Why couldn't euro have been set up without fiscal controls?

[Arbu]

So the fiscal controls that were designed to prevent eurozone countries from running big government deficits didn't work, partly because investment banks helped governments to hide the debts they were running up. So now the plan is to introduce tighter, more supervised, fiscal controls and hope that they work.

But what I don't really understand is why the euro couldn't have been set up much more loosely. If a country goes bust then that's its problem. If it has a big trade deficit then it can use up its currency reserves and then that's it, it will have to stop importing until it's sold some more exports. That doesn't mean an end to the single currency. So why didn't it work out like that? Why did Germany allow itself to get into the situation where the government and banks had lent so much to Greece that the government had to keep lending more in order to protect its banks? I'm not sure that I get it.

 

[The Leopard]

So the fiscal controls that were designed to prevent eurozone countries from running big government deficits didn't work, partly because investment banks helped governments to hide the debts they were running up. So now the plan is to introduce tighter, more supervised, fiscal controls and hope that they work.

But what I don't really understand is why the euro couldn't have been set up much more loosely. If a country goes bust then that's its problem. If it has a big trade deficit then it can use up its currency reserves and then that's it, it will have to stop importing until it's sold some more exports. That doesn't mean an end to the single currency. So why didn't it work out like that? Why did Germany allow itself to get into the situation where the government and banks had lent so much to Greece that the government had to keep lending more in order to protect its banks? I'm not sure that I get it.

There was little thought put into the euro because it's not an economic thing, it's a political thing. Nobody was really interested and it could have been a single anything. If a cheese was one of the major features of a federal superstate, we would have had a single cheese instead of a single currency.

The EU has always proceeded carefully, taking powers slice by slice and in an underhand way, instead of declaring the purpose of the project from the beginning. The shambles that is the euro could well have been set up with weaknesses to lead to a crisis and the necessity of taking further powers to the centre. The idea being presumably that this could even be popular, that it would demanded by grateful and desperate populations looking for a saviour and willing to pay any price. The only thing that went wrong was the scale of the crisis, which is more serious than they probably imagined back then.

 

[Martinghoul]

So the fiscal controls that were designed to prevent eurozone countries from running big government deficits didn't work, partly because investment banks helped governments to hide the debts they were running up. So now the plan is to introduce tighter, more supervised, fiscal controls and hope that they work.

But what I don't really understand is why the euro couldn't have been set up much more loosely. If a country goes bust then that's its problem. If it has a big trade deficit then it can use up its currency reserves and then that's it, it will have to stop importing until it's sold some more exports. That doesn't mean an end to the single currency. So why didn't it work out like that? Why did Germany allow itself to get into the situation where the government and banks had lent so much to Greece that the government had to keep lending more in order to protect its banks? I'm not sure that I get it.

'Cause, as experience shows, you can't set up a currency union loosely... It's either tight or it's not a ccy union. Reason for this is that debts and trade deficits are just symptoms of the underlying problem that is inherent to a "loose" ccy union, such as the Eurozone. Specifically, it's the competitiveness issues.

As Leo pointed out, the Euro is an ambitious political project that was counting on a sustained period of growth and gentle integration. If the Eurozone countries had a few more decades of crisis-free union, they might have evolved the institutions necessary to make the project work. Sadly, that's not how the cookie crumbled.

 

[barjon]

arbu

Given that the euro was introduced without central European-wide economic control there had to be something to give at least the semblance of that overall control - hence rules.

With countries going their own way the erstwhile checks and balances that came from changing exchange rates was lost and the disobeying of the rules exacerbated that. Just imagine what the deutchmark/drachma exchange would be at the moment!! That they are euro equal is now massively to the disadvantage of Greece and massively to the advantage of Germany.

I guess the advantage to Germany in terms of what is in effect a massively undervalued currency compared to what the deutchmark would have been against the rest of the world is well worth the expense of bailing out euro zone lame ducks.

jon

 

[The Leopard]

Sadly, that's not how the cookie crumbled.

Although I am sceptical of the benefits of the EU and believe in our independence (therefore my eyes swivel, I am rabid, I wish England to be little, and of course I am a staunch racist) in principle I see nothing wrong with the concept of the EU as a genuine single state. There are powerful arguments in favour, and it should have been possible to find sensible ways to overcome the difficulties.

But the implementation of the project has been so secretive and so objectionable, the ideas, goals and methods so mad, and the resulting mess so dismal, that it baffles me how anyone can support the wretched thing.

A tremendous missed opportunity in the history of human affairs, caused by what looks to me like a mixture of stupidity, bad ideas and bad ideology, and political cowardice.

 

[Martinghoul]

Although I am sceptical of the benefits of the EU and believe in our independence (therefore my eyes swivel, I am rabid, I wish England to be little, and of course I am a staunch racist) in principle I see nothing wrong with the concept of the EU as a genuine single state. There are powerful arguments in favour, and it should have been possible to find sensible ways to overcome the difficulties.

But the implementation of the project has been so secretive and so objectionable, the ideas, goals and methods so mad, and the resulting mess so dismal, that it baffles me how anyone can support the wretched thing.

A tremendous missed opportunity in the history of human affairs, caused by what looks to me like a mixture of stupidity, bad ideas and bad ideology, and political cowardice.

Agreed... I think the moral of the story is that it's a good positive idea that is, really, well ahead of its time. Whenever people try to do something that's ahead of its time, even with the best of intentions, it inevitably ends in pain and suffering.

 

[intradaybill]

The euro is a trading system (literally) the Germans invented that has positive expectancy for them and negative for many other countries. It is a mechanism for transferring wealth from net importers to net exporters. In lieu of the euro, net importers would be forced to devalue currency to balance their books. With the euro they cannot. Then they are forced to borrow back the money they paid to German for industrial goods and pay high interest so they can import more. Those leaders that insist on staying with the euro while being net importers are essentially working for the Germans.

 

[Splitlink]

arbu

I guess the advantage to Germany in terms of what is in effect a massively undervalued currency compared to what the deutchmark would have been against the rest of the world is well worth the expense of bailing out euro zone lame ducks.

jon

That is the nub of Germany's problem, even now, Jon. By exporting with a devalued Euro they are selling at much cheaper prices. In a way, they have been, and still are, playing China's game. Merkel has to sell that to her electorate, though, because I feel that the German taxpayer has been more than patient with Greece.

As far as Spain is concerned, the population is working its nuts off so as not to have to go to Brussels for money. The sad fact is that if Spain went for even the smallest amount of money there would not be any in the pot. Rajoy said that, a few weeks ago. If Spain has to go to Europe for a loan, it will be the end of the Euro and, probably, Europe.

 

[The Leopard]

it will be the end of the Euro and, probably, Europe.

I'm sure that Europe would survive. The continent has far bigger problems than the possible collapse of the Euro. Demography, for one (particularly acute, I believe, in Spain's case).

 

[barjon]

That is the nub of Germany's problem, even now, Jon. By exporting with a devalued Euro they are selling at much cheaper prices. In a way, they have been, and still are, playing China's game. Merkel has to sell that to her electorate, though, because I feel that the German taxpayer has been more than patient with Greece.

As far as Spain is concerned, the population is working its nuts off so as not to have to go to Brussels for money. The sad fact is that if Spain went for even the smallest amount of money there would not be any in the pot. Rajoy said that, a few weeks ago. If Spain has to go to Europe for a loan, it will be the end of the Euro and, probably, Europe.

split

I don't think it's problem for Germany - on the contrary they must be rubbing their hands at their export competitiveness.

After the last war they (and Japan) had a fixed exchange rate which gave them increasing export led competitiveness as their economy recovered. They got in the doldrums a bit when that fixed rate went and their competitiveness suffered because of the appreciating DM. Lo and behold they invent the euro and regain the advantage. As I said before, imagine where the DM would stand relative to other eurozone countries if the euro died tomorrow and relative to the rest of the world.

jon

 

[Splitlink]

I'm sure that Europe would survive. The continent has far bigger problems than the possible collapse of the Euro. Demography, for one (particularly acute, I believe, in Spain's case).

I'm not quite sure what you mean about demography. Population growth? That is the fundamental problem facing the world to-day and one that will, eventually, be the end of us all. What I meant about Rajoy's comment was not about Europe's survival but about the Union's. Europe, of course, will survive as long as the rest of the planet but it will become increasingly unpleasant.

The UK's problem with old age care is just one example of what we can expect with all us living longer.

 

[The Leopard]

As I said before, imagine where the DM would stand relative to other eurozone countries if the euro died tomorrow and relative to the rest of the world.

jon

What would the sound currency of a serious and industrious nation of savers and workers be worth against the badly-printed toilet paper of a load of bone idle, spendthrift Southern layabouts who take three-hour lunches and view endemic corruption as the best way of getting things done?

I know well (and love) a couple of the Mediterranean countries, and frankly I wouldn't wipe my backsides with their currency if they had their own again. Unless they printed it on very absorbent paper, like the old Escudos.

 

[barjon]

I'm not quite sure what you mean about demography. Population growth? That is the fundamental problem facing the world to-day and one that will, eventually, be the end of us all.

Did you know that China's population is now the same as the whole world's population was in 1939?

 

[Martinghoul]

split

I don't think it's problem for Germany - on the contrary they must be rubbing their hands at their export competitiveness.

After the last war they (and Japan) had a fixed exchange rate which gave them increasing export led competitiveness as their economy recovered. They got in the doldrums a bit when that fixed rate went and their competitiveness suffered because of the appreciating DM. Lo and behold they invent the euro and regain the advantage. As I said before, imagine where the DM would stand relative to other eurozone countries if the euro died tomorrow and relative to the rest of the world.

jon

To be sure, the German "miracle" wasn't just due to the Euro. The Germans have been objectively able to engineer competitiveness by keeping wages low.

 

[The Leopard]

I'm not quite sure what you mean about demography. Population growth? That is the fundamental problem facing the world to-day and one that will, eventually, be the end of us all. What I meant about Rajoy's comment was not about Europe's survival but about the Union's. Europe, of course, will survive as long as the rest of the planet but it will become increasingly unpleasant.

The UK's problem with old age care is just one example of what we can expect with all us living longer.

What's this population growth Split? Check out the birth rates in Spain and Italy - something like 1.2 per couple (and even that nay be skewed upwards by the birth rates of recent immigrants). Those are endgame rates.

The Spanish are becoming an endangered species.

Then of course there are other demographic changes that nobody really wants to face up to. Not that you can blame them - people get murdered in Holland for bringing it up.

I know you meant the Union rather than Europe, I'm just always keen to point out that the two are not the same. I believe language is very important, and is frequently used in relatively subtle ways to create a subconscious impression (not saying you did this). But conflating Europe with EU is used to create the impression that people who do not think the EU as currently established is a good thing somehow are swivel-eyed, little Englander blah blah drivel.

I am extremely pro-Europe, visit the continent as much as I am able, and am the son of an immigrant from one of the work-shy Southern nations currently causing so much bother. But I hate the EU with a passion.

 

[barjon]

What would the sound currency of a serious and industrious nation of savers and workers be worth against the badly-printed toilet paper of a load of bone idle, spendthrift Southern layabouts who take three-hour lunches and view endemic corruption as the best way of getting things done?

I know well (and love) a couple of the Mediterranean countries, and frankly I wouldn't wipe my backsides with their currency if they had their own again. Unless they printed it on very absorbent paper, like the old Escudos.

Well I wouldn't have put it quite like that , but that's the point. Tying themselves to a common currency with the industrious nation(s) has enabled them to buy things they couldn't otherwise have afforded with their own currency and encouraged them on a borrowing spree to buy even more since they could borrow euros at a piffling rate compared to what they'd have had to pay with their own currency.

Meanwhile the industrious nation chuckles into its beer, knowing that the excesses of those unruly children is depressing the euro and giving them (the chucklers) an ever increasing advantage in the market place.

 

[counter_violent]

If Spain has to go to Europe for a loan, it will be the end of the Euro and, probably, Europe.

Good....and...

There's no "IF" about it.

http://www.thisismoney.co.uk/money/...ng-billions-EU-bailout-fund-Cameron-vows.html

 

[Splitlink]

split

I don't think it's problem for Germany - on the contrary they must be rubbing their hands at their export competitiveness.

After the last war they (and Japan) had a fixed exchange rate which gave them increasing export led competitiveness as their economy recovered. They got in the doldrums a bit when that fixed rate went and their competitiveness suffered because of the appreciating DM. Lo and behold they invent the euro and regain the advantage. As I said before, imagine where the DM would stand relative to other eurozone countries if the euro died tomorrow and relative to the rest of the world.

jon

Oh, yes, they are as far as Merkel and the management is concerned. The population, though, are pretty well the same mentalised people that they have always been. ie. highly disciplined to do as they are told. Until now, that is. As you say, being in the Euro is something that they must be rubbing their hands over but how far are they going to be willing to support the weak countries and, by weak, I mean all the rest? It is a formidable task that will make Germany stronger by devaluing the currency if she can get away with it but the rest will never get out of the holes that they are digging for themselves. The problem is not that Germany is, by itself, putting money into the Central European Bank but that all of the rest of us are, too, and we are all decreasing our standards of living by paying off debt.

We are all in this together but some are in in it a lot deeper. The UK is, also, supporting the Euro via the IMF, even when Cameron said "No way" If we stopped doing it and Hollande is, probably, thinking hard about that, even Germany would have to think again.

 

[barjon]

To be sure, the German "miracle" wasn't just due to the Euro. The Germans have been objectively able to engineer competitiveness by keeping wages low.

Oh yes, they have an extremely sound long-term economic strategy right across the board. Nonetheless an artificially undervalued currency, first by post war fixing and then - increasingly - the euro, has helped enormously.

Not a bad time to go to the euro either since the timing lets you peg to a nice low base after the economic strains of bringing the GDR/East Germany into the fold and reunifying the country.

 

[Martinghoul]

Oh yes, they have an extremely sound long-term economic strategy right across the board. Nonetheless an artificially undervalued currency, first by post war fixing and then - increasingly - the euro, has helped enormously.

Not a bad time to go to the euro either since the timing lets you peg to a nice low base after the economic strains of bringing the GDR/East Germany into the fold and reunifying the country.

Yep, agree 100%... That is yet another flaw of the Euro. By construction and pure arithmetic, the policies all end up primarily benefitting the Germans. The rest of the Eurozone either overheats or gets depressed. Because there is no central fiscal authority, these imbalances are then allowed to fester and deteriorate, with the inevitable result.