"Consider a small open economy with fixed exchange rates. Suppose the central bank announces that it will devalue the currency by 50% one year from today. What are the consequences of this announcement?"
IIRC, the whole point of the Euro was that questions like that wouldn't make any sense, and so would never need to be asked again, and so we wouldn't have to face the ugly answers. It hasn't worked out that way. That same question is back on the exam paper, only in a more ambiguous form.
Nobody knows exactly which assets are denominated in domestic currency units and which assets are denominated in foreign currency units. Maybe bank deposits will be devalued, but bank notes won't. Some debts will be devalued, but other debts won't. Nobody knows exactly how much foreign exchange reserves the central bank has, or can borrow from foreign central banks. The students are raising their hands, asking the professor to clarify the exam question. But the professor doesn't know either, because he didn't write this question.
But there's no choice on the exam paper, so the students just have to do the best they can with what they've got.
The students know roughly what must happen.
People will want to sell domestic currency assets to buy foreign currency assets. The BP curve will shift up, raising domestic nominal interest rates. The central bank will lose foreign exchange reserves, and will seek to borrow reserves from other central banks (Target2). If the central bank runs out of reserves and cannot borrow enough from other central banks, it will be forced to devalue immediately, rather than a year from today. The increased interest rates would cause a recession, which would cause a movement along the Short Run Phillips Curve and reduce the inflation rate. But at the same time the Short Run Phillips Curve might shift up, if firms increase prices in anticipation of the inflationary consequences of the future devaluation. The real exchange rate might even rise, temporarily, thus worsening the recession.
This was precisely what the Euro was supposed to avoid, by making it impossible to imagine a future devaluation. Currency boards were supposed to avoid that too, by making it impossible for the central bank to run out of reserves. Argentina showed that didn't work, because you still need a lender of last resort for the commercial banks; plus high enough real interest rates and a big enough recession will force the central bank to devalue today even if it still has enough reserves.
The same question is back on the exam paper. Currency boards don't work to keep it off. Common currencies don't work to keep it off.
[This post is an attempt to get my economics brain back up to speed after a fortnight in England doing other things. The Euro crisis is the only thing that really matters now. Peter Boone and Simon Johnson are very pessimistic. So am I.]
Worthwhile Canadian Initiative 
What will be denominated in what is indeed the question, and one which ought to ba answered clearly:
The Greek government can start to use it’s own currency but cannot default on the debts in has made in euros and neither can anyone else.
If Greece just has a money supply problem, the national currency will start to circulate and the euros will stay in the banks where they need to stay.
It’s not like this situation hasn’t been practices before (the wildcat banks of yore).
Thanks for pointing me to Peter and Simon’s post. Johnson actually makes the talk by Buiter I heard ten days ago look optimistic (and everyone was stunned by how black his vision was.) It’s also worth noting that Johnson is a former Chief Economist of the IMF — he knows a thing a two about currency crises, financial panics, and their macroeconomic impacts.
Jon:
“The Greek government can start to use it’s own currency but cannot default on the debts in has made in euros and neither can anyone else.”
ROTFL!
Really? Just what can anyone do to collect from a sovereign state that refuses to pay? Call the police? Arrest them?
Funny, I thought Greece had just finished “negotiating” a >50% reduction in the debt they owe private creditors. That qualified as a default. Are you saying it did not happen?
Simon, I’m talking about what the greek government would agree to do in exchange for EU assuming supervisory and deposit insurance roles for the Greek banks because the Greek banks hold so much of the debt in question, any backstop of the Greek banks in the fashion I described has to be made contingent on this point.
Simon: I read the Boone and Johnson piece 3 times. Remembering who they are, and that they aren’t hysterical types, AFAIK. I have read the odd anecdotal report about ordinary business breaking down too, even between solvent trading partners, because people just aren’t sure of what currency they will eventually pay or be paid in.
I’m not 100% sure I would rule out the military option.
Where did you hear Buiter? Is there an online version?
Nick,
I think it should be assumed that all Greek laws and all contracts subject to Greek jurisdiction would be redenominated in Drachma. Foreign jurisdiction contracts would be unchanged, and (obviously) subject to the rules of those jurisdiction including bankruptcy law, etc. What interests me most is the jurisdiction of ELA funding (presumably Greece), but more relevantly the MLF and LTRO: are these governed by a supranational jurisdiction?
As to the source of the Panzers in Athens rumour, it’s not very credible. E.g. the opening paragraph contains the following piece of grade A hysteria: “Berlin has failed in its efforts to force Athens into subordination by threatening to withdraw the Euro…”
Seriously…
K: then there are the Target2 balances, which are technically liabilities between the ECB and the national banks. I don’t know how those will come out, in practice. This is what I said in my February 24 post: “All the Agreement does is make it harder for Greece to abandon the Euro and redenominate its debt into Drachmas (because the new bonds will be governed by English law not Greek law). So the eventual default, when it comes, will be even messier than it would be otherwise.” I don’t have much to add to that.
Yep, that website didn’t seem highly credible. But suppose (say) Greece did really come apart at the seams, and became a failed state, because the cops and soldiers weren’t being paid. Is it impossible that other EU states, or NATO, mightn’t send “peacekeepers”?
Jon suggests that the wildcat banking era might be a good analogy. I don’t know. But I think it will be a lot more complex than the 1930’s. Late 1945 Europe might be a closer analogy (minus the physical destruction).
God this is depressing.
Nick,
Isn’t Target2 effected through the MLF+LTRO once direct interbank lending fails?
“Is it impossible that other EU states, or NATO, mightn’t send “peacekeepers”?”
I think it is. But they wont be Panzers, and they wont be enforcing the fiscal compact. I assume they’ll be blue berets. I really don’t think there will be any attempts to squeeze blood from the stone.
“God this is depressing.”
I feel like when the twin towers collapsed. I can’t quite believe this is happening.
I really don’t get the hysteria. Soldiers will not get paid? Why?
Ritwik: because the government is broke and the banks are broke. The cheques bounce. Something close to this is already happening in Greece. Greeks are supposed to get free (or is it heavily subsidised?) prescription drugs. But the government hasn’t been paying the pharmacies. So the pharmacists insist on Greeks paying cash up front, and tell them to seek reimbursement from the government. The government has also raided the university (and hospital?) bank accounts, IIRC. It get’s into a vicious spiral too, because more Greeks are delaying paying taxes and other bills, hoping that if they postpone long enough they can pay in New Drachmas rather than Euros. Gresham’s Law in anticipation. The expectation of bad money drives good money out of circulation.
You were in England? Aw, I would have bought you a pint if you let me know you were passing through London. Hope you had good time.
Next time you visit, I won’t be able to buy you a pint, because we are all screwed.
CIA World Factbook states that there is hydropower potential in Greece. It also states we will balance our budget in 2015…what kind of coup did CPC engineer?
Greece is an oil importer. If they can lower their trade deficit, or even get a surplus, that should help stem the slow bleeding towards hyperinflation. Greece also has high military expenditures. They could sell their 1/2 of Cyprus. It is a teeny Empire protectorate they really can’t afford now. Solar thermal power, at least with Euro purchasing power, would also lower oil imports. It would be nice if they could maintain purchasing power while constructing things that lower oil imports.
My God, Boone and Johnson is depressing. I don’t know whether I ought to dismiss them as hysterical or expand the garden and stock-up on ammo.
Last time I checked Cyprus was a sovereign state and Cypriots have a low opinion of Greeks. Hydropower in Greece. Ok, what rivers are going to be dammed? The place is semi-arid and it doesn’t have many.
Speaking of soldiers, the Greek Army is made up of conscripts, I don’t believe the pay is particularly good. These soldiers will be civilians in 18 months anyway so a coup like that isn’t such a good thing.
Turkey does coups like that, though, but they seem to have broken the habit.
“SPIEGEL ONLINE: Mr. Ritschl, Germany is coming across like a know-it-all in the debate over aid for Greece. Berlin is intransigent and is demanding obedience from Athens. Is this attitude justified?
Ritschl: No, there is no basis for it.
SPIEGEL ONLINE: Most Germans would likely disagree.
Ritschl: That may be, but during the 20th century, Germany was responsible for what were the biggest national bankruptcies in recent history. It is only thanks to the United States, which sacrificed vast amounts of money after both World War I and World War II, that Germany is financially stable today and holds the status of Europe’s headmaster. That fact, unfortunately, often seems to be forgotten.”
http://www.spiegel.de/international/germany/economic-historian-germany-was-biggest-debt-transgressor-of-20th-century-a-769703.html
Nick: Normally, I recognise the inter-temporal budget constraint, but the government cannot literally be broke. Payments will be prioritized, pharmacies may see their bills delayed, but to reason from there to a coup? What happened with Argentina? Why’re western democratic systems perceived to be so fragile? Public servants, including armed forces and doctors, get delayed payments in developing nations all the time. Life goes on.
My hypothesis is that following a Greek exit, forced or otherwise, you’ll see some crappy policies being enacted and low/negative growth for a while. Lots of sovereign debt restructuring, of course. But that’s that. Greece still remains as beautiful as it was. Feta cheese tastes just as good. And the merchant navy hasn’t lost its capability overnight.
If anything resembling a military takeover of large scale violence does start, we would seriously have to re-look at the fragility of all/most developed democracies. Not just Greece.
Today Germany does not need a Prussian militarism with von Manstein types, field marshalls who can get away with starving lessers, sending their harvests back to the fatherlandt.
That the likes of von Manstein were not hanged and Germany was allowed to reunite are grave errors.
And then there’s Spain.
A link from the estimable Felix Salmon:
http://blogs.the-american-interest.com/wrm/2012/05/26/new-spanish-finance-horrors-shock-the-world/
Ritwik,
If next month’s elections deliver a another deadlocked parliament, that may produce a constitutional crisis just as critical decisions need to be made. Couple that with huge economic pain, mass demonstrations and riots, it seems to me the conditions are there to provide necessary cover for a military coup.
Does that make me feel hysterical? A bit, yeah. I’m old enough (barely) to remember fascism in southern Europe, but I grew up with a strong sense that we were living through a permanent progression towards freedom and liberal democracy. The possibility that that was merely another temporary reprieve from the centuries old equilibrium of brutal dictatorships and imperialist wars does indeed fill me with dread and a deep feeling of loss.
Determinant, “hydro” is Greek for water.
I would describe the climate as Mediterranean. But yeah, turning arid is the main risk here. AGW will happen before the end of the lifetime of any dams built and all climate model point to drier S.Europe.
But this is balanced against future rises in oil price, future nuclear meltdown Europe events, and existing unemployment.
Cdn Oil Sands (tar) employs one person per $1M in annual revenue. Vestas (wind) does one per $400k. Manitoba Hydro is one per $160k. For utilities is very labour intensive. IDK about privatization. And this doesn’t measure new construction projects.
IDK what rivers. The NW has the most potential. I’ll guess: Akheron, Akheloos, Kremasta, Pinios, Aliakmon…my specialty regarding hydrology here is peaty N.Europe and Russia.
And Chretein tried to help Europe (like NDP trying to arrest cdn debt today with corporate tax increase) back when economic problems were easy (before debt). Italy called him a neocon. The mountainuous terrain is very good for hydro and protection from Roman conquerers. At 4%+ of GDP, military seems high and is not employment intensive. Education is and is one % below cdn spending.
Did you know hydro was a Greek word and that they co-invented hydropower?
…wow, changed my mind about Cyprus. They are incompetant is a sovereign nation. Germans should take them over. They can’t be a European economic ray of light post-explosion.
The sad part is how unnecessary this all is. Having to stop a football game because of a lightning storm or a serious injury is one thing, but having to stop because you ran out of numbers to put on the scoreboard is truly absurd.
Declan: wouldn’t it be stopping the game for lack of a ball?
Jon, no country inside the Euro zone can print their own “money” — so Greece has to exit to do so (and many claim that’s the best at this point).
On the other hand, they COULD print Bearer Bonds, at 0% interest, for one year, and pay off their obligations in such IOUs, especially if they accept such Bonds immediately at 100% face value in payment of taxes.
Such Drach-Bonds could be introduced immediately, and could allow Greece to stay in the eurozone longer, by paying its external debt costs in euros (i.e. from tourist taxes) while paying its local creditors in printed Drach-Bonds (or Drachons? dra-con). As long as companies are not forced to accept Drach-Bonds, tho allowed to (at a discount, perhaps), such bonds are not legal tender.
Of course, this doesn’t give Greek exporters the devaluation goose; but they don’t lose the euro yet, either.
Germany, too, could do this, and reduce the German gov’t borrowing from capital markets, pushing the capital towards funding more private businesses. If Germany did this first, they could more easily push for Greece to follow.
…devaluation or splitting off seems always a likely scenario. Goivernments will depreciate or print to avoid riots or malnutrition. MB hydro also maintains grid I assume, here is a pure dam estimate:
http://www.wuskwatim.ca/project.html
Is $276k in construction costs per job year created. The main benefit is reduced foreign oil imports, reduced deficit. Leave it to the grecians on the beaches to do that math.
Nick,
This may be the Buiter interview you were asking about.
http://www.bloomberg.com/video/80554502-europe-must-act-now-to-avoid-a-default-buiter-says.html
Peter N – great link. Time to stock up on canned goods and small arms.
Actually, the really terrifying specter Simon raises isn’t just economic collapse, but the possibility of the political collapse of countries like Spain where there are sharp (and within recent memory, violent) regional tensions. Faced with the prospect of both an insolvent federal government, and bailing out insolvent regional governments, you wonder if the wealthier regions of spain start wondering about hiking out on their own. Or, as Simon suggests, maybe the poorer regions decide they’re getting a raw deal, and strike off on their own.
And is Spain unique in that regard? Belgium’s ethnic divisions are held together with sticky tape (how many months did it take Belgium to find a government?). There are long running regional tensions in Italy between the wealthier north and poorer south. Even France, the ultimate example of the modern unitary state, has had its issues (albeit relatively minor) with Basque and Corsican nationalists over the years.
The political collapse of those countries would be bad enough, but the collapse of countries with sharp ethnic divides (Spain or Belgium) raises the scare of a much nastier kind of conflict. Sure, the Spanish or Belgians as decent, civilized people (for the most part) so we like to think that they wouldn’t start massacring one another. Then again, people used to say the same thing about the Yugoslavs. Right up until they started massacring one another.
Ritwik: “What happened with Argentina?”
Good question, and the answer depensd on the year you’re talking about? In 2001, democracy in Argentina survived an economic crisis. In 1930 (at a time when Argentina was one of the wealthiest countries on earth), it didn’t. Western democracy is seen as fragile because the history of a lot of western democracies – and Greece is a prime example – suggests that it is.
I don’t understand the precise nature of the ECB risks that Boone and Johnson are talking about. ECB capital requirements are, as I understand it, a price stability management tool. The bank is the issuer of the Euro, and so it cannot have a solvency problem in the Euro. The bank cannot go bust, although it could be forced to relax its current price stability targets or alter its stabilizing mechanisms.
This all looks to me like a lot of misplaced German phobias about their own history. Any suggestion at all of monetizing spending or integrating fiscal and monetary operations sounds to them like a recipe for a Weimar hyperinflation wildfire. Every sign of political ferment and aversion to neoliberalism is a sign of emergent fascism. They seem obsessed with disciplining the formerly fascist countries of the periphery to be good former fascists – like Germany!
Somehow, it is hard for me to believe that a continent languishing in unemployment and stagnation is going to launch into a riot of price increases as a response to a boost in money-financed demand. Won’t they just happily go to work and produce more. The only thing pushing the continent into the kind of insecurity and panic that could touch off currency collapse is the atmosphere of Merkelmaniacal rigorism and fear-mongering that is poisoning the economic life of that continent. She really has to be pushed politically out of the picture. Her party of moral fanatics are paralyzing and destroying the EZ.
Dan Kervick: it’s more complicated than that, as I’m sure genauer will be around shortly to tell you.
Germany’s entire society and economy down to the local Aldi’s grocery is designed around a certain attitude towards money. To the ordinary German worker/consumer, increasing inflation expectations looks like the wholesale breaking of a social contract, and they’re very suspicious (and with good reason) that they are going to be the beneficiaries of any compensation or upside.
That is why Merkel cannot move. Note I said “can’t.” If you can read Der Spiegel in German (particularly the comments section), you’ll find that the discussion is cast in entirely different terms, with completely different underlying expectations for the universe. Like an alien planet.
The German worker was a good little boy/girl, and sacrificed the possibility of future consumption to subsidize production and export. For this, the German worker expects to reap a big reward, much bigger than what has hitherto been reaped, in the face of rising Krankenkasse costs, etc. Now you are telling them that the savings that they made, subsidizing exports, are going to be inflated away. And they are wondering, what happened to the margins?
The idea that Hollande got elected on a platform of lowering the retirement age in neighbouring France is viewed as a deep betrayal, with incredulity on German TV.
Assuming Mandos’ story is accurate … wow. Just wow. Is there really no realization among Germans that their primary export during the naughties was hyper-bubbles to the GIPSIs? Anyway, who do they think was buying all that stuff they were exporting? Martians? No. It was Spanish construction companies.
History would suggest that this won’t end well.
“Somehow, it is hard for me to believe that a continent languishing in unemployment and stagnation is going to launch into a riot of price increases as a response to a boost in money-financed demand. Won’t they just happily go to work and produce more.”
In fairness, the Germans are probably worried about the impact of loose monetary policy on Germany, not the Euro-zone generally. And that’s a fair concern (at least from a German perspective). That’s the flip side (so to speak) of the Euro. The fact that a monetary policy that’s just right for Germany is too tight for the periphery also implies that, absent structural change, a monetary policy that’s just right for the periphery will be too loose for Germany. The continent might not launch into a riot of price increases, but Germany probably would (which, I suppose, Germany’s critics would say is exactly the point – you can resolve the structural imbalance in the EU by either driving down costs in the periphery – through austerity and structural reform – or driving up costs in Germany through inflation).
I also have some sympathy for the (admitedly, self-rightious) view that a large part of the problem is that the governments of the periphery countries haven’t made an adult decision in decades (Higher pensions? Sure. Earlier retirement ages, why not? Shorter working weeks, bien sure! Cheaper tuition? We’re not Americans, of course. Paying for it? That’s what bonds are for). That doesn’t make the German position right, but its understandable.
That being said, faced with the prospect of mass European banking failure, the break-up of the Euro zone, and basically the end of the post-WWII european project, a bout or two of rampant inflation doesn’t strike me as the end of the world. And while self-righteousness is fun and all, as a general proposition, if your neighbour’s house is on fire, it isn’t particularly clever idea to tell him that he should have installed sprinklers like you did.
Like an alien planet.
Right, Mandos. But what you are telling me is that the Germans are extremely insular, and don’t seem to have any conception of living in any kind of “union” at all.
Despite all of these savings, aren’t the Germans in fact quite rich? Did the riches come only from domestic sales? No.
Wolfgang Münchau writes a column/blog for Der Spiegel, in German, where he basically channels Paul Krugman and Martin Wolf, for the most part.
Now, Germany is not like the USA, and there is a balance of “traditionally” left- and right-wing voices in the Der Spiegel comments section…typically united in contemptuous rage at Münchau’s treasonous voice. The left views this (and I sympathize, obviously), as an opprobrious bailout of bankers who should have long since been jailed, at the expense of the German worker who pays both on the upside and the downside.
The right views this as “lazy Greeks” and demands a return to sound money. ‘Nuff said.
And yes, there is a chorus of voices who believe that everyone can produce to prosperity. That’s what producing is, duh.
The German worker was a good little boy/girl, and sacrificed the possibility of future consumption to subsidize production and export. For this, the German worker expects to reap a big reward, much bigger than what has hitherto been reaped, in the face of rising Krankenkasse costs, etc. Now you are telling them that the savings that they made, subsidizing exports, are going to be inflated away. And they are wondering, what happened to the margins?
Wow. Way to not face reality by defining it away (Germans I mean, not you Mandos). I was a good little boy, studied hard, tried to get the right summer jobs, and it didn’t get me anywhere. Trying to get a job in Canada’s depressed economy is like trying to push spaghetti uphill.
Two can play righteous indignation about inter-war policy. In Canada and the United States, we learned we didn’t have enough inflation. And then when we finally set our minds to producing c. 1939-1940, we snapped out of that depression. And then when we demobilized, we shifted that production to consumer goods. Keynesian economics had a lot of credibility by c. 1955.
Then there is the fact that the Weimar hyperinflation was political in origin over the occupation of the Ruhr. It was also over by 1923 and by 1928 Weimar Germany was doing well. The Depression was a different event altogether. That Guy did not appear or get power because of hyperinflation, that was ten years later.
Germany is an enormous country by population with a diverse selection of several mid-sized and very different metropoles (as opposed to France’s one giant Parisian metropolis). West Germany in particular has had a huge amount of immigration both from other EU countries and of course from Turkey, etc. When you get on the bus and hear a mix of black and white teenagers speak an incomprehensible local dialect, you’ll realize that Germans think they’re open enough, thank you very much, and no one can lecture them on insularity.
The problem is, across the EU—and not just the EU, this applies to almost all major forms of international economic integration—there is a crisis of democratic legitimacy. Germans did not ask to be made responsible for this crisis, as they see it. They’d have been happy with the DM. They were promised in the Maastricht treaty, that their way of doing things would be respected in it. The point of the treaty wasn’t the debt, it was the inflation.
Mandos,
I think you accurately capture the self-image of the rentier. But you neglect to capture the underlying psychology. While they imagine themselves as paragons of Lutheran boyscout virtue, they are actually just a bunch of whiny socialist pussies. Real men (and women) don’t plan to spend their lives slavishly serving The Man and then live a comfortable retirement by virtue of a government provided inflation guarantee. Real men (and women) understand that consumption can ultimately only be deferred through ownership of real capital assets with real risks. And they don’t lend money to deadbeats at juicy rates and then cry to the government like a bunch of babies that their savings are supposed to be risk-free, when the deadbeats turn out, in fact, to be deadbeats.
Patrick, “GIPSIs”? What was wrong with PIIGS? (Plus, in this context, the use of the defined term GIPSIs almost certainly risks a human rights complaint of some sort).
Very likely. For once I agree with Bob Smith. Actually, maybe for twice? 4L of milk in Germany is 2$ cheaper than what it is in Canada, VAT and all. A nice package of smoked salmon can be had from your local Netto for 3 EUR—a steal, compared to the prices I’ve seen for it in North America. French restaurants are considerably more expensive than German ones.
So that 400 EUR minijob? Yes, very difficult to survive. But possible.
But, you see, it’s much easier to yell “Raus aus dem Euro!!!” and “Tsipras is not sticking his grubby fingers in MY pocket, no way.”
This is what they think you’re asking them: not just not to lecture the neighbour, but to invite him into your house while he is still playing with matches. There is a reasonable demand for democratic legitimacy. If a 100M German-speakers get to vote on how the Athens tax office is run, then a 100M southerners can vote themselves equalization payments. But the French won’t allow this tradeoff, so why should the Germans?
But again, I agree with you, the margin has been squandered, and all roads lead to inflation in Germany one way or another. Better to do it and hold the Euro together than not.
Willem Buiter – Can central banks go broke?
Click to access PolicyInsight24.pdf
Debt is not a time machine.
There’s no Santa Claus and there’s no Social Security Trust Fund.
The amount of money available at any point in the future will determine the prices at the time. Even if we saved money by burying it in the back yard, what the money would buy when we dug it would depend on how much money there was as a result of digging. Burying and digging up twice as much money would just increase prices accordingly.
A sovereign’s unfunded future transfer payment liabilities are unfunded because they’re unfundable.
Europe seems to be discovering this astonishing fact. Who knew?
@Nick Rowe,
please stop promoting racist hate mongering references like your “military option” link.
Beyond that:
Well, as a German, I find it often puzzling, what people somewhere else assume of us, our motives etc.
1. Maastricht treaty
no bail out, no money printing, these are not just some vague “promises”. It is the law. period.
Not subject to majority votes. Breaking the law, and stealing from your neighbours is just criminal.
2. Germany “insular”
The extreme opposite is the case. There is no country on earth, which has more neighbours, somebody counted 11, I reach 10, compare that to Canada, or the US. Germany sits right smack in the center of it all. Our trade / GDP is much higher than most other (larger) countries.
3. popular Germany
The recent Pew poll (Germany 1st by a large margin) and BBC popularity (first time only 2nd, with Japan 1st this year with some deserved Fukushima sympathy) are extremely good for Germany. Apparently all the constant hate mongering of certain Anglos, Greeks, and lefties did not make a dent. This is quite some social capital to spend, hitting some folks sheen bones : – )
Most people in the world honour LONG TERM reliable, honest, effective, trustworthy (ten year rates are now MINUS 1.0 percent after tax and inflation) and helpful neighbour, who uphold the law.
4. Germany is different
We were the first to have universal health care, retirement plans (since 1885), which also explains, why only 43 % think they need to own their home. We (nearly) dont have any of those skyscraper wastelands, the social geography is not centered around 1 capitol, incomes do not increase with city size, many cities above the size of 50k are blooming, with an emphasis on “walking distance”
The Maasstricht treaty enshrines the time honored Bundesbank principles:
– total independence (“neither praise nor critizise”)
– inflation targeting only
all those silly things like phillips curve, BP curve, keynes are for non-german wimps only. If people dont like the treaty, they signed, they should make proposals, how they want out.
Our German Ordnungspolitik works, like swiss clocks and german cars, reliable, robust, simple, long term, as in the Nordic states, and very socially. Others can do for themselves whatever they want, but they are NOT allowed to screw up us here.
Mandos made that point as well, cheap prices from intense competition, in short distance, when you look at quality of live, I challenge everybody, where this should be better. Takers ?
“but to invite him into your house while he is still playing with matches.
Hey, shocking day, I don’t disagree with you (truly a sign of the apocalypse). And your point about democratic legitimacy highlights the fundamental structural problem with the EU. Whatever the formal powers of the EU (and they aren’t much to begin with), only national governments that have the democratic legitimacy to have real power to address their problems. Or not.
Moreover, the Europeans lack a shared idendity to smooth over hard-feelings between their nation states. While the prospect of bailing out the governments of, say, Quebec or Michigan, would no doubt be a source of tension within the Canadian or American federations, at least there’s a sense of shared citizenship/identity to smooth over the hard feelings on both sides – Quebecers may be Quebecuers, but they’re also Canadians (I realize that Quebecers don’t always see it that way, but they generally come around when the question of federal money arises). Does anyone in Europe identify themselves as a “European”?
“Better to do it and hold the Euro together than not.”
That’s probably right, but even as I say it, I can see the other side. It would be one thing if they thought that a one-off burst of inflation (or fiscal transfers) might be enough to smooth the implementation of structural changes in the PIIGS countries (and elsewhere in the EU, ahem, France). Doing something you don’t want to do is pallatable if you only have to do it once, and you think that there’s an upside. On the other hand, if you think that the PIIGS aren’t likely to resolve their structural issues in real terms (through increased productivity and/or lower incomes) then the Germans are faced with the prospect of either an eternity of fiscal transfers to the PIIGS or a monetary policy set to the priorities of the weakest members of the Euro zone.
I can see the Germans (and others) taking the view that that’s not what they signed on for. And your mention of Hollande and Tsipras nails the issue right on the head – French and Greek voters are telling the Germans that they aren’t all that interested in structural change, or at least the Germans could be forgiven for reading the message that way (that interpretation may be wrong – politicans will say anything to get elected, and there’s always the possiblity of Hollande or Tsipras doing the Nixon to China thing). Maybe the Germans figure it’s better to make the PIIGS make their call now. Either they reform, or they don’t. If they don’t, the German eat the cost of breaking up the Euro zone now (and impose de facto structural change through devaluations of the new PIIGS currencies) rather than drag this sick puppy of a currency zone along for another decade in the hope that the PIIGS will eventually get their act together, with no guarantee that, in a decade, the Germans won’t be faced with the exact same decision and the exact same costs/risks.
That option isn’t great, but I suppose from a German perspective, at least it’s not dependent on the dubious promises of Greek (and other) governments who, heretofore, haven’t shown themselves to be either particularly competent or particularly good at keeping their promises.
Well, the point is that this exists now at the expense of others, not that it isn’t very good, and that a balanced Eurozone and the Maastricht treaty were an impossible contradiction. Krugman recently quoted someone else as calling it a postmodern novel in full treaty form.
And he’s right. ie, if Maastricht was the condition, then the Eurozone should never have been created, because it can never work that way. Every currency union is a transfer union. French politicians intended that Maastricht would eventually become a dead letter, because the Euro was intended to force integration.
But this is not a good thing. The confidence in Germany has been borrowed from its neighbours. Or is beggaring its neighbours.
It’s possible to be too productive.
Declan and Patrick,
“The sad part is how unnecessary this all is. Having to stop a football game because of a lightning storm or a serious injury is one thing, but having to stop because you ran out of numbers to put on the scoreboard is truly absurd.”
“wouldn’t it be stopping the game for lack of a ball?”
That’s a really easy way to explain the difference between money’s function as the unit of account and as the medium of exchange. I’ll have to remember it.
The Greek crisis proves that, regardless of whether or not economics has advanced since the early 1930s, economic institutions have regressed. The Gold Standard had its flaws, but there wasn’t a huge logistical puzzle of “How do we get off the Gold Standard?” It was staying on it which was a challenge at times. In contrast, the Greek crisis is mind-numbingly complex when one starts to factor in the institutional problems and the vague externalities involved.
If you can judge macroeconomics by the institutions created by politicians, then it has largely moved backwards since the 1920s neo-classical period. I like to think that Irving Fisher, for all his eccentric and quixotic causes, would have never had any time for the Euro. While politics was a factor in it, the neglect of the importance of monetary disequilibrium that emerged in macroeconomics a few decades ago helped legitimise the bad politics.
Monetary economics seems to be cyclical: money goes from not mattering to mattering to not mattering etc. When macroeconomists think that money isn’t important and start thinking that credit or the “real economy” or whatever are what is important, then we seem to get some very bad policies from politicians. Unfortunately, we’re at the tail end of a cyclical downturn in macroeconomics, just like the early 1930s (with the Austrian School, the Real Bills Doctrine, Fabian Socialism and Marxism all doing well) so we’re going to see some 1930s style bad policies, like the apparent “Status quo till I (we) die)” policies of the EU.
Our German Ordnungspolitik works, like swiss clocks and german cars, reliable, robust, simple, long term, as in the Nordic states, and very socially. Others can do for themselves whatever they want, but they are NOT allowed to screw up us here.
You might want to reconsider your comparison to the Nordic states. Sweden, Norway and Denmark have refused to join the Euro, the Norwegian and Swedish Kronas still float freely. Second, Sweden pioneered deficit stimulus, starting in 1930. That’s why they exited the Depression in 1934. Unlike the Germans, they realized the parts that wouldn’t work and didn’t sign on to them. The Swedes do Keynes more than anyone.
retirement plans (since 1885)
Bismark’s over-70 plan which wasn’t supposed to be paid to many people since they were supposed to die first?
the maastricht treaty made it perfectly clear, that the ECB is not a fiscal or transfer union. To somehow assume, that some folks just spend, and the others have to pay, against written treaties, is simply hilarious. Better to get rid of such clowns.
There can be no union with fundamental criminals.
And it were those with the current account deficits, who lived at the expense of their neighbours, and have to learn now, that this will not go on forever.
Did I mention earlier my depressing visit to the European Parliament’s Strasbourg branch? No tour, no cafés, solitary art museum with very limited hours, arty architecture by half-hearted committee, and I had to “hold it” until I managed to get back to the shopping mall in downtown Strasbourg.
No, Europeans do not identify themselves as European. But, on the other hand, there’s a sense that something has to be made to work…
Mr. Tsipras is a more complicated figure than the media seems to allow, which is why he remains popular in Greece. The problem for the Greek citizen is that they also lose on the upside and on the downside. On the upside, the benefits are taken by the Greek elites. Then they are stuck with the bill via austerity. Tsipras is willing to admit that Greek society must change, but quite correctly, it can’t change when no investments are made at all.
So I for one hope he wins the next Greek election.