Eurozone Crisis

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They're trying to stave off catastrophe again.

I'm not an economist. I merely have a rudimentary understanding of its general principles. But this is how I see it...

Surely, the Euro can only work if the whole of Europe agrees to economic harmonisation? As things stand, different countries will have different levels of debt or other pressures which mean they need to adjust interest levels up or down, depending on what's sensible at the time. The halfway house we (they) have at the minute seems inherently flawed.

I can only see German taxpayers getting more and more annoyed at the prospect of bailing others out of the ****. Is it conceivable someone will leave the Euro or even that the whole thing might be scrapped? Or, looking at the other approach, might this increase the likelihood of ever-greater integration?

 

My Bachelors thesis was a comparison between Sweden and Finland and their respective currency choices (Sweden choosing to stay out and Finland joining) and the consequences of those choices. Interestingly enough this crisis blew in my face during the time I was writing it. In any case the EMU is very difficult to defend simply in economic terms and through economic theory. It's as much of a political project as it is an economic project.

The idea was that countries would adapt to the European Central Bank and its leadership over monetary policy. Greece is one thing, they should never have been taken into the Euro in the first place their economy is way too frail, but the clever politicians there decided to falsify the figures through fraud. If Greece was alone everything would be more or less okay.

If every EMU country bothered to actually care about the Maastricht criteria we would not be in this situation. Of course its easier said than done. The EU has a lot of legal problems in trying to enforce the Maastricht criteria. It's difficult to fathom what possible punishment from ignoring the criteria would be. Throwing a country out of the union is bound to cause economic turmoil. The Euro has been found as a strong currency with inflation control being the only criteria for its monetary policy. This suits quite well the countries which had tradition of a similar monetary policy and worse countries that were using monetary policy also to counter business cycles. Now their economic policy has been unable to counterbalance the loss of monetary policy and they basically overheated their economy and they suffer.

Typically during the era of fixed but adjustable exchange rates the common procedure was to devalue your currency and balance the economy that way (in the meanwhile making debt repayments easier). Because of the common currency such methods can no longer be used and we're stuck in a completely new crisis where no one seems to have the slightest of idea what to do.

Finally what would happen if Greece got kicked out of the Euro. The value of the Euro would collapse and Greece would return the greatly devalued Drachma. This would practically be a partial default on Greeces part (the nominal value of their debt is in Euros so changing that to the devalued Drachma equals default). The results would very likely be the largest financial meltdown we've seen so far with interest rates skyrocketting which would probably cause further defaults by Portugal, Ireland, Spain and Italy. The French and German banking sectors would crash and a massive international bailout of the banking system would be needed. Effectively killing all growth in the world economy and freezing the monetary markets for quite a while. It would be impossible to guess how long the recovery of such a total collapse would take.

In short breaking the Euro zone would be a disaster but then perhaps inevitable. I hope it would not be necessary but the situation is difficult and that is where we might end up. Now the costs of the banking sector are efficiently socialized to European tax payers in order to avoid the disaster. It's not a very sustainable solution and sooner or later the popular opinion is bound to seriously turn against it.

EDIT: I'm tired and wrote this rather quickly so if something makes absolutely no sense feel free to point it out and I'll try to clarify.

 

Are there any nations in Europe that are in good financial shape? I was under the impression that things were as bad over there as they are over here. Granted, I'm sure Germany, France, and Britain, for example are in a lot better shape than Ireland, Greece, Portugal, Italy and Spain, but is the economy doing well anywhere at the moment?

Ther problem with the Euro is that in order for it to work, all the member nations have to be willing to give up some degree of their autonomy, at least on economic matters. Nations, understandably, are reluctant to do so.

 

I think the emboldened bit is definitely true. The Euro has always been, from the outset, an economic means towards a political end. There is no truer example of this than Ireland. They would have been much better to accept the Pound Sterling, or even the US Dollar. Political will has driven the idea, not economics. It never made sense to apply uniform monetary policy to widely divurgent economics - to have, for instance, the same interest rates for Germany and Greece. This is obviously stupid - you need no more than a GCSE level understanding of economics to understand why - but the Eurozone was allowed to rapidly expand on that basis anyway. A triumph for doctrinnaire policy making over evidence-based and logical policy making. Of course it went **** up.

Britain is not a part of the Euro. Probably the only thing Gordon Brown and Ed Balls reserve credit for. Well played to them.


The real test of the Euro will be not be Greece (which accounts for approximately sod all of the Eurozone group), but when/if Spain or Italy end up a Greece-like situation.

 

Yeah, I know Britain isn't part of the Euro, but I imagine their economy is big enough to have an impact on Europe as a whole, and certainly, the state of the Euro has an impact on their economy. My more general question is here in the US, to economy is crap, and we still have unemployment around 9%. So are there any bright spots in Europe? I mean, it shouldn't always fall to France and Germany to fix other Euro nations.

That's the other thing I don't get with the Euro - you're taking nations with huge economies, like Germany, and combining them in one economic plan with nations with small economies, like Greece. How, is this suppsed to work - even in theory?

 

We're struggling too. We're on about 7.7% unemployment rate and 20% tax. We are tied tightly with a few I think, but I don't know much about it. I know we bailed out Irish banks with a truck load of cash a few months ago.

Exactly.

 

@BA

I think you condemn the Eurozone a bit harshly. Compared to the 90'ies the eurozone has brought Europe a stability on the currency markets which is quite important and also something Britain has gained from. Even without the common currency the debt problems of Italy would affect every damn country on the globe, not just the euro zone.

@Aldeth

The German economy has been growing surprisingly well and many countries are not in similar problems as Greece, Italy, Portugal, Spain and Ireland. Germany, Denmark, Finland, the Netherlands, Austria and many Eastern European countries have been surviving this quite OK, of course global concerns affect more or less everyone. France is OK at the moment but a bit on a worrisome road.

Also regarding the differences in sizes between the countries in the union. The size is not regarded as a very important factor by most economists. It can be taken into consideration but bigger emphasis is usually put in GDP per capita, similarity in rate of inflation, interest rates, business cycles and production diversity.

 

You see, that's the kind of stuff that doesn't get reported here. All we get in the US news is that France and Germany are paying for most of it - which is probably true considering they have a larger GDP than most of the other Euro nations - but it leaves out the part that it is a proprotional payment.

 

Well, it is, but Germany and France are far bigger than most other EU members,and their economy is proportionately bigger. They will shoulder most of the cost, just not all of it. They also have the biggest political pull, so they tend to have the most to say - and the most media attention when they say it.

 

well, France are struggling to continue with their current contribution, it has been suggested that France may fight for a rebate from the EU just as Margaret Thatcher did when she famously told the EU "I want my money back" of Britain's £12.5B gross contribution it recieves a £3.5B rebate every year, and France is in a similar position, so I cant see anything getting better any time soon.

 

A lot of things have been suggested but France won't get a rebate. I doubt they'll even ask for one. Besides this thread is about the euro zone and not the European Union as a whole.

 

The new deal is agreed. It's a massive leap forward on the previous deals. The old ones were like a bank dealing with someone who can't pay his mortgage by giving him a credit card to stick the repayment on. The repayment terms meant the debt would grow at a faster rate than their capability to pay and it was always going to end badly. This deal is still optimistic in their ability to repay but is feasible. I don't see anything to address future problems in other countries though. Spain and Italy especially look to be in major trouble.

From a reports of IMF documents the UK seemed to be the only country (along with the IMF itself) which was trying to work out a long term solution rather than kicking the can down the road like the other European countries and the US. I suppose you find out who your friends are when you're in trouble. Though if one was cynical the UK has far more trade and investment in Ireland than anyone else so had far more to lose. I like to gloss over that though.

Yeah this seems very strange to us. Most central banks I'm familiar with would always have had a mandate to balance inflation and unemployment. A mandate to only consider inflation and not the wider effects seems more a cultural hang up than logical to me. After all, some of us are perfectly capable of putting up with a bit of inflation without turning into genocidal maniacs . Independent central banks were a great bulwark against opportunistic politicians but the new system means the ECB is often doing the opposite of what an individual country needs. In our case it's like having a nurse that was keeping an alcoholic away from the bottle being replaced by one plying him with whiskey.

 

Yes well the ECB has never been there for the individual needs of a country, that should have been cleared to everyone when the euro was created. In fact it can't be there for individual countries. The inflation goal is a good one in most cases. It creates
stability and predictability in monetary policy. The countries that haven't adapted have only themselves to blame, the ECB's policy has been the same for the entire existence of the Euro, they had plenty of time to adapt.

I maintain that the existance of the Euro is good for Europe and the currency markets. If we would not have the Euro we'd have the same currency speculation debacle as in the 90'ies with strongly fluctuating exchange rates. Individual countries may very well be better off with their own currency since they can then use the exchange rate and the monetary policy to their own ends. Practically the Euro binds the monetary policies of smaller countries within the EU to itself because of their dependency on European trade but exchange rate variations can help individual countries. Sweden for example benefited greatly from the depreciation of the Krona against the Euro during the recession which sped up their recovery.

 

Isn't a large part of the Greece's issue the fact that they are really rubbish at paying taxes? If they have the temerity to complain and blame the state for this mess, then that's just daft. Had they paid their taxes like all of us do things would have been less bleak. Now what is on offer? Germany and the rest of Eurozone should pay more taxes so that the Greeks don't have to? Surely that's taking the piss. I heard that the Greeks haven't paid their taxes for decades (maybe ever) and they are asking for the easy way out so that they can keep being corrupt for the forseeable future.

 

Emphasis mine.

Taluntain, I'm still a little unclear as to your opinion of Greece -- could you clarify your feelings for us?

 

Perhaps, it would be better to not believe whatever BS is published in the mainstream media. Is tax evasion a big problem here? Yes, it is. Does all the population evade taxes? No, the tax evaders are mainly free launchers (lawyers, doctors etc.) and corporations. The majority cannot evade taxes, even if they want to because the tax is withheld from their salary every month. Personal example: monthly salary 1369.49 euros, amount withheld 286.82 euros (and i don't counting what I pay in non-direct taxes as VAT, which is currently at 23% for the majority of the goods). So why are these people blame state for this mess? Because the state has been unable to catch the tax evaders and in order to cover the loss, it taxes more those that pay their taxes.

Are you sure about this? According to wikipedia the average salary in Slovenia is 1041 euros. You can see mine in the previous paragraph.

I don't know if the money will be paid back or not, what I know is this:
"Wir haben bisher 19 Millionen Euro an Zinsen von den Griechen lukriert und noch keinen einzigen Cent verloren" Maria Fekter, Austrian Federal Minister of Finance.
http://www.wienerzeitung.at/nachrichten/politik/oesterreich/45253_Familiensplitting-ist-retro.html

 

@BOC

That's what politicians everywhere in the countries loaning to Greece wish the emphasize to the voters. The economists sadly usually disagree with the assessment. The Greek economy is not growing, without growth it's hopeless to pay back their debt. Some sort of restructuring (read: default) will be necessary sooner or later. What we do now is buy time in order to figure out how to practically go about it with minimal damage.

 

Sorry BOC, I like you mate I didn't mean to piss you off. I wasn't thinking about our Greek resident when I wrote that.

I'm just happy we didn't adopt the Euro! Mr Brown saw the true motivation behind it and said 'Thanks, but no thanks'.