Free Markets, Free People

How Bad Is It? Check Out Europe

It is certainly worse abroad than here. As Dale pointed out, if this is a failure of the “free market” why is Europe, which is very tightly regulated, having a worse time than we are? Ambrose Evans-Pritchard has a blog post outlining the woes of Europe. First, the real possibility of repudiation of debt:euro

Ex-Bundesbank chief Karl Otto Pohl has just said that Ireland and Greece are in danger of defaulting on their sovereign debts and/or may be forced out of the Euro, for those who may not be aware of his Sky interview by my colleague Jeff Randall.

“I think there are countries considering the possibility. It would be very expensive,” he said. “The exchange rate would go down, 50 or 60% and then interest rates would go sky high because the markets would lose all confidence.”

Then we have the possible abandonment of the Euro in order to “re-establish economic competitiveness quickly”:

Laurence Chieze-Devivier from AXA Investment Managers — in “Leaving the Euro?” — says that the rocketing debt costs of Ireland, Greece, Spain, and Italy are taking on a life of their own. (Italy has just revised is public debt forecast from 2010 from 101pc to 111pc. That is a frightening jump. While the CDS default swaps on Irish debt is are at 376 basis pouints. Austria is at 240. This is getting serious).

It is far for clear whether all these countries will accept the sort of drastic retrenchment required to stay in EMU. “By leaving the euro, internal adjustments would become less `painful’. An independent currency would re-establish economic competitiveness quickly, not achieved by a sharp drop in employment or wage cuts”.



The possible death of the “European nation”:

Carsten Brzeski for ING in Brussels said the eurozone laggards were more likely to default than pay the punishing costs of leaving EMU.

“It is difficult to believe that Portugal, Italy, Ireland, Greece, and Spain, would be better off outside the eurozone. While a government could possibly get away with a redenomination of its debt, the private sector would still have to service its foreign debt. We believe any attempts to leave monetary union would lead to the mother of all crises, and total isolation in any future European integration”

Mr Brzeski said the bigger danger is that countries will face a buyers’ strike for their debt as a flood of bond issues across the world saturates the markets.

“A further worsening of the crisis could lead to (partial) sovereign defaults in one or several countries.”

How is that likely to happen?

The country’s parliament could pass a law redenominating debt into the new Lira, Drachma, or whatever. But there would be a pre-emptive run on bank deposits long before then. “Anyone not desirous of losing money would presumably see the writing on the wall and transfer any funds beyond the reach of the state. In other words, close down that account with Monte dei Paschi di Siena and open a new one with Commerzbank in Germany”.

Such a wholesale shift would lead to a collapse in the money supply, perhaps equal to the 38pc contraction in M3 from October 1929 to April 1933 in the US — but concentrated in a much shorter period. “Banks would be forced to call in outstanding loans, bring about a collapse in the country’s business.”

Certainly a bit of a doomsday scenario, but, unfortunately, not at all outside the realm of possibility. In fact, as they are, some are arguing it will happen in the near future. Almost every bit of it the result of market distortions implemented or enabled by government.


Tweet about this on TwitterShare on FacebookShare on Google+Share on TumblrShare on StumbleUponShare on RedditPin on PinterestEmail this to someone

9 Responses to How Bad Is It? Check Out Europe

  • Weren’t all the lefties saying we should be more like Europe?

    I guess they have a lot more spending to do to catch up.

  • As I’ve written before, Erb was actually right (for the wrong reasons): the problems the world is having – which may well get A LOT worse – are the result of the failed policies of the past several decades, notably socialism or its American cousins, “liberalism” and “compassionate conservatism”.


    You can’t indefinately give away increasing amounts of money away no matter how benevolent your purpose.  Somebody has to pay the check, and when that somebody runs out of money…  The check is still there.  How will it be paid?  Borrow or steal from somebody else?  Try to rewrite the check in terms more agreeable?  Refuse to pay until some undefined later date when you hope you’ll have the money?

    It seems to me that there must be a limit on the amount of money governments and central banks have for purposes of bail outs.  What happens when that limit is reached?  For that matter, how do we know that we haven’t exceeded that limit?  The US government has been passing out money like candy to banks even though we’re in debt up to our eyeballs.  Can a check from Uncle Sugar bounce?

    What can be done?

  • “You can’t indefinately give away increasing amounts of money away no matter how benevolent your purpose.  Somebody has to pay the check, and when that somebody runs out of money…  The check is still there”

    docjim505 – Very well put.  To the point, and states the basic problem with pretty much all the financial mess out there.  Eventually, the bill comes due.

  • This could also happen here.  What if China and others decide they are not going to buy US government debt anymore?  All that debt comes home and our economy collapses. 

    The bad debt held by the private sector is bad enough but if the public sector debt goes bad then that is it.
    It could happen.  A bit remote on the chances, but it could.

  • Not really related to your post, but I believe Slovakia and Slovenia have both switched to the Euro, and so should be red on your map there.

  • Several other countries have pegged to the Euro as well – breaking the peg wil cause dislocations, too.

    As screwed up as the USA is, some countries in Europe actually had mortgages in foreign currencies, i.e. a Latvian would borrow in Euros to buy his house. or even Japanese yen!

  • Your data can’t be right, because it would mean more of Erb’s comments and predictions were wrong. The dollar is supposed to be crashing by now.

  • Currency trades tend to show equivalent longterm planning to drunken sailors (or perhaps this is unfair to drunken sailors) and the reason Europe is “having a worse time” of todays currency valuation has nothing to do with viability or otherwise of historical social spending. 

    Europe has given notification that it will not provide coverage for states that are unable to pay their debt, it will not hand out billions of dollars to the states of its union in stimulus and may strip bankrupt states of currency union.  Europe is announcing there will be no cheap beer risk free investment in Europe and the drunken sailors currency trades are rocking out of town to the place where free beer is being given away.  The American tax-payers are gaurantors that no federal or state public debt will go unpaid; nor will any private debt from a carmaker or a bank or an insurer go unpaid; soon Washington will gaurantee that mortgage will go unpaid. 

    The euro is down, because the risks associated with euro debt are higher than that associated with USD debt.  The euro is down, because the EU is accepting that prudent financial management requires that they do not bail out everyone.  Politically the reason is the eurocrats know that there is no way on Gods green earth that German, British, French and Scandi states would ever agree to act as backstops for every piece of crud Ireland, Spain, Greece, Italy have overspent AND most critically because the EU cannot by-pass the states to dip directly into the backpockets of every European. 

    The Europeans are liable to suffer some shortterm pain and make the USA administration of Obama-ites look like savants for the next year or two.  However in 3 to 4 years the Eurozone might just about carry a debt to GDP ratio of 70% and the USA will be what – 100%, 200%, more?