The only thing that can stop the euro from breaking apart in the short term is old-fashioned capital controls. Otherwise, more and more money will flow from the periphery to the core. The weaker the peripheral countries become, the higher the risk of political instability and the greater the risk of a change in policy.
Peripheral Europe – including Ireland – suffers from that most politically regressive type of economic policy, one that hurts but doesn’t work. And it doesn’t work eventually – it doesn’t work at all and never has worked anywhere.
A policy that hurts but doesn’t work will become an ex-policy in short order. If all the countries in the euro had full control over their currencies, they wouldn’t tolerate a policy that hurts but doesn’t work. But because they don’t have control, they have to tolerate a policy which hurts but doesn’t work until it becomes insufferable.
However, right now, we do not have control over the currency we use. For a currency to be described meaningfully as a “country’s currency” or “our currency”, we have to be able to print the currency freely or not as we choose, and we have to be able to change its value as we choose.
The problem is that the euro is no one’s currency and everyone’s currency at the same time. For Ireland and Spain and any of the other peripheral countries that have huge debts, the implication is that we have to pay debts in another country’s currency.
If a country is already running a current account deficit, as much of the periphery is, paying back all the debt will make the economy contract. As the economy contracts, unemployment rises and this – understandably – prompts political instability.
So without the currency to offset the different competitive positions of the countries, the entire adjustment has to come via the rate of unemployment in the weak country. This is because wages rarely fall. The academic idea that you can get wages to fall effortlessly goes against everything we know to be the actual way things work. In an actual economy, everyone at work fights to keep his wage up.
For those in work, it’s better that the rate of unemployment rises rather than their individual wages falling to absorb the unemployed. So the labour splits into a classic insider/outsider pattern, where the interests of the employed are pitted against the unemployed, rather than the old Marxist line where the interests of the employed are pitted against the boss classes.
The only way to quickly get real wages down in this type of scenario is to devalue the currency, generating a bit of inflation and reducing wages both externally and internally through currency depreciation and inflation. That’s how it is done. (See Iceland, all the Asian tigers, Scandinavia in the early 1990s, etc.) But if you can’t do that, then the rate of unemployment rises permanently. This puts huge pressure on the afflicted country’s budget deficit.
Furthermore, if the afflicted country has high levels of debt, the people will want to pay that debt back, and the banks of that country are also likely to have large amounts of bad debt. This means that the people don’t want to borrow and the banks don’t have the ability to lend. This is a classic liquidity trap which – regardless of the rate of interest – will have no effect on the economy. Everyone is saving to rebuild their balance sheet.
This is exactly what is happening in Ireland, Italy, Spain and, of course, Greece, where the dilemma is most severe.
Now think what happens when everyone is saving and a foreign country instructs the afflicted country that its government must save too. Well, if everyone is saving, no one is spending and, as your spending is my income, everyone’s income falls too.
This is what austerity does in the liquidity trap – it makes things worse. I likened it on BBC’s Newsnight the other night to putting an anorexic on a diet and expecting that person to put on weight.
Now let’s see what happens to capital in such a strained environment. Some bits of classic economic theory state that capital will flow into the afflicted area to avail of opportunities. But that is not what actually happens. It will only happen after a massive policy change, like a devaluation – not before. Until then, the risk that there will be a devaluation pushes capital away.
But why could there be a devaluation in the euro? Wasn’t it supposed to be an irrevocably fixed system? Well, it was until last week. The minute the European elite in Brussels under José Manuel Barroso told Greece that the election should be a vote on whether it is in or out of the euro, the notion that the euro was permanent evaporated.
We now have a currency which is conditional. And it is conditional on local politics, which are themselves dependent on local economic conditions, which we know are getting worse in the periphery.
If it is not a monetary union, it is a system of fixed exchange rates, and the credibility of this system is based of the willingness of the weaker countries to tolerate austerity and the willingness of the stronger countries to tolerate what some have called “peripheraid”.
Peripheraid is the ongoing cash infusion from the rich countries to the poor countries, which could go on for generations.
The working model for peripheraid is Italy. In Italy, the north has been transferring money to the south for years. But this is one country, with one language and one political system.
Do you think that Germans will pay for Spaniards for the next few generations? Nor do I. The people with money in Spain think exactly the same, and that is why they are getting their money out.
As a result of this analysis, money is flooding out of the periphery. There is what looks to be a bank run in Spain. In Greece, whatever money hasn’t left is on its way. We are seeing similar developments in Italy.
A friend who works at a large bank in London told me last week that it was experiencing a massive inflow of money into sterling. Significantly, she said that the bank didn’t have many peripheral clients, so the money was coming from countries like France and Belgium.
The only way to stop this is with capital controls. It will buy the afflicted countries a bit of time, but once you introduce capital controls it means you have given up on the central basis for a monetary union. Once that goes, so will everything else.
David,
The euro and monetary union is on course.
It is working very nicely for the insiders.
The euro and monetary union has generated wealth on a scale never before imagined for set interests.
If capital controls suits them in the next stage of their wealth transfer progrom they will more than likely use them I am sure.
They’ve used the printing presses without worry, they’ve used public monies without worries, they’ve used you without worry so they will use capital controls is needed.
Typo *is*. Should be *if*.
Capital Controls The time factor is important because once the panic button is pressed by our Minister for Irish Feta Cheese, its too late and Your capital in your bank is no longer under Your control . Excuse me …..I am listening to RTE news flash at 9.59pm 31st May , 2012 …sorry its incoherent ….and the news reader is looking for water ….’ It has been announced by the Minister Mr Michael Mooman …( a pause) ~~~~~~ the newsreader is struggling to hold the announcement ~~~ After a cabinet meeting held urgently a few moments ago it has been… Read more »
David, The more I learn and that has been quite a bit for someone with a technical background. Finance is now the key subject of living from forex, capital markets, current account and budget management. Let’s get back to real basics – Cash Management; & – Treasury Management Do not spend more than you earn!!! Aren’t all the other offshoots, problems, issues, crisis fundamentally caused by a lack of cash management! I know this sounds so simple that it could not be true. Disobeying this simple guideline opens the doors of finance to enhance / exploit any country that puts… Read more »
subscribe.
It’s all irrelavent when you see what is being paid out to bondholders (most unsecured) on a regular basis.
see:- http://bondwatchireland.blogspot.com/
“”I likened it on BBC’s Newsnight the other night to putting an anorexic on a diet and expecting that person to put on weight. “”
You have it backwards David. The patient is not anorexic ; the patient is chronically obese.
What you are advocating is force-feeding this chronically obese person, and expecting them to lose weight.
It won’t work.
I thought I was going to read a proposal, with which people was going to go out on the street, like the Chinese did with Mao’s red book. …ummm I don’t think that will achieve a significant change! . Is rather more interesting what Jonathan says: “The Central Banks are Private and Immune. The Bondholders of the corrupt banks are protected more than the citizens of the country”. . Somebody has to pay for this mess, and they think should be us, the ordinary citizens running ordinary lives, while the political and financial elites want to keep it all! They… Read more »
David, I assume you wrote this article as an intellectual provocation! There are much more effective ways of achieving debt forgiveness. Anyway some feedback: (1) Capital controls on what assets and versus whom? (2) Complete prohibition by the Treaty on the Working of the European Union versus EU members (article 46); (3) If Ireland were to sequester the US$1 trillion of assets belonging to mainly US & UK banks currently sitting it the IFSC, I think we would have the warships sailing up the Liffey by teatime; (4) Irish companies would be dealt the same hand with their assets by… Read more »
I have a feeling the government will announce some bit of good news any day now to try to sway the no voters
Interestingly, here was reported the UK imposing exchange controls on Santander since 2011 already :
http://www.davidmcwilliams.ie/2012/05/17/premature-vote/comment-page-2#comment-117429
So the UK has slapped one of the largest Euro Banks.
I’m sure CEO Botin is not amused.
Was in an airport in German recently, and a barney type cartoon was been broadcast to any idiot who was in a trance, letting them about the EU’s capital controls.. ridiculous. Most Germans aren’t as smart as people make them out to be, they are utterly brainwashed and under control
“Barroso’s political activity began in his late teens, during the Estado Novo regime in Portugal, before the Carnation Revolution of 25 April 1974. In his college days, he was one of the leaders of the underground Maoist MRPP (Reorganising Movement of the Proletariat Party, later PCTP/MRPP, Communist Party of the Portuguese Workers/Revolutionary Movement of the Portuguese Proletariat).”
http://en.wikipedia.org/wiki/José_Manuel_Barroso
perfect for the Soviet European Union
Vote YES = Vote for Communists
I think DMcW is close to what’s going on. The UK has Santander already under controls, but bank run’s are already on, as the Economist admits. BRITISH ARE PANICKED THAT “THE DAM IS BREAKING” ON THEIR FINANCIAL SYSTEM May 20 (LPAC)–The elephant in the kitchen at the Camp David G8 summit, was the fact that the British Empire’s entire trans-Atlantic financial system is in meltdown, with runs on banks already underway in a number of nations, accompanied by shrill calls for “unimaginably large” hyper-inflationary bailouts issuing from the mouths of London’s freaked out policy-makers and financial elite. One such banker… Read more »
“The only thing that can stop the euro from breaking apart in the short term is old-fashioned capital controls.”
The reason the euro is breaking up in the first place is because it is an artificial construct. It is run by technocrats-bureaucrats? More controls will worsen the situation just like every other government 5 year plan conceived.
“Peripheral Europe — including Ireland — suffers from that most politically regressive type of economic policy, one that hurts but doesn’t work. And it doesn’t work eventually — it doesn’t work at all and never has worked anywhere” In Canada there are 10 Provincial economies and other state territories (Yukon, Nunavit, north-West)all operating separate fiscal policies with only one national currency. This is spread over the second largest land mass in the world. 3500 miles from east to west and 2000 miles north to south. National monetary policy does not fit all parts of the country at the same time.… Read more »
Hi David Interesting article – I agree in principal with many of your points but I’m less sure of the efficacy of a devaluation in the case of a currency block the sheer size of the EZ. This has a large footprint in global trade (devaluation of a small country can be “absorbed”) and and will I believe lead to currency war and global recession. In my view, some form of dual currency (with debt write-off) approach may be workable but messy to say the least (given the political & legal journey to get there). The only precedent I can… Read more »
“The only way to stop this is with capital controls. It will buy the afflicted countries a bit of time, but once you introduce capital controls it means you have given up on the central basis for a monetary union. Once that goes, so will everything else.” Capital controls are the result of trying to defeat the market assessment that the country’s currency is overvalued. people in a free economy invest where they have confidence and remove funds from where they do not. Many countries have operated with a successful economy without a national currency, including the early days of… Read more »
I find it interesting that the EU is paying to influence the people – just Google “eu fiscal treaty” and look at the sponsored link at the top. So the “yes” vote is all about being able to get more funds from the EU “if required” via this EU stability fund. Weren”t we told we wouldn’t need another bailout? Can anyone help me understand the possible implications of this “second tier status” point on a sponsored link? http://www.iiea.com/blogosphere/the-stability-treaty-faq-frequently-asked-questions: WILL IRELAND HAVE TO LEAVE THE EURO IF IT VOTES NO? a ‘no’ vote risks diminished influence for Ireland and potentially a… Read more »
Ralph Atkins reporting from Frankfurt breaks news today in the Financial times that Greece has received a secret 100 Billion euro aid package for its Banks.See how much coverage THIS gets in Irish Media……..Seems the 1% DO get what they need,while REAL people have to sign away their lives to try and survive…….
Incredible.Vote NO to this fiscal treaty,which,if in use 10 years ago,would not have prevented any crisis as this was created by Banks…..
When so many people are leaving Ireland and so many on the dole.
So many on social welfair and so many young surly we will have no chance of paying back even a small amount of this country’s dept.
Maybe I have this wrong but at the present time the bonds we are paying back unsecured and secured, is beening payed back with borrowed money.
So how come Europe thinks Ireland is sticking to the program sure that’s a con job surly.
Who’s fooling who.
David, why did you not share your wisdom on the Euro with the rest of Ireland and the world, when Ireland glorified itself for being the second richest country in the world? Wages have been ridiculous high back then – only a few years ago. As well as that a lot of new-rich Irish send (aka “invested”) their money in Germany, Spain, France, Eastern Europe and even in the Gulf States. There was a huge flow of Euros leaving Ireland and indeed the Euro-zone back then, so where was your warning voice then? You didn’t shout for stopping the money… Read more »
David mentions our currency is not our currency because we cannot print it freely as we choose. In actual fact the Central Banks of Europe can print as many euros as they like as long as they show the demand for them to the ECB. However printing euros is an insignificant ability in modern times since only 3% of the total European money supply exists as cash. The 97% is digital money and consists of the numbers in our current accounts and savings accounts on a computer screen. It is the commercial banks which create this digital money and they… Read more »
HERE IS AN IDEA….
AUTOMATIC LIMIT DEFICIT 0.5%…
-> NOW PUT IT IN CONSTITUTION..
-> SO WE CANT CHANGE IT
-> IF WE WANT ??!
IT MUST BE A “SURE” THING? HA
NEVERMIND….WE CAN BORROW FROM ESM!
-> BUT NOT MORE THAN 0.5% DEFICT?
OOPS!
I agree with most posters here that the only way forward is reducing our debt levels either by a write off or restructure plan from Europe or a euro exit and a new currency that matches our ecoonmic situation. But even achieving that where are we as an economy. None of the promised structural reforms have come into place. All we have done is reduced services and increased taxes for the private citizen. We are like beggars with a bowl out to multi national corporations and the 12.5% tax rate is so precious it cannot even be discussed while citizens… Read more »
“We need new political parties and politicians (and less of them) who are not afraid to shake up the lethargic permanent government. We need leadership that we have never had in this country.”
Good luck with that gizzy, you’ll be a long time waiting and then you’ll probably give up and leave.
Watch out! Here is what’s going on while we focus on the admittedly gripping financial meltdown.
Blair is running Obama’s reelection campaign! The “advisor” who gave us Iraqi wmd mirage, wants the greatest Wall Street hero back in the saddle.
Obama’s willful provocation of Russia was the test – he passed. A thermonuclear war-monger.
Blair obviously knows the system is melting.
http://laroucheirishbrigade.wordpress.com/2012/05/22/tony-blair-running-obamas-campaign-preparing-his-own-comeback/
Here we go.
JPM lying through the back teeth.
The losses are now 6 billion and counting – CNN
Anyone who blindly accepts the banks and their spiel I have a bridge I wanna sale ya contact me at…..
http://money.cnn.com/2012/05/18/markets/jpmorgan-loss/index.htm?iid=Lead
Greek Budget Would Have A Surplus Without The Debt Payments May 21 (EIRNS)– Figures have come to the surface that nearly 20% of the Greek national budget goes to debt service. As could be expected, the Greek budget would have a surplus if it were not for the debt payments. In fact, it is demonstrable that it was the fact that the memorandum wasimplemented, which has led to the collapse of the economy, and had it not been, Greece would have had a surplus. According to a report by Eurobank EFG, in 2011, Greece made EU16,384 million in interest payments,… Read more »
London Professor Declares the Failure and Death of the Euro May 21 (LPAC) — Dr. Jonathan Eyal, speaking of the euro experimant, writes that “seldom before has there been such a comprehensive failure.” Eyal is a Romanian who was educated at Oxford, taught at Oxford, and now heads the International Security Studies sector at the Royal United Services Institute (RUSI) in London. Eyal, in a {Singapore Straits Times} op-ed, writes: “Europe is rapidly approaching one of the most critical decisions in its post-war history. It can either offer an unlimited amount of cash to failed states such as Greece, thereby… Read more »
Have you heard of a Bank Jog? Well it’s on! So, You Think You Still Have “Your Money”? May 21 (LPAC)–This week opened with reports from CNN and others, that, lo and behold, losses at JP Morgan, once king of the derivatives casino, are not the $2 billion admitted on May 10, but are now running in the $6-8 billion range, and going up daily. Given JP Morgan’s reported $100 billion holdings in casino paper, are you dumb enough to believe {those} figures? Obama’s favorite banker, JP Morgan chief Jamie Dimon refused to say how big the loss may get,… Read more »
Some people can see through the government.
Some people don’t want to see through the government .
Some people are not affected by the government or so they think.?
The well has run dry for sum .
If the current government are using scar tactics to freighted people into voting yes is it not a sad day for the return of the school bully.
I wonder if any of the current government where school bully’s when they where in school because it seems like they have resurrected the past or has the past come back to haunt.
We don’t have political instability and that is the heart of the matter. How can we have debate when a coalition government and their opponents sing from the same hymn sheet. Who do you believe? You have your beloved state but there is no democracy. Foolish! You are correct in stating that austerity has never worked in a western democracy but it looks like the Chicago Boys are trying to prove you wrong. Their warped ideology has never worked anywhere except in brutal dictatorships but that’s besides the point in ‘polite company’ at least. It never happened of course and… Read more »
Only way out of this whole mess is to laugh. If we are not under the thumb of the Chicago crew then it is someone closer to home
Just got a message from Pat (can I please please ask a question Pat!! slurrp!) and v v v vinnie
http://www.independent.ie/world-news/europe/hands-up-if-youre-david-cameron-now-internet-pokes-fun-at-his-chelsea-celebrations-3116219.html?start=10
Capital Controls. Indeed. I presume McWilliams you are anticipating what the government is going to do next and I agree with you and have been articulating that citizens have their savings in a mix of gold and sterling. Your article however is self-contradictory from the point you have been arguing all along and even within the article itself. You start by making the statement that there is only one way out of the mess and then end by saying more or less that it will only be a short term measure anyway as you feel all hell will break loose.… Read more »
+1.
Just considering the comments by whirmark and others, a couple of things come to mind. Firstly, it seems to me that this blog – and it is a blog, not a forum – is about providing enlightening, edifying, and engaging, commentary, on these historic times. Unless I misinterpret things, the blog entries are neither advisory, not are they for tactical or strategic policy. I’m sure that David would be delighted to be consulted, but that is not here. Secondly, the comments naturally turn into conversations, and, over months, include broader and broader areas. What most people would deem ‘conspiracy theory’… Read more »
The EU is bunched. America is bunched. Japan is bunched. Australia, New Zealand, Norway have ten years left and then they will be bunched. (when the easy resources run out). Canada is exposed to the US. The biggest liar on the block is right next door to us. No more North Sea oil. Financial Services based on Derivatives. That could explode. Maybe Scotland will be able to get out in time, before it all blows apart. Probably not. Folks, save yourselves. That’s all I can say. The G8 conference resulted in loads of jawboning. We were informed last week that… Read more »
Syriza leader Tsipras: You Don’t Negotiate with Hell
Greek Syriza party leader Alexis Tsipras at a press conference in Paris, once again reiterated that Greece’s rejection of the brutal memorandum is non-negotiable, the issue is the debt crisis, and that is a European wide crisis.
http://laroucheirishbrigade.wordpress.com/2012/05/22/syriza-leader-tsipas-you-dont-negotiate-with-hell/
Well worth reading what Tsipras said in full. He is in Berlin to meet the SPD and Die Linke.
Now Enad is adamant no Finacial Transaction Tax because it would be bad for this country.
Can he say for who in this country. Can he quantify in euros or jobs how it would be bad. It’s enough now just to say it would be bad.
So now we bail ouy Banks, we suffer years of austerity to do so and it would be bad now for us to tax them. Enda you muppet.
Another leaflet came through the door. The woman smiled, handed me her leaflet and said ‘i am campaigning for a yes vote.’ so I thanked her and read the leaflet but found it unconvincing because it sounded like ‘a lot done, a lot more to do’ (yes as if) and ‘vote yes for jobs.’ She was about 50, had a nice smile and believed in what she was doing. She knew she was on a hard sell and wanted to leave fast After reading the leaflet I wanted to lie down in my old bedroom and listen to the Rats… Read more »
Summer is here and it’s time for rambling boys of pleasure to ramble again. Up and down the great west coast where Cuchulainn’s ghost will make you forget those urban myths and fears Turquoise waters where silver trout roar among flashing silver sands that make the eyes sore. The finest place on irth says I and my Sligo granny who was born in 98 but expired in 88 told me so in 73 Its early. The sun is coming up and it makes you want to go shore fishing for sea trout because it a fine May morning The rivers… Read more »
I got a girl there waiting there for me
Well at least she said she’d be
I got a home and a big warm bed
And a feather pillow for my head
Goin’ back to Houston, Houston, Houston
Capital Controls are anathema to uncle Milties vision. No let’s bin that suggestion tut tut. It is not in the manual and is a surely a clear sign of mental illness and proof that ‘the patient’ is not responding and in need of even more shock therapy (and all at once) just to make sure he is jolted into getting his mind right and being brought to his senses. Kubark mark 2 .. Iraq and Afghanistan Dr Cameron obviously did not make his position clear enough and it shows that his disciples have a lot to learn on the basics… Read more »
Why doesn’t each country simply start issuing its own currency again? Don’t leave the Euro, just use two currencies in the interim. After all, if any country leaves the Euro, the physical coins and bank notes will still be around and at least some merchants, if not all, will still accept them. Under any scenario, other than total collapse, there will be a two currency situation. If the inevitable collapse of the Euro is certain, why not preempt the crisis by each country issuing their own currency again and mandating all government transactions be in that currency? Yes, it would… Read more »