11:58 – The Euro farce continues to degenerate. All parties are desperately searching for a solution, except Germany and the other conservative northern tier countries, which know there is no solution. The Euro is and always has been fundamentally broken. Every competent economist knew that even before the Euro was introduced. Even I knew that before the Euro was introduced.
The fundamental problem is that it is impossible to have a monetary union without a fiscal union, and Germany, the Netherlands and Finland would be insane to agree to such a union, particularly now. As Milton Freidman predicted back around the time the Euro was adopted, it would collapse at the first serious economic crisis. And that’s exactly what’s happening now. Also, as I and others predicted, the ridiculously expensive social programs in Europe would bankrupt them, and that too is coming to pass.
Simply put, there is no solution to the Euro problem, or at least there is no solution that is acceptable to all parties involved. Greece, Portugal, Ireland, Spain, Italy, and other bankrupt EU nations are now clammering that there’s no alternative to a fiscal union, starting with expansion of the EU bailout fund from its current €440 billion to something in the €3 trillion to €4 trillion range and followed by the introduction of Euro bonds, which are basically blank checks that allow the bankrupt EU nations to borrow as much as they wish and have Germany pay the bills. The problem is, Germany is no more likely to agree to those measures than I am to cosign a mortgage loan for a homeless drug addict. At least I’d have a better chance of being repaid than Germany would.
The only possible solution is one that European politicians are not (yet) ready to speak of. Germany and the other rich northern nations need to leave the Euro and go back on their own currencies. That leaves the Euro bankrupt, along with all of the countries that would still be using it, including France and Belgium. Holders of Euro-denominated bonds from those bankrupt countries would lose essentially everything. They’d be lucky to get one cent on the Euro. But eventually the markets would adjust. Greece, Portugal, et al. would not be able to borrow any money, and would return to being very poor nations, which they’ve actually been all along.
I’m doing laundry, and I just went into my lab to collect towels. It occurs to me that one of my unusual personality quirks is how I handle used towels, paper towels, surgical gloves, disposable pipettes, and so on as I’m working. I toss them on the floor, to be collected and washed or disposed of later. Same thing on the very rare occasions when I contaminate a set of splash goggles. Onto the floor they go, and I pull a new set off the shelf.
I actually remember when I started doing this, as a teenager working in my darkroom. I dried my hands with a towel, which turned out to be contaminated with a processing chemical. I then touched a print, which was ruined. From that day forward, as soon as something becomes contaminated, onto the floor it goes. That way, I know that an item on a counter must be uncontaminated, or it would be on the floor. So, there is method in my madness.
Again, I disagree that returning to the old–and multiple–currencies is any kind of a solution to the EU troubles for anyone (their problems are no more a “crisis” than the so-called “debt crisis” in the US). Returning to old currencies would be positively certain suicide for the poorer countries–so they are not about to do it,–and would most likely cut back growth for even the richer ones, as transaction and banking costs increase significantly.
It is positively obvious that bigger has proved to be better in business. And so it is with countries. The days that small nations can go it alone is over. Nationalism is an impediment to success and growth. The countries of Europe are fully aware of that. And if you do much listening to BBC’s Business Daily podcasts, it is perfectly clear that European decision-makers and the populace in general are in agreement. The EU is willingly crawling in the direction of a more Federalist system, like the US, and the populace there is mostly okay with the fact that a few euro less in everyone’s pocket to benefit Europe as a whole, is worth the sacrifice. Clearly, Americans cannot relate to that AT ALL, as the definitive attitude here is death to those who cannot help themselves. In fact, as is obvious here, Americans do not believe anyone else in the world could possibly hold a different view than their own, nor do they believe there is any solution to Europe’s woes. We will see.
Furthermore, I totally disagree with the view that the euro was doomed from the outset. Europe did–at the time–what they could get agreement on doing, and headed in the general direction of what all of them knew would benefit everyone. And as things have played out, the players have gone along with changes that have been necessary to insure the union continues. They will continue down that path. As one of the architects of the EU recently said, “It took the US 70 years to arrive at a single currency, and the world wants us to do it overnight. That is not going to happen. But it will happen in less than 70 years.”
Meanwhile, there is a good article in the WSJ about how worthless the ratings firms analyses on predicting government defaults are.
http://online.wsj.com/article/SB10001424053111904823804576502481646797782.html
Well, Chuck, I don’t think you understand anything about economics. Furthermore, if you’re getting your information from the BBC, you’re getting propaganda. The UK public, for example, is overwhelmingly against adopting the Euro, and a substantial majority favors leaving the EU entirely. A majority in Germany favors dropping the Euro in favor of a new Deutschmark.
Furthermore, I’m not sure what you (or he) means about the US taking 70 years to arrive at a single currency. We did it from the beginning, when the US Mint was established by the Coinage Act of 1792. Now, it’s true that foreign coinage continued to be accepted and used, but that was accepted as specie, based on the weight of silver or gold it contained. Also, at times when money (i.e., real money, gold or silver) was in short supply, banks would sometimes produce private money in the form or coins, tokens, or bills, but that was never official currency. The US has been on the dollar continuously since 1792.
You’re right, we will see. Care to place a small bet?
You haven’t placed the day/date at the top…
America is in deep do do, but its problems can be fixed. Europe’s problems can’t be fixed while they have one currency but not political and fiscal union. If they found a way to impose *real* discipline on the profligate nations that use the Euro then possibly it could survive, but I think the south will just continue to blackmail the north and the north will take the path of least resistance, which is to protest loudly but roll over.
Having a single currency is very convenient, but I don’t see how the more disciplined states can prevent the undisciplined ones from pillaging them.
Actually, I did put the day/date at the top. WordPress somehow deleted the heading for this entry and scrambled the heading for today’s entry by adding an extra comma after the day and changing 2011 to 2001. I’ve fixed both problems now. We’ll see if they stay fixed.
You’re absolutely right. The Euro is doomed unless Germany agrees to bail it out via Eurobonds, in which case Germany’s debt:GNP ratio jumps to what Italy’s currently is, and Germany can no longer borrow money at reasonable rates, which in turn dooms the Euro. In other words, the Euro is doomed no matter what happens. Italy, Spain, France, and Belgium are toast, and if Germany, Holland, and Finland try to help they’re going to get dragged down with them. It’s every man for himself, and you can bet that Germany isn’t going to end up on the short end of the deal.
Merkel and Sarkozy are meeting Tuesday. Don’t bother to read the news reports. All they’re going to agree is that they’ll carry out the agreements they made at the 21 July summit, which as I pointed out at the time were useless. Sarkozy will be pushing for a Eurobond because he knows that France isn’t going to be able to borrow the money it needs once its rating is reduced from AAA, so he wants Germany to subsidize France’s borrowing.
Germany saves France. Hasn’t that been tried before?
Not to their liking…
Wasn’t it Patton who said “I’d rather have a German division in front of me than a French division behind me?”
I think the exact quote was, “I’d rather have a German division in front of me than a division of cheese-eating surrender monkeys behind me.”
I’m convinced that what he said was “I’d rather have a wiener chomping Hun division in front of me, than a division of cheese-eating surrender monkeys behind me”, and the whole thing was cleaned up by his aide. Who was then slapped for his temerity.