At some point, it occurred to me that switching everyone over to the same currency should have been the last thing that Europe does to unify its economy, rather than one of the first things. It was a big symbolic victory, but as a practical matter it means the countries in the Eurozone share a fiscal policy, while still having independent economies. They should have waited until their economies were already on the same page before conjoining their currencies, but instead they tried to force a unity that wasn't there yet. Now Greece is missing one of the big knobs that could have been turned (by itself or others) to deal with its crisis, namely devaluing its currency.
This article points out something I hadn't seen before, which is one way in which the unified currency may still end up somehow achieving its goal of unifying Europe: as the strong, fiscally-responsible states bail out the weaker ones, they get to dictate policies in those states as conditions of the bailouts. Politically, the bailed-out states will start aligning more with European interests compared to purely self-interested ones.
It's not the best way to achieve European unity, but it has some advantages. On the one hand, it's a little unfair that Germany gets to strong-arm Greece into doing what it wants, because it's an involuntary loss of sovereignty. On the other hand, it seems like a decent heuristic that the states with the strongest economies get more power to make economic decisions. How well that works out for Greece in the long run depends on the politics and alignment between what's good for Germany, what's good for Greece, and what's good for Europe as a whole. I assume the EU will be making sure German bankers don't simply pillage Greece's economy for decades.
Switching to a common currency had enormous benefits in terms of reducing the friction associated with trade between nations in the Euro zone. It wasn't a bad idea to switch early but at least two glaring mistakes were made with the implementation:
1. The European establishment decreed that no sovereign in the region would ever default on its debts and backed that decree up by allowing banks to hold the debt without allocating capital against it. This was the European equivalent of US rating agencies rubber-stamping toxic mortgage securities with a AAA rating.
2. Member states have been allowed to cheat outrageously on the Masstricht treaty criteria, even before shenanigans like Greece window-dressing its numbers by disguising some debt as currency swaps, without much enforcement.
If these errors hadn't been made, they probably wouldn't be in a situation in which member states were allowed to paper over their problems with cheap credit while digging the entire continent into a very dangerous hole.
#1 it linked to #2. The theory was that with Maastricht criteria no member state should have even come close to default. But this doesn't work if you aren't able to effectively control the application of those criteria.
By the way, I don't think that a fixed maximum deficit requirement, independent of the external conditions (eg the 2008 crisis...) is such a good idea. But at least during normal times it should have been applied.
> They should have waited until their economies were already on the same page before conjoining their currencies, but instead they tried to force a unity that wasn't there yet.
Exactly. By having a single currency weaker economies were propped up at the expense of stronger economies, (yep, this is Germany, esp now); in essence, promoting economic mediocrity. Had the respective economies been similar in strength in regard to each other it would have been more feasible. But now it's too late for that. The Euro happened. In the long run, the Euro failing could be a good thing. By this I mean that those economies more capable might fair better however those that aren't, not so much. If they can escape debt (a Grecian default for instance) and then focus on rebuilding a sustainable economy, that in the long run would be more healthful. For now it's been put off, left for tomorrow, so to speak.
I see it differently: there's nothing wrong with a common currency and separate fiscal policy as long as you don't try to maintain the fiction that all sovereign entities have equal credit risk. Excessive/unexpected devaluation is just de facto default, but making this tool unavailable shouldn't mean that you should ignore the risk of de jure default. The countries of the common economic block should be able to enjoy the benefit of reduced friction in trade without being in a situation where it looks like a good idea to loan money to the Greek government at low interest rates. Regulatory authorities should be insulated from the political fallout of telling banks that they need to treat Greek bonds as less creditworthy than German bonds when they go to calculate the required amount of capital to carry their assets.
Alternatively, nation-states could have retained their currency and focused on enacting policies that reduced friction of trade, i.e. a single currency is completely unnecessary to do this. There is no reason why a third-world economy should be joined with a first-world economy under a single currency: the outstanding result is that the currency hurts and ultimately the stronger economy props up the weaker a la Germany and Greece.
> ...as the strong, fiscally-responsible states bail out the weaker ones, they get to dictate policies in those states as conditions of the bailouts. Politically, the bailed-out states will start aligning more with European interests compared to purely self-interested ones.
History has shown us that wealth is transferred, not created. And sometimes it's multiplied (when we switched from gold to debt / fractional reserves), but again, never created.
Due to this, the stronger players tend to import the benefit from and export the pain into the weaker players, as that is the only play there is to make.
And then the cycle repeats itself where the rich players get richer and the poor players get poorer until some major event happens (global war, industrial revolution, energy discovery) and things get shuffled a bit).
If you can't answer that, then it is a result of multiplication rather than creation.
Wealth is a relative term and has remained about the same through time... There are those that are "rich", there are those that are "somewhat comfortable", and there are those that are "poor"...
The amount each group has is irrelevant.
Wealth is about the purchasing power of relative standards of living (between the different groups).
This is false. Wealth ultimately boils down to the most finite resource we all have -- our time -- and we are able to accomplish a whole lot more with our time today than we were in the past. Let me explain:
Imagine the edge case at the very beginning of civilization. There are two families, and for illustrative purposes they both spend 100% of their time farming without tools, and live in caves.
One day, someone invents the hoe. Let's imagine that this saves both families 50% of their farming time. Now they are each able to build a home, instead of living in a cave.
The families use a currency to trade crops, and there is a total of $100 in the world, $50 for each family's output. One of two things happened here, but they're pretty much the same thing:
- If we hold the money supply as fixed (saying wealth is zero-sum), then the price of the crops would go down, since we can now buy houses with our money too.
- If we hold the price of the crops fixed, then there is now more money/wealth that exists in the world.
It doesn't really make sense for the price of crops to go down -- they're the same thing that existed yesterday. It makes much more sense to say that there is more money in the world. Regardless, wealth was created.
It's a lot more complicated in our currently economy because there are a lot more moving parts, but the fundamentals still apply. Take something that used to take a lot of time and make it take less time and you'll have created wealth. People can now use the extra time they have to go be productive elsewhere in a way that benefits people.
Going back to your comparison about rich/comfortable/poor, you're not arguing that wealth is zero-sum, you're arguing that there has always been wealth inequality. But the presence of wealth inequality doesn't imply that wealth is zero-sum: wouldn't you say that even today's poor Americans are wealthier than the richest Sumerians?
If we consider the money/medium of exchange as its own resource. When someone invents a hoe freeing up time for other desires, its not the value of the crops that falls.
Wealth is not a zero-sum game. The new houses built have added actual value, its just that the amount of money to distribute is limited leading to the appearance of the price of crops falling. This is called monetary deflation, the value of the money itself has gone up since there are more things to buy (demand) while there is a fixed amount (supply).
I would argue that the new houses add value. even though I feel that satisfaction is a good measure of wealth and not precisely quantifiable, happiness(Man with house + crops) - happiness(Man with cave + crops) > 0. In short creating wealth. (Some people might argue, his total happiness is a constant and its just dependent on more things now "Simplify Man" http://en.wikipedia.org/wiki/The_Old_Man_and_the_Lisa)
> Wealth ultimately boils down to the most finite resource we all have -- our time -- and we are able to accomplish a whole lot more with our time today than we were in the past.
If you want to go that route then boil it down even further and you'll get "well-being" and/or "self-validation".
> wouldn't you say that even today's poor Americans are wealthier than the richest Sumerians
In my argument wealth has always been a relative term, never absolute.
It is about what you are trying to achieve for yourself/ego, which in the human psyche is always relative to the other person. This connection cannot be disputed, you can only dispute the first part...
So is wealth an extension of the ego, or is it a database entry?
I'm claiming that it is the former, since so many people experience it as such.
I think you are saying wealth == happiness. And from the vantage-point of someone without wealth, that may seem true. But any person with wealth will tell you that wealth does not bring happiness or ego or confidence -- all of those are only achieved from within.
You can purchase more things that take a lot of time to make, and you can not worry about money issues, but you can't buy happiness.
I'm not sure if there is more global happiness today than there was in Sumerian times; I would imagine there is. As you mentioned though, happiness seems to be relative, so it's pointless to complain about since it's a fundamental human limitation.
Wikipedia: Wealth is the abundance of valuable resources or material possessions
There are ~750 million automobiles in the world today. In 1700, there were none. Thus there is more wealth in the world today (on that one dimension; others similarly).
Athens has run irresponsible deficits for a decade
on top of an economy operating at a fraction of
the productivity of Germany and France. If it were
in control of its own currency, the solution today
would be simpler. It would print more money to
depreciate the currency until the value of goods
fell relative to trading partners, which would
grow exports. But Greece doesn't control its own
currency. It's stuck with the euro, which bought
ten years of low borrowing costs at the price of
three years (and counting) of difficult, if not
impossible, adjustments.
Interesting. Isn't this situation (not controlling your own currency) the same thing that happens if a country uses a commodity-based currency where there is a relatively fixed supply of the commodity? (E.g., gold). In other words, is what is happening in Greece a refutation to those who say we need to switch in the US to a gold-based currency?
Basic macroeconomics is a refutation of the Gold Standard. The only people I've ever heard who promote it are those (usually libertarian) who object to the very existence of the Fed on ideological grounds. I've never heard a serious, mainstream economist propose it.
Interestingly, it's also a refutation of BitCoins as a currency. They actually make a very good commodity, but they're useless as a currency. The very scarcity that gave them perceived value in the beginning has led to the hyper-deflation that now makes them unsuitable for commerce. If they could be granularized (so you could pay 150 mBC), then they might be worthwhile. When the smallest transferable amount is $10, however, they kinda suck.
> I've never heard a serious, mainstream economist propose it.
Jim Grant has been calling for a return to the gold standard. He is the publisher of Grant's Interest Rate Observer, which is a very serious publication widely followed by professional investors.
Bitcoins are actually divisible, one bitcoin can be split into 100 000 000 pieces. I don't know how inflation would work though. You can't print more money. Maybe not having enough bitcoins would drive prices down.
Debt isn't good or bad in itself. Whether a given debt is bad depends on some factors:
* What is the debt as a fraction of GDP?
* What is the interest rate on the debt?
* What is the growth rate of the economy?
* What was the debt incurred to finance?
If a large public debt finances critical public infrastructure that will promote rapid economic growth and interest rates are reasonably low, the country will be in a situation where the economy is growing faster than the debt and the debt-to-GDP ratio is going down. That's a good situation to be in.
I think you can make the case though that Greeks with savings in euro are quite glad that the government can't just devalue the currency when they see fit.
Also, the harsh measures which are necessary now could actually go some way to restoring the imbalances in the Greek public finances, whereas devaluation is just kicking the can down the road.
They will remain quite glad unless the Greek authorities decide to freeze all of their accounts and then summarily convert them into something (maybe "new Drachma") with considerably less value the way that Argentina did in 2001-2002.
I would personally be moving my money to a bank somewhere beyond the reach of the Greek government if I were them.
You just pointed out one of the many reasons that world economies have moved past gold-based currency. Commodity based currency also runs risk to sudden discovery of new quantities of commodity (like South American Silver mines), which lead to economic impacts for no reason at all.
I got downvoted here, so I thought I'd expand. If we replace "South American gold mine" with "the release of the iPhone" or "the creation of Google" perhaps my point is clearer - i.e. the creation of value should have economic impacts. Even in a fiat currency situation, the discovery of a massive South American gold mine would have an economic impact as someone now has access to more valuable resources than they did previously.
Now, if the currency was based on a commodity that has no value, then maybe your argument makes some sense, but precious metals were chosen specifically because they are valued irrespective of their role in currency. Besides, if an enormous amount of gold was discovered, sovereigns and governments still had control of the currency through debasement.
A gold based currency can still be devalued. Simply change the amount of gold it is backed by. For example:
"Congress passed the Gold Reserve Act on 30 January 1934;...The act also authorized the president to devalue the gold dollar so that it would have no more than 60 percent of its existing weight. Under this authority the president, on 31 January 1934, fixed the value of the gold dollar at 59.06 cents."
debasement even happened when actual phisical coins made from precious metals were being used:
"Throughout history, governments have been known to create more coinage than their supply of precious metals would allow. By replacing some fraction of a coin's precious metal content with a base metal (often copper or nickel), the intrinsic value of each individual coin was reduced (thereby "debasing" their money), allowing the coining authority to produce more coins than would otherwise be possible. Debasement sometimes occurs in order to make the coin harder and therefore less likely to be worn down as quickly. Debasement of money almost always leads to price inflation unless price controls are also instituted by the governing authority, in which case a black market will often arise."
I have been trying to understand why German politicians are willing to throw so much money at this problem, clearly against the will of the majority of the electorate. Here is the best theory I can come up with: Germany relies on exports. They need countries which buy them - having everybody use the same currency benefits trade. But more importantly, banks of strong countries like Germany, France are lending money to the fiscally weak countries so that they can import the goods they produce. This benefits their industries. However, why would the banks take on credit when they can be quite sure that these countries will default sooner or later? Well, there has to be some guarantee/assumption that they will be bailed out by the central bank/governments. And of course this happened.
So German banks and the export industry, the two entities with the biggest lobbies, get subsidized with tax money. The weak countries won't ever develop their industries and become competitive.
I believe the mainstream view is that Germany is willing to do this because having weak countries like Greece and Portugal share the same country weakens the euro, making Germany's exports better priced.
If Germany was to revert to the Deutsche Mark, or a Euro made up of strong European economies (for example, Scandinavia, Germany, Low Countries, Austria) their currency would appreciate and hurt exports and industry.
German politicians simply think the cost of bailing out Greece will be less than the cost of a strong currency.
So this is the only solution to weaken the currency? Why not spend the money on Germany instead of Greek? (things like Aerospace, Crazy Arts, Free public goodies...) Won't this make the same effect for the currency?
This would only help when it benefits external currencies (e.g. imports). Otherwise it may help the GDP and economy, but won't lower the value of the Deutsche Mark.
You know, the spectrum of human words and the syntax of sentences does not provide enough power to describe nor to solve the problems of today. But even if you call me a nazi or racist, just answer me this, do you really think Germany can hold up such a strong currency and economy if 65% of all kids here are not German?
Also, with all the cuts in education going on, do you think there will be enough qualified people to keep up the quality of engineering/manufacturing? Sure, you can always allow foreigners in. But who wants to come to a country with high taxes and bad outlook due to high debts and bad politics?
Because german banks have been benefiting from the usurious interest rates being charged to the southern european countries. If Greece defaults several german banks go bankrupt.
True, but what sane bank would take on the risk (=higher interest) without knowing that it is worth it? So I assume there was some background deal, an assumption that governments will cover for defaults.
The banks take this risk not just because they expect that there will be a bailout but also because the Basel Accords allow them to treat sovereign bonds as riskless when calculating their Capital Adequacy Ratio, making those bonds look like a better deal relative to other bonds of equal risk.
I suspect there are a couple reasons. First, having unprincipled economies in the Euro zone helps keep exchange rates low, which can be good for exports. Second, realistically no matter how strong Germany's economy is locally if the weaker European economies started collapsing there would be a lot of pain throughout Europe economically. Germany would rather try to delay that as long as possible.
Don't buy this line of reasoning, Greece must be saved or all of Europe is in a for a very difficult period, economically. If the Greeks are allowed to give creditors a haircut, the first thing that any sane (if slightly rapacious) investor/trader (of which there are more than enough) should do is to start shorting the Italian and Spanish bonds, buying credit default swaps on them, and shorting the Euro. Once the seal is broken and one sovereign entity is allowed to default, it becomes obvious that a sustained speculative attack would drive interest rates high enough to force the larger Southern European economies into default as well. The whole thing would play out in a fashion similar to the exit of the British government from the European exchange rate mechanism in 1992 except that the scale is much larger and the global financial sector has more numerous and powerful tools at its disposal.
Europe, like America, is run by politicians with a 2-4 year election cycle "accountability" making long term multi-generational fiscal obligations (i.e., here is a tiny raise now, but we'll promise to give you free healthcare benefits 20 years from now)
Europe will play the "austerity" game for a bit (cut this & that, raise taxes, etc), but it will only kill economic growth and make the problem worse.
Inevitably, the "social contract" will be broken. Current working age generations are not willing to live with both "ruinious taxation" AND government "austerity" -- just to maintain the status quo of retiree benefits and government largess.
Old people might vote....but young people fill streets and use firebombs
To my understanding, the German version of the law that was passed says:
The guarantees are basically possible, but they are still optional.
Whatever the ESFS contract says, and whatever the EFSF Bureaucrats might decide: before any real money flows from Germany to Greece, the German parliament (or a parl. committee) will have to approve this a second time.
The latter. Germany is responsible for about $280 bill. But this is a fund. We don't know how much will actually have to be footed by the govt/people when it's all over. TARP cost much, much less than its first price tag. The bailout of Greece will probably cost mcuh more than today's price tag.
Usually the share of contributions to the EU by national states are proportional to GDP. So everybody (who adopted the Euro) is contributing, but Germany has the biggest proportion. A lot of haggling was needed to convince Finland to contribute...
The reason for the "haggling" was that there was parlamentary elections in Finland and the presidential elections is also pretty soon so the populists are playing their games.. I'd say most Finns just as happy to contribute as everyone else.
That's how the rich get richer, Germany is in a realistic position to create it's own currency. Germany has better leverage over the situation than the Irish, hence they pay less.
Germany guarantees €211bn, this is part of a previously existing fund created by all EU countries. I assume they provide the money as needed, not upfront.
I'll give you a hint: 90% of Americans probably couldn't find Greece on a map, and of the 10% who could, 90% wouldn't know what the word "eurozone" meant.
As far as the Euro bailout goes, my take is that it's roughly the same as what happened in the US - too-big-to-fail banks holding too much bad debt (sovereign debt in Europe, vs mortgage, other collateral-backed, and municipal debt in the US), and maybe still too-highly leveraged using those debt 'assets' as collateral.
If the collateral (Greek, Portugese, Irish, etc bonds) defaults, not only do the banks take a huge haircut on their capital, but they also get margin calls on their leverage that they can't pay. Boom, bankpocalypse.
The German government knows this, just as the US government did, which is why they too will proceed with the bailout despite citizens' vehement opposition and at the risk of losing their next election. The alternative is something that, once it occurs, can't be undone easily, and which most citizens would probably regret once it became real.
I'm sure there are tons of details I'm missing, but haven't been following this as closely the past two years. But that's one American's take on it, fwiw.
I would add that while the U.S. government took quick and massive action of first bailouts then stimulus measured in the trillions of USD, the euro story seems to be one of hesitation and deliberation.
From an American perspective, somebody--Germany, most likely--needs to step up and take decisive, perhaps even unilateral action, and do so sooner rather than later.
This article points out something I hadn't seen before, which is one way in which the unified currency may still end up somehow achieving its goal of unifying Europe: as the strong, fiscally-responsible states bail out the weaker ones, they get to dictate policies in those states as conditions of the bailouts. Politically, the bailed-out states will start aligning more with European interests compared to purely self-interested ones.
It's not the best way to achieve European unity, but it has some advantages. On the one hand, it's a little unfair that Germany gets to strong-arm Greece into doing what it wants, because it's an involuntary loss of sovereignty. On the other hand, it seems like a decent heuristic that the states with the strongest economies get more power to make economic decisions. How well that works out for Greece in the long run depends on the politics and alignment between what's good for Germany, what's good for Greece, and what's good for Europe as a whole. I assume the EU will be making sure German bankers don't simply pillage Greece's economy for decades.