Haha, funny. I wonder why US and UK publications publish this topic over and over.
There is zero chance that Germany will go back to the Mark.
Ireland and Greece are tiny countries. Their problems are totally blown out of proportion. Germany has a GDP of around 2.5 Trillion Euro. The EU has a GDP of 12 Trillion Euro. Ireland has a GDP of around 160 Billion.
The Euro being under pressure? How is that bad news for Germany's export oriented economy? It is not.
Second, the countries like Greece and Ireland under pressure? That's also great for the greater EU. It makes everyone aware that changes in economic policy are needed. Up until now in many areas the EU and Eurozone countries have different economic policies that are not really adjusted to each other. There is now some chance that this will change.
The internal problems in Europe have been caused by a few factors:
* the banking system took a lot of risks and also invented fancy new products (aka ponzi schemes)
* bubbles in a few countries, especially the housing bubble in the UK, Ireland, ...
* budget deficits for example in Greece, UK, ...
The financial crisis has exposed these problems. Giving up the Euro does not solve any of these problems.
The single currency market of the Eurozone has been given such a boost to the economy that very few people would be willing to give that up. The only real question that is worth discussion is how to repair the broken parts.
All other speculation in this area is wishful thinking and market manipulation from people who want to profit from the manipulations.
"I wonder why US and UK publications publish this topic over and over."
"Ireland and Greece are tiny countries. Their problems are totally blown out of proportion."
I think you answered your own question, I bet if you asked a number of Americans which had the larger population of Ireland or Germany, a significant number would not know or would even guess Ireland. I also bet if you asked a number of Americans which had the larger population of Ireland or Massachusetts, a large majority would say Ireland, even residents of Massachusetts.
I bet if you asked a number of Americans which had the larger population of Ireland or Germany, a significant number would not know or would even guess Ireland.
This may be true of the average US citizen. Probably much less true of readers of thestreet.com or any US publication about economics. And certainly not true of folks reading economic publications in the UK, who are well aware of the relative sizes of Ireland and Germany.
Spain, on the other hand, has fifty million people, and is being talked about as possibly the next domino to fall. If that happens, it's much more serious than Greece or Ireland.
PS. Ireland and Massachusetts are roughly the same size; I think anyone can be forgiven for not knowing which is larger.
To save other people Googling, populations and GDP per capita (2009, USD) of the economies under discussion. All from Google apart from GSP (gross state product) per capita of Massachusetts, which is from Wikipedia.
That high GDP # is the real estate bubble about to burst. Unfortunately most of my erstwhile countrymen (including the bankers) thought it meant spending power. I find it painful to read about, honestly.
I understand your argument that "it makes everyone aware that changes in economic policy are needed. ", however isn't the Euro basically a straightjacket preventing each individual country from setting its own monetary policy?
For example, the Central Bank of Ireland can't set its own interest rates, and basically needs to follow whatever Germany decides. Or Greece can't devalue its currency to attract more capital, etc.
I'm far from the expert but this has been my understanding so far.
Yes. Good thing too, because monetarism worked very badly and led to continual economic instability prior to the ERM. Multiple currencies are an expensive inconvenience and an impediment to trade. Comversion fees are also a stealth tax.
It's not impossible, just expensive and annoying for business or frequent travelers. When I was younger European currencies used to go up and down like yo-yos.
These countries are facing cuts to government spending and wages while increasing taxes. This causes debt to be more of a burden. Devaluing the currency would make paying for these things easier. Devaluing too much would cause problems as well.
So your advocating stealing from those who are responsible (savers) and giving money to those who are reckless (debtors). Also, when inflation happens it normally hurts the middle class and lower class much more than upper do the lower classes not owning assets - stock/land etc.
Plenty of people with significant equity in their home still have negative cash positions for most of their lives regardless of the amount of money they save. On the other hand people that short stock can have significant cash holdings without saving anything.
To the extent that home has intrinsic value, the homeowner is saving. To the extent it gains value against the dollar it transfers wealth from non-homeowners. In fact this is the express goal of the current Fed policy.
Ireland faces a situation of genuine societal collapse. The unemployment, lack of social services, etc. affect everyone regardless of who is a saver or not. I'm advocating that in a dire situation the best course of action be taken. In Ireland's case that would be devaluing the currency. There is too much public debt and raising taxes, lowering pay are not viable solutions.
Yeah this problem can easily be resolved by looking at Irelands GDP. After all, if Irelands economy collapses the UK won't be affected. Each individual Irish citizen only spends about £4k a year on British products & services.
And hey, if the UK economy is severely affected then that won't affect the rest of Europe!
Small population, small landmass, small GDP, the worlds second largest software exporter.
Do you honestly believe GDP is a real indication of a countries ability to affect the economy of those it is surrounded by and nothing else should be considered?
There is zero chance that Germany will go back to the Mark.
The Germans have a history of spending silly money on contingency plans for things that will never happen. Oh wait, they don't.
Grow up, look at the bigger picture and face facts.
Not the whole economy of Ireland is affected. It is just parts - banks, real estate, etc.. The companies are still there and their products and services are still valuable. When the EU keeps the banks from collapsing, makes credit available, then Ireland is still alive.
To keep a tiny country like Ireland with 6 million people running should not be difficult for an EU of 500+ million people.
The real parts of Ireland consisted of US companies tax havening there to avoid paying tax on their sales in the UK and Germany. And a housing boom that meant that more new houses were built than the country actually has people for!
The traditional solution for Ireland will still work - every body between the ages of 20-40 simply leave the country. With EU passports they can work in other countries even if the US doesn't decide to let them all move there this time.
> The Germans have a history of spending silly money on contingency plans for things that will never happen. Oh wait, they don't.
The German General Staff had and has contingency plans for everything. The General Staff was Prussia's / Germany's secret weapon for two centuries, until it was copied by other nations.
But that's just the German army, I don't know about the civilians.
I think you should read about LTM and what it wrought. Look what Lehman's collapse did. When everyone is over leveraged then it doesn't take much to get a crisis rolling. If Ireland and Greece aren't propped up then Deutche Bank will suffer. It was German and French banks that lent to Greece and Ireland. Do you really think DB would survive if their Irish and Greek bond holdings become worthless?
Yet, it is still true that DB holds a lot of Greek and Irish debt. If Ireland and Greece fail to pay this back then there will be severe problems for Germany even though they are small countries.
So what? The task is to keep the banks alive. Much of the rest of Ireland is still there. There are still people, buildings, companies, services, machines, ...
The problem is that, early in the crisis, the Irish government took the bank debts onto its own books.
So it's now in a situation where defaulting on the loans is no longer a matter of a large private institution failing (which is bad enough) but a sovereign government (and Eurozone member) repudiating its obligations.
"The German economy has hugely benefited from a cheap euro. This has fueled its export-driven economy, and the country has racked up a huge trade surplus. [...] Germany has benefited from a cheap exchange rate and is running trade surpluses that are more than 6% of GDP."
"Many of the benefits of European integration came from the harmonization of regulations and the steps that were taken to facilitate cross border movement of goods, services and people. My work [...] shows that there is little or no impact when the euro is introduced."
He explicitly says that the Euro does not contribute to removing the barrier. He's saying that the fact that countries with trade deficits have pressure to devalue their currencies contributes to a country like Germany with a trade surplus not revaluing its currency when it might otherwise have done so.
Edit:
Quote from the abstract of his paper:
"The Euro adoption as well as the anticipation of the Euro adoption has minimal effects on market integration."
The paper goes into more detail and is freely downloadable. In particular he says that there is a small effect from the Euro introduction in his regression model, but that it is much less significant than EU membership in explaining correlation between valuations of similar companies in different countries. The "anticipation of the Euro adoption" is intended to counter the possibility that integration due to preparation for Euro adoption might harmonise the valuation figures prior to actual adoption.
I'm a bit suspicious of the arguments he lays out for the lack of a Euro effect on integration of economies within the EU, especially in the light of his article. The paper claims:
"In addition, ex ante we would expect the process of economic market integration to be more important for equity valuations than the adoption of a single currency. This is because currency movements account for only a small part of the total variation in equity returns and the variability of intra-Europe exchange rate changes before 1999 was quite limited."
So here he's arguing that Europe exchange rates before the Euro didn't change significantly relative to each other, and using this to argue that other factors are more important for market integration than the currency. If that's the case you might then expect that getting rid of the Euro would equally have very little effect. It seems he wants to have it both ways: the introduction of the Euro has little effect on market integration, but getting rid of it would decrease harmful effects of market integration.
In general he tries hard to tease out the correlation versus causation in integration effects due to introduction of the Euro, but some of his arguments seem a little arbitrary, for example, the Euro affect that he observes is statistically explained away by introducing a "distance from Brussels" control and a "foreign language spoken" control. I could well be misunderstanding, but I think the significance of these controls needs more explaining to make his case convincing. This is the point where a lot of free time and access to the secondary literature would become helpful...
shin_lao's certainly wrong that the author 'seems to forget'. That topic is the entire focus of his research, that the euro hasn't reduced barriers to trade, they had already been reduced before.
The main funding powers in Europe are Germany, France and the UK. The UK has a unique position in that it is a net contributor to Europe, bails other countries out but does not have the Euro. To claim that the UK is somehow insulated from effects of the Euro is disingenuous. A large part of our trade is with Europe, and Europe or the US being adversely affected affects us.
France is another big player in the Euro and will contribute to bailouts, but only so far. Germany will look to the UK to make up the difference where possible, then countries like the Netherlands and so on until it finds someone.
If Germany pulls out of the Euro thats it, the Euro is over. However if the Euro dies overnight then expect massive upheaval in Europe, rising nationalism and the potential for war. This however is unlikely thanks to the Lisbon treaty, a treaty that centralises European power. It is likely that the EC will want to transfer control of financial policy to Brussels for those that receive larger bailouts (as they can no longer be trusted to run their own economies without risking the rest of Europe - this will be one of the reasons put forward) and Lisbon will be the vehicle to do it.
What I would love to see is actual reform of the EU as an institution as well as reform of financial obligations from member states, but sadly it's more likely we'll see the European equivalent of the old republic trying to extend it's reach in order to protect itself.
Our interest in bailing out Ireland was unusual in the level of exposure our recovering banking sector has to Ireland. Possibly, because of our traditional support for national sovereignty within the EU, we're even more willing than most countries to do so without compelling the Irish to address their budget imbalance by raising their artificially low taxes. I'm not sure the same self-interest in applies to aiding Portugal though.
The fragmentation of the Euro would undoubtedly have consequences for the UK, but I'm not sure that they would be wholly negative in the shorter term (a bankrupt country unilaterally withdrawing and allowing the Euro to appreciate might even be good for UK exports). Given the parlous state of our own finances, I'm not sure the economic case for contributing to a bailout of other countries is clear cut (given that it's by no means guaranteed to succeed...), and certainly it would be politically disastrous for the British government to commit to any additional spending.
Other countries have more invested in making the Eurozone a success, but ultimately the survival of the Euro depends largely on the continued support of France and Germany as the rest of the Eurozone isn't exactly inundated with money, which leaves inevitably aligns its future very closely with the interests of those countries.
As always on HN, the debate is always stimulating and informative compared to other places.
I think you're right about Ireland. There's also a lot more in common culturally with Ireland than with Portugal, and while Anglo-Irish history is a tricky subject, I would imagine people would take the concept of helping Ireland more seriously than Portugal.
Your point about fragmentation is quite interesting to me. Perhaps if Portugal and Spain were 'encouraged to leave' by the EU that might be a politically bitter pill to swallow, but perhaps a financially acceptable solution. After all, a large part of the Eurozone no longer meets the Copenhagen criteria. Unfortunately neither the EC or EU Parliament seem to have any grounding in reality or rational thought.
All germans know that this is not going to happen. The euro is here to stay, and germans (at least those who generate most of the GDP for germany) are willing to pay in order to keep it. After all, we can do the math.
"The German economy has hugely benefited from a cheap euro" - this is complete crap. It is the first time I hear that the euro is cheap. If the euro is so cheap why it did not benefit to other countries? If the euro is so cheap why is France lobbying to devaluate it? If Germany benefited from cheap euro, how comes that Germany was always supporting the policy of the ECB to maintain a strong and stable euro.
Alone this quote makes this article to lose credibility. For me this article is pure propaganda.
Mixing in weaker coins with the mark to get the euro makes the euro weaker than the mark was. That helps German exports to non-euro countries.
Within the euro, the link is even stronger. Before the Euro, there was an agreement to keep exchange rates more or less fixed, but the fixed rates would get adjusted when they grew too unrealistic. When that happened, the Italian lire, Greek drachme, Spanish peseta, etc. would get devalued, making German products more expensive for people in Italy, Spain, Greece, etc. That mechanism is gone now.
One euro was worth about $1.60 in the middle of 2008. It's worth about $1.35 now. Was worth about $1.20 back this summer. And in mid 2001 it was worth about $0.85.
On the last page it says "Currency union without fiscal union is bound to fail -- and we are seeing the failure right now."
I guess the argument is that if each country has their own currency, they can devalue it when they are having problems and get out of trouble and the Euro prevents that possibility? But does anyone know how things worked in terms of this issue back when gold was more the common currency and before paper money was more common?
The next big ones are Italy, Belgium and *France*.
France is in trouble, too? I hadn't heard that. I'd be interested to read about it, if anyone has any links. (I'm not French, despite the username. :-)
Angela Merkel warned that Germany could abandon the euro
"Angela Merkel at the EU summit on 28 October. According to witnesses, during an discussion with the Greek prime minister at dinner, she said: "If this is the sort of club the euro is becoming, perhaps Germany should leave."
"The German chancellor, Angela Merkel, has warned for the first time that her country could abandon the euro if she fails in her contested campaign to establish a new regime for the single currency, the Guardian has learned."
There is zero chance that Germany will go back to the Mark.
Ireland and Greece are tiny countries. Their problems are totally blown out of proportion. Germany has a GDP of around 2.5 Trillion Euro. The EU has a GDP of 12 Trillion Euro. Ireland has a GDP of around 160 Billion.
The Euro being under pressure? How is that bad news for Germany's export oriented economy? It is not.
Second, the countries like Greece and Ireland under pressure? That's also great for the greater EU. It makes everyone aware that changes in economic policy are needed. Up until now in many areas the EU and Eurozone countries have different economic policies that are not really adjusted to each other. There is now some chance that this will change.
The internal problems in Europe have been caused by a few factors:
* the banking system took a lot of risks and also invented fancy new products (aka ponzi schemes)
* bubbles in a few countries, especially the housing bubble in the UK, Ireland, ...
* budget deficits for example in Greece, UK, ...
The financial crisis has exposed these problems. Giving up the Euro does not solve any of these problems.
The single currency market of the Eurozone has been given such a boost to the economy that very few people would be willing to give that up. The only real question that is worth discussion is how to repair the broken parts.
All other speculation in this area is wishful thinking and market manipulation from people who want to profit from the manipulations.