It is now down to Germany. Does it want to save the euro or not? If it does, it will have to underwrite the Irish along with the Italians, Spaniards and a few others besides, not to mention the Greeks.
If it doesn’t want to save the euro, it will have to deal with a rapidly rising new deutschemark, which will soar in value against every currency — not just in Europe but against every currency in the world. In fact, the blueprint for Germany is Switzerland, and last week the Swiss National Bank responded to the rising Swiss franc by capping its rapid appreciation because it is hurting Swiss industry. A post-euro Germany with the new deutschemark would be like the Swiss Franc on steroids. It would be like a massive Switzerland in the heart of Europe with a hugely overvalued currency.
The reason for this is that everyone would seek the “safety” of the new deutschemark as the new currencies or new blocs of new currencies fall in value, trying to find their new level. For the European economy to work properly, the rest of Europe would have to be much cheaper than Germany.
In the event of a euro collapse (which is no longer that unimaginable), strategically, Ireland would be in a better position than say Spain or Italy because our natural home would be with sterling — as it has always been. Yes, the new Irish punt would fall dramatically, as it should do. The basic rule of economics is that weak economies should have weak currencies and vice versa. However, with an implicit link to sterling, rather than an explicit exchange rate target, there will be a level against sterling where the market will buy punts again. Things will settle down — as they always do.
In Ireland, although there would be one new currency, there would in effect be two. There would be one currency for transactions — a new punt — and one for savings, the new deutschemark. In this post-euro world, people with savings will try to convert their punts into deutschemarks, as happened when the euro was introduced in 2000. Over time, as the new currency becomes more credible, savings will flock back to the punt because interest rates in punts will be much higher than those of the deutschemark.
Changing the currency that people “transact” in is nothing new. For example, there have been four different currencies circulating in this country during my lifetime. When I was a very young boy, we had pennies with big hens on them, the old pre-decimal currency. Then we had a new decimalised currency with totally different denominations and shapes and sizes. People adapted quickly, even though this was in a decade when inflation was raging. Then we changed currency again in 1979, breaking a monetary union with Britain, which was centuries old. (This new monetary union with Germany is only 11 years old).
We introduced a new currency with a new name — the punt — which no one had ever heard before. Official Ireland claimed that this would be a “strong” currency but in fact it devalued five times in its first 14 years! Then in 2000, we introduced the euro. So that’s a currency for every decade of my life! These things happen and have happened. In Europe, following the end of the Soviet Union, close to 20 new currencies were issued between 1990 and 1992! Changes are not without cost, but they happen. Currencies change, that’s the lesson of history.
There is no reason for the euro to be any more permanent that the others . . . or is there?
Of course there is. At the outset, the euro was seen as a political initiative that would force all the economies of Europe together. In the context of political integration, this wasn’t a bad idea, except that not all economies were suited to it and not all countries wanted it. Of the three countries that joined the EEC in 1973, Ireland, the UK and Denmark, only Ireland joined the euro. The other two opted to keep their currencies having done rigorous analysis of their trade and investment patterns. So too did Sweden.
Despite what you hear from “serial integrationists” now about the link between the euro and the EU, Britain, Sweden and Denmark all remain members of the EU. Are they any the less European for having their own currencies?
The main beneficiary of EMU was the dominant industrial nation in Europe: Germany. It could export all it liked to the rest of Europe with no exchange rate risk and, more importantly, no political ramifications. Germany got a free lunch, which was paid for with borrowed money by the rest of Europe. But who lent this money to the rest of Europe? Why Germany of course! So Germany was lending money to the poorer EU countries in order to give them the wherewithal to buy German goods, which had generated the German savings in the first place!
When these countries had difficulty paying back the German banks, what did the Germans do? They penalised them in the draconian terms of the EU “bailout”. Instead of acknowledging its own role at the centre of this European-wide Ponzi scheme, Germany initially played the role of major loan shark, borrowing at 2pc and lending to the distressed states at 6pc! This penal approach didn’t work because the balance sheets of the distressed countries were too weak to pay this money back and the crisis became more acute. The “patched up” solution of a few months ago is unraveling.
We are at the brink. The Germans have four choices: (1) take the losses their banks will suffer on the likes of Greece and Ireland, Spain and Italy on their own balance sheet; (2) force their own banks to take the hit for their reckless behaviour; (3) allow Greece to default — which would give “permission” to the rest of us to default; or (4) force the Greeks out of the euro which would lead to the unravelling of the currency.
Angela Merkel knows that the German public doesn’t want to pay for anyone, particularly the Greeks, who have been viciously caricatured in the German tabloids. She also knows the end of the euro would knock the shine off European integration, but then again she is not Helmut Kohl — a war survivor and driver of EU integration. Ms Merkel is an East German, fluent in Russian not French — a different kettle of fish altogether. She also knows that if she bails out Greece or anyone else with German money, she loses the next election. So what do we have? A stand-off as politicians have no idea what to do next.
As for Merkel and Germany, their role in this debacle is clear. They benefited from the boom and now, naturally, want to insulate themselves from the consequences. But they can’t have it both ways.
As Duc de Levis, a staunch enemy of Bonaparte, himself an earlier champion of European integration, said: “To govern is to choose.”
Your choice now, Angie.
savage …
The availability of unlimited credit on the international market for both profligate governments and profligate bankers, has brought us to where we are today. The Euro currency clearly allowed money to flow across borders,in the belief that we are all one, and the loans are underpinned by the governments of the responsible economies like Holland, Finland, Germany and France. The Euro should have had a stricter oversight regime, and implementation of the rules for budgets,and borrowing by both governments and banks.! European banks poured the fuel on the fire.i.e. the Ponzi style property racket encouraged by a Fianna Fail government… Read more »
Spiegel Online Poll Shows Majority of Germans for D-Mark A striking example of how a right idea coming at the right moment can make history, “surprisingly”, is the way Spiegel Online, one of Germany’s leading news websites, this afternoon takes up the call for a referendum on the euro and on the EU . Spiegel goes through numerous pros and cons, being on the pro-euro side, naturally, but concluding that there should be a referendum nevertheless, because, in the present crisis situation, where the “gulf between the people and their [elected] representatives” is widening, it would be more detrimental to… Read more »
Perhaps the Irish might like to try genuinely free floating its currency and concentrating on generating domestic demand and supply rather than trying to supply the rest of the world (whether with labour, goods or services).
Ireland constantly seems to want to export its real goods and services rather than holding onto that output for its own benefit.
Is it any wonder it ends up poor all the time with that approach?
I sincerely believe that the higher authorities in Europe, those who want a United States of Europe, wanted to be able to put pressure on the smaller states by loaning them too much money. With the collapse of the world financial markets, their plan went awry. They are afraid of pushing things too much in case the whole pack of cards collapses. But we need to be very careful about what we do next, as they will continue to try and get their U.S.of E.
Ubber Alles
http://www.thejournal.ie/germanys-eu-commissioner-wants-irish-flag-flown-at-half-mast-225071-Sep2011/
(didnt notice the new blog was up when I posted this reply on the previous one. So re-posting here) @ coldblow Much of what Lammert says is incomprehensible to me too. No I am not influenced by Kunstler. Don’t know his work in any depth. He seems to be mostly concerned with the crisis of the physical economy — which is the biospheric crisis; depletion of resources (peak oil etc) and environmental degradation. The crisis Lammert is talking about is the financial crisis. They are interconnected naturally but they are distinct. The biospheric crisis is a much bigger problem than… Read more »
Gunther is bloo*y right.!
If the electorate of the PIIGS continue to elect governments which continue to act irresponsibly,we need a Europewide referendum to give more powers of responsible fiscal management to a central authority which answers to no individual power.
I dont see anything wrong with what Germany did. They made quality goods that the rest of the world wanted. They sold them for a profit and used that profit to loan to the rest of the world to buy more goods,they reinvested their profits,whats wrong with that? Contracts were signed by all,Germany has not reneged on anything. It is not a Ponzi scheme,Germany did not get in and get out quick with the takings. If they dont get paid back then they will be the victims,but they will pull themselves together and get over it. They will work harder… Read more »
Lets be honest thanks to our own generations of so called leaders we never did really get to enjoy the free movement of goods and services as envisaged indeed promised. (And voted for) Almost everything was more expensive here – including Irish goods! Who invented VRT? It was clearly anti-European and represents more than anything else the utter contempt our own leaders have for us; (Why should the people enjoy cheaper goods when we can tax them the difference and protect the vested interests in return for their kind donations?) European funding allowed us to potentially become a first world… Read more »
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For a long time we blamed the English for our problems. And guess what, we brought them in to sort out an internal quarrel amongst ourselves. We were responsible for starting that debacle. Every time there was an independence movement of some sorts, it got betrayed by somebody who wanted to grovel to the regime, rather than move to more liberty and freedom. We spent money like fools, pi55ed it against walls the length and breadth of the land and “celebrated” something. (for the life of me, I am still not exactly sure what was being celebrated). We invented the… Read more »
Don’t agree with the headline. “Germany” didn’t profit during the boom. Until Schroeder brought in some reform in 2004/05, everyone was saying Germany had gotten it wrong, too much manufacturing etc. Wages hadn’t increased for a decade (compare that to Ireland!), and even after the reforms, wages have increased only little. It was Ireland, Britain etc who profited during the boom. Hardly any unemployment and substantial wage increases.
Germany continue to be exceptional in the production of many goods, however their individual fiscal prudence aggregates into an economy with a lagging domestic consumption, the oft cited paradox of thrift applies, Germany needs a deficit of demand to be plugged from elsewhere and with the same currency the Euro delivers that demand to a level not possible with a floating currency. Germany has a well recognized and established national arrogance and air of superiority that has become increasingly more amplified since their power in Europe has increased ( they have never been more influential in Europe as they are… Read more »
Great Article David, In conversations with some German friends recently, I was amazed how blissfully unaware they were that their savings were splashed around the globe in a Brewster’s Millions & Millions bonanza. Like us [some years ago] they listed off statistics… employment, exports data and a ream of other data that proves beyond double that Germany is financially secure and the economy is growing. When I asked them where did the money Germany has loaned come from? No one could answer! Like all great democracies the banks and government squandered / allowed the squandering of the Germans peoples money.… Read more »
The longer this whole banking fiasco continues the clearer the true picture emerges. German banks drowning PIIGS in debt to buy German products is just one of these picture puzzle pieces. So, banking elites orchestrated a housing bubble through which massive demand for domestic products to fill those houses kicked in and German Industry was on hand to provide alot of these products. German banking used German savings to market make massive demand for German products. An orchestrated plan by people in the know to make a killing. The plan had to have a property bubble, and banking interests who… Read more »
There was a good segment on the Greek situation on Newsnight just now. I encourage posters to seek it out.
All three guests expect imminent Greek default.
Newsnight’s excellent economics editor Paul Mason wrote this article today too which I am just about to read.
http://www.bbc.co.uk/news/world-europe-14915333
The title of the above article is extraordinary….. The commentary on Angela Merkel also. In view of the complexity and seriousness of the current state of affairs, the tone of the final sentence is inappropriate at this time, regardless of how one evaluates recent events.
It is important to stress the obvious that the Germany is a very valuable contributor to the EU not only monetarily, that German people make a very positive contribution and that I would like to see a fair and equitable resolution to the debt crisis with a strong economic opportunities for all to compete fairly. I do not want the tone of the article to infer any issue with German People but it is fair to say that the German establishment has imposed a supposed resolution to this crisis on Ireland that is neither equitable or sustainable.
All of the PIIGs should hold a national referendum giving their citizens a right to vote a ceding of sovereignty, such that the ECB has new powers to examine each and every nation suffering from corrupt/servile/incompetent governance, and decide how and where the financial pain be imposed, in order to bring order to each nation’s national debt.
Excellent Greek Economist on Vincent Browne tonight , you could have heard a pin drop while he was speaking.
Greek default imminent…He claims , and certaintly seems to know what he is talking about.
“The perfect storm may be only days away”
He also predicts that Germany will return to Deutschmark and that Germany would rather suffer a bad recession than have to prop up 50 % of European debt.
First time I saw Vincent Browne quiet and in awe of someone !
Remember , Look after your self and your Families first.
Take care & Goodnight
basically the case for allowing euro to break up is stronger than case for trying to keep it together, ireland has been in a state of suspended animation since 2008, i think a euro break up while traumatic is the only thing that will shock the country back to life and redistribute resources back to the productive sectors of the irish economy, it would make croke park agreement irrelavant , i think a crisis like a euro break up while dangerous might bring real leadership and proper critical thinking to the top of irish society,
I agree, Todays crisis may turn out to be the only viable option we’ll ever get to reset our economy and societal hierarchies and values. There will never ordinarily be the mindset to change the “L’Oreal” attitude (we’re worth it!) that exists in the so called upper echelons of Irish society. Our current political system guarantees that national interest will always be secondary to those of the party. A full scale crisis is probably the only thing that will prevent people from ever tolerating such things again. Maybe amidst the panic, pain and confusion there might possibly be a Eureka… Read more »
Morning All, Today will be interesting. Just to clarify, the titles are written by sub-editors not me and can sometimes be misleading. All I am saying here is that “Germany is destiny”. What Germany decides will be what happens and the German people need to be informed that a single currency is not a one way bet. There are responsibilites on the lender and the borrower. My preference as both an Irish citizen and an economist is to revert to our own currency a la Denmark/Sweden/UK etc. Many arguements on either side. The last thing I am is some jingoistic… Read more »
Good to see the game coming full circle. German leadership is pragmatic, they will opt for a bailout of the euro, population will have to suck it up, possibly the end of Merkel given the poor handling of the issue since 2008, Sarkozy might join her in retirement.
John Pilger in the New Statesman:
“On 13 September, one of the world’s biggest arms fairs opens in London, backed by the British government. On 8 September, the London Chamber of Commerce and Industry held a preview entitled “Middle East: a Vast Market for UK Defence and Security Companies”. The host was the Royal Bank of Scotland, a major investor in cluster bombs. According to Amnesty International, 98 per cent of the victims of cluster bombs are civilians and 30 per cent children. RBS has received £20bn in public money.”
Full Article: http://www.newstatesman.com/africa/2011/09/pilger-gaddafi-british-libya
Hi, So we’re finally PIIGS and those responsible for the PIIGS are getting into the roller coaster trolly, its been ascending slowly but inevitably. When we reach the apex of the slope today brakes off and wheeeee ….. By now they’ve designed the vector route of the tracks. Its probably similar to the same layout of 2008. In this instance consider sovereign countries similar to the following banks pre 2008 in the US. This is what they did? First up, Bear Stearns sold to JP Morgan. Now I’m hoping the EMU replay of this will be Ireland Inc sold to… Read more »
The end of the line is not too far away. Spoke to some Italians in Italy this morning and in their minds, they’re gearing up for an exit. Up until now, their own citizens always bought government debt, but not any more, and unless the Chinese step forward, they see writing on the wall. To the Chinese, Europe is a very important market, so it’s in their interest to preserve the status quo. As for Germany, they’re suffering from crisis fatigue and will exit the whole mess at the first opportunity. They can’t understand us, having been given the gift… Read more »
So if the collapse of the Euro is being discussed/floated, it’s likely that the European/Irish banking system is well ahead of us and have worked out how to use the process to enrich themselves and rip off the people further (just as they did in both the boom and the bust!). Can anyone say what are the likely steps between the ‘collapse/demolition’ of the Euro and the reestablishment of national currencies. My feeling is that the bankers are well ahead of us on this and will have no doubt ‘gamed’ various scenarios and worked out which will profit them. Is… Read more »
Pratically many people are coming around to the fact that southern European economies won’t compete with the northerners in productivity and economic growth.
They have a different outlook on life, they like long lunches and longer holidays etc.
On key graph is the competitveness graph. Germany has been getting more competitve and Greece has drifted.
Should they be in the same currency zone? The Italians seem to understand this.
as usual David McWilliams is full of sh*te. First he sells the country to the devil and recommends a blanket guarantee to the minister of finance and now he is trying to piss off the Germans, the last lifeline for Ireland.
David McWilliams has the talent to destroy stuff unfortunately he can’t make any meaningful contribution to the discussion. David McWilliams is and always was just a media punk.
@ Blah blah. What are you 14 or 15 years old? Who told you David recommended a blanket guarantee? You are an asshole of the highest order. Shut your cake hole as you dont know what the fuck you are talking about. You aren’t man enough to carry David’s jock strap much less refer to him as a punk you little puke. What do you make a year? €30 maybe €40K? He can crush you like the insect that you are anytime he wants you loser. Goddamn,… guys like you make me sick.
Off topic, what really gets me about this breaking rogue trader story is that the RBS have called the cops at 1am in the morning to report him and have him arrested and you can bet your bottom dollar that he won’t see the light of day for about five years. But the very same twats at the top who are dobbing in this 31 year old (whom they manifestly failed to mentor and supervise) carry on regardless as if the are innocent of all crimes. The young guy has lost 2 billion gambling for this ‘bank’ and ‘no clients… Read more »
http://www.youtube.com/watch?v=J35f5sbTHtw
http://www.independent.ie/business/european/debt-crisis-central-banks-flood-money-markets-with-dollars-2877614.html
Is the elite getting ready for Greek default?
@ coldblow Thanks for that excellent summary of Fennell’s work. If Michael McDowell doesn’t like him that probably means he’s right…or at least right enough to spook McDowell. Back in the Cold War 80s the great civilisation destroying fear was nuclear holocaust. It was and still is a threat, but at that time I used to argue that the civilisation crisis when it came would be economic collapse not nuclear holocaust. I could see that the global economy as constituted was not viable. The physical economy was running a mounting deficit with the biosphere; and the virtual economy, or the… Read more »
Greek sovereign debt is not manageable within the terms being enforced by the Troika. Austerity further reduces Greece’s ability to pay. And another bailout will only make things worse. If Greece goes into a rogue default that would surely start a cascade of defaults and possibly destroy the Euro and the EU. A structured default for Greece would require the same for Ireland, Portugal etc. A European structured default. But if Europe goes into a structured default that would surely start a cascade of defaults and possibly destroy the dollar and other currencies. Unilateral defaults could plunge the world into… Read more »
As David points out, had to come back to the Germans in the end, boomerang effect. Merkel is trying to work a political solution to try and salvage her party with elections looming (SPD resurgence) and an economic solution to salvage Germany’s stake in the EU – if they keep their heads they should be able to work something out with the French. All highly ironic given the role of both German banks and the German government in allowing all this to happen in the first place, while the German population seemed bamboozled, in a rude awakening.
I think the posts on this article sum up where the world is now. People have their views and are not influenced at all by the views of others, either dismiss them or ignore them unless they are in agreement with their own cerebal workings.Is there some major global conspiracy or are the world and its inhabitants just reacting to information that comes so quickly that they cannot even process the previous piece before the next one hits them. The markets are irrational. ( the markets drop on fear of Greek default yesterday, the markets poitively view central bank statements… Read more »
Anyone any idea of the amount required to finally end the Euro debt crisis, not expecting specific figures but a 1 Trillion Euro in debt write offs paid for by a once off Eurobond type offering from the ECB suffice? I have no idea I am not familiar with debt ratios etc, surely a TARP type deal with a bit of QE to bridge the GAP ala US is the obvious solution economically and thus the real uncertainty is solely the conflict of interests politcially. The US of course is actually in a worse debt position than the EMU as… Read more »
@dwalsh I just happened to have this to hand (!) Usual apologies for length, no link etc. I think it gives a picture of a sleepwalking society. Of course, time will tell. From Desmond Fennell “The Postwestern Condition” (1999) “Just as the period of the Industrial Revolution had a ‘social problem’ specific to it, so, too, has the contemporary West. From Los Angeles to Stockholm and Naples, anyone who reads the newspapers, or looks for a thoughtful moment at the life he is living, sees it — the moral chaos. Quite regardless of their individual merits, the rules and values… Read more »
@ businesslunch
In my view the underlying problem is the financial market itself. How it is constituted at this time is inherently destructive. A Eurobond offering will only feed it…it will not satiate it.
The Financial market cannot be satiated.
It has to be shut down.
Timothy Geithner tried to pull the same rollover crap he made Obama with QE1 and QE2 swallow, namely, more money for the banks’ slush fund to dip into to pay for their debts. This time the europeans, especially Germany and France, didn’t buy it. Stalemate is bad for everyone so today’s meeting will make the markets even more jittery and add to the turmoil. As per usual nothing got fixed today and things were made worse. Instead of a roller coaster ride, world leaders have turned the future into a ride in a ghost train. We’ll have to wait and… Read more »
@ coldblow Thank you for posting that passage from Fennell. “The stricken West will enter an impoverished, violent winter with no foreseeable spring.” There are others warning of such an outcome. It is a possibility which I hope will be avoided by good sense prevailing in the nick of time – fingers crossed. He also writes about senselessness and alienation; I think this is important. At this time the people who do best in our world are those who believe business is what life is about. They see the world in Darwinian terms as an economic jungle in which to… Read more »
Someone suggested a couple of years back: “A new genre of economics is blossoming. Existential economics (or EE as it is affectionately referred to by insiders) is becoming so popular that it is about to extinguish itself. Existentialists need to stand about, in the corner, observing everyone else’s reality. Alone. So what happens when they are no longer loners? A crowd of existentialists is a self-negating idea. “What drives an Existential Economist? Questioning the expectations of the masses brings a certain kind of validity to being alienated. Non Satis Scire. ‘To know is not enough’ is the EE motto. “So,… Read more »
I’m not quite sure about the influence of “Existential Economics” in the overall scheme of things Malcolm but I do know that “Behavioral Economics” has gained a lot of traction of late. Marketing departments with large budgets etc. are turning towards Economists who show a greater understanding of the type of behaviors’ that underpin decision making i.e. purchasing decisions, upgrading decisions and so forth. It is generally accepted that a marriage of these various disciplines, Marketing, Economics, and Finance etc. should give a more favorable outcome, in terms of a business’s ability to grow and prosper. The above is the… Read more »
David, when I look through your articles written at the time of the bank guarantee, I see no mention of the words ‘temporary’ or ‘selective’. In fact, what I read is, and this is a direct quote from your article of September 28th, 2008. “The only option is to guarantee 100 per cent of all depositors/creditors in the Irish banking system. This guarantee does not extend to shareholders who will have to live with the losses they have suffered. However, it applies to everyone else.” But you do ask a great question. What would I, or anyone else, have done… Read more »
Some useful excerpts from that very famous article: http://www.vanityfair.com/business/features/2011/03/michael-lewis-ireland-201103 “A few months after the spell was broken, the short-term parking-lot attendants at Dublin Airport noticed that their daily take had fallen. The lot appeared full; they couldn’t understand it. Then they noticed the cars never changed. They phoned the Dublin police, who in turn traced the cars to Polish construction workers, who had bought them with money borrowed from Irish banks. The migrant workers had ditched the cars and gone home. Rumor has it that a few months later the Bank of Ireland sent three collectors to Poland to see… Read more »
‘We are at the brink…” We are. The world is. In past civilizationwith the passing of the old king, the new would declare debt forgiveness and the system frozen with inequality and debt would reboot. The bankers of the world hold debt as an asset. Currencies in which the debt is denominated are dear to bankers for the same reason debt is dear to bankers. The macroeconomic system has limits and the progression to debt default is mathematically predictable. The maneuvering of the the German political leadership has no appreciable effect on the timing of coming historical asset collapse. Of… Read more »
Hi lammert I think you may well be right about the end being nigh. A few reflections. Though I accept the immense value of mathematical analysis I do think it is questionable to presume that the determinism which applies within the mathematical model also applies in the underlying reality which the mathematics models…you know…the old territory and the map thing. The global economy is organic; not mathematical; not mechanical. There are factors which are neither deterministic nor merely random or stochastic. And although mathematical statistical methods can remove this non-stochastic indeterminism from the models, it nonetheless persists in reality. Human… Read more »