One of the great American popular economists of the last century was Herbert Stein who combined journalism, policy work; he flirted with academia and dabbled in all sorts of private ventures. He also held the prestigious position of Chairman of the Council of Economic Advisors in the US during the 1970s. His greatest contribution to economic was the simple rule “when things can’t go on forever, they stop’.
Thinking of the endless crises within the Euro whether it is Greece, Italy, Belgium, Ireland or Spain, whether it is bank debt, household debt or sovereign debt, whether it is Germany’s taxpayers of France’s banking system — Stein’s law comes to mind. This can’t go on forever, so it will stop one way or another.
Increasingly, as events overtake and eclipse all previous “bailout”/”rescues”, it is becoming evident that the option of the two-speed euro is now on the cards. Ireland will be firmly in the “softer” euro camp.
No one has mentioned this specifically yet, but it is likely because Europe has always had a core/periphery dimension. In times of crisis, such as the last financial crisis the 1993 currency crisis, the European elite’s instinct is to save the core and deal with the periphery in as expedient a manner as possible.
Faced now with a meltdown of their system, Europe’s elites need a solution that snatches a political victory from the teeth of financial defeat.
Apocalypse — in the guise of a country being ejected from the euro – is not a political option because the risk of everything falling apart are simply too high. In addition, a two-speed euro, with a hard euro for the core and a soft euro for the countries in trouble, relieves the pressure on the whole European financial system.
Arguably, for the average citizen such a deal is preferable to the choice we face now. That choice is either a complete, chaotic break up of the system with huge negative implications for savers; or ten years of austerity with huge negative implications for borrowers.
A two-speed euro — involving two distinct but related currencies — keeps the entire euro project together and gives the EU donkey the carrot of moving forward and the stick of promised economic reform. It is important to understand the perpetual forward motion idea lies at the heart of the EU. As long as the project seems to be moving forward slowly towards the nirvana of more integration when the time is right, “Europe” is progressing.
A break up of the Euro means the project has stalled and this is unacceptable to the people who make the rules in the EU. They are believers; and like any ideologues, these true believers are driven by the utopian notion that the future is always brighter than the present. Incidentally, heaven is based on the same premise.
This weekend we are at a tipping point and it has been a long time coming. Don’t be suckered into the spin that this crisis came out of the blue or was unforeseen. It has been brewing
For many years now this column has pointed out that the Euro could/would breakup, presenting Ireland with a big dilemma. At the time it was pretty radical even to question the economic legitimacy of Euro. It was unfashionable to suggest that the currency might be dogged with internal inconsistencies centered on inter-country trade and capital imbalances, national idiosyncrasies and profound economic differences. More radical still was to follow this logic by predicting that the system would implode.
As is typical in Ireland, the dissenter is dismissed as a crank or worse an enemy.
But after all the insults we are where we are, the euro in its present form is doomed. So lets look at what is likely to replace it.
Consider what the two-speed Europe might look like.
The first thing we know is that the peripheral countries can’t keep up with Germany. Take Ireland as an example. When we had the Punt linked to the Deutsche Mark we devalued six times in thirteen years just to try to keep up competitively with the Germans. Conversely, when we joined the Euro and could not devalue, we lost 30% competitiveness against Germany. It could not be clearer.
For the other peripheral countries the situation is worse.
So we all need a change in the value of the currencies we trade in to make our companies more competitive and thus, more likely to export. In tandem, we need to make imports more expensive so we don’t buy too many of them. The weaker exchange rate achieves this. Devaluations work. And to any one who doubts this, just point to the lasting competitive gains garnered by Finland and Sweden after their 1992 devaluations.
Without currency change, we can’t keep up with the Germans and this makes the EU’s promise of economic convergence hard to achieve without huge borrowing. Up till now, we borrowed to achieve a lifestyle and a level of economic activity. Now none of us can pay this money back.
So we need debt forgiveness or some debt deal. Accompanying the new euro would be mass debt write downs because if you reduce the value of the currency that the people get paid in but you don’t commensurately reduce the value of their outstanding debts, the people will simply not be able to pay and the country will default after the devaluation. This would not be clever. Everything must be done together.
So let’s think about the new euro. The new soft euro would trade at 70% of the old one (my figure plucked out of the air). This would mean that relative to Germans, our standard of living would be cut by one third overnight. We would achieve in one night what the present policy seeks to do in five years.
We would be extremely attractive place to investment in because our labour would be much cheaper. But don’t forget that this reduces our income by the same amount.
All our debts would be reduced by 30% because they would be in a new currency. Obviously, the banks that lent in hard euros and would now get paid in soft euros would carry a huge exchange rate loss. This would need to be dealt with. Possibly, the banks in each country could issue bonds backed by the EU and redeemable for new euros at the ECB. These bonds could be considered capital so that the banks didn’t go bust.
What about the savers who lost out on their stock of old euro saving which would be devalued by 30% when converted into the new euro? They could be given new inflation-linked euro bonds issued by the State and redeemable from the ECB but not straight away. There would be an incentive to keep them in the banks as savings. This is normal because if you think about it, most people don’t touch their savings. The State would have to make sure that the new bonds were credible enough so that people wouldn’t want to cash them straight away.
There is no easy way out of this mess. There is no way we can wave a magic wand and promise that no one will be affected, but it is clear that the euro is on its way out and will at best, mutate into something else.
The two-speed euro idea, at least prevents the chaos of a messy implosion and the rushed reintroduction of many currencies. It achieves the competitive devaluation, which for us with the majority of our trade and investment coming from and going to, America and Britain, it would give us a shot in the arm. The debt forgiveness element would also give the heavily indebted commuter generation — the Pope’s Children — a break.
There is never a best way to do things in a crisis, simply a least bad way. Maybe this is it.
One thing we do know for sure is that “when things can’t go on forever, they stop”.
Yes, Germany is putting structures in place to accomodate the two-tier Euro. But….the real battle is being fought within the ECB at present. Frankfurter Allgemeine Zeitung online yesterday 111113 quotes one of the Directors José Gonzalez Paramo as follows: ‘Die Zentralbank sei der Kreditgeber der letzten Instanz für Banken, aber nicht für Regierungen’ [ECB is the lender of last resort for banks but not for governments]. In Germany the practice of bond-buying by the ECB is seen as sacrilege…….Juergen Starck and consortium will have blood on the floor..bald [soon]. There is another element: Germany will want to teach errant ‘Laender’… Read more »
Let’s assume this two-tier Euro is going to happen….
For those people with savings, is it a no-brainer then to buy say Dollars or Sterling now with our “strong” Euro and then just buy back the weaker Euro when it is implemented?
Hi David,very interesting and informative. I have found it very difficult to get answers to the following 3 questions and it would be great to get your opinion: 1.Logically then and in order to take advantage of the more valuable Tier 1 Euro those of us with some savings should try to put them in Tier 1 or Hard Euro banks before the 2 Tier setup is brought in? 2. Which countries (aside from Germany, and France I presume) do you think will be Tier 1? 3. What about Sterling, what do you think will happen there and what about… Read more »
DMcW says;”we need to make imports more expensive so we don’t buy too many of them. The weaker exchange rate achieves this. Devaluations work”
What imoprts would that be?
OIl?
Inflation would go through the roof, the price of inputs for production would go through the roof.
Fact is there there is no such thing as a successful well developed country with a weak currency.
COUNTER ARGUMENT Let me start with a two points that we probably would agree one, well, more than likely, but do correct where you feel we would not agree! 1.Capital is mobile 1.1 Herein lies the reason for the protracted defaults forced upon nations. In reality, what appears as chaotic to the public, and I can not overstress that point enough, it is played out as if it would be chaotic, in reality this is a deliberate deception tactic, it is a highly organized ‘retreat’ from the peripherals. Let’s face it, this is about the fraud with risk. Right? This… Read more »
David:
They could be given new inflation-linked euro bonds issued by the State and redeemable from the ECB but not straight away.
ECB:
In the first part, the article shows that most of the segments of the long-term debt funding markets have recovered from the tensions experienced during the crisis.
Source: ECB monthly bulletin 11/2011
http://www.ecb.int/pub/pdf/other/art2_mb201111en_pp73-90en.pdf
David writes: ” Obviously, the banks that lent in hard euros and would now get paid in soft euros would carry a huge exchange rate loss. This would need to be dealt with. Possibly, the banks in each country could issue bonds backed by the EU and redeemable for new euros at the ECB. These bonds could be considered capital so that the banks didn’t go bust.” The fatal flaw in this argument is that inflation by 30% represents walking away from debts totalling €200 billion (Assuming that Peter Matthews estimate of total debt being 490% of GDP is correct).… Read more »
David, Interesting article on the ‘two speed Euro’. It might work but I can see difficulties. Another thing we do know is: “when things can’t go on forever, they change”. We know for certain that a single currency for Europe does not work when we have independent national governments, different cultures, values, language, custom, etc. The Euro experiment clearly has failed. The Euro could exist as a single currency but only under a federal Europe, probably resulting in Germany & France dictating to the rest of us. This is now an unlikely option because of the mistrust built up over… Read more »
the contrarian in me asks: if it were possible for the avaerage joe soap to invest his savings in icelandic króna, would that be worth doing or is that a total wackjob of an idea?
Deciphering the Codes David has gone Aquarius ( element -air ) in this article . He projects : devaluation to 70% , ‘plucked out of the air’ . He did not say something like well lets say ‘ based on the national GNP ‘ . No, he went jugular to his inner conscience and that is what it is, don ask me how . David has also gone spiritual when he roars like a Lion to all the little people in the forest and says , ‘ the end is nigh’ , this is in line with his Leo Sun… Read more »
David, What makes you think the feckless Merkel et al., the deciders of all things Euro, will accompany the creation of a Tier 1 and Tier 2 Euro with a debt write-down? This makes sense but the Euro gang leaders do not.
The other move the Euro gang leaders can take:
1. The ECB is authorized to print money.
2. Countries are encouraged to do stimuli rather than austerities.
3. Inflation.
4. The debts are paid with cheapened money, thus being reduced.
5. The Euro loses value against the dollar.
6. EU bonds are issued at a fairly high rate of interest and they find a market.
Of course none of this gets anywhere near the roots of the evils of financial capitalism, so the traders live another day to cause another big recession.
Interesting, the quote on Herbert Stein, AEI member etc. The wiki page is a mess, but a cursory glance must alert one. Being on Nixon’s Economic Advisory committee, raises the question : Had Stein something to do with Nixon 1972 axing of the Bretton-Woods 1944 currency agreement? This opened to the door to derivative trading by the Inter-Alpha banking group within months. So the stable currency regime did not just “stop”. The only remaining brake on chaos was the 1933 Glass-Steagall Act repealed under Clinton in 1999 by Larry Summers. Presto – the financial crisis tool off. Sure it had… Read more »
David
A strong Euro / weak Euro scenario sounds fine, if one could just wave a wand and make it happen. What nobody seems to be able to tell me is how we get there in practice, avoiding complete chaos en route. What are the steps to be taken? How does one avoid a run on banks, bankrupt financial institutions, empty ATMs, non-functioning financial software and so on (not to mention rampant litigation)? How long would it take to have the new currency printed?
MC
David-please do elaborate. What is the new currency? Who controls it? Are we lumped in with Greece/Portugal etc? Can we not revert to £punt and regain our own currency and control of our monetary policy? Would that not be better for Ireland Inc?
Things must be serious when the Italian President is putting an economist in charge.
I mean, even though things got bad here, we continued to appoint lawyers, school teachers, student union politicians and social workers into positions of responsibility.
The only economist we picked was Baby Brute, and his investment strategies really give the game away, as to his economics ability….
If we get a new currency – the debts will still be owed in Euros. This is the law as such. A case of the “the small print” of EU Treaties.
subscribe.
Unicredtit, Italy’s biggest bank writes 10,6 billion losses in Q3 adding up to a combined loos Q1,2,3 of 9,3 billion. Oh, and guess what, Unicredit’s stocks were excluded from trade today!
Eat that Monti.
Did the Finnish devaluation of 1992 inspire Linus Torsvalds to invent Linux? Was it the seed that created Nokia?
Of course it wasn’t.
Real quality permanent change is not really a function of the currency that country transacts in.
In the absense of such real change, devaluation number one would be followed by devaluation number two, three and four. At the end of which it’s back to square one.
If David was a dietician, he’d be all for liposuction. Changing your own habits and behaviour is far more effective.
David, would you explain to me why countries kicked out of the eurozone would accept a common 2nd-rate currency. Why would Greece team up with Portugal e.g.? They’ve different debt structures and need different policies to keep afloat.
When the euro blows up, the overhead structure will crumble. Confusion will reign and angst. Every country will reconsider and weigh its options along lines of national interests, and save who can. Don’t you think so?
I even doubt the core to hold under those circumstances.
There will be no eurolite and euroheavy , lets just see what happens to Greece , they are first in line . My guess is that they return to the Drachma. Merkel and Sarkosy want them out but why would they set up a another common PIIGS currency , it doesnt make sense. The big issue is the unravelling of Euro contracts for the PIIGS . Remember after Greece is Ireland , Portugal is way ahead of us economically , we have 494% debt to GDP if you count all the debts. There will be no soft euro , it… Read more »
Would it be wise to purchase physical gold or silver with any cash you might have to spare at this time.? Keeping in mind that the financial wizard Max Keiser thinks the price of both is going to increase in the future
So with a two-tier currency, we would still have, for Germany and France, say, the Euro. For Ireland et al, would it be the Pean? Or the Peon?
[…] […]
Within Ireland itself the High Street is dying. Little emperors on the local authorities are sucking the life blood out of the Irish retail sector. Whatever business exists is going to chains operating out of dreary, energy consuming, plasticky, monotonous shopping malls. Brought to you by credit from Anglo Banglo, and paid for ultimately by the same austerity pressed taxpayers who previously supported the High Street. The concept of the urban centre is being killed by idiots sitting in plush new expensive offices in local authorities, and running riot over their domains, like mini-Bertie Aherns. And the media pumps out… Read more »
The German aim is as stated by Merkel, a united federal Europe. A two tier Europe would put back this option for perhaps thirty years. I can not see this being done unless there is no other option available. The alternative is that we are all offered a out clause from our outstanding debts, if we agree to a federal Europe. This will be done very soon. We are gradually being educated into believing that this is the only option left to save all of our economies, and our politicians will go along with this fiction.
Why is it a given that borrowers would have to repay there money in “weak euros”? Surely if banks have to convert all previous lendings to weak euros, we are again revisiting the world of bank recapitalisation…..after all won’t the banks claim that they needed to borrow that money in strong euro’s? Also does anybody know if you can open USD/SEK/NOK bank accounts with Irish banks?
Article states – *Now none of us can pay the money back.*
This I reckon is the nub of EVERYTHING.
Why?
Well because insiders have socked away the swag.
The swag could pay the money owed back.
Topsy turvy, you can open non-resident accounts easily in other countries. See http://www.preparefordefault.ie. Might provide more security than savings in Irish banks but who knows… Like the idea that savers would somehow be protected in a conversion to a two tier euro but not sure how likely that would be.
If I have this right someone correct me, the bonds that are being bought up at the moment are as far as I can see junk bought to help save Greece / italy/ect ect why buy these junk bonds if there are going to be worthless or at best only worth a fraction of what they cost,which brings me back to Anglo is ther not something in common here.that’s why I am convinced that the present government in place are going about running and rep the Irish people very very badly, the stakes are just to high they are playing… Read more »
Does this meen anybody with savings here should convert them into sterling to protect there savings before savings follow the pension route?:
I have a very simple question.
“Prospects are uncertain as the German government, the Bundesbank and hardliners in the European Central Bank have blocked key policy options. These include issuing common euro zone bonds, mutualising the euro zone’s debt stock, letting the ECB create money to fight the crisis, or having it act as lender of last resort, directly or via the euro zone rescue fund.” – Irish times
Why are they not pursuing ANY of the above solutions?
David I am really getting fed up of you sensational economics, which are only to raise your public persona even more. Saw you on the Cowen crisis, and your feeble attempt to rewrite history; the famous bank guarantee. Defending your idea with T&C that I cannot remember! The weak Irish media gave you a real easy ride on that idea when does anyone take you on in Ireland. Enough, when is the simple economic solution the best, but that’s boring and does not sell books, TV series and seminars making you a wealthy man. I was a fan when you… Read more »
The above encapsulates much of what is wrong with Ireland: DMcW offers yet another of his ‘this wek’s magic bullet’ solution to get this under-regulated, mediocre-educated, iphone fidgeting spoiled brat country ‘back in business’. If only it were that simple David, we’d have bounced back since 2007 already! …then Andrew above takes time out to criticize David, fudges his own point by meandering into an ad hominum attack and is then too lazy, or perhaps too impatient or too disrepectful to both DMcW and readers of this thread, to be bothered proof reading his own contribution. His argument is that… Read more »
week’s :-)
My error above gives me an opportunity to apologize for my mistake. My comment reads ‘wek’s’ when it should read ‘week’s’. I recognize my error and correct it accordingly. All over Ireland the revolution is about to begin – shake-ups in the public sector and the professions. Michael Casey and others have been highlighting the amazing carry-on of architects in terms of dodging accountbility for poor building regulations standards. What I’m optimistic about is the coming overhaul of institutions and practices at all levels. But the resistance to change will be impressive. The conservatives are well entrenched absolutely everywhere in… Read more »
Here’s a fascinating book review about our dearly beloved global economy and culture. From http://www.brainpickings.org, Nov 13, 2011 “Monoculture: How Our Era’s Dominant Story Shapes Our Lives,” by Maria Popova What Galileo has to do with the economy, or how Wall Street is molding your taste in art. “The universe is made of stories, not atoms,” poet Muriel Rukeyser famously proclaimed. The stories we tell ourselves and each other are how we make sense of the world and our place in it. Some stories become so sticky, so pervasive that we internalize them to a point where we no longer… Read more »
[…] http://www.davidmcwilliams.ie/2011/11/14/the-end-of-the-euro-is-nigh […]
VERY CONCERNED!
What would anybody advise to do with say 50,000 euro savings in Irish bank accounts???
Already sent it home monthly from Australia for the past two years! So its pointless sending it back, or is it??
Don’t know who to ask about this and I will not contact any Irish bank personnel!!
PLEASE give some guidance or my plan to build a house in Ireland next year is doomed!!
A little bit of history that we shall never forget!
Busy with my yearly IT cleanup, I thought I post this here for you to download as a historical document, something that in my opinion shall never be forgotten.
http://dl.dropbox.com/u/4914840/document15.pdf
@bonbon, Citizenwhy, Deco etc.
You know what I would find most interesting? The personal intersections of our ‘good Lords’ in Banking, Legal, DoF, the core of senior civil servants etc. and the Opus Dei in Ireland.
It is just a hunch, well, a bit more than just a hunch really, but I feel that the influence of certain groups in ireland has been instrumental to a public behavior that I would call extremely submissive.
Spain = Ireland muliplied by seven. I personally, have been absolutely bemused at how a country with 50% plus unemployment rates for people between 23 and 30 is able to tell the world that real estate prices have only declined circa 15% from peak. This is a load of official nonsense from the Spanish govermnent, the Mr.Bean like prime minister, the banks, and the state authorities. Unemployed people do not bid on real estate. http://www.marketwatch.com/story/pain-returns-to-spain-as-yields-jump-2011-11-14 Spain’s accounting is loaded with regional government waste, and off balance sheet accounting tricks – like having a stimulus plan now, and incurring the bill… Read more »
People will not change even given a burning platform until the flames are licking at their own feet. Change is not driven by empathy at the struggles of others but by personal need and sometimes it even needs desperation. To Eireannach. The fify and sixty somethings have to take the blame for this mess not the youngsters. They are in charge set school curriculams and ignore things such as language teaching for the ages when they are far easier to learn. The older generations grew up in a poor country and decided that accumulation of wealth was the key to… Read more »
Morning, There have been a number of comments about the Bank Guarantee. I would like to take the opportunity to get something straight about the Bank Guarantee, not in my words but in the words of Brian Lenihan. It is true that when he called out to my house I told him that in my opinion (Opinion, not advice — advice is given by paid advisors, civil servants, paid consultants, paid central bankers etc) he should copy the Swedish banking policy of 1992. This would stop the bank run that was happening. That was it. I assumed that they would… Read more »
Here is an intelligent American view of the reality behind widespread misunderstanding of European leader’s motives. http://bit.ly/rtmZdj There has been a resurgence of comments in this blog about an assumed American thrust to warfare as solution to global economic problems. Americans are portrayed as irresponsible war mongers on one hand and the European elite as irresponsible federalists in pursuit of global domination using financial instruments on the other. Friedman’s better balanced review concludes that European elite is simply trying to prevent a recurrence of the wars that have devastated the continent so often in the past. Those leaders see the… Read more »
Good morning Mr Monti Ponzi
http://www.bloomberg.com/quote/GBTPGR10:IND
http://www.youtube.com/watch?v=xq3BYw4xjxE
We are the many not the few – / it’s the same in Europe as in the states – listen to the song!
I listened to Warren Buffet yesterday repeating what he has said before that credit default swaps are socially destructive. He is one of the most successful capitalists in history, he says that but no one moves to ban them.
G 20 could make three decisions to immediately help the world economy.
Ban cdss.
Ban short selling.
Ban speculation on oil and gas.
David, an easy $400,000 for you!
Simon Wolfson, the CEO of European retailer NEXT, is offering a prize of �250,000 — about $400,000 — to the person or group that comes up with the solution for how one or more of the 17 countries now using the European common currency can stop using it without causing a massive shock to the global financial system.
http://finance.yahoo.com/news/win-prize-breaking-euro-214200129.html