Some thoughts on the impending collapse of the euro, and how much the UK may end up on the hook regardless of the fact that they kept sterling. I found this part interesting, though:
Again and again in politics, great schemes don’t work – Soviet Communism, for example, and now the euro. Rational people tend to conclude that, because a scheme doesn’t work, it will quickly stop. Unfortunately, rational people are wrong. Bad political schemes are usually given up only when they have been tested literally to destruction. It would be much better for Europe if the euro had never happened, and I long for it somehow to fade away, but the process of destruction will be horrendous, and it is only just beginning.
I think that we were seeing the same thing with Constellation and NASA’s five- and ten-year plans. Interestingly, the Founders didn’t have a great scheme, because they understood that they don’t work. That’s why they wrote a constitution of limited government. Unfortunately, the great schemers have managed to circumvent it over the past two and a third centuries. Their great scheme is on the verge of collapse, as well, and as usual, all will pay, guilty and innocent alike.
Typical Torygraph. Perhaps they should remember that the UK itself has a public debt larger than Spain, or Ireland adjusted to GDP.
The number of nearly failed banks propped up by government funds in the UK is higher than the EU average. In fact the UK government initially even refused to say who they propped up (including £62 billion in loans) when the financial crisis happened. UK banks put a lot of money into funding construction bubbles in Dubai and elsewhere. UK citizens also managed to essentially bankrupt Iceland. The UK managed to do all of this without being part of the EMU.
Hardly surprising really, since the UK surrendered most of its industrial capacity to turn into a nation of speculators and bankers. I dare say it is some people in the UK and the US that wish for the Euro to collapse for their own financial profit, much like George Soros’s hedge fund profited from shorting the UK pound sterling and forcing it out of the ERM some years ago. Do not think these people will be satisfied with having the Euro destroyed. If they manage to collapse the Euro, the Dollar will be next. Many people have converted their savings into physical commodities, or invested into BRIC economies, so they can risk the rest trying to bankrupt Western economies for their own pleasure. Biting the hand that fed them.
I suspect the EU confederation will find a way out of the crisis. Unemployment in Spain was inevitable. After the construction sector imploded most of the people tied to the sector had to go, Euro, or no Euro. These people will have to find jobs elsewhere. In case of deep social turmoil it is painfully obvious what will happen: the number of unemployed people in Spain is roughly the same as the number of immigrants in Spain.
God, I think you’re missing the point. Yes, England may have economic woes. So might the Greeks, on any random year of a century. Economic downturns are a fact o’ life in this vale of tears.
The point is that having a pan-European currency without a pan-European government doesn’t allow you to solve those problems in the time-tested ways. The problem the Greeks have is only partly their pension obligations and overbuilt government. It’s also the fact that there debts are measured in euros, and the value of the euro is set by the Germans and French. The obvious solution of devaluing their currency, whcih would curtail domestic consumption, i.e. enforce more domestic savings, encourage capital inflow from abroad (because Greek interest rates would be far higher than the European average), and boost demand for Greek exports (because their prices would tumble) allowing the Greeks to repay their debts by a combination of implicit tax on Greeks, borrowing from abroad, and strong export growth, is forbidden to them — because they don’t control the currency.
They can still do it the hard way, of course. But this requires lots more self-discipline, and that’s exactly what’s in short supply.
The point of the article is that a currency union without a political union was madness. It also assumes that political union is undesirable, which leads to the conclusion that the euro was a bad idea. But he acknowledged that there will be people who simply see the problem of the euro as a reason for a faster United States of Europe.
“the obvious solution of devaluing their currency […] is forbidden to them”
Which would also be true if, for example, they based their currency on gold.
For that matter, none of the NZ (since 1984), USA or pre-euro German governments could devalue their currencies either, because they all have floating currencies and give control of the printing presses to a strong central bank with other priorities.
To amplify on that .. here in NZ we had FAR FAR TOO MUCH of devaluing our currency every six months all through the 1970’s and early 80’s. It didn’t fix anything. Floating the currency and forcing the government to put its own affairs in order did fix it.
This is why so-called progressives, i.e. the great schemers, need to be permanently separated from actual power. Americans, more than most people, have the ability to do that, if they will only use it.
Hardly, Bruce. Basing your currency on gold doesn’t mean you must exchange the same amount of your currency for the same amount of gold. You can exchange $34 for an ounce of gold this year, and $2,000 for an ounce of gold next year.
In any event, when I say the Greeks would devalue their currency, I am actually employing synecdoche here. I don’t mean that the Greek government would deliberately do anything in particular. What I mean is just that Greeks would clamor for marks, say, because of great distrust in their own currency and price stability. By the same token, Germans would disdain to buy drachmae, except at huge discounts, for the same reason. Only speculators would do it.
In both cases the result would be to drive the “price” of the mark in drachmae up and the “price” of drachmae in marks down — that is, the drachma would devalue relative to the mark. It would be the result not of some deliberate central action by the Greek government, but the result of a bazillion private economic decisions.
This would stop when the price of Greek goods and services — which must be bought in drachmae — became so low for foreigners that they found them more attractive than the domestic version, priced in marks or francs or pounds. Additionally, a deflating drachma would imply strong inflation, and that would help the government erase its debts, since it would be paying its domestic creditors with drachmae that are much less valuable than those it borrowed in the first place. Basically the savings of thrifty Greeks would be destroyed in the interest of paying off the public debt, which sounds nasty, and is– but there simply is no other source of domestic wealth to cover the government’s obligations. Next time, don’t vote in a bunch of thieves, or at least recognize that every single promise government makes it makes with your savings.
“Basing your currency on gold doesn’t mean you must exchange the same amount of your currency for the same amount of gold. You can exchange $34 for an ounce of gold this year, and $2,000 for an ounce of gold next year.”
I don’t think that’s what those who advocate a “gold standard” have in mind.
“what I mean is just that Greeks would clamor for marks, say, because of great distrust in their own currency and price stability. By the same token, Germans would disdain to buy drachmae, except at huge discounts”
I’m well aware of how a floating currency works, having in fact worked in an FX brokerage in the distant past. What you describe is not at all what we mean by a devaluation. Those occur when the government in fact does set the value of their currency against some other currency, or basket of currencies. From time to time they may find that their citizens who want to buy foreign currency (and sell their own) can not find any willing buyers. At that point the government does one of two things, either 1) step in as the buyer and dispense foreign currency from some reserve fund, or 2) announce a devaluation.
In fact, generally both happen, with at first the government saying “we will not devalue, we think our currency is at a good level”. This is the signal for those in the know to buy as much foreign currency as possible while the government is doing 1). Then after the inevitable devaluation, those “speculators” can repatriate their foreign currency at the new rate and make a considerable profit.
In fact it’s even better than that, as the “speculators” will generally borrow as much as they can domestically, and put it on deposit in the foreign country while they wait for 2). This drives domestic interest rates up, and foreign ones down. A large mismatch between foreign and domestic interest rates makes it clear to anyone with eyes to see that a devaluation is imminent which usually forces the matter pretty quickly as everyone else scrambles to get their money offshore.
And the moon shot wasn’t a great scheme? They don’t ALL fail.
And the moon shot wasn’t a great scheme?
What came of it?
“Basically the savings of thrifty Greeks would be destroyed in the interest of paying off the public debt, which sounds nasty,”
I guess it depends on which segment of society in Greece is willing to make their point by setting police officers on fire with gasoline, and which people in Greece are willing to take their “financial haircut” quietly.
The scary thing is we are kinda, sorta moving in that direction, not so much a matter of Socialism, where resources are re-allocated by action of government, but the kind of Socialism where the re-allocation takes place less by the rule of law and more by informal extra-legal arrangements — think Chrysler bond holders.
And the moon shot wasn’t a great scheme?
It wasn’t a great scheme if your goal was to open up space. It was an utter failure.
Forgive me Carl, but these seem backwards…
You can exchange $34 for an ounce of gold this year, and $2,000 for an ounce of gold next year.
If your currency is based on gold or whatever, it would be tied to a specific amount and rise and fall with the price of gold. You couldn’t arbitrarily say a note for an oz. is now only good for half an oz?
This would stop when the price of Greek goods and services — which must be bought in drachmae — became so low for foreigners that they found them more attractive than the domestic version, priced in marks or francs or pounds.
OTOH, products are not tied to a specific amount of currency. If I sell something for $100 this week, I could sell it for $50 or $200 next week if my currency changes in value. The product price might not move as quickly as the currency leading to currency trading.
Again, not having political control of the currency means politicians have less control and that seems like a good thing to me. The problem isn’t with the Euro, the problem is with out of control social spending and a population demanding it.
I’m looking forward to being corrected. I so seldom disagree with you.
Bailing out the Greeks doesn’t solve the problem. It just makes it worse for those that aren’t spending as fast. Again, that’s not a problem with the Euro.