The only thing that will stop Ireland – and a number of other EU countries – from defaulting on their debts is if the European Central Bank bites the bullet and starts printing money to buy up government debt in Europe in limitless quantities.
This is what we have come to. Anything less and the financial markets will keep selling European sovereign debt.
Today we will hear what EU governments have decided to do. Some kind of EU stabilisation fund is promised. However, unless there is a major move by the ECB to buy government debt, the crisis will deepen.
This must be driving the Germans mad.
However, they went into this euro adventure with their eyes wide open and, now that their worst fears have been realised, it is beginning to look like they are on the hook for the whole thing.
Worse still from the German perspective, their banks, which had been exemplars of prudence for years, are now up to their necks in the government debt of delinquent nations – debt which no one wants. The only buyer of downgraded sovereign debt – Ireland’s included – is the European Central Bank (ECB).
In order to save the finances of Ireland – and the interests of Germany’s banks which are owed €127 billion by Irish banks – the ECB has to do what our government did back in September 2008,when it guaranteed the banks. The ECB now has to guarantee all the government debt of Europe. Anything less and the financial markets will run a mile from all nonGermanic government debts, precipitating mass sovereign default all over Europe.
As a consequence of this realisation, we are facing Credit Crunch Mark II. This is because fear has once again replaced greed, and the contagion has spread. At the beginning of last week, investors were rightly worried about how much sovereign debt was on the books of the large German and French banks. The EU put together its mega-package to bail out the banks that had exposure to Greece, but the markets brushed it off because they realised that the banks were contaminated.
Europe is now back to the situation where the US found itself after Lehman Bros collapsed, because the banks don’t trust each other. Certain European sovereign debt is the ‘sub prime’ of 2010, and the banks won’t lend to each other until they know who has this trash on their books and how much of it they have.
This will cause a double dip, because the new credit crunch will simply squeeze business, and the whole of Europe will face the capital constraints that Irish business faces at the moment.
We will then see reverse contagion: the bond markets drive the money markets which in turn drive the bond markets down further, which begets more capital flight from the bond markets.
The cash will just end up back in the central banks because, without trust, we will end up with loads of money, but nowhere to invest it. So we will have money alright, but no credit. So the money markets are seizing up as well as the bond markets, which are now shut to Greece. The door is also closing on Ireland, Spain and Portugal. But it won’t stop with us.
When the banks stop lending to each other, someone else has to. This is where the ECB comes in. Having prevaricated for weeks, the ECB will now have to throw caution to the wind and print money. It will have to orchestrate Europe’s own Tarp – a ‘cash for trash’ scheme – which sees the central bank bailing out every government in Europe.
It will be a type of continent-wide Nama where, instead of buying loans underpinned by land, the ECB will buy loans underpinned by each country’s ability to pay tax in the future.
But the problem with this is that, as long as the countries can’t devalue their currencies, they will have to get competitive by enduring long and painful falls inwages. Most workers won’t put up with this carry-on indefinitely. As the economies contract, their ability to generate revenue to pay the extra interest of the new loans falls. So the ECB doesn’t so much lend money to governments as give it to them.
This will open the floodgates to inflation because, with so much money injected into the system, there will ultimately be nowhere for that cash to go except into the price of real stuff.
Germany can’t insulate itself from this.
The Germans face two appalling vistas.
The first is staying with the euro but not allowing the ECB to buy up all the dodgy government debt. In this case, the periphery defaults, and the German taxpayer has to write a cheque for the German banks that will be dragged down by the meltdown.
The second choice Germany has is to allow the ECB to print money and therefore abandon the obsession that Germans have with low inflation.
Either way Germany loses. Not as much as we do, but it loses nonetheless. At some stage, the Germans have to ask: ‘‘What’s the point?” They were perfectly happy with the deutschemark and could be again.
They only signed up to the euro to get permission from the French for German reunification. Now that reunification is history, what’s to stop the Germans reconsidering the euro? After all, the only way they can insulate themselves from the mess in Europe is by leaving the euro.
Such an event is unimaginable, even in the face of today’s crisis. But if the remedy doesn’t resolve the inconsistencies at the heart of the euro, the problem will just resurface again and again. Is such a construction worth keeping?
All this is reminiscent of the collapse of the USSR. The powers, the politicians and all the experts were caught on the hop. No one believed that it would collapse overnight, yet it did. I was in the Soviet Union in 1990 trying to learn Russian and, although there was a sense of something happening, very few Soviet citizens whom I met imagined the country would break up.
A decade and a half later, in the most exciting day of my journalistic career, I interviewed Mikhail Gorbachev for a programme I presented onTV3 called Agenda. He was my hero, yet I couldn’t shake off the feeling that here was a man who understood the problems but couldn’t see that there was no solution to the problems within the parameters which he was prepared to consider. He had to think the unthinkable, but he couldn’t. The Soviet Union disappeared, and life went on.
If the euro goes – which is still only a small risk, given political inertia and the fact that big individual and institutional reputations are tied up in the project – life would go on. In fact, there are those of us who believe that Europe would thrive economically without the euro, in the same way as the Asian Tigers expanded after the devaluations that followed the Asian crises of 1997/8.
This is a minority view now, but wait till the Germans realise that their politicians have waltzed them up a financial cul-de sac and that the only way out is inflation.
http://www.ecb.europa.eu/press/pr/date/2010/html/pr100510.en.html
Listening to reports, ECB gets a war chest of €750bn, €250bn from the IMF, plus new powers to purchase bonds directly in the market place. So, presumably, if markets send bonds to 5.8% for Ireland, ECB can intervene and either purchase them at that price or higher, or issue others to Ireland at a lower price. Curious to know from any economists here where ECB gets its funding from? Is this an exercise whereby the ECB has preferential rates for its borrowings, so can borrow in bulk at a lower interest premium than can be obtained by individual member states.… Read more »
Somehow it reminds me to the sick gambler in Las Vegas….
He gambled and lost more than he could afford…. However, because of his illness, he is convinced that now is the time to gamble really hard, pulls the title deeds to his house and land out of his pocket and places it on zero.
Now the ECB buys trash for cash, welcome to ‘les jeux sans frontières’ stagnation in Euro land and enforced inflationary politics.
[…] David Mc Williams in his latest posting Memo to ECB: print money David Mc Williams in his latest posting Memo to ECB: print money […]
I have heard this printing our way out of trouble from a number of places but isn’t the immediate rejoinder that inflation will rocket. Double the amount of euros circulating and surely our exchange rate with the dollar will halve and the price of oil will double. Everything from food to TVs to mobile phones to clothes would all rocket in price. Plus the Chinese and Americans would want more interest in future on loans in euros because the risk of currency devaluations would have gone up? Surely that is why the value of the euro has to be protected… Read more »
I am not so sure we can compare the breakup of Russia with a probable one for Europe. In the Russian case, the breakup was into a more favorable and improving world economic climate. For the Asian crash, it too was happening when the rest of the western world was improving. The fact is that unless China and other Asian markets become buyers like the westerners have been up until recently, we are looking at a steady decline all round. Asian markets simply do not buy globally. They sell globally – and that translates into selling into the west. If… Read more »
Euro Abulance Brigade :
My reading is that the recent anouncements by the EU means they have not explained how they will finance their funds entirely .What I mean is that have stopped short of saying they will print money.Why have they done that ? It seems thay are playing mind games with the Chinese and US .
Why are the markets taken their decision as a positive step to raise the euro exchange value and the bonds and shares on the open markets ? This confuses me.
Interesting analysis by BBC’s Robert Peston here http://www.bbc.co.uk/blogs/thereporters/robertpeston/2010/05/eurozone_crisis_is_postponed.html
David was well ahead of the pack as usual.
Yet there is a significant inconsistency in the market’s reaction to the news. Stock markets have soared, reflecting the devaluation of currencies caused by the massive quantitative easing the bailout represents. Yet the Euro actually rose against the dollar and sterling. This suggests that some of the funds were employed to manipulate exchange rates in the Euro’s favour.
Can anyone explain the inconsistency of massive QE not resulting in devaluation of the Euro?
Malcolm – sometimes explanations make no sense in a cover up instead what you see is what you get.
its my guess when after the true values are recorded for exchange euro value etc and the arrival of inflation then the next phase will be :
Mark 3
‘ A Regulated Euro Market for goods and services ‘
Tarriffs
Exchange Control outside of EU
There are interesting parallels to Norman Lamont’s attempts to support sterling in 1992: Early September 1992: Norman Lamont, Chancellor of the Exchequer in the Major Government, was defending Pound Sterling against attacks from the international financial markets. Since October 1990 the Pound had been part of the exchange rate mechanism of the European Monetary System. This arrangement allowed participating currencies to fluctuate within a margin of 2.5 per cent. If a currency fell outside of the margin, the other participating currencies were required to intervene to support the currency or to engage in negotiations to reach agreement on a new… Read more »
Well, I find it more than concerning that the IMF is in the entire european boat now. NOT good!
David. The article is peeling the layers away and getting to the essential truths on what is ‘actually going’ on. It’s taking all this time finally to get to mainstream that the euro was a botched job and done through the cooking of books. Now the cracks are showing and the insiders of europe are plastering over the cracks again but this time using the ‘printing of money’ out of thin air, not backed up by wealth generation or provision of labour, but we have a money printer out the back garden shed been wheeled out to bail out debts… Read more »
its official, we are in a depression
Pravda/RTE have a series of programmes on the aftershock to our meltdown. http://www.rte.ie/aftershock/ No doubt this will be propaganda elevated to an art matching even p18 of yesterdays Sunday Indo. Even RTE gets it right occasionally though, last nights broadcast of Ghost Land being exception rather than the rule. http://bit.ly/crXpn4 You’d think it would be available on the RTE player, but no, seems they’ve already canned it, I couldn’t find it. The original documentary included a tour of a selected number of the approx 650 vacant/unfinished developments around Ireland. Your heart would go out to some young couples who found… Read more »
Printing money is not the way out. The Weimar Republic did this very thing and look what happened. The Japanese have tried this and they are still stuck in a deflationary low growth economy which is on the precipice of its own debt crisis. Helicopter Ben has cranked up the printing presses since 2008 and still cannot get any inflation and unemployment is at 10%. Please stop with this QE fluff. Lets just default and start again
“Consider Ireland as Exhibit A in this regard. Ireland began cutting back deficit spending in 2008, when its banking crisis began to spread and its budget deficit as a percentage of GDP was 7.3 per cent. The economy promptly contracted by 10 per cent and, surprise, surprise, the deficit exploded to 14.3 per cent of GDP. We would wager heavy odds that a similar fate lies in store for Greece, given the EU’s inability to understand or recognize basic financial balances and the interrelationships among the various sectors of the economy. Neither a government, nor the IMF, can predict with… Read more »
Bigger picture here.
Credit Crunch Mark II is the next stage in orchestrated the absolute removal of sovereignty from the European People including us. The real issue is whether the other peoples of Europe will acquiesce as we have…
Hyper Inflation leads to eviseration of middle classes and leads to extremist politics. Perfect conditions for people to give up more of their freedom out of fear.
PS
Trilateral Commision must have loved Cowans abasing himself on our behalf
But what have the Europeans really agreed to? From here it looks like a giant NAMA solution! Yes we have arrived at the unthinkable, a NAMA for Europe .this of course is just as bad if not even worse that our own Irish NAMA ,but with much worse consequences. All over the air waves to-day we hear that the Euro has been saved and the markets initial reaction is positive but the markets are prone to swing at a moment’s notice and I would not put faith in any initial reaction. Where are all these billions going to come from… Read more »
That’s it – I’m buying loads of paint and canvas and catfood and going to hide in the hills of Glencar until this all blows over
They deprive us of every privilege – they turn round and taunt us with our inferiority! –they stand upon our necks, and ask why we don’t stand up erect? They tie our feet, and ask us why we don’t run? The laws forbid education and they ask, why we are not moral and intelligent? They tell us, because we are not, that th…ey have the right to enslave us. ~ Frederick Douglass, Cork, October 23, 1845. They rob us and ask us why we are ignorant………………… Fury as fee-paying schools get extra €1m in government grants Officials turn down funding… Read more »
I don’t think this crisis can be solved by adjusting the current batch of equations. Printing money will only feed the beast and deepen the underlying abyss. It will buy a little time, but not a solution. The only way forward – hopefully by global agreement – is an entirely new economic system. But that will not become a perceived option until there are no other options left; until the current equations expand to infinity and collapse. At that point the pirates will be seen as the common enemy of all humanity and the spell they now hold the political… Read more »
This is going to turn out to be the mother of all NAMA’s
How is adding to you debts going to solve your problems of having unserviceable debts in the first place?
At best ,this pan European action from politicians , by the way have their 54th meeting to discuss their 9th solution to the problems that were contained in just Greece have now ,they claim the final solution and that is to print more money
He lads! Printing toilet paper is not the answer!
Its about bloody time the Germans, French et al agreed to put in place a big enough contingency fund. If it was down to me I would have made it 1trillion and send a clear message to the market that member governments would have their risk assessed by the ECB ( and not the george soros’s of this world), when they needed to issue bonds to fund infrastructural developments etc. as it only make sense given that a lot of these developments are usually undertaken to comply with some Euro directive. I have also argued consistently that the French And… Read more »
Man we humans really are stupid and pretictable most of the time, thinking out side of a box never crossed these ejets minds. In the words of Einstein ” A problem cannot be solved with the level of thinking that created it” fact.
THE DECLINE OF THE WEST Most analysts (at least the ones that are worth reading) contend that the sovereign default crisis (Greece, Portugal, Spain, etc.) in the EU is about the collapse of a system that created monetary union without a political union. It isn’t. That’s actually a narrow, parochial view. Instead, the current sovereign debt crisis is about something much more interesting: it’s another battle in a war for dominance between “our” integrated, impersonal global economic system and traditional nation-states. At issue is whether a nation-state serves the interests of the governed or it serves the interests of a… Read more »
Furrylugs thanks for the words of encouragement. I am just another individual trying to figure out what is going on. We are all on an intellectual journey of increasing our competence level. My adivice, is to stay determined but intellectually honest. We have lived in a society where being made into a follower of others, is I think that we are all trying to improve the level of debate.It is hard work. It is important for each individual to develop their own ability, not be following others (who have often ther own hidden agendas) but by following in search of… Read more »
How realistic is the use of barter to reduce the average families reliance on money?
I wonder has there been any serious studies done on it. For example, if you were in advertising, could you do a deal with your home heating oil supplier to provide marketing services to the value of a year’s supply?
I don’t see any reason why the Euro has to disappear completely, ending up with every country having a separate currency like the deutschmark, as David suggests. The problem right now is with the PIIGS. The other Euro zone countries have their economies more or less in sync. There’s no reason why they should create new problems of having to deal with varying exchange rates whenever they trade with each other. The solution appears to be to split the Euro into two currencies, which would effectively mean a devaluation for the countries choosing the weaker one.
I read this yesterday evening, and my first instinct was to disagree with the proposal to “paper over the cracks”. The idea of printing money to solve the problem is a zero-sum game. You can create as much money as you want, but you cannot create wealth. All you can do is redistribute it. And in this case, working people whose finances represent sweat, are losing wealth to the benefit of those who borrowed. It is also a reassignment of resources from those who were scpetical to those who were obedient. In essence this produces an obedient society. In this… Read more »
Lets assign Nama to Mother Nama the procreator of all monopoly money and watch the real value of the loans sink and the assets /securities revalue to return more piglets .
[…] Memo to ECB: print money | David McWilliams […]
So moving money from Irish Bank a/c in Euros to a German bank a/c (also in Euros – for the time being) is potentially a good move?
Any takers / comments?
Its amazing that so much fiction ;can be printed on paper.I like the phrase “real stuff”.
Don’t worry lads….we are on top of things….. http://www.independent.ie/national-news/cowen-met-with-regulator-twice-in-four-years-2173983.html did they meet on the golf links or in the bar of the Shelbourne Hotel ? And as regards Mr.Bruton saying Mr. Cowen refused to take notice of any warning signs, let face it….nobody on Kildare Street took any notice of the warning signs….and nobody in IBEC -ICTU (the real government – opposition) took any notice either. There were all clueless about macroeconomic imbalances….the lot of them….the entire “leadership”. And if the “leadership” is useless,then you have to make you own way through the morass that they create. You have to… Read more »
Why do I get the impression from reading this blog and the associated comments that there is a distinct anti-German, anti-ECB undertone? Nobody forced the delinquint Irish and PIGS to borrow money that they couldn’t afford to repay. This is the price of fiscal sovereignity. That or either acknowledge the need for further EU supervision. The typical Irish syndrome of always trying to play the part of the victim seems particularly prevalent while trying to aportion blame onto any other entity. Time to grow up and accept individual and communal responsibilty. To dismiss Germans for being savers, instead of consumers,… Read more »
I hope no mis understands my comment .which refers to the sudden changes in the value of printed paper money.Since we are paper free on the silicon.David writes very serious stuff.
Thanks ye all.
Folks, this, from Nouriel Roubini this evening:
“A excerpt of my new book Crisis Economics in Newsweek magazine: “Bust-up the Banks” http://www.newsweek.com/id/237631
I hate to say but have the Soap Operas deadened your mindset that caused delay in your recent comments ?
Folks, from Krugman, a few minutes ago:
http://krugman.blogs.nytimes.com/2010/05/10/second-thoughts/?src=twt&twt=NytimesKrugman
aye they say the scotch cured many an ill
http://www.nama.ie/Publications/2010/AngloLoansTransferSeniorAppointments.pdf
http://www.spiegel.de/fotostrecke/fotostrecke-54629.html
Good Evening,
The Euro sliding again. Not good news for the bailout. If this fails, we will be back to square one looking at a two speed Europe. Probably no bad thing.
David
Sethspray,
I hope there isn’t an anti-German bias here. All I have been saying is that for the Euro to work properly there needs to be less spending in the periphery and more spending in the core, otherwise we’ll have these periodic problems again and again. Best David
Just seen the Aftershock program and now Pat Kenny’s Frontline. Decided I would make an observation, while it is on my mind. Richard Curran took aim at the big sacred cow of FF, IBEC and ICTU policy that is the “Smart Economy”. In fact of all that I have seen I think that Curran’s point makes a ton of sense. But it this way. We are short on resources in this country at the moment. And keeping existing jobs is always cheper than creating new jobs. And besides government job creation projests tend to end up like the Dublin Docklands… Read more »
Sethspray.
One may take the view that German interests sped the euro through into reality, turning a blind eye on one or two things, in order for speedy euro implementation in order to get ahead on the funding on the regenerating program for East Germany in the nineties.
BLUFF I think the desperate ECB change of mind is a very dangerous move in deed. It can cause tons of stability problems on many levels. However, I favor two scenarios; 1. CHAMPAIGN Somewhere you hear that distcint sound of champaign bottles opened, and probably around 200 people have called inner circles friend to come and party. They cashed in and disappear again. 2. FLANKED The move was not a one shot wonder, on the contrary, it was a deliberate move to get the ECB out of hiding and make that critical error. I referred to chess earlier, and currently… Read more »
CliqueWatch.
While everyone was watching YoYO-Land, look what happened.
http://www.independent.ie/business/irish/nama-appoints-new-head-of-treasury-2174611.html
It’s just jobs for the boys all the way.