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The Complicated Euro Crisis

This is probably the best headline on the collapsing Eurozone that I've yet to see, courtesy of the United Kingdom's The Telegraph: Euro armageddon is approaching, but it's too boring and complicated to explain.

Previously, it was relatively easy to explain: Greece is bankrupt and we don't know what to do about it. But then we bailed Greece out and it's still not over. Now it's something along the lines of: Greece is bankrupt, but then French and German banks own Greek debt, so they might be bankrupt too. Then Italy has lots of its own debt, which Germany would like it to pay off, just in case that markets start worrying that Italy is bankrupt too.

And that's before we even get into the the proposed solution (mostly it seems to be that Germany should throw money at everything, which the Germans understandably aren't too keen on). How big does the bailout fund need to be? Who pays for it? Who do we (well, the Germans) bail out: the Greeks, or the banks? Should the European Central Bank be allowed to buy government bonds? No one is sure of any of this. Not even the people whose job it is to understand it.

As Europe descends further into chaos, it appears more and more likely that the 27 sovereign states that make up the European Union are not going to be able to reach an adequate agreement to save the Eurozone from collapse (though the Greeks may have a plan!). German Chancellor Merkel, French President Sarkozy, British Prime Minister Cameron, and especially Italian Premier Berlusconi are increasingly unable to work with each other, and the German Chancellor went so far as to raise the specter of war in Europe should the Euro collapse (the warning was soon followed by the passage of a $1 trillion spending deal). It's all quite a mess.
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Discussions - 10 Comments

It seems to me that after a half-century of European idealism that human nature, war, and nationalism have been conquered, the debt crisis is in fact stirring up tensions between nations that had sought supra-national forms economically, politically, culturally, and militarily. They are contronting a situation in which national interest is pitted against the European-wide interest. I wouldn't be surprised if a war could in fact result from this or similiar crises in the future. It's interesting to see Europeans begin to understand human nature and international relations amidst these gut-wrenching crises.

International finance mostly eludes me. Still, I would have thought that the simpler explanation is that Europe, or some of Europe, made a mistake in adopting a common currency without creating a common central bank. It created opportunity without enough discipline, the politically harder thing to agree to. Is that right?

Steve:

http://www.ecb.int/home/html/index.en.html

The adoption of the euro postponed the crisis for these governments and part of adoption of a common currency was to enable Germany, France and other European nations who had the "knack" of prosperity and financial stability to balance the others, who were clearly headed for a fall.

Kate - Calling a dog’s tail a leg, doesn’t make it a leg.

Steve, that seems inarguable. How does it relate?

Does your bank have all the tools of a real central bank? If not, it is the name but not the thing.

It's not my bank. It is the European Central Bank of the European Union and it controls the euro. How much power do you think it should have? Its statute is one of the documents attached to the website, which is why I thought you would find it useful.

I think it's a leg.

We need more knowledge here than I have, which is why I am so tentative. "Controlling" the euro means what? The agreed-to ratios regarding debt mean what? Why do member states have to step in at this stage, to cover losses and stick it to the exposed banks? One can sympathize with the Germans, left holding the bag for more profligate states. I know you are suspicious of expertise, but we need some on these matters. Anybody out there?

I am sorry. You ask a bunch of questions and you just get me. I am not suspicious about expertise about everything, which might be why I am guilty of reading the Wall Street Journal so faithfully. Often, if you read different sections you get different points of view: experts do not always agree. I like that about the paper. I especially liked this editorial:

http://online.wsj.com/article/SB10001424052970203687504577001671498250002.html?mod=WSJ_Opinion_AboveLEFTTop

As ROB notes above, all of this is confusing and is probably intentionally so. "Agreed to ratios of debt" means that everyone accepts that Greece (and others) are going to spend profligately and that a debt of 120% of GDP comes to look good in the circumstances. Oh, well, they, the other European nations, all shrug and cut their losses, which is called, amusingly, a haircut.

Controlling the euro, according to the ECB website means "The primary objective of the ECB’s monetary policy is to maintain price stability. The ECB aims at inflation rates of below, but close to, 2% over the medium term." That website, noted in the comment above, has a nice section on the bank's monetary policy instruments, but reading it may be a waste of time since those do not seem to be working very well.

Back to the WSJ; the guys in the Marketing section are likewise skeptical of EU monetary policy and say of the current situation:

"Take the idea—central to a solution of Greece's woes—that the country will undergo a "controlled default" in which banks and other debt holders would "voluntarily" agree to shoulder a 50% reduction in the value of their securities.

That is financial engineering at its most Machiavellian. The deal is designed to avoid triggering the payment of credit-default swaps on Greek debt, the much-maligned securities meant to insure against precisely this kind of scenario.

The structure is not much different from the accounting contortions used by banks during the 2008 crisis to avoid bearing the brunt of mortgage-related losses."

Remember how that saved the US economy? No?

The European Union is trying not fall apart. They are trying to avoid revolutions through collapsing economies and they are all trying to survive a little while longer, hoping something happens that does not require drastic change. (Rather like here) Any currency is based on faith, and as the dollar is backed by the "full faith and credit of the United States' government", in the same way the euro is backed by that European Central Bank and we are all having trouble taking that seriously right now. Germany and France, et al, are trying to puff a little faith and credit into that system.

Better to hurt banks than nations?

"Anybody out there?" You really should read farther afield than NLT for information, and don't watch TV, which comes to seem like a confusion factory -- also perhaps intentionally but it may simply be the cacaphony required to fill the time.

"One can sympathize with the Germans, left holding the bag for more profligate states."

I am not even sure about this.

I do agree that there is a huge distinction to be made between a bank and a central bank.

It is possible that the Germans are benefiting from the best currency arrangement in world history to this point.

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