not be an end in itself, but it would accompany a governments attempt to stimulate demand through deficit-spending whilst not issuing government debt.

This is another 1,000 year edifice that didn't last - can someone PLEASE explain how it was ever thought possible to treat so many disparate economies as one????

It was as obvious as an elephant in a china shop, that the euro funny money was doomed before it got going! It went straight from maternity unit - to the mortuary!

Oh yes....nearly forgot....get stocked up on gold for when the elephant lets go & it hits a wind turbine!

@88 The_Bongos_of_Doom

How about the 'Givemee'?

Someone keeps trying to censor my posts.

There is no chance of a German withdrawal. This is total fantasy stuff, and it is laughable that we are even discussing it.

As for the Euro not having an effect on German exports, this is also laughable. I can't believe that I am reading that. The mind truly boggles at the level of understanding. It ought to be utterly obvious that if Germany was still using the DM, it's currency would have appreciated as a result of all the surpluses and demand for its stuff. The Euro's weaker countries and continued devaluation assist German exports even further.

It should also come as no surprise that the countries that are weaker are to some extent weaker actually *because* the Germans were dumping their surpluses there. Not just a bit of money either, more like a trillion Euro.

92. At 9:57pm on 30 Nov 2010, W Fletcher wrote:
"...It went straight from maternity unit - to the mortuary!..."
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Odd then, that it's much stronger now against both Sterling and the US Dollar than it was when it was launched.

83. At 9:27pm on 30 Nov 2010, fleche_dor wrote:
"...Happy to provide the academic reference if you wish..."
+++++++++++++++++++++++++++++++++++++++++++++
We trust you.

#86 Richard Dingle,

Richard,

I meant what I said. As for "loving it", if you read carefully what I said then you will finally understand that I am not "loving it" at all.

YES the German man and woman on the strasse is about to get shafted one way or another. That gives me no satisfaction whatsoever.

You'd better go back and look at your economic primers - Samuelson would probably suffice. You won't be getting any interest back from countries that default but you will be left with loads of useless paper and a banking system that is shot to bits.

Could the EU survive without Germany? I don't know. That may rely upon what France decides top do as a counter to German actions.

As for a German-Russian alliance, that would be interesting. The last time it didn't work too well but this time Russia has its hand firmly on the gas tap :)

88. At 9:44pm on 30 Nov 2010, The_Bongos_of_Doom wrote:
Thoughts please
++++++++++++++++++++++++
It won't happen, but: The Manuro

Several points

The eurozone is not going to fail. There is no two tier option, it is pointless. Its not credible. Nobody can seriously look at the facts and come to any other conclusion, it is not even worth debate. 88% of the EU are not resident in the PIGS. The EU in 2009 was 21 percent of world product. There is hardly a lack of resource.

Germany, who appears to have considerable potential downside bank exposure, is sharing the cost of the support via other EU members. If direct support was better they would follow that route.

The EU is stronger as a fully integrated market. Individual countries do not supply a sufficiently large market base to develop novel technologies. The EU fails to move to a fully integrated market due to national politicans. the latest example is the UK refusing to declare budget figures to the EU as a first stop. In view of this being a proposed common standard I fail to see the problem. It is designed to stop the misdeclaring of figures which have plagued some countries.

Whilst as a temporary measure being able to have the pound drop has been helpful it is not a long term solution is it. Equally well having a pound which was clearly overvalued at one stage for some considerable time could hardly be regarded as being helpful and was damaging to areas of the economy.

In terms of general administration it is difficult to see the EU could be worse than the UK. The UK has hardly covered itself in glory and far too much emphasis at government level has been placed on domestic housing and finance for decades. It really beggers belief that these two areas can provide any long term sustainable solution. To do so there has to be neverending expansion to counter natural limits and higher efficiency models.

What is striking is the lack of intent to provide objective information to the voters in any matter.