Euro on the brink of collapse

[alfred russel]

What matters is how willing lenders are to service your debt, and at what cost. Japan has about three times our debt as a percent of GDP, but has no problems financing it. Russia has far less debt than us, but there were concerns of default a year ago.

Sovereign debt is just like a mortgage.   Credit worthiness is based on repayment history and debt/income.

It is more complicated than that, but in any event Spain just went on credit watch.

[grumbler]

I thought that's what we have been discussing. 

Your claim that there is a bigger difference, culturally speaking, between the UK and Greece than between New York and Kentucky, is quite true, but it has nothing to do with the discussion at hand: that other than the language barrier, the worker mobility in Europe is not materially lower than in the US.

Most of this is quite true, which is why I thought it absurd that you brought Kentucky workers in New York into the discussion.  Now that you have conceded my point, we are not discussing anything any more.

As far as non-language barriers to inter-European-country worker mobility, I wouldn't know about that in general.  I have anecdotes of British friends of mine who now live in Paris and found the culture shock pretty profound, but they are individuals and I am not in the habit of Marti-ing from a single fact into a sweeping generalization.

[Ed Anger]

However, I am in the habit of sweeping generalizations and I'd prefer you don't describe it as Martinizing. Thank You.

[Iormlund]

As far as non-language barriers to inter-European-country worker mobility, I wouldn't know about that in general.  I have anecdotes of British friends of mine who now live in Paris and found the culture shock pretty profound, but they are individuals and I am not in the habit of Marti-ing from a single fact into a sweeping generalization.

In my very limited experience Italians, Portuguese or southern French are fairly similar to us. Open, social and all that. Swedes and the like, OTOH, won't even acknowledge your existence unless they are terribly drunk. Maybe a lack of sunshine thing.

[DGuller]

As far as non-language barriers to inter-European-country worker mobility, I wouldn't know about that in general.  I have anecdotes of British friends of mine who now live in Paris and found the culture shock pretty profound, but they are individuals and I am not in the habit of Marti-ing from a single fact into a sweeping generalization.

In my very limited experience Italians, Portuguese or southern French are fairly similar to us. Open, social and all that. Swedes and the like, OTOH, won't even acknowledge your existence unless they are terribly drunk. Maybe a lack of sunshine thing.

Or having standards thing.

[jimmy olsen]

A good article that breaks it down to it's most simple components.

http://www.nytimes.com/2010/02/15/opinion/15krugman.html

Op-Ed Columnist
The Making of a Euromess

By PAUL KRUGMAN
Published: February 14, 2010

Lately, financial news has been dominated by reports from Greece and other nations on the European periphery. And rightly so.

But I've been troubled by reporting that focuses almost exclusively on European debts and deficits, conveying the impression that it's all about government profligacy — and feeding into the narrative of our own deficit hawks, who want to slash spending even in the face of mass unemployment, and hold Greece up as an object lesson of what will happen if we don't.

For the truth is that lack of fiscal discipline isn't the whole, or even the main, source of Europe's troubles — not even in Greece, whose government was indeed irresponsible (and hid its irresponsibility with creative accounting).

No, the real story behind the euromess lies not in the profligacy of politicians but in the arrogance of elites — specifically, the policy elites who pushed Europe into adopting a single currency well before the continent was ready for such an experiment.

Consider the case of Spain, which on the eve of the crisis appeared to be a model fiscal citizen. Its debts were low — 43 percent of G.D.P. in 2007, compared with 66 percent in Germany. It was running budget surpluses. And it had exemplary bank regulation.

But with its warm weather and beaches, Spain was also the Florida of Europe — and like Florida, it experienced a huge housing boom. The financing for this boom came largely from outside the country: there were giant inflows of capital from the rest of Europe, Germany in particular.

The result was rapid growth combined with significant inflation: between 2000 and 2008, the prices of goods and services produced in Spain rose by 35 percent, compared with a rise of only 10 percent in Germany. Thanks to rising costs, Spanish exports became increasingly uncompetitive, but job growth stayed strong thanks to the housing boom.

Then the bubble burst. Spanish unemployment soared, and the budget went into deep deficit. But the flood of red ink — which was caused partly by the way the slump depressed revenues and partly by emergency spending to limit the slump's human costs — was a result, not a cause, of Spain's problems.

And there's not much that Spain's government can do to make things better. The nation's core economic problem is that costs and prices have gotten out of line with those in the rest of Europe. If Spain still had its old currency, the peseta, it could remedy that problem quickly through devaluation — by, say, reducing the value of a peseta by 20 percent against other European currencies. But Spain no longer has its own money, which means that it can regain competitiveness only through a slow, grinding process of deflation.

Now, if Spain were an American state rather than a European country, things wouldn't be so bad. For one thing, costs and prices wouldn't have gotten so far out of line: Florida, which among other things was freely able to attract workers from other states and keep labor costs down, never experienced anything like Spain's relative inflation. For another, Spain would be receiving a lot of automatic support in the crisis: Florida's housing boom has gone bust, but Washington keeps sending the Social Security and Medicare checks.

But Spain isn't an American state, and as a result it's in deep trouble. Greece, of course, is in even deeper trouble, because the Greeks, unlike the Spaniards, actually were fiscally irresponsible. Greece, however, has a small economy, whose troubles matter mainly because they're spilling over to much bigger economies, like Spain's. So the inflexibility of the euro, not deficit spending, lies at the heart of the crisis.

None of this should come as a big surprise. Long before the euro came into being, economists warned that Europe wasn't ready for a single currency. But these warnings were ignored, and the crisis came.

Now what? A breakup of the euro is very nearly unthinkable, as a sheer matter of practicality. As Berkeley's Barry Eichengreen puts it, an attempt to reintroduce a national currency would trigger "the mother of all financial crises." So the only way out is forward: to make the euro work, Europe needs to move much further toward political union, so that European nations start to function more like American states.

But that's not going to happen anytime soon. What we'll probably see over the next few years is a painful process of muddling through: bailouts accompanied by demands for savage austerity, all against a background of very high unemployment, perpetuated by the grinding deflation I already mentioned.

It's an ugly picture. But it's important to understand the nature of Europe's fatal flaw. Yes, some governments were irresponsible; but the fundamental problem was hubris, the arrogant belief that Europe could make a single currency work despite strong reasons to believe that it wasn't ready.

[Agelastus]

An interesting article, with points the "Better off with the Euro" crowd here should take heed of.

The inflation bit in particular; in terms of personal experience, lighting fittings made in Spain became more expensive than Italian fittings a few years ago. I don't know if anyone else has worked in the lighting industry, but Italy was always the byword for expense before that, and had been for several decades.

[grumbler]

But what the article points out is really that Europe's problem is a kind of nationalism (maybe regionalism is a better term); the desire to stay in one's own country amongst one's fellow-countrymen.  The solution isn't closer political cooperation, but rather policies that make labor more mobile - including public awareness of the desirability of mobility.

[The Larch]

But what the article points out is really that Europe's problem is a kind of nationalism (maybe regionalism is a better term); the desire to stay in one's own country amongst one's fellow-countrymen.  The solution isn't closer political cooperation, but rather policies that make labor more mobile - including public awareness of the desirability of mobility.

That is something that will hopefully increase with the new common European academic framework, in order to have academic credentials instantly acknowledged all over the EU. Even if generally speaking it's something that is currently workable, for certain specialities and professions it's a bigger problem. Mobility programs have also been funded for decades, and programs like Erasmus helps creating a greater desireability for moving.

[Josquius]

That is something that will hopefully increase with the new common European academic framework, in order to have academic credentials instantly acknowledged all over the EU. Even if generally speaking it's something that is currently workable, for certain specialities and professions it's a bigger problem. Mobility programs have also been funded for decades, and programs like Erasmus helps creating a greater desireability for moving.

I'm just hoping employers do recognise European qualifications well.
Its all well and good to say officially one qualification is equal to another but I could well imagine in a ignorant country like Britain at least they would see someone with a degree from a good European uni like Heidelberg or Uppsala or whatever and due to not having a clue what unis are good abroad (I didn't have the foggiest before I started looking into Sweden some might recall) will choose someone from a second tier British school like Sheffield or York instead.

As for certain professions...there you really do have a big problem. In Sweden the amount of people admitted to medical school is purposfully kept lower than the demand for doctors (the medics union wants to make sure everyone has a nice joib) so lots of Swedes end up going abroad to Romania and the like to study medicine.
Not to say other countries are inherantly bad but standards tend to be different across different countries. Not even lower in some cases, just different.

In my very limited experience Italians, Portuguese or southern French are fairly similar to us. Open, social and all that. Swedes and the like, OTOH, won't even acknowledge your existence unless they are terribly drunk. Maybe a lack of sunshine thing.

You say open and social. We say touchy-feely, overbearing and invaders of personal space :p
But yes. The average Swede is very hard to crack.

[Martim Silva]

In the meanwhile, it was finally found out how did Greece, with its unstable economy, manage to join the euro.

The answer is... Wall Street bankers helped it fudge the numbers.

Right, no surprises there. 

Particularly at fault is a certain Wall Street bank whose first name beguins with a G and the second one with a S, and is beloved by certain Languish posters, which hid billions of greek government debt so they could join the Eurozone.

http://www.nytimes.com/2010/02/14/business/global/14debt.html?hp

Wall St. Helped to Mask Debt Fueling Europe's Crisis

Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts.

(...)

Gary D. Cohn, president of Goldman Sachs, went to Athens to pitch complex products to defer debt. Such deals let Greece continue deficit spending, like a consumer with a second mortgage.

Don't expect it to end here. The banksters hid debts from lots of countries, and I know - since our Finance Ministers' top advisors are my ex-colleagues - that our deficit is WAY higher than the official numbers.

[Faeelin]

Governments shouldn't be led by unsophisticated hicks who can't handle financial information. either they do what they are doing, or are so incompetent that the Greek people should string em up.

[Razgovory]

Did you damage your keyboard?

[Agelastus]

But what the article points out is really that Europe's problem is a kind of nationalism (maybe regionalism is a better term); the desire to stay in one's own country amongst one's fellow-countrymen.  The solution isn't closer political cooperation, but rather policies that make labor more mobile - including public awareness of the desirability of mobility.

A quick (and rough) internet search indicates that as of 2007, approximately 15% of Florida's population were migrants who had moved into the state after the year 2000 (although I don't have a split of that figure between migration between US States and overseas immigration.)

For Spain the percentage of the total population who are not Spanish citizens was approximately 15% of the total population, with a massive increase in the 2000s.

Now, those figures could do with a breakdown into actual origins, and don't include the additional 700000 approx who immigrated to Spain in 2008, but they are suggestive that Spain has effectively received as much additional labour as Florida.

I suspect a proper analysis of the figures would reveal that the average skills level of the migrants to Florida was higher, however, meaning they were economically more valuable.

I do need to hunt down the relative economic growth rates of Florida and Spain, as well.

[grumbler]

A quick (and rough) internet search indicates that as of 2007, approximately 15% of Florida's population were migrants who had moved into the state after the year 2000 (although I don't have a split of that figure between migration between US States and overseas immigration.)

For Spain the percentage of the total population who are not Spanish citizens was approximately 15% of the total population, with a massive increase in the 2000s.

Now, those figures could do with a breakdown into actual origins, and don't include the additional 700000 approx who immigrated to Spain in 2008, but they are suggestive that Spain has effectively received as much additional labour as Florida.

I suspect a proper analysis of the figures would reveal that the average skills level of the migrants to Florida was higher, however, meaning they were economically more valuable.

I do need to hunt down the relative economic growth rates of Florida and Spain, as well.

I am not sure what you are trying to demonstrate with these numbers.  The issue is not that Spain should get the same number of new people as Florida, it is that it should attract sufficient additional labor that labor costs do not rise.  If 15% was sufficient to prevent this in Florida but was insufficient to prevent this in Spain , then the conclusion we should reach is that 15% was insufficient for Spain, not that Florida's percentage is good enough for Spain so we need to look elsewhere for the problem.

You will never have perfect labor mobility, of course, because of the marginal costs of actually moving, but the better one's economy's labor mobility, the fewer the localized inflation issues like those being discussed here.  The solution isn't to do as well as some arbitrary other party (like Florida), but rather to do well enough to avoid the problem.