Europe's problems

[libor.plus1]

I don't think anyone seriously expects Greece to survive through this.

 

There's a lot of noise about Greece being forced to leave the EU. But that would be like kicking a drunk underager out of a high school party. There are many more indebted countries in the EU than just Greece. Perhaps a better response might be for Germany to leave the EU. That would erode the value of the euro and perhaps stabilize some of the poorer countries who really had no business adopting such a strong currency in the first place.

 

Anyone want to venture a guess as to the ramifications when Greece is forced to default?

 

 

[alwaysinvert]

I haven't got anything more insightful than this:

 

http://www.ft.com/intl/cms/s/0/f3f54cd6-7b36-11e0-9b06-00144feabdc0.html

 

While I think disintegration would be the best course of action, due to the eurozone being a madness of a currency area, at this moment in time it's hardly politically viable that countries would leave EMU. But who knows, stranger things have happened.

 

 

[tombgrt]

I don't think anyone seriously expects Greece to survive through this.

 

There's a lot of noise about Greece being forced to leave the EU. But that would be like kicking a drunk underager out of a high school party. There are many more indebted countries in the EU than just Greece. Perhaps a better response might be for Germany to leave the EU. That would erode the value of the euro and perhaps stabilize some of the poorer countries who really had no business adopting such a strong currency in the first place.

 

Anyone want to venture a guess as to the ramifications when Greece is forced to default?

 

 

 

 

Greece can't be forced out the EU by other countries, the IMF or whoever. Greece could only step out of the EU by its own decision, which would basicly be its own destruction (drachme would return, making all debts that are still in Euro even harder to pay back).

 

Biggest chance now is that Greece gets another (smaller) bailout so that banks and other countries that would get affected have more time to take the hit that will probably come one day when they permanently release Greece from a part of their debts in order to make it survive.

 

I like the overseas stories a lot more now, bad things could happen here with irrational behavior from politicians or a worsening situation. I am not really restless with my current portfolio that has 55%+ in USD, CAD and GBP (the rest is in euro's as I am a European after all).

[zarley]

one curious angle to the Greek debt story is the role of the borrowing/building spree leading up to the 2004 Olympics.  How important is that little splurge to the problems the Greeks are currently facing?  How many tens of billions did they spend leading up to that little party?

 

Idle curiosity mostly.

 

 

[Parsad]

- The EU will provide a package for Greece. 

- They will restructure debt obligations, which will be viewed as a form of default by the credit rating agencies. 

- Very strict austerity measures will be applied. 

- You will get massive outcry by the populace...perhaps a large exodus of both people and capital. 

- The Greek economy will suffer for the next several years, but will survive longer term. 

- They will stay a part of the union as the alternative isn't any better. 

 

The problem isn't Greece...it's Spain, Italy, Belgium, Portugal, etc.  They cannot create a program or package big enough for everyone other than Greece and Ireland.  The Euro will not survive in it's current form long-term.  Cheers! 

[Alekbaylee]

Sanj,

 

The Euro will not survive in it's current form long-term. 

What do you foresee? What's the alternative to the Euro?

 

I have a hard time envisionning a return to national currencies.

 

What I think will happen is :

- Very strict austerity measures will be applied. 

- You will get massive outcry by the populace...perhaps a large exodus of both people and capital. 

- The economy will suffer for the next several years, but will survive longer term. 

- They will stay a part of the union as the alternative isn't any better.

 

for all those countries you cited : Spain, Italy, Belgium, Portugal, France, etc.

[Parsad]

What do you foresee? What's the alternative to the Euro?

 

I have a hard time envisionning a return to national currencies.

 

The Euro will exist, but the union will be made up of different partners.  What benefit is there for Germany to be a part of the union?  You will get people asking these questions as Germany's share of the responsibility for others gets larger and larger.  Others in better shape will question why they are bailing out everyone else.

 

for all those countries you cited : Spain, Italy, Belgium, Portugal, France, etc.

 

No for some.  The French populace needs just any stupid reason to riot.  Can you imagine what will happen when social security benefits are reduced in France?  Or their obligations to themselves and to support others in the union get larger?  Historically in these types of environments, you start to see regime changes...either wide swings to the left or right...usually capitalizing on widespread discontent. 

 

Unlike the U.S. where you have 50 states under one government, the European Union is 27 governments under one union.  Congress can tell every U.S. state to go to hell if they don't agree with something.  You can't tell any of the 27 countries in the European Union to go to hell, because they will just literally walk away.  Cheers! 

[alwaysinvert]

What do you foresee? What's the alternative to the Euro?

 

I have a hard time envisionning a return to national currencies.

 

The Euro will exist, but the union will be made up of different partners.  What benefit is there for Germany to be a part of the union?  You will get people asking these questions as Germany's share of the responsibility for others gets larger and larger.  Others in better shape will question why they are bailing out everyone else.

 

for all those countries you cited : Spain, Italy, Belgium, Portugal, France, etc.

 

No for some.  The French populace needs just any stupid reason to riot.  Can you imagine what will happen when social security benefits are reduced in France?  Or their obligations to themselves and to support others in the union get larger?  Historically in these types of environments, you start to see regime changes...either wide swings to the left or right...usually capitalizing on widespread discontent. 

 

Unlike the U.S. where you have 50 states under one government, the European Union is 27 governments under one union.  Congress can tell every U.S. state to go to hell if they don't agree with something.  You can't tell any of the 27 countries in the European Union to go to hell, because they will just literally walk away.  Cheers! 

 

Shrinking the euro zone would be a good start. France, Germany and the Benelux countries actually make up a pretty good area for a currency union and hardly makes less sense than the Eastern Bundesländer sharing currency with the old West Germany if you look at the homogenity of their demographics, politics and economic policies. But the political reality of Europe is a thing far removed from economic theory (or even economic reality, heh)

 

As for the comparison with the US, that is not very apt. The EU is a confederalist organization and not meant to be a federalist one (even if many politicians have wanted and want to move in that direction), and walking away is hardly as easy as you make it out to be. Most countries are very dependent on the EU for political shelter, especially the newer ones.

 

Estonia is not going to leave the EU or the EMU for economic reasons even though you could make a compelling case that they would be better off with the restrictions imposed by CAP and other bizarre EU programmes. I visited Estonia some time after the Russian invasion of Georgia and the population was absolutely convinced that they were next on the list (a crazy thought near term, obviously - but maybe not so crazy long term). Getting closer to the EU and the West at the cost of some growth seems a bargain deal when faced with that reality...

[Charlie]

What benefit is there for Germany to be a part of the union?

 

One of the great benefits for Germany to be part of the union is a relatively weak currency.

So Germany can export much more. The German Mark would have appreciated much more

than the Euro.

 

Charlie

[oec2000]

What benefit is there for Germany to be a part of the union?

 

One of the great benefits for Germany to be part of the union is a relatively weak currency.

So Germany can export much more. The German Mark would have appreciated much more

than the Euro.

 

Charlie

 

Perhaps the Europeans here can provide a better answer but I thought that the EU was primarily about expanding the political power of Germany and, to an extent, France. The Germans were prepared to sacrifice financially so that they can eventually control a larger political entity, the United Sates of Europe, that would be comparable in size to the USA. Isn't this the reason why they continue to support the basket countries financially?

[Myth465]

Germany would be screwed without the Euro. A sky high currency for a nation with high exports.....

They would have to debase the currency to make it all work, and I am not sure if Germany is willing to do that.

 

This problem seems to offer no good solutions. Its in the too hard pile, but I have some popcorn and am enjoying / fearing the next chapter in the show.

[alwaysinvert]

What benefit is there for Germany to be a part of the union?

 

One of the great benefits for Germany to be part of the union is a relatively weak currency.

So Germany can export much more. The German Mark would have appreciated much more

than the Euro.

 

Charlie

 

Perhaps the Europeans here can provide a better answer but I thought that the EU was primarily about expanding the political power of Germany and, to an extent, France. The Germans were prepared to sacrifice financially so that they can eventually control a larger political entity, the United Sates of Europe, that would be comparable in size to the USA. Isn't this the reason why they continue to support the basket countries financially?

Well in short, you are a bit off. That is not the historical reasons for the different organizational frameworks starting with the ECSC and ending in the EU. The reason for the ECSC was actually 95% financial for Germany and the rest of the members (the original six, Benelux and Italy as well) with a touch of reaching for lost political power from France (something that has come back to haunt the Union with the consensus decision making effectively blocking every chance of reform of the Common Agricultural Policy, with France's implicit veto in power). After WWII there was a ceiling on German industrial output because of the fear that they might otherwise be used for war purposes. In order to work through the technological backlog and catch up with the lost years that would have to be addressed to make Europe as a whole grow.

 

This was solved by tying up the coal and steel production of France and Germany against each other and enacting currency convertibility via the partly US funded European Payments Union. All of which was a foundation for the Single market (that is free movement of capital, goods, services and people in the Schengen area). For historical reasons Germany's reach in the EU is mostly on economic and monetary policy (with very strong proponence of a low inflation rate, think Weimar hyperinflation).

 

France has an unproportionally large say in the union compared to their population and they have been the main agenda setters from the get go, not Germany. And Germany has most certainly not suffered financially from the integration of Europe; rather the other way around, they have probably been the biggest winner of them all.

[alwaysinvert]

Germany would be screwed without the Euro. A sky high currency for a nation with high exports.....

They would have to debase the currency to make it all work, and I am not sure if Germany is willing to do that.

 

This problem seems to offer no good solutions. Its in the too hard pile, but I have some popcorn and am enjoying / fearing the next chapter in the show.

Oh, they fared pretty well during the 80s when most European currencies and the dollar were devalued 40-60% against the DM...

[Myth465]

How do you think it would work now with Asian countries and everyone looking to devalue to prop up exports. I think at some point they would be priced out and would have a hard time printing money due to historical issues and culture.

[alwaysinvert]

How do you think it would work now with Asian countries and everyone looking to devalue to prop up exports. I think at some point they would be priced out and would have a hard time printing money due to historical issues and culture.

Devaluations to prop up exports is nothing new, loads of countries were doing it in the interwar period. Arguably, the ones printing the most money did not emerge as the winners back in those days. I think a sound monetary policy based on a long-term view will win out in the end. Don't forget that most of the share of German export goes to other countries in the eurozone, a zone that has a customs union... So raising tariffs would be a possible way to deal with it (I have no clue on the likelihood and I don't think it would be a good idea, but anyways). And obviously, Germany's own market is not negligable in buying power, as opposed to that of the Asian manufacturers. Looking back on the monetary policy of France, Italy, Spain in the decades before the implementation it was nothing short of catastrophic... So here's hoping that Germany will keep a tight grip on the ECB for years to come, otherwise we are in deep shit.

 

[Aberhound]

My prediction is gloomier. Don't invite me to any dinner parties.

 

1. The Estonia/Latvian solution will be imposed on Greece etc. with internal devaluation

2. Euro will muddle through with lots of Austrian Economics pain mixed with theft from the public to pay for bankers mistakes.

3. US will continue with Keynesian policies until the dollar collapses.

4. We will all have a Euro imposed on us from an international level to "solve" the problem.

5. Then you have it right:

 

[pre]"What I think will happen is :

- Very strict austerity measures will be applied.

- You will get massive outcry by the populace...perhaps a large exodus of both people and capital. (To safe havens like India?)

- The economy will suffer for the next several years decades, but will survive longer term.

- They We will all stay a part of the union as the alternative isn't any better we won't have any choice."[/pre]

 

[prunes]

The trend seems to be towards increased austerity. The way the European Monetary Union is set up--from this layperson's perspective--they will not easily be able to print money to bail out defaulters like the US would. But this augers in my mind images of the Great Depression. If every government is trying to right its finances by slashing expenditures and raising taxes, you're going to have a large decrease in overall demand, leading to a vicious circle of increased unemployment, additional pain for overlevered consumers, declining tax revenues, etc. I think the optimal solution is kick Greece and any other freerider out of the union, let them default, and then have whatever banks own Greek government debt raise additional equity or face nationalization to stem a banking panic.

 

I am skeptical that countries would be able to "stay the course" of austerity if this kind of pain results.

[rjstc]

  Politicians know that with deflation you'll be voted out of office. With inflation everyone will complain but they will still have jobs and the politicians will still have theirs. Inflation will wipe out the debts. Somehow or other the politicians will find a way to keep their jobs. Both here and in Europe.