Free Markets, Free People

Half Solutions Will Not Work

Brett Arends is skeptical about Europe’s current direction:

Their proposal is preposterous. Anything can happen in this life, but it would be remarkable indeed if this idea got off the ground. Anyone pinning their hopes that this will solve the crisis needs to think it through.

Why would the Portuguese accept the right of Germany to impose budget cuts on their country? Why would the Greeks?

Would we accept that role for the Chinese and the Japanese, the biggest holders of Treasury debt? How would you feel if you opened the paper to be told that the new Sino-Japanese “Fiscal Stability Commission” in Washington had just slashed your grandma’s Social Security checks by one-third, scaled back federal highway repairs, and that it would impose a 10% national sales tax?

That is, after all, effectively what is being offered to the people of Greece, Italy, Spain, Portugal and Ireland.

It’s absurd. There is no reason why these countries should have to surrender sovereignty. They can simply, where necessary, default. A default by, say, Louisiana would not destroy the dollar. Neither did the bankruptcy of Enron or Lehman.

What happens when after signing the new treaty (if it ever actually comes to be) the Greeks or Italians decide to thumb their noses at the EU and default anyway? Kick them out? Isn’t that right where we are now? Isn’t the fear that countries are kicked out or leave leading to financial chaos and defaults? Will these countries truly continue to pay their bills and accept austerity in the face of a severe recession/depression?

If that is the concern, just as I have been pointing out for some time, anything short of true fiscal and political union will fail. The right of existing states to refuse to honor the treaty (remember the last one was treated as inconsequential by violators, including Germany and France) cannot exist which means the right of states to secede or be expelled from the union cannot exist. If that option is not off the table then Eurozone bonds cannot be treated as risk free. If they are not seen as risk free then they will be rated accordingly and the Eurozone will be unstable as Louis-Vincent Gave points out:

Basically, we have to remember that the average sovereign debt buyer is not a hazardous investor. The guy who buys a government bond is looking for a very specific outcome: he gives the government 100 only so he can get back 102.5 a year later. That’s all the typical sovereign debt investor is looking for. Nothing more, nothing less.

But now, the problem for all EMU debt is that the range of possible outcomes is growing daily: possible restructurings, possible changes in currencies, possible assumption of other people’s debt, possible mass monetization by the central bank etc. Given this wider range of possible outcomes, and the consequent surge of uncertainty, the natural buyer of EMU debt disappears. Again, the typical sovereign investor is not in the game of handicapping possible outcomes; he is in the game of getting capital back!

This is very problematic because once uncertainty creeps in, bonds will tend to gradually drift towards what I have come to call the bonds “no-man’s-land”. Basically, once sovereign bonds reach 90c to par, they tend to have a much higher volatility and much greater uncertainty. As a result, they are no longer attractive to the typical bond manager or asset allocator looking to buy bonds to diversify equity risk (think how Italian bond yields are now correlated to European equities. If you want to be bullish Italian bonds, you may now just as well spend a fifth of the money and buy European banks for the same portfolio impact…). And once a bond enters into no-man’s-land, it has to fall a lot before attracting the attention of distressed debt and vulture investors (usually yields of 15%+). So the first obvious problem is that more and more European debt markets are entering this “no man’s land” bereft of “normal” investors.

Do these countries need the Euro over the long term to be prosperous? More Brett:

The British look smarter and smarter for staying out of the euro area in the first place. Prime Minister John Major, and then, later, Chancellor of the Exchequer Gordon Brown, each took the decision to keep the British pound free. At the time fashionable opinion predicted disaster for the Brits. So much for that.

(Predictably, fashionable opinion now says the Brits look “isolated” for staying out. Really, you couldn’t make it up).

My guess is Brett is correct that we are no where close to a real resolution, which is a path to political unification or breakup.

It has long been clear the Franco-German duo wanted to use their shared currency to bludgeon the continent into something closer to a federal system.

Any investor pinning their hopes on this bird flying needs to be aware it looks a lot more like a turkey than an eagle.

This week’s meeting of European leaders already marks the fifth “summit” to solve the region’s debt crisis since early 2009.

My favorite comment this time: “After a series of ‘final’ summits, it would be nice this time to have a real ‘final’ summit.” That was from Standard & Poor’s chief European economist, appropriately-enough named Jean-Michel Six. What’s the betting Mr. Six will be attending Summit No. Six in the new year?

Which is not to say that the ECB or some other entity couldn’t stem the immediate crisis and kick the can further down the road. Maybe, but if so the question is how far? A week, a year, five years? That I cannot answer now.

80 Responses to Half Solutions Will Not Work

  • The history of the EU is one of crises moving the project forward, with skeptics convinced the effort is too ambitious. The agreement is a very good step forward, and I suspect will ultimately bring in the rest of the EU. I’ve always been a Merkel fan (even back in the early 90s when people saw her as just Kohl’s token East European), but really there was never a doubt they’d do what they had to. The Euro failing is not an option. Moreover, as I pointed out yesterday, there is strong reason to believe Europe’s never been stronger: http://scotterb.wordpress.com/2011/12/08/europe-stronger-than-ever/

    Not only is the total debt to GDP ratio lower than ours, but they’re tackling that problem and the political systems have been able to reach compromises whereas the US system has been dysfunctional. It’s too early to say the crisis is over, but I think we can see the path forward for the EU. It is going to become more federal, but that’s not a bad thing.

    • @scotterb The path forward is various central banks looking to buy new printing presses. Really Gollum, why do you even bother?

      • @DocD I was living in Germany exactly 20 years ago when word of the Maastricht agreement came out. I feel similar emotions at this — an historic move forward for Europe. If the British, Swedes and others want to stay outside, they can (though I suspect ultimately they’ll see it in their self-interest to participate), Europe can be renewed without them. Not only won’t the Euro die, but this will strengthen it. This is also very good for the global economy. Now we need to see what Mario Draghi and the ECB will do.

        • @scotterb
          ” but I think we can see the path forward for the EU”

          So the best path forward for the EU is the path in which the parts of the EU disagree with Gollum just buggar off. Fair enough.

        • @scotterb @DocD

          And, as has happened before, it will sort of work until the day France or Germany just choose to ignore their obligation to pay attention to the treaty.

          All that’s going to come out of this is renewed nationalism, the more they’re told by the ‘ruling authority’ the more it will grow. It’s going to end up looking like Europe under the Holy Roman Empire. Interesting that two of the party’s staying out are old hands at not being dominated by the traditional continental powers.

    • @scotterb No. The issue goes way beyond getting their debt under control. Currency unions without fiscal union cannot work, for the reasons laid out above, which you have not addressed. The bond market will not accept it otherwise. Fiscal union cannot work without political union, which Germany is not willing to do (nor are they the only ones unwilling to do so) at least with all of the members. For good reason I might add. Finally Merkel’s plan will not work. Austerity without the ability to depreciate your currency cannot work, and she is demanding austerity. In Greece and Portugal’s case at minimum they cannot service their debt under any conceivable set of outcomes. The total debt to GDP ratio is irrelevant to the problem unless you have a union. Then you are right, they would be in better shape than us. However, if ifs and buts were candy and nuts we would all have a merry Christmas. They aren’t a union and such metrics are meaningless.

      Finally, I am so tired of hearing that Euro failure is not an option. It has failed, it just hasn’t broken up. It will not survive in its current form. More federal isn’t good enough, it ultimately becomes a union or it shrinks/breaks up.

      • @Lance Paddock I guess we’ll have to let time determine which of us is correct. The goal of monetary union is in part to work towards fiscal union and political union of a sort.

        I think it’s too black and white a statement to say these things ‘can’t work.’ You’re ignoring the middle ground between fiscal union and fiscal independence. So far the bond markets, currency markets and stock markets seem bullish on this deal. I guess the point is the EU is a 53 year project (or 63 if you go back to the ECSC) of building a new form of political order, and I am convinced you underestimate the progress made so far. I think the error you make here is that you embrace stark dichotomies “it’s X or Y, and unless it’s Y it can’t work.” The era of the centralized bureaucratic state may be ending and the EU is modeling new ideas about political organization. They have a lot of problems to address, but they are charting new ground.

        • @scotterb @Lance
          Let’s just cut to the chase Gollum. You make grand empty pronouncements. Life on the ground and various impertinent fascists hand your ass around on a plate. You go through various stages of grief, denial, anger, bargaining, depression and finally acceptance of some minor point. It starts up again after a day or two, you get offended on behalf of someone else, get an attack of the vapors and huff off to write a blog entry for your students. There, that saved some time and electrons didn’t it?

        • @scotterb @Lance “The era of the centralized bureaucratic state may be ending and the EU is modeling new ideas about political organization.”

          Eh? And this central authority that will dictate government budgetary decisions to member countries, you see this authority as a decentralized one do you?

        • @looker @scotterb @Lance Don’t hassle him with logic. Europe is already a centralized bureaucracy without any real accountability. A “premier” who nobody voted for and the 99% can’t name. Bizarre rules that do little good for anyone in countries it doesn’t matter (60W incandescent lightbulbs banned and mercury leaking from CFLs, why???). And on, And on, And on… Yeah this is a decentralized central bureaucracy, in the world where thieves are noble and bananas are mandated to be straight.

        • @scotterb @Lance The markets are not bullish. If it was widely believed that this was a solution the markets would be up a lot more. In fact, what they think today doesn’t matter. What matters is does any of this take default risk off the table? No it does not. Does it ask for austerity in the peripherals. Yes it does. Do we already know that austerity is leading to wider budget deficits and a full on depression in places like Greece, Spain Portugal and Ireland? Yes we do. Will more austerity make their economic straits better? No it will not. Will the citizens of these countries continue to subject themselves to creditors diktats with no way to make themselves more competitive so starry eyed europhiles can utter platitudes like “failure is not an option.” My god man, I expect the attacks to come from the libertarians to my analysis. I am not arguing against the Euro Bureaucratic state (though I could) I am pointing out that based on some paleo economic distorted austrian need to force austerity down their throat they will strangle these countries. I am pointing out they need more Union, not less, but they don’t want it. Defending the union to me is silly and shows you didn’t read or comprehend what I wrote. I am not a fan of the union, but the flaw in the Euro is one of too little centralization, not too much. Since Europe (and for good reason, but irrelevant to my argument) doesn’t want to give up their sovereignty they want half measures. There is a reason no currency union has without fiscal and political union has survived or stayed stable. It is impossible.

        • @DocD @scotterb @Lance Studies that take three years and proclaim water does not re-hydrate. Yes yes, it is genius.

        • @Lance Paddock @scotterb @Lance The forecast calls for a 50% chance of outmoded 20th century thinking with an 80% chance of globalization appearing in the discussion. A high probability of youth affecting the outcome is anticipated by a guy who doesn’t notice a good number of countries involved still occasionally have riots over sporting events, but will lay down peaceably when told by foreigners they are not allowed to get cost of living raises or increased government subsidies and that more austerity will be required of them.

        • @Lance Paddock @Lance My point is you don’t need the kind of centralization you think is necessary to get fiscal discipline, as well as to handle situations in troubled countries where you need austerity but you don’t want to have it turn into a depression. That’s key – without austerity, how do you get debt under control and reduce bond yields? Just having troubled countries default would do severe damage to the European and global banking system. I think you’re under estimating the capacity of the EU and the European financial sector to make this work. There may be protests but business and banking communities in the countries with problems don’t want out of the Euro and they have the clout. Currency union first, moves to fiscal union are underway (there is no need to have absolute fiscal union as long as you have strict standards – which is what this agreement contains), and a kind of political union is already in progress.

        • @scotterb @Lance You need to reread what I wrote, including the links. Let’s start with austerity without the ability to devalue doesn’t work. It can’t work in some countries especially because even if austerity didn’t crush growth immediately they would need austerity for decades. Since it does crush growth their deficits blow up and then they have to go through more austerity which hurts growth again, rinse and repeat.

          “That’s key – without austerity, how do you get debt under control and reduce bond yields?”

          That’s the point, their is no answer if the countries cannot adjust their fiscal policy, currency value or monetary policy to encourage growth. What you are claiming will work is exactly what they have been trying, and it has been a disaster. Sometimes in life their are no good solutions (unless they believe that union is what they want, but as of now that doesn’t seem to be the case.) They either need to be bailed out by direct transfers (which might happen in a true union) default or leave the Euro. Obviously the second option is compatible with the other two options. There is no third way, at least not one that will be chosen. These countries want to be in the Euro because it would be painful to leave and they believe it is longer term in their best interest. If being in the Euro means a decade or two of depression for them, which is what is being proposed, those countries will leave the Euro. Ireland is already developing plans to leave the Euro if they don’t get to write off most of their debt. If they want to save the Euro, they need to press on much more aggressively. The markets are not collapsing, but this package does nothing to address the problems in the EZ. The reason they are not collapsing is some of them believe the ECB will intervene. If they don’t the decline will commence just like every other solution that has amounted to no more than trying to squeeze the debtor nations harder.

        • @Lance Paddock @scotterb @Lance
          “Let’s start with austerity without the ability to devalue doesn’t work.”

          And the inverse is also true, the ability to cool the markets of a small economy when they are being driven so hard by the common currency is severely limited. Which is partly why Denmark and Sweden stayed out and are doing OK now, whilst Ireland is pretty screwed.

        • @Lance Paddock @scotterb @Lance Meant to say “is also true in the good times”.

        • @DocD @Lance @scotterb Absolutely, it lead to the housing bubble in Spain and Ireland.

        • @scotterb @Lance let me observe at this time that despite months of ‘fixing’ the crises, from one fix to one crises to another the troubles rise. Which is leading to more ‘fixing’ and yet keeps the faith that they actually know what they’re doing.

          Dreamy eyed faith that, presumably because they are wise Europeans, it MUST work, it cannot fail.

          The good news is, few of them have spent any money on their military for years, and as it’s unlikely we will lend Germany our army when they do an end run through the Ardennes (unexpectedly) we can at least anticipate the fighting will be minimal. Fisticuffs between support units generally end up with more people in the stockade than the hospital.

        • @looker @scotterb @Lance No one wants the euro to collapse. But as you say each proposed fix seems to worsen the chances of a dreamy-eyed outcome. So now we gave various smaller Euro members making sure they have access to printing presses to (re)make (old)new money. And various supports of exchanges are ensurimg that the reappearance of the drachma (or other) happens without a hitch. In most situations it’s better to observe the support staff, rathr than the wishes of a handful of personalities.

        • @Lance Paddock @Lance I don’t think they’ll have a decade or so of depression. The ECB will have to intervene and ultimately there will be involvement from the IMF (the US) and even China. I see what you’re saying but I think what’s going to happen is the equivalent of debt write offs will occur, but in a way that avoids both default and Euro break up. In the aftermath a stronger fiscal regime will be in place, one that upholds monetary union. I guess my objection was that you so bluntly dismissed the possibility they could kraft a solution by saying it was impossible without fiscal union. Fiscal coordination is necessary, and help adjusting to the austerity and the new rules is important, but the idea it’s impossible is overstated. There is a chance this won’t work, but I think there’s a really good chance it will.

        • @scotterb @Lance China is the deus ex machina now? All this hoping on bailout from external actors is fine until their markets also synchronize with yours. The big threat to free markets is unification to the point that no one can rescue anyone. Then those extremely unlikely 6-sigma events suddenly become much more likely and the system fails (or collapses to the point people can move again).

        • @scotterb @Lance “There is a chance this won’t work, but I think there’s a really good chance it will.”

          “The ECB will have to intervene and ultimately there will be involvement from the IMF (the US) ”

          Yes yes, we, the US taxpayer, must intervene to save the dreams of Europe’s pseudo socialists. And the fact that we have to intervene will mean, in your measure, that the Europeans were successful in their efforts.

          Frankly I’d rather continue spending on a military to support their inability to defend themselves via NATO than to start paying for their social programs. Guns, planes, bombs, tanks and troops seem to be cheaper and we have our own debts to deal with.

        • @DocD @scotterb @Lance About the only reason I’d like to see the Euro collapse is so Erb would have a fit of apoplexy trying to explain it. That hardly seems reason enough to plunge Europe into such a crisis however. I don’t wish Europe any true ill. I think perhaps they admitted some countries to the scheme prematurely in a rush to “get ‘er done”. We’re seeing the result.

          I don’t see an alternative to what they are proposing, actually, but I also don’t think enough of them are ready to give up their sovereignty to manage it. No, Lance is right, they can’t take half measures on this and reasonably expect it to work. They’ll need to start thinking of themselves the way New York thinks of New Jersey, rather than the way the Republic of France thinks of the Kaiserreich.

          Now, how that will reflect on the states that have historically held themselves apart, such as Sweden and England, remains to be seen. Perhaps the days of Britain perceiving a united continent to be a threat to them have completely passed (what with the Empire being not even a mere shadow of it’s former self).

        • @looker @scotterb @Lance The Empire will rise again. Consider what it has going for it with its former members:
          1 common language
          2 billions of people
          3 little animosity
          4 the Queen already knows how to run the show
          5 we all play proper sports

          Slap a common currency on and away you go. If that won’t work, nothing will.

        • @DocD If I had any respect for American Football, I’d disagree with you, but alas.

          Still, Cricket? I mean, really? and my Commonwealth friends insist that Baseball is boring?

        • @Lance Paddock @scotterb
          ” but the flaw in the Euro is one of too little centralization, not too much. Since Europe (and for good reason, but irrelevant to my argument) doesn’t want to give up their sovereignty they want half measures.”

          However it is almost axiomatic that only half-measures will be considered. What will be lurking in the back of every Euro politician’s mind is the fear that some country will be forced to put a decision on the Euro or even EU membership to a public vote, anf none of them are confident of the result of that. Even before the bad times, putting things to the public was an inconvenience as they tended to be “unreliable”. The rise of parties promising better sovereign power in the face of demands from Brussels terrifies the current crowd of rulers. Anything stronger than a half-measure risks turning the unwashef 99% against the euro-supporting government rathet than the faceless banks and capitalists. Maybe it would only topple Greece or Slovenia, but the precedent would be set and it wouldn’t take long to spread. No, you won’t see any strong measures that might risk a real popular revolt and rise of new parties. It’ll be attempts at muddling through hoping that things will get better enough to avoid dealing with the underlying weaknesses that will always risk fracturing “Europe” when times are tough.

        • @looker Do not make me quote Churchill at you!

          Anyone who cannot appreciate a game that lasts five days and may end in a draw due to rain does not deserve to vote.

        • @scotterb @Lance ECB intervention is not a panacea. My post already describes why the market will ultimately be disappointed. However, that only solves the issue of countries which can service their debts, not those that can’t. They still have to default. There is no some other way except Germany or France paying them off, which they refuse to do. If they had a true fiscal union they could do so, but it amounts to the same thing. Germany doesn’t want to make a direct transfer to Greece, thus they won’t have them in a union where it is hidden inside the unified budget. ECB backstops ultimately mean a transfer from creditor countries to debtor countries. Put all that together and you get Germany’s game. They want more of a union so they can force everybody to pay their debts on terms they find favorable. They will not have a unified budget until everyone is within certain bounds. The other cannot pay under the restrictions of the Euro so they will revolt eventually.

          However, even if everybody did stay within the treaty limits it doesn’t work longer term. Without a true union the differences in the economies of the various countries would diverge leading to massive imbalances again. Unable to stay within the treaty the crisis occurs once again. Since the markets have figured that out the crisis stage will in the future happen much quicker. In fact, I am not sure it won’t happen years before any actual crisis, such as immediately because of the rationale above. If bonds are not considered risk free they get priced accordingly. Without a true union bonds can never be risk free, they are very risky.

        • @DocD @scotterb @Lance True, but every issue can’t be dealt with in one post. China is an oncoming trainwreck anyway.

        • @looker @scotterb @Lance The size of any rescue by the IMF is pitifully small compared to what is necessary. The US is certainly not going to commit a trillion or so to beef it up.

        • @looker @DocD @scotterb @Lance I will say I would rather they break up than unify, but unifying is better than half measures. That way will lead to an interminable series of crises.

        • @Lance Paddock @Lance Ultimately it’s a negotiation game — Germany has its interests and other states have theirs. However they all have over arching interests not to see the Euro fail and to support the EU. I disagree about the need for more centralization and/or fiscal union. Obviously you don’t need absolute fiscal union — even the US doesn’t have that. The question is how much leeway and budgetary power do the states have. I believe that it will work better without too much centralization as long as the guidelines are clear and applied consistently. That allows states to set their own priorities, including high or low taxes, more or less social welfare spending, etc., as long as they stay within those guidelines. I actually would like to see the US move that way, shifting fiscal power away from the feds and to the states.

          I think you are underestimated the value placed on all players, including the troubled states, on keeping the Euro and the EU strong. That has become an interest in and of itself, shared across most of the Eurozone. Moreover, the big banks have a very strong interest in the Euro continuing, as does the business community. They have the clout and power to actively work to counter act imbalances. The development of the EU has been one of really 60 years of movement towards more economic and political unity. Sometimes crises make it seem like all is lost, but they find a way to make it work, in part because they no longer think like sovereign states acting out of self-interest, but have value in keeping their collective enterprise alive. I think you’re under estimating their capacity to handle the difficulties. Time will tell.

        • @Lance Paddock @DocD @Lance Well, I give you credit for one thing: you have very strong opinions! China is a train wreck? Possibly. Clearly the cheapest manufacturing is shifting to other parts of Asia and it’s not clear how their bureaucracy can handle the shift to more value added manufacturing. Also the political monopoly of the Communist party will be called into questions (though quick moves to democracy in China could be disastrous). China is investing strongly in Europe, especially countries like Italy. That’s an interesting trend.

        • @scotterb @Lance Political unity, such as the Germans opining they should have never let the English into the EU. That’s your idea of growing closer? You see the English veto as a success I gather?

          “time will tell”, as Watson probably desperately wanted to say at times, “no s&^% Sherlock”.

        • @Lance Paddock @DocD @scotterb @Lance In any union, there will be stronger partners and those on the outside. There are several countries I cannot see peaceably abiding by drastic budgetary control emanating either from Brussels or Berlin, or Paris for that matter, should the French suddenly realize they’re on the road to becoming the Vichy government and trying to wrest control from Berlin.

          But it for damned sure won’t be any of the other continental players because they don’t have the economic muscle. As Lance says, the bills are going to come do, and writing off the debt hardly seems a sound way to start off a new fiscally sane union.

        • @scotterb @Lance @DocD It is a train wreck because they have a real estate and credit bubble that is bursting.

        • @scotterb @Lance It isn’t a matter of will. it is nothing like the US, which shows you don’t understand how monetary systems work. Look, this is a fixed exchange rate between independent states. Greece for example is uncompetitive with Germany at par. Since they don’t issue their own currency they cannot devalue it. Thus they can only balance trade with them through lower wages and prices or they run a trade deficit. If they run a trade deficit and the government does not run a deficit them mathematically households have to go into debt. If both the government and the private sector tries to save at the same time they must run a trade surplus. If they cannot run a surplus (which they cannot due to the currency issue) then the attempt to save leads to a collapse in economic activity and needless to say, deficits for both the household sector and the government. This is not opinion, it is double entry accounting and true as a tautology. it has nothing to do with will, or people’s willingness to cooperate or anything else. Of course, Germany could make massive transfers, but they don’t want to. In the US we make transfers and people move and all kinds of other things because we are a single country and don’t mind (at least not much.) The Greeks and Germans mind very much. Greeks don’t want to become German’s and all move, and the German’s don’t want to make massive transfers to balance the equation.

          This issue to one extent or another runs true between all the countries, it just has become a crisis with the PIIGS first.

          This is math, not opinion. The inability of so many to not acknowledge it is exactly why I have consistently been right every time someone says the problem is manageable and needless to say, it hasn’t been.

        • @Lance Paddock @Lance OK, the first part of your post is exceedingly simplistic. Not only do I know how monetary systems work, but so do the bankers and economic ministers of the EU. They certainly understand the basics. But you can’t jump from there to saying they can’t solve this problem. I think you’re ignoring the capacity of the EU governments and banks to deal with the difficulties inherent in stabilizing monetary union and moving towards fiscal coordination. I think you’re under estimating the understanding that the leaders of the EU have of the problem. If it were really as clear cut as you’re saying than the leaders — bankers, finance ministers, etc. — all lack basic understandings of monetary policy. I think you’re drawing a pessimistic conclusion from a very simple read of the basics, and not taking into account the details and the capacity of the EU to manage the situation. Political will matters, and you shouldn’t consider the European finance ministers and economists all fools who are overlooking the basics.

        • @Lance Paddock @Lance @DocD Maybe. But I suspect rather than a crash they’ll have increased inflation. I think a soft landing is possible. I think a train wreck is unlikely.

        • @scotterb @Lance “Not only do I know how monetary systems work, but so do the bankers and economic ministers of the EU. They certainly understand the basics. But you can’t jump from there to saying they can’t solve this problem. I think you’re ignoring the capacity of the EU governments and banks to deal with the difficulties inherent in stabilizing monetary union and moving towards fiscal coordination. I think you’re under estimating the understanding that the leaders of the EU have of the problem.”

          The problem with that as I see it is that it is the very same ministers and bankers who got the crisis going in the first place. So by implication either they were negligent in their duties up until now, or they actually didn’t know where their policies would take them. Either way it isn’t a rosy picture.

        • @scotterb @Lance “Sometimes crises make it seem like all is lost, but they find a way to make it work, in part because they no longer think like sovereign states acting out of self-interest”

          You are conflating the will of the political class with the thinking of the 99%. The politicians are generally very much for the whole “Europe” project, which is entirely understandable. Whether you view it as a positive thing, with a view to moving towards peace and harmony, or negatively as pigs at a trough making work for themselves, is not so important.

          But the thinking of the 99% is entirely another thing. The majority most definitely do NOT view themselves as Europeans first and certainly DO value their sovereignty. Politically this view is typically held only by the far left and right parties in most EU countries and it only gains little traction because the whole EU thing has been little more than a distraction for the 99% during the good times. Now however, different ballgame altogether for domestic politics.

          This divergence of opinions is what will ultimately tear the place apart in some way, if things really do go to hell in a handbasket. Political will by the masters to keep the project alive is one thing, the masters facing down domestic voters is entirely another.

        • @scotterb @Lance “China is investing strongly in Europe, especially countries like Italy.”

          China is awash with foreign currency and is using its sovereign funds to buy influence in many places and has been for a long time. But China is irrelevant really, the sovereign funds cannot pump in enough capital to solve this crisis and the Chinese leadership really doesn’t care. If the EU stays together, they trade with the EU. If the EU breaks up, they trade with whatever the new constellation is.

        • @DocD @scotterb @Lance “The problem with that as I see it is that it is the very same ministers and bankers who got the crisis going in the first place.”

          Yes yes, but you see NOW they’re smarter because this is all too big to fail.

          Odd, his faith that lately they aren’t just more or less throwing poo at the wall to see what sticks. More to this point, his faith that the countries actually causing the crisis are suddenly going to “see the light”.

          Six countries for certain in the Union are the equivalent of drunks on a street corner, swearing that if their more wealthy brethren passing by will just give them a few bucks they’ll get a decent meal, clean themselves up and stop their binge drinking, honest. The Germans and French declare they can reform the reprobates if all the other passers by will agree to a system by which the Germans and French control everyone’s paycheck in the future and they start shaking their fists at the British guy who’s ducking into the local pub to give it some thought over a pint rather than just handing his wallet to them.

        • @scotterb @Lance @DocD “I think a train wreck is unlikely.”

          The prognosis for world train wreck is looking better right now than it has since, say, 1976.

        • @looker @scotterb @Lance ” About the only reason I’d like to see the Euro collapse is so Erb would have a fit of apoplexy trying to explain it. That hardly seems reason enough to plunge Europe into such a crisis however.”

          Well it is as good a reason as any, but I suspect he’d just claim he saw it coming and slink off to his blog to edit his predictions to make the past agree with the future. Just this weekend Prof “I am not a crook” Erb had an error pointed out in his diatribe on Islamophobia, so he deleted the comment and changed his post with none of the usual blog courtesy of marking an update. No, admission of error and acknowleding correction is for the plebs. Political scientists use the memory hole. He’s also been given some very softballed question comments to springboard further essays off, so I suspect he’s also sock-puppeting his own comment section as well as zealously deleting and editing his writing history.

        • @DocD @looker @Lance Oh, that was you?! From the vile language (insults, an F-bomb) I thought it was a right wing neo-nazi type. I’ve restored the comment and noted my comment policy and why it was dropped. While I have a liberal comment policy, your post did violate it. But it’s back up.

        • @scotterb @looker @Lance No, it wasn’t me sorry. I had been reading your comments and saw it first time round and then disappear when I browsed through a couple of hours later along with the edits.

        • @scotterb @looker @Lance By the way, in the spirit of the season I forgive you for calling me a neo-Nazi.

        • @scotterb @Lance @scotterb “Not only do I know how monetary systems work, but so do the bankers and economic ministers of the EU. They certainly understand the basics.”

          Scott, you may know a great many things, but you don’t know how monetary systems work. I will skip the obvious point that the economic ministers don’t know how they work either, or have ignored how they work for political reasons, or they wouldn’t be in an existential crisis. We have had summit after summit that not only has failed, but hasn’t even come close to addressing the reasons for the crisis.

          Instead we will address your claim of simplism in my response. Nice insult, but you don’ say in what way it is simplistic? Also, if it is, you have not shown that it is incorrect instead making hand waving statement about “capacity” and “understanding” of various parties in Europe. So, please explain, if it is a matter of will and discipline as the European plan on offer assumes, two things. Please be specific if you do understand these issues. I an very willing to do so myself:

          1. If that is true how come all the efforts to cut spending within the Euro have not only not improved the situation, but have seen the PIIGS economic situations not improve, and in fact generally get worse. Several of these countries are in full fledged depressions the likes of which have not been seen since the 1930′s in America. So much for being able to “manage the situation.”

          2. More importantly, please explain how a country in a fixed exchange rate that has bee running chronic trade deficits, saddled with massive debts can grow their economy if they undergo austerity. Please show your work (or at least describe it in detail.) Note, many of us have been pointing out that the Euro was headed this way for quite some time, that each of the ballyhooed plans were going to fail and been right. I suggest we stop listening to people who have been wrong, and turn our ears elsewhere. If the leadership was honest (assuming they know) about the situation they can give their people two basic choices. Break up and shrink the Euro or integrate into a political union. Before you say that is unnecessary please accurately explain why I believe a union is necessary before you explain why it is not.

          Bizarrely as you defend this nonsense, you admit that the reason the Euro will survive is something else will be done. The ECB will step in etc. Of course Draghi (who may get it) has said fiscal union would be necessary for them to do that. Maybe he is lying, but if he is then the ECB will just have kicked the can again, and possibly for not long.

        • @scotterb @Lance @DocD If so that would be the first real estate bubble on a national scale to result in a soft landing. However, you seem to be believe a lot of things that have never been successfully done before will happen this time.

        • @Lance Paddock @scotterb @Lance
          “We have had summit after summit that not only has failed, but hasn’t even come close to addressing the reasons for the crisis. …”

          You know I am pretty sure that many people are hoping that the wise and powerful “adults” of Europe are going to find the little boy with his finger in the dyke that is *just* holding back the flood of disaster and that they will fix things in the nick of time.

          But everyday it looks more like that little boy is just going to look askance at the performance and observe that, actually, Emperor Merkozy is not wearing any clothes.

        • @DocD @Lance @scotterb “observe that, actually, Emperor Merkozy is not wearing any clothes.”

          Not an image I really wanted to deal with.

        • @scotterb @Lance “So far the bond markets, currency markets and stock markets seem bullish on this deal.”

          After a weekend to digest things people have noticed that the new pact does nothing to fix the present crisis:

          ‘Credit rating agency Moody’s said last week’s summit “offers few new measures.”‘

          “Analysts warn that the deal doesn’t help cut existing debt”

          “Although Italy managed to raise euro7 billion ($9.4 billion) in an auction of 12-month bonds, its yields on the secondary market — where the issued bonds are then traded freely — continued to rise.”

          “It’s 10-year bond yield was up 0.49 of a percentage point at 6.72 percent, not far from the 7 percent level that is considered unsustainable in the longer term. The rise in the yields indicates investors are more worried that the country might eventually default. Although Italy managed to raise euro7 billion ($9.4 billion) in an auction of 12-month bonds, its yields on the secondary market — where the issued bonds are then traded freely — continued to rise.”

          “It’s 10-year bond yield was up 0.49 of a percentage point at 6.72 percent, not far from the 7 percent level that is considered unsustainable in the longer term. The rise in the yields indicates investors are more worried that the country might eventually default.”

          “Greece opens bailout, debt swap talks” Talks that we were laughably told over 18 months ago by all those ministers who understood things so well would never be needed. Let me make another prediction, these write offs will not be sufficient either. Greece will need write downs of closer to 80%+, not 50% of only a small part of the debt. In reality current negotiations seem to be only likely to cut it by less than 20% once we exclude official holdings such as the ECB who do not want to take a loss. European leaders either don’t understand, are deep in denial or are lying to everybody. I suggest a combination of all three.

          “Italy sells bonds as workers strike over austerity” Yeah, the people are 100% behind this plan.

          “Euro zone fiscal pact fails to restore confidence” No kidding. The half life of solutions which change nothing seems to be getting shorter and shorter. 5 year Italian bond yields just shot above 7%. If that isn’t fixed by January Italy may have no choice but to leave the Euro.

        • @Lance Paddock @DocD @Lance @scotterb “”So far the bond markets, currency markets and stock markets seem bullish on this deal.”

          And this instant market response to a treaty that Britain torpedoed, you think perhaps that reflects some hard reality?

          You’ve been paying all this financial attention and studied all this time and you believe that the market after a fix it attempt reflects reality?
          The market is purely emotion, in more cases than not. If you’re using that as your measure for how good things will be, well, better reconsider.

          In the short term the market is more often a drunken blonde at a party than a sober Burgher wisely investing his cash based on his years of experience. If it weren’t for the fact that it’s such a disaster these market ups and downs and the constant and desperate attempts to use a 2 day rise as an indicator for forecasting a great coming year would be hilarious.

        • @Lance Paddock @Lance I wasn’t meaning to insult you, only that you gave a very basic explanation about how the system works. You leap from the basics to an absolute pronouncement which overlooks both EU history and the policy tools at their disposal. My reaction in general is that absolute pronouncements (this cannot work/this will certainly work) typically over-simplify. I think a lot of people underestimate just how linked the EU and especially the Eurozone has become. Greece is to the EU more like California is to the US than Mexico is to the US (and California has debt problems!)

          First, austerity is going to harm the economy (something that’s true here too). But there, like here, debt levels have gotten so high in relation to GDP there is no alternative. Second, going off the Euro would be harder on those economies than staying on it — and could have widespread ramifications for the entire European economy and banking system. Third, most Eurozone states are fine with the new regulations, have debt under control and aren’t in crisis. If I am reading you right, you’re not saying the Euro is doomed, only that those states who are doing well by it could form a closer union while dumping problem states (fiscal union is too strong — as California attests, we don’t even have an absolute fiscal union). My point is that through a series of actions starting with this plan the wealthier EU states can help guide the problem states through the crisis with a mix of aid, ECB intervention (and IMF) and oversight so they can stay on the Euro and work through this. You disagree. Time will tell. I’m not making a certain pronouncement – neither of us really knows. I do think you underestimate how connected the EU has become.

          Finally, to your point about political union it would require a longer answer. I think the political model of the sovereign centralized bureaucratic state is giving way to a mix of supranational and sub-national/regional organization. In short, I don’t think political union as traditionally defined is necessary. The supranational rules need to be strong enough to enforce fiscal discipline, but within that framework a lot of diversity can still exist. I think we could learn from that here too, and give more fiscal power to states and away from the feds (which I think most Republicans would agree with).

        • @scotterb @Lance
          “My point is that through a series of actions starting with this plan the wealthier EU states can help guide the problem states through the crisis with a mix of aid, ECB intervention (and IMF) and oversight so they can stay on the Euro and work through this.”

          Greece didn’t just wake up one morning and looked around to find default looming as an attractive option. Likewise the ECB didn’t suddenly notice that the PIIGS were wallowing in debt and let the situation get bad enough they had to come down from on high with a silver-bullet solution.

          I think the question many people would like answered is… if these states and/or ECB are capable of such benevolent, wise and powerful guidance just how did these other problem states end up in this situation when they were all playing under sensible rules laid down by the benevolent, wise and powerful?

        • @DocD @Lance That’s a fair point. I guess my response could be viewed as overly optimistic, but I’d liken this crisis to a heart attack suffered by an overweight relatively young man. His doctor had been advising exercise, but since the man was young and felt good, he ignored the doctor and the doctor wasn’t too worried. After the attack, it’s possible that both doctor and patient suddenly realize that they MUST eat less, exercise more, and change the situation.

          Also, one thing that has to be remembered here is that this agreement is as much for European banks and the larger EU economies as it is for the problem states. And if they do get through this — I’m obviously more optimistic than you are — then as with the heart attack victim, ‘what doesn’t kill you only makes you stronger.’

          If a few states do leave the Eurozone, I suspect the will likely develop plans to put them on track to rejoin after problems have been worked out. Greece never should have been let in (it was a late addition to the initial wave). I see very little likelihood the Euro itself will fail.

        • @scotterb @Lance Since the cure being prescribed really amounts to “fix debt with more debt” I’d say a better analogy would be a junkie going after just one more fix. Or to use your own analogy, a drunk Hillary Clinton looking at a smashed drinks cabinet. Either way, I’m not aware of many junkies who are made stronger by their addiction when the doctor is enabling their dependency.

          But then again, there is no proof by analogy either unless you’re aiming to drive your argument towards different goalposts.

    • @scotterb “The Euro failing is not an option. ”

      Gosh I love it when people make proclamations like this. “Failure is not an option.” It’s a stupid phrase, when one goes into something failure is always a possibility, but it’s seldom considered to be an option anyone would choose. However, saying it’s not an option does not mean it cannot occur.

      It’s a pretense to pretend there is anything, at all, that is too big to fail.

      • @looker @scotterb Funny how Erb’s solution for a supranational entity is basically the same as the solution he hates applied to banks etc… i.e. too big to fail, it’ll be better if we get past this by whatever means necessary, those that shouldn’t have had that power in the first place just need a lot more of the same power to really cock things up next time. Cognitive dissonance… no worries, we’re post-modernists, worrying about “too big to fail” is soooooo Tuesday!

      • @looker @scotterb http://bit.ly/tcSxio So sayeth Adam. So sayeth Jamie.

        • @myweeklycrime @looker @scotterb Failure is not an option… but firing a cannonball through the neighbor’s house is.

          http://www.washingtonpost.com/lifestyle/style/mythbusters-cannon-ball-accident-caused-by-unforeseen-bounce/2011/12/08/gIQABK68fO_story.html

          “Unforeseen bounce”. Kind of fitting analogy.

        • @DocD @myweeklycrime @scotterb In case anyone thought cannon rounds needed to explode to cause damage. A 30lb ball no less, that’s a siege caliber. But then the report was they were going to use stone balls to see if they could be used to breach a stone fortress wall (they can, I’m not sure why they thought this was a myth that needed testing).

        • @looker @DocD @scotterb “I’m not sure why they thought this was a myth that needed testing.”

          (1) Scientists and engineers should be thorough. And, (2) it’s fun to shoot things and blow stuff up.

          Just glad nobody got hurt.

          In a recent episode, Grant recalled how they were no longer welcome in Esparto, where they disintegrated the cement truck, due to the damage caused in the town from the shock wave. I’m just surprised how much they actually do with guns and explosives on the show which happens to be filmed in California. (If I recall correctly, they did mention having to go to a neighboring state to play with machine guns.)

        • @myweeklycrime @looker @DocD @scotterb Not so much for them, surely they know – I’m wondering about who thought it was a myth. The Turks certainly employed stone ball in their sieges, and lest anyone think they were NOT superior siege crafters, those individuals should think again (course survival of all their siege personnel was not a notable priority for them).

          I think my one of my favorite episodes involved their discover that the jacketed rounds from modern high powered personal arms don’t do much more than shatter when fired into a couple feet of water. Not that I ever plan to have to use that knowledge for my benefit…either way.

        • @myweeklycrime @DocD @scotterb Not so much for them, surely they know – I’m wondering about who thought it was a myth. The Turks certainly employed stone ball in their sieges, and lest anyone think they were NOT superior siege crafters, those individuals should think again (course survival of all their siege personnel was not a notable priority for them).

          I think my one of my favorite episodes involved their discovery that the jacketed rounds from modern high powered personal arms don’t do much more than shatter when fired into a couple feet of water. Not that I ever plan to have to use that knowledge for my benefit…either way.

        • @looker @DocD Even 50 cal rounds couldn’t hurt anyone under a few feet of water. You have to employ explosives against anyone attempting underwater escape—and be fairly close.

      • @looker @scotterb http://bit.ly/tcSxio So sayeth Adam. So sayeth Jamie.

  • The very positive reaction to the debacle from the Sweden:

    Prime Minister Reinfeldt said, “If you read the text, it seems a bit strange to support something which can be seen as assuming we are part of the euro,” he said. “It would also require the support of the Social Democrats.” The Social Democrat’s leader Håkan Juholt’s first reaction was that Sweden cannot agree, if the ‘no’ vote in the referendum on the euro is to be respected.

    In other words, Sweden is unusually united, Left and Right, on agreeing that this isn’t something for non-EU countries to agree to. At least, not if they have half a brain and no public debt.

    • @DocD While as a non Eurozone member Sweden doesn’t have to follow the same rules, this story suggests that they will stand in the way of the treaty – and politicians seem to be speaking well of the treaty in so far as it affects Eurozone members: http://www.thelocal.se/37838/20111209/#

      Meanwhile, the UK is in crisis as Nick Clegg threatens to leave the coalition over Britain’s isolation, and many think Cameron played into Sarkozy’s hands. The French have been arguing for a long time that Britain was standing in the way of a closer union (and of course De Gaulle originally blocked their membership). So the political ramifications are going to be interesting.

      • @scotterb Most Swedish politicians are in favor of joining the euro, but the populace isn’t. The euro was rejected in a referendum in 2003 and support for it has dropped even further. Your average Sven in the street typically thinks the country dodged a bullet and has little regard for the various machinations going on. Sweden is also a large net contributor to the EU, which leads to grumpiness sometimes, like now with other less rrsponsible countries facing bailout for what most Svens view as incompetence. So Reinfeldt has made positive noises to the euro meetings now, but carefully made sure that anything dramatic (or that could be viewed as conceding more control to the euro lands) is punted back to the riksdag in the knowledge no party will put its head on the chopping block of public opinion. The coalition governing Sweden wad formed many years ago to defeat the Social Democrats, so is well practised at keeping a united face on most matters, it isn’t an odd post-election marriage of convenience such as the Tory/LibDem government.

  • http://www.spiegel.de/international/europe/0,1518,802823,00.html

    Hm, I don’t think these Germans GET the whole union thingie, I mean, they’re speaking awfully badly about the British here, what with this talk of forcing, and coercing and punishing and excluding.

    Rather contradictory for the word Union, I would think.

    • @looker
      ” “If you’re not willing to stick to the rules, you should keep your mouth shut.”

      How quaintly Germanic. And they wonder why people still instinctively don’t trust them.

      Interesting that Erb’s comment below is a condensed version of the German article. Maastricht 20 years ago, Britain et al get f**ked. Deutschland uber alles, ooops did I say that out loud, sorry I meant Unity and compromise. Or else.

      • @DocD Yes, I particularly note Der Spiegel had quite a bit of ‘or else’ from the various German party members.

        I suppose that’s all a jolly part of Scott’s Union thingie wherein peace, love and brotherhood will reign from the central authority to the outlying districts when it comes to their buggering their national budgets.

        • @looker Well at the risk of sounding flamey, you can understand the poor Germam politicians. Yet again they had the continent in their grip, with a compliant puppet government in France, Poland back where it belongs and VW has absorbed the Skoda arms factories. But then some fool Italian gets them tangled in Greece, the Spanish are good for nothing layabouts, the Swedes won’t commit to anyone and the f**king British keep firebombing their train-set. Next thing you know the Russians will be knocking on the backdoor, or at least cutting the gas off in winter. It is just so *unfair*.

        • @looker And then we have Lord Hawhaw giving daily rosy updates on economic progress, the superiority of the reich, errr, EU over the USA and progress on the Eastern front around Stalingrad is brilliant.

          Or is that a bridge to far?

          Sorry it has just been the longest day.

        • @DocD HawHaw likes to point out how almost everyone is better than the US these days. He likes the word decline for some unclear reason. More than likely his “US Sucks” switch got sticky jam on from his toast during the Bush years. Back when a 5.6% unemployment rate was unacceptable and reason for impeachment in the media; during the times when the President mistakenly saying he was in Texas, instead of Kansas, during a speech would have led to further claims he was held underwater for far too long during a childhood bathing accident.

          Hawhaw could be trying to ‘egg people on’ to show his respect however, especially here, since the site is populated by a bunch of, how is it Ott Scerb says, former military knuckle draggers and ill-informed, inbred, sterile thuggish righties.

        • @looker Now I understand why Sméagol is so fond of Obama… Obama doesn’t understand what language Austrians don’t speak and that “plate teutonics” are powerful forces in this world. Very crypto-Germanic.