€urozone Crisis Follow-up Thread
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Eldritch
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Information €urozone Crisis Follow-up Thread
Please post news and commentary regarding the seemingly never-ending European debt crisis here.

I like to look at the human self-model as a neurocomputational weapon, a certain data structure that the brain can activate from time to time.

Thomas Metzinger
2012 Mar 23 16:42
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RE: €urozone Crisis Follow-up Thread
The IMF says Greece will need a third bailout package by 2012:

IMF warns of fiscal gap, proposes slower reforms

Report suggests a third bailout, only from the eurozone, will be needed


[Image: imf_390_0209.jpg]

The International Monetary Fund expects Greece to show a fiscal gap between 32 and 67 billion euros after the end of the new funding program, in 2014, according to a report seen by Dow Jones Newswires, and proposes an alternative plan with a slower pace in reforms.

The IMF therefore expresses its worry that Athens may well require a third bailout package in a few years’ time as the first two simply would not suffice.

“Prospects for a return to the markets are becoming ever less certain,” the Fund’s report says.

European officials have estimated that after the completion of the new program for Greece, Athens would be able to return to the markets, at least with short-term bonds of high risk as the country’s record in the market will initially run counter to the issue of long-term bonds. That may actually entail a dependence on official creditors.

Given the particularly high exposure of the IMF in Europe, and particularly in Greece, the Fund assumes that any further assistance would need to come from eurozone coffers only.

However, the IMF considers the threat to the full and timely implementation of the reform program to be particularly high. It therefore offers an alternative plan according to which fiscal reforms would be put off by up to three years and reforms would be conducted at a slower pace than planned owing to market limitations and political obstacles.

According to this scenario, the debt-to-gross domestic product ratio would reach up to 171 percent in 2014 instead of 160 percent, and to 146 percent in 2020 instead of the 117 percent planned by the agreement between Athens and its creditors.

eKathimeri.

coffee

I like to look at the human self-model as a neurocomputational weapon, a certain data structure that the brain can activate from time to time.

Thomas Metzinger
2012 Mar 25 23:15
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RE: €urozone Crisis Follow-up Thread
PM satisfied with Finnish-EU Lapland retreat

Finnish Prime Minister Jyrki Katainen expressed satisfaction with an informal meeting of European leaders that took place in Saariselkä in Finnish Lapland over the weekend.


Speaking at a news conference after the conclusion of the weekend retreat, Katainen said that it was useful to discuss EU economic issues over a longer period rather than in acute crisis management mode.

“I have learned a lot,” Katainen told reporters. Rolleyes

...

Katainen and Foreign Trade Minister Alexander Stubb hosted the retreat, which included Latvian Prime Minister Valdis Dombrovskis, World Trade Organisation head Pascal Lamy, Spanish EU Minister Íñigo Méndez de Vigo, European Central Bank executive board member Jörg Asmussen and Vice President of the EU Commission, Olli Rehn.

YLE news.

I like to look at the human self-model as a neurocomputational weapon, a certain data structure that the brain can activate from time to time.

Thomas Metzinger
2012 Mar 26 07:06
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RE: €urozone Crisis Follow-up Thread
What will happen to the euro?

by Bernard Connolly and John Whittaker

Abstract

The Stability Pact – intended to make EMU governments run prudent budgets – is losing its credibility. This essay asks the question: what will happen if national debts start to rise again and some governments then have difficulty borrowing? It suggests that there will be calls for bailout, that the EU’s political structures will not cope well with the resulting arguments over which countries will pay, and that the eventual and painful result will be the re-establishment of national currencies.

Introduction

When a country commits to a fixed exchange rate regime, the commitment is only credible if there is confidence that the country’s debtors, both public and private, will generally be able to meet their obligations. When doubts arise about the ability to service and repay foreign debts, lenders become hesitant to continue lending and demand greater default premia. When there are doubts about the returns on capital, capital is withdrawn. These events lead to further erosion of confidence in the country's ability to pay and, unchecked, they inevitably lead to the fixed rate being abandoned.

There are various devices for enhancing commitment. Under a currency board, for instance, the central bank is supposed to carry larger foreign reserves to support the fixed rate. This may prolong the life of the fixed regime, but it may also allow more time for unsustainable debts to accumulate. There is then the risk that, when the devaluation finally occurs, it will cause more distress.

Economic and Monetary Union (EMU) is a form of fixed exchange rate regime, but member countries have raised the stakes much further by giving up their national currencies in favour of the euro. Technically, a member country could withdraw from EMU simply by reissuing its old currency. However, EMU has cemented financial claims into a ‘foreign’ currency, the euro. Given the absence of agreed exit procedures, the redenomination of these claims into a re-established national currency would cause severe difficulties, as is discussed below. It is this feature, above all, that makes the commitment to EMU credible: countries will tend to stick with EMU even if it hurts, but only so long as leaving would hurt more.

EMU has not eliminated the forces that undermine fixed exchange rate regimes, however, particularly excessive government borrowing. Indeed, membership of EMU reduces the perceived penalties for overspending. First, a government may validly assume that its ‘partners’ would be uncomfortable with the financial disruption that would accompany a debt default and would therefore be prepared to provide assistance. This assumption gains support from the understanding in the EU that richer ‘regions’ help poorer ones, via the structural and cohesion funds, for instance.

Secondly, for governments that used to have a reputation for inflation and loose fiscal control, borrowing is cheaper. This is because default premia on eurozone government debts have remained low,1 while inflation premia have been brought down by the success (so far) in holding down inflation expectations. In effect, the euro has enabled fiscally-lax governments to gain from Germany’s reputation for fiscal and monetary prudence. All governments face continual pressure to tax less and spend more. Membership of the EMU ‘club’ dilutes the financial discipline that would be faced by an independent government and makes it more likely that some governments will succumb to this pressure.

The natural reaction to this moral hazard is to deny that any such assistance would be forthcoming, as set out in the no-bailout clauses of the Maastricht treaty (article 104, original numbering), although this denial is qualified by the let-out (article 103a.2 ) that “Community financial assistance” may be granted when a country is in difficulties “caused by exceptional occurrences beyond its control”.

The other response has been to try to force governments to run prudent finances by means of the ‘Stability Pact’. This prescribes fines for countries whose budget deficit exceeds 3% of GDP, and governments are also supposed to aim for budget balance, averaged over the business cycle. The European Commission has the job of demanding tighter budgets if it judges that this principle is not being respected.

Full PDF


When I first read this text, I couldn't believe it was written in 2002, since the authors described the contemporary Eurozone problems in detail.

Another interesting thing is that the first author, Bernard Connolly, used to work for the European Commission as a leading scientist for the ERM (the predecessor of the modern Eurozone) but was fired on grounds of damaging the institution's image and reputation after he wrote a book titled 'The Rotten Heart of Europe: The Dirty War for Europe's Money' (which I wholeheartedly recommend).
2012 Mar 26 19:18
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RE: €urozone Crisis Follow-up Thread
Germany Is Also To Blame In The Euro Crisis

One of the persistent refrains we keep hearing during the euro crisis is how the Germans should not have to accept any sort of negative impact from the euro crisis because they’ve been so well behaved. The apologists for the north like to ridicule the periphery nations as having been “profligate” and “irresponsible.” And while that’s true to some extent, it’s also true that Germany has been a profligate lender. And not just a small profligate lender, but by far the most reckless lender in all of Europe.

This mess in Europe was caused by an inherent trade imbalance in the region. Since they’re all using the same currency there is no floating exchange rate to serve as a re-balancing mechanism between trade surplus and deficit nations. And unlike the USA, there is no federal government to help the trade deficit nations maintain their private sector surplus due to the trade leakage. So, what happened in Europe is essentially one huge transfer mechanism whereby the “reckless” periphery nations purchased goods and services from the “prudent” core nations and then financed their growing budget deficits by borrowing from the same people they were buying goods and services from. And as this trend became increasingly unsustainable (debt growth has its limits) the sovereigns in the south were forced into an ever increasing debt hole as they financed their “profligate” ways.

The great irony here is that someone had to lend them all of this money. And who was there with open arms to lend them this money so they could continue to boost the booming German trade surplus (which has helped lead to this great German economic boom of the last 10 years)? WHY, THE GERMANS OF COURSE! And at the time this all appeared entirely rational. After all, the yields of the periphery nations had become nearly perfect substitutes for the northern yields giving the appearance of being of equal credit risk. But as Stephanie Kelton so brilliantly wrote almost 10 years ago, this was merely one huge market inefficiency at work that was destined to break. And break it did. And when it broke the Germans suddenly woke up to realize that they were the ones on the hook for much of this profligate lending that they had done. It is eerily reminiscent of the credit crisis. Can you imagine Countrywide Financial coming out in 2009 and saying that they are not to blame for the bad decisions of the homeowners and that they should therefore not have to write down any mortgage losses? That’s essentially what the media is implying here by saying that Germany has been so well behaved in recent years. They have the whole story entirely backwards!

So, just how deep is the German (really the northern) hole? VERY deep. Germany’s banks are on the hook for 22% of the entire EMU’s debts. France is a close second at 16% and the Netherlands is in 4th place at 10%. In all, these three countries, widely viewed as the “prudent” nations in Europe, are on the hook for almost 50% of the EMU’s debts!

[Image: saupload_debt1.png]

This is why I keep saying these countries are inextricably linked. In fact, you could even make the argument that the periphery nations hold all the cards here because they’re the ones holding the northern banks by the throat via default risk. The periphery nations, ironically, could sink the German economy overnight if they wanted to. But let’s not get off track. The point is, blaming the Greeks and not the Germans is a lot like the husband who gives his wife a new credit card and then gets mad at her for going shopping. And just like any marriage, these countries must understand that their union via single currency makes them inextricably linked. They have two choices now. They can get a divorce (disband the euro entirely) or recognize that one half’s problems are also the other half’s problems and move along in an effort to rectify the issues (via full fiscal union). But let’s stop pretending that Germany and the other northern nations are without blame in all of this. There is plenty of blame to go around. But bickering isn’t going to help anyone solve this crisis. And in fact, once Germany realizes that they have made enormous mistakes, they might finally come around to the reality that they need to make some concessions in these negotiations.

* German and French banks alone are responsible for 55% of the debts in Portugal, Ireland, Italy, Greece and Spain.

source
2012 Apr 07 13:40
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RE: €urozone Crisis Follow-up Thread
^Germany and France are the main instigators in this mess.
2012 Apr 07 13:45
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RE: €urozone Crisis Follow-up Thread
(2012 Apr 07 13:45)Treffie Wrote:  ^Germany and France are the main instigators in this mess.
I also think so. Well, apart from Greeks, Italians, et al. being profligate spenders, German and French decision makers have been either utter fools, or there is some other, more sinister, purpose to this current disaster. My bet is on fiscal union. dunno
2012 Apr 08 16:56
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RE: €urozone Crisis Follow-up Thread
Euro Was Flawed at Birth and Should Break Apart Now

Since the launch of the euro in January 1999, Germany and the Netherlands have experienced a growth slowdown and loss of wealth for their citizens that would not have happened had they never joined the euro.

We know this to be true, because we can compare the progress of these two Northern European economies with that of Sweden and Switzerland, which kept their freely floating currencies in 1999 and continued to grow as before. Indeed, over the period of the euro’s existence, the German and Dutch economies have grown significantly more slowly than those of the U.S. and the U.K., despite the debt crisis now engulfing the “Anglo-Saxons.”

Sweden and Switzerland grew as fast or faster in 2001-11 as they did in 1991-2001. The German and Dutch economies, by contrast, not only slowed down in 2001-2011 (to 1.25 percent from 3 percent in the case of the Netherlands), they also suppressed wage growth to adjust for the effects of the euro. As a result, real consumer-spending growth fell to a feeble one quarter of a percent a year in these countries. A recent report on the Netherlands’ experience in the euro calculated that if growth and consumer spending had followed the pattern of Sweden’s and Switzerland’s in the decade from 2001, Dutch consumers would have been 45 billion euros ($60 billion) a year better off.

Angry, of Course

No wonder the Germans and Dutch are angry. But their anger should be directed at the governments that took them into the euro, not at the hapless citizens of Mediterranean Europe, who now are also suffering the effects of the common currency.

Sweden and Switzerland didn’t have to make any such sacrifice of ordinary people’s prosperity, while at the same time they enjoyed stronger employment as well as budget and current-account balances. That leads to only one conclusion: The euro was a mistake from the outset. It should be abandoned in unison and soon. Nobody should be surprised by the persistence of divergent cost and price inflation that has occurred among the 17 countries that have adopted the euro. That divergence produced major discrepancies in competitiveness that continued to grow over the euro’s 13-year existence. Italy’s relative unit-labor costs, for example, are now 37 percent higher than in 1998, before the euro’s introduction, while Germany’s are 11 percent lower.

At the same time, wide disparities in the sustainable growth rates of the common currency’s economies have created a natural source of imbalances. These include a buildup of excessive private-sector debt that has crippled nations with fast-growth potential, such as Spain and Ireland, since the financial crisis. Contributing to this imbalance, the European Central Bank’s “one size fits none” short-term interest rate, though nominally the same for all member countries, has varied widely and counterproductively in real terms. Real interest rates in low-inflation, slow-growth Germany were higher, further inhibiting its economy. In high-inflation, fast-growth Spain, real rates were lower, encouraging the excessive accumulation of private debt.

The blithe assumption that such imbalances would be evened out by the ready mobility of labor was always flawed: In the absence of a common language, tax structure and social-security entitlements, workers were never likely to cross borders to take up job opportunities in sufficient numbers. The policy focus on keeping the budget deficits of euro members to common targets was irrelevant to these problems, and in any case was ignored even by the policy’s main proponent: Germany.

Abysmal Result

So 13 years later, where are we? Greece, if you look at the government’s monthly cash figures rather than the massaged numbers of the troika, now has a budget deficit of more than 11 percent of gross domestic product, a 4 percent to 5 percent primary deficit (excluding interest), and total debt of 135 percent of GDP net, 168 percent gross. The austerity program the Greeks are following -- their only option, given that without control of their own currency they cannot devalue -- has made both the deficit and debt ratios greater. Austerity has caused deflation of nominal spending and incomes, which have fallen by more than 5 percent, cutting tax revenue. Government debt will surge under any scenario within the euro: If Greece stays in, the correct “haircut” for its debt is 100 percent. But it could well be forced to leave later this year.

On current prospects, Italian net government debt, which is now 100 percent of GDP, according to the Organization for Economic Cooperation and Development, will be 110 percent by the end of 2013. There is no prospect of improvement, owing to Italy’s negligible growth trend within the euro. Other euro-area economies are in worse shape.

Portugal’s government-debt ratio is close to Italy’s, but business debt is, on average, 16 times net cash flow. That means the vast majority of Portuguese corporate debt is now junk, given that junk classification occurs at 10 times annual pretax- and-interest cash flow. A recession could sharply shrink business cash flow and cause a banking crash, meaning that Portugal will probably have to leave the euro shortly after Greece.

Spain’s business sector is also in the junk zone, because Spanish corporate debt stands at 12 times net cash flow. Real- estate and other asset prices, meanwhile, are heavily overvalued. Spain’s recession may slash asset values and wither cash flow, leading again to a banking crisis and soaring government debt. Spain, Portugal and Ireland have much greater total debt, once the private sector is included, than Italy or Greece -- and austerity programs are drying up the cash flow needed to return to solvency. Austerity can only work for these countries -- with the exception of Ireland -- if they leave the euro.

Artificially Competitive

All these symptoms of the euro’s poor design are linked. Wage suppression in Germany and the Netherlands has created artificial cost competitiveness, boosting exports to, and exacerbating inflation in, Mediterranean Europe. Lower wages in Northern Europe, meanwhile, have ensured weak demand for imports from the South. The resulting trade surpluses enjoyed by Germany and the Netherlands were, and will be, wastefully invested in such assets as U.S. subprime-mortgage paper and Greek government bonds.

In the future, the euro can survive only if these surpluses are given away as unrequited transfers -- more or less what is happening now, in the form of bailouts. With 2012-13 prospects for global growth much weaker than in 2010-11, dependence on the German “export machine” will blight the whole European economy, heightening the malignant effects of the euro.

To prevent a meltdown, the ECB has engaged in unprecedented and dubious practices to expand the euro system’s central-bank balance sheet, accepting junk collateral against the provision of banking liquidity. The risks are increasingly confined to the central bank of the host country, which may make future exits from the euro easier. But liquidity provision will not stop fiscal tightening from deepening recessions in Mediterranean Europe, widening deficits and debt ratios, and threatening banking crises.

Most support for deficit countries so far has been indirect, coming via the ECB, the European Financial Stability Facility and the International Monetary Fund, but it’s likely to become more explicit in the future. And the totals are large. Taking care of the virtually worthless debts of Greece and Portugal, and the budget deficits of Italy and Spain over the next four years could amount to a total of 1.25 trillion euros. If Italy and Spain additionally have to be helped to refinance maturing bonds issued in the past, this cost may double. That would threaten the financial position of some of the core euro- area countries -- including downgrades of their credit ratings.

Simultaneous Exit

Sequential disorderly exits from the euro need to be avoided because of the huge and extended financial turbulence they would cause. Yet it is likely that the politicians running euro-area economies will be driven to make the fundamental reforms required for a return to long-term growth only if some countries do leave the currency. As a result, the simultaneous return to freely floating national currencies offers both the best economic outlook for the member states, and the least damaging euro-decommissioning process.

This would be challenging, of course, but it could be done. All domestic deposits, transactions and obligations (including home mortgages) would be converted 1-to-1 into each new home currency. The ECB would become the guardian of a legacy “European Transition Currency” into which cross-border euro contracts would be converted at the 1:1 ratio, but without money-creating powers. The ECB would have to be recapitalized by euro members that are financially strong. Major transition loans to deficit countries would be needed to permit them to re- establish national currencies that would then float freely.

And leaving the euro area is likely to be cheaper than staying in it. A recent report on the Netherlands and the euro estimated the net initial cost to that country of leaving would be 51 billion euros, an amount the economy would more than recoup within two years, by not having to continue contributing to euro-area bailouts.

The need for radical action is urgent. Spain, for example, already has an unemployment rate of 23 percent -- and 49 percent among youth -- and yet within the euro, it is engaged in a savage further fiscal deflation that is bound to raise joblessness much higher. The politics of Mediterranean Europe could soon be seriously destabilized. It is less than 40 years since the dictatorships of Franco in Spain, Salazar and Caetano in Portugal, and Papadopoulos in Greece ended. Their equivalents may not be about to return yet, but the risk of turmoil is increasing rapidly.

source

Seeing how the eurocrats are zealous about their precious currency, I highly doubt countries will be forced to abandon the monetary union. Instead, I expect the indebted nations to suffer for decades under foreign surveillance, while paying off old and unnecessary new loans.
2012 Apr 10 00:06
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RE: €urozone Crisis Follow-up Thread
Europe Crisis Timeline: Maastricht to Papandreou

We must dissent.

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2012 May 13 16:05
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RE: €urozone Crisis Follow-up Thread
Greece Crisis: Greeks withdrawing euros afraid of the prospect of rapid devaluation

ATHENS: Greece's president spoke of "fear that could develop into panic" at the country's banks in the weeks before fresh elections that could precipitate Athens exit from the euro zone.

Greeks are withdrawing euros afraid of the prospect of rapid devaluation if the country leaves the single acurrency, minutes of President Karolos Papoulias's meetings with political leaders showed. Greece's warring parties have refused to form a viable coalition, triggering new elections that could strengthen the hand of opponents of Greece's EU bailout.

Central bank head George Provopoulos said savers withdrew at least e 700 million ($894 million) on Monday, the president told party chiefs. "Mr Provopoulos told me there was no panic, but there was great fear that could develop into a panic," the minutes quoted the president as saying. "Withdrawals and outflows by 4:00 pm when I called him exceeded e 600 million and reached e 700 million," he said. "He expects total outflows of about e 800 million, including conversions in German Bunds and other such things."

The specter of Greece quitting the single currency sent the euro and European shares to a fresh four-month low on Wednesday and raised the yields on Spanish and Italian debt, reflecting the risk that other European countries will be hurt.

Sources at two Greek banks told Reuters that withdrawals on Tuesday had taken place at about the same rate as Monday and the president's numbers appeared to be broadly accurate.

Greeks have been withdrawing funds from banks for years, and there has so far been no sign of queues at banks in Athens, but withdrawals at such a pace in two days are unusual.

A senior bank executive said there had been withdrawals but there was no sign of a panic, such as in April 2010 when eight billion were withdrawn just before Greece obtained its first bailout.

According to central bank figures, Greek businesses and households had e165 billion on deposit at the end of March, having withdrawn e72 billion since January 2010.

source

It would seem they may still prove me wrong. Big Grin

We must dissent.

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2012 May 17 21:27
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