Tag Archives: european economic and monetary union

Hot news! The wehrmacht failed to take Greece. Now Germany tries again, with a different method.

Summary:  Germany used it power over the European Monetary Union to institute a monetary policy that disproportionately benefited itself, to the disadvantage of the periphery nations.  Germany prospered, they lost competitiveness.  Now Germany acts to continue the game, attempting to force the losers to stay in the game.  Now it’s Greece’s turn to go under the hammer.  Will they comply or resist?


  1. The Financial Times breaks the story
  2. Update: The Greek government responds
  3. Update: Replies to Greece by the EU and the German goverment
  4. For more information about the European crisis

(1)  The Financial Times breaks the story

Call for EU to control Greek budget“, Financial Times, 27 January 2012 — Opening:

The German government wants Greece to cede sovereignty over tax and spending  decisions to a eurozone “budget commissioner” to secure a second €130bn  bail-out, according to a copy of  the proposal obtained by the Financial Times.

In what would amount to an extraordinary extension of European Union control  over a member state, the new commissioner would have the power to veto budget  decisions taken by the Greek government if they were not in line with targets  set by international lenders. The new administrator, appointed by other eurozone  finance ministers, would take responsibility for overseeing “all major blocks of  expenditure” by the Greek government.

Here is the “proposal” obtained by the FT.  Only fools would accept this insulting and contemptuous offer.

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Are Europe’s rulers copying the policies of Herbert Hoover in 1929, or the French Monarchy in 1789?

Summary:  There are two paths for Europe. The path it is on, leading to a painful future and fundamental change.  And the other path, with unknown risks and pain — but offering the potential for a better future.  The path chosen by Europe’s leaders reveals much about them.  The outcome will reveal much about Europe’s peoples.

Two major reports this week describe the perilous condition of the world economy.  Both are well worth reading.  Both raise serious doubts about the path that Europe is traveling.

The PIIE report goes into greater detail about treatment for Europe’s ills, giving the solutions recommended by our banking class — that dominate these discussions in the West.  Especially note two aspects, one recommended — and one omission.

(1)  Liquidate the people of the GIIPS and the institutions which serve them

The second ingredient is a far more aggressive program to reduce budget deficits and improve competitiveness in the periphery. These nations need to be highly competitive if they are to generate growth soon given the large risks overhanging their economies. This requires large wage cuts, public-sector spending cuts, changes in tax policy to attract investment and business, and stable politics.

… In a nation with a flexible exchange rate, adjustment is usually achieved with budget cuts and a sharp devaluation. Since euro area nations have forgone their right to devalue, they need to regain competitiveness through price and wage cuts, while even more sharply cutting budget spending. In essence, they need to increase volatility of their wages, prices, and budgets if they are prepared to forgo similar changes that could be achieved through the exchange rate.

The available evidence from the outcomes of the troika programs in Portugal, Ireland, and Greece, as well as the recently announced budget plans in Italy and Spain, suggests current policies will fail at this task.

… However, so far, there is little political will to take these necessary measures. Europe’s economy remains, therefore, in a dangerous state.

Boone and Johnson recommend very conservative policy changes.   Large cuts in wages,  Large cuts in public sector spending.  Changes tax policy to help the rich and businesses.  To be forced through by severe pressure from the nations of northern Europe and the institutions they control (eg, IMF and ECB).  Bismarck would consider these too far right-wing.

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Looking ahead to see the new shape of Europe

Summary:  The slow fire in Europe slowly moves to a conclusion.  From America we cannot foresee what will happen because the news media paints it as a morality play, obscuring the dynamics at work.  While we cannot predict which path the peoples of Europe will choose, we can at least understand the causes of the crisis (it’s not a morality play) and the two alternatives.  See the comments for updates.

European elites still hope the current crisis drives Europe to unification.  The slow-building deterioration since August might result from a conscious decision, allowing events to spiral down, so that the eventual crisis (coming soon) provides the political conditions for bold policy action.  Unification amidst mass panic.

Prime Minister Merkel tours Europe advocating unification, requiring large changes to the treaties defining the Union.  It’s easy to see why German’s elites support unification.  Germany used the European Monetary Union to impose interest rates optimal for Germany — with terrible effects on Europe’s periphery.

  • Germany got strong growth and low inflation — at the cost of large loans to the periphery.
  • The periphery enjoyed strong consumption facilitated by low interest rates — at the cost of large debts to the core EU nations.

That regime crashed, forcing either fragmentation or unification.  Unification looks easier for the periphery, with fewer uncertainties compared to the leap into the darkness outside the EU.  Plus Germany and France (desperate to save its banks) exert fierce pressure.  The combination of bullying and fear might produce some form of unification.

The next step:  a fiscal union

The news media acts as a mouthpiece for the financial industry, so we hear little but the wonderfullness of unification.  Understandably so, since the banks see unification as another bailout of their potentially lethal loans to the periphery.  Sometimes they explain the perspective of anti-unification German, and of the “technocrats” in the periphery who do the bidding of Germany.

The banks want immediate monetization by the EMU of sovereign debts.  That’s not going to happen.  A limited monetary union before political union was a bold gamble (now failed).   A full central bank — able to directly finance national spending — without central fiscal control would be deranged.

The next step towards unification means central control (in effect, German control) of individual nations’ fiscal affairs.  Since Germany used the EMU to rape the periphery (albeit with their ignorant consent), they should expect Germany to do it to them again in a fiscal union.  As the AA teaches, insanity is repeating ones actions but expecting a different outcome.

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Will Italy stay in the Euro-zone?

Summary:  The strong often believe that the weak have no choice but to stay in the game (however rigged) and accept whatever cards they’re dealt.  While logical, the weak often have the ability to turn the tables.  So it is with creditor nations, who often confuse the power of loans with that of tanks — and confuse the morality of the Beatitudes with the claims of a promissory note.

Trouble rather the Tiger in his Lair than the sage among his books. For to you Kingdoms and their armies are things mighty and enduring, but to him they are but the things of the Moment, to be overturned with the turning of a page.
— Ancient wisdom, source unknown — it applies even more to loans than armies

Creditors often assume that they have both worldly power and moral superiority over their debtors.  Only God can judge the latter, but history suggests that the former is wrong.  Nations that accumulate large debts are locked in a system of trade imbalances which make them as or more vulnerable than their debtors.

  • The US was a large creditor in 1929, and fell harder than most during the Great Depression.
  • Japan was the world’s top creditor in 1989, and still has not recovered from the following bust.

Now it’s Germany’s turn.  They prospered from exports to the PIIGS which it financed with loans.  Now they expect the PIIGS to suffer depressions in order to repay the loans, threatening expulsion from the euro-zone to any who default.  The consequences of that are unknowable, but certainly traumatic.

But fear of the unknown might not deter one or more of the PIIGS, as default and devaluation may provide a new start — and be the best path to the future.  Here we look at Italy.  We cannot predict what they will do; we cannot see beyond choices the people of Italy have not yet made.


  1. Italy is bust
  2. A more detailed analysis, same conclusion
  3. Barclay’s runs the numbers, gets the same answer
  4. Roubini asks if Italy wants to stay with the Euro?
  5. For more information

(1)  Italy is bust

Italy  is bust; it’s just a question of when“, Matthew Lynn, MarketWatch, 8  November 2011 — “Italy has a lot of debt and a lifeless economy … and faces three big problems.”

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Europe begins its endgame. Watch and learn, for Europe’s problems are the world’s.

Summary:  The endgame for Europe (in its current form) probably has started.  Like birth, nobody what comes next.  Will the process be easy or difficult?  Fast or slow?  Produce an angel or monster?  Here we make some guesses.  Pay attention, as Europe’s travails mirror those to come for the world.


  1. The present:  rising stress
  2. What comes next?
  3. The lesson Europe offers to the world
  4. For more information

(1)  The present:  rising stress

In a troubled marriage the first mention of divorce can spark its dissolution, as the partners protect themselves by grabbing assets and consulting attorneys.  Something similar afflicts the Eurozone.  The G-20 conference was advertised as the last chance to save the Eurozone.  After it passed with no strong action, Greece’s PM proposed a referendum — in response to which Germany’s PM threatened to eject Greece from the EMU.

Now they have taken the next step, making contingency plans.  “French and Germans explore idea of smaller euro zone” (Reuters).  “Merkel’s Party May Adopt Euro-Exit Clause in Platform, CDU’s Barthle Says” (Bloomberg).  Italian bond yields have spiked up in response to the increased risk of default.  Next will come capital flight from the PIIGS to safer lands.  Such things will destabilize Europe.  If continued the current structure will collapse, forcing either unification or fragmentation.  Most experts bet on the latter, although anything is possible.

(2)  What comes next?

The news media describe the European crisis — like they do almost everything — as a morality tale.  Strong northern Europeans sell their fine manufactured goods to their swarthy southern neighbors (loaning them the money to do so).  We consume these tales like children.  In fact all these nations did well until they joined the EMU.  Only after 2000 did the debt for goods trade develop, the inevitable result of a monetary regime designed for Germany wrecking the competitiveness of the southern members of the EMU.

The outcome might disappoint those in the audience hoping for a victory of goodies over baddies.  The likely fragmentation of Europe might mean devaluation and default by some of the PIIGS.  Freed of their excessive debt burdens and mad German-imposed austerity programs, competitiveness restored by their new (and devalued vs. the Euro) currencies, their economies might recover.  That assumes that they manage the process well, using the turmoil as an opportunity to make vital reforms.

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