Sovereign debt bubble thread

[Zanza]

Iormlund suggests long-term capital controls as short-term capital controls in the weeks of changing the currency wouldn't have the effect he hopes for.

The EU commission has neither the legal right nor any inclination to allow that because as I said, it violates one of the four freedoms, which are the cornerstone of the EU's internal market. That's the very core, the raison d'être of the EU. If we abolish that, we can just abolish the EU wholesale as it will have lost its point. The rest can be administrated by a beefed up Council of Europe.

[Sheilbh]

The EU commission has neither the legal right nor any inclination to allow that because as I said, it violates one of the four freedoms, which are the cornerstone of the EU's internal market.

It's in the Lisbon Treaty.  The Commission has the right to authorise capital controls and mutual assistance to EU members who are not part of the Euro if they suffer a balance of payments crisis that's so severe that it threatens the stability of the internal market then the Commission can take steps that would allow the member state to impose capital controls, or to grant a bailout loan.  One of the early suggestions during the Euro crisis was to extend this to Eurozone members - it would have created a better legal basis bailouts.

It would be madness if the Commission couldn't allow further intervention even in the case of a balance of payments crisis that was threatening the internal market.  We'd be in a situation where the internal market had to die to preserve the four freedoms.  It's absurd.

Edit:  As I say it's clear this is a last resort but it is legally possible.

[Zanza]

It's in the Lisbon Treaty.  The Commission has the right to authorise capital controls and mutual assistance to EU members who are not part of the Euro if they suffer a balance of payments crisis that's so severe that it threatens the stability of the internal market then the Commission can take steps that would allow the member state to impose capital controls, or to grant a bailout loan.  One of the early suggestions during the Euro crisis was to extend this to Eurozone members - it would have created a better legal basis bailouts.

Do you know the article by chance? I never heard that before.

[Sheilbh]

Do you know the article by chance? I never heard that before.

I'll look it up.

My understanding is it allows EU bailout and protective balance of payment measures in accordance with the treaties.  If that fails then the Commission's allowed to design protective measures with the member state - presumably that go further than the initial measures.  It's all in agreement with the Council and governed by proportionality of course.

But my understanding is that there are times when non-Eurozone but EU members could be allowed to impose credit controls.  All of the four freedoms have exceptions within the treaties and I think a balance of payments crisis threatening the internal market is an area in that's an exception to the principle of freedom of capital.

[Sheilbh]

Articles 143 and 144.  They're also listed on the Commission's website as a treaty exception to the principle of free movement of capital.

[Iormlund]

Capital controls are against the four freedoms of the EU. So what you are talking about is not just abolishing the Euro, but abolishing the EU.
As long as people are afraid of their future and the state's ability to pay a reasonable pension, they'll save. If you create inflation, they'll just try to find inflation hedges. Unless you make that utterly impossible, which also means that the Spanish people will have no means to privately take care of their retirement time, I don't see it working. It could possibly even make the situation worse by increasing the savings rate to overcompensate for inflation losses.

Sheilbh has already addressed this part. In any case I'm not suggesting long-term controls, mjust during the transition.

Yes, but that doesn't help with the current stock of debt.

Sure it does. It stops it from growing relative to income/earnings/GDP AND erodes it via inflation/floating devaluation.

That assumes the Euro ceases to exist, which is not a necessity. If the Euro still buys stuff in say Northern Europe, the black market money will just shift there, no?

I'm assuming the shock of a Spanish exit would trigger the exit of Greece, Portugal and Italy. Maybe Ireland, France and others., or at least pose such a significant threat that the Core itself would want to issue capital controls of their own to avoid massive appreciation/inflation.

So far your plan to me looks like this:

1) Leave Euro
2) ???
3) Profit!

More like:

1) Leave Euro
2) Great suffering
3) Recovery

Whereas the current plan is:

1) Kick the can down the road
2) ??
3) Endless depression

I'm sorry but I can't see how the country can survive with 30 to 40% real unemployment for one or two decades while it bleeds young talent and the baby boomers retire en masse.

[Iormlund]

It's just better than a decade-long depression via internal devaluation

Japan has had that for two decades, and they have their own currency. There's no guarantee.

Of course. The only thing guaranteed is that the current path leads to disaster.

[Iormlund]

Apparently Wilders has walked out of budget negotiations ...

[Tamas]

Apparently Wilders has walked out of budget negotiations ...

who is he again?

[Zanza]

Dutch populist with fancy hair.

[Iormlund]

The leader of that anti-Muslim party. AFAIK the government needs his votes to pass stuff.

[Sheilbh]

The leader of that anti-Muslim party. AFAIK the government needs his votes to pass stuff.

Yeah.  I think he wouldn't be tied down to responsible coalition government, but the government generally needs his votes.

The Dutch PM's said he'll consult with Parliament but chances are it'll go for early elections (that's what Wilders wanted).  It'll be interesting to see what Wilders wanted and if he was actually just being a spoiler all along aiming for early elections that, presumably, he thinks he can do well in.

I love the Dutch, in 2010 when the last had elections there was a large budget deficit and all of the parties (except for the single-issue ones) ran with quite detailed proposals of what they'd cut and what taxes they'd raise etc.  It was refreshing.

[Tamas]

ran with quite detailed proposals of what they'd cut and what taxes they'd raise etc.  It was refreshing.

OMG how I envy that

[Sheilbh]

OMG how I envy that

Here's a blogpost on it:

Democracy and deficits
Competing with Dutch budgetary responsibility
Jun 4th 2010, 15:12 by M.S.

SPEED-READING through Matthew Yglesias's chapter-length output of blog posts yesterday, I emerged with a general impression of exasperation with conservatives for not empirically caring about budget deficits and wariness of the "competing against foreigners" frame for thinking about America's economy and governance. A quick sentence that also caught my eye noted the Netherlands is in very good fiscal shape even though the Dutch are always putting themselves down. Starting with the last point: Last week I went to a voters-abroad meeting organised by the Dutch embassy to raise awareness for the coming elections. Admirably, the meeting didn't just tell people how to register and so forth, as an American voters-abroad meeting would; it actually involved a debate between panelists on various campaign issues with lots of audience participation, and each issue was followed by a straw poll and then an overhead projection of where each of the country's dozen or so political parties stood on that issue, to help people figure out how to vote. Also admirably, the meeting was held in the performance space of a really nice bar with Carlsberg on tap. But to get back to the main point: almost every Dutch political party, Labour included, appears to be obsessed with the country's budget deficit. This is true even though, as Mr Yglesias says, the Dutch national debt was just 59% of GDP in 2009, heading to 66% in 2010. (America's national debt was 83% of GDP in 2009, heading to 94% in 2010. The Dutch budget deficit is projected at 6.6% of GDP for 2010; America's, 10.6%.)

If there's an area where Americans should feel out-competed by foreigners, I'd say we should feel out-competed by the transparency and responsibility of Dutch democracy. American politicians generally claim they want to cut the budget deficit. When a Dutch political party says it wants lower deficits, it actually outlines an electoral programme with details about how it plans to cut spending and/or raise taxes. For example, the most economically laissez-faire Dutch party, the VVD or "Liberals", wants to slash 34 billion euros out of the budget by 2015, and it lays out how it will do this: limiting unemployment insurance to 12 months, raising the retirement age to 67, freezing educational spending on special-needs children, and all kinds of unpopular stuff. The Labour Party wants to cut the budget by 15 billion euros, including raising the retirement age to 66 and cutting defence spending by 1.6 billion, and raise business and environmental taxes while cutting taxes in a progressive fashion on individuals, ultimately coming out with 500m euros more in revenues. The Christian Democrats want to cut spending by 21.4 billion euros and cut taxes by 2 billion euros. Most importantly, all these details I'm providing come from the Dutch Central Planning Bureau, which evaluates all the parties' electoral programmes and assesses how much they would save compared to baseline assumptions. It would be like American parties and candidates submitting their full programmes to the CBO for an assessment before the elections, so you could decide who to vote for.

The closest thing American parties have to an electoral programme, the Republican and Democratic platforms from back in 2008, essentially don't contain any budget numbers. The only American candidate who's produced a complete budget plan, as far as I'm aware, is Paul Ryan, and it's not endorsed by the rest of the Republican leadership. Since party discipline is far less important in the American system, party platforms aren't much use anyway. And to be fair, party programmes are no guarantee of anything in the Dutch system either, since governments are formed by coalitions and the policy you wind up with is some form of compromise between the parties in the coalition. But at least the Dutch system forces the parties to reckon publicly, in a rational and coherent fashion, with budgeting choices, so that those discussions form the framework for political debate. Mr Yglesias's posts took off from Jonathan Chait's post yesterday wondering why the only Republican who really did cut the deficit in recent memory, George H.W. Bush, is reviled by conservatives. It's certainly true that conservatives have, empirically, spent their time in power over the past two decades cutting taxes and growing government. But a lot of that represents the broader failure of American voters to grasp what their government actually spends its money on; that incomprehension is partly voters' own fault and partly a feature of our political system, in which nothing forces politicians to make any honest reckoning of their taxing and spending plans. It's no wonder voters drive the budget towards deeper and deeper deficits when the political process doesn't do anything to inform them of what's actually in the budget. If you had no idea what your income was and no idea what you were spending it on, your household budget would probably be pretty far in the red, too.

[citizen k]

Pushing The Euro To The Brink

There is no more risk that the euro will implode," declared French President Nicolas Sarkozy on Friday, two days before the first round of the presidential election. Europe is "recovering," he said desperately. Thanks to his leadership. To make sure that Europe doesn't fall back into the hole, the French would need to reelect him. A few weeks ago, he'd proclaimed "The crisis is finished." But Spain may require an emergency bailout of such proportions that the IMF is already collecting hundreds of billions of dollars from around the world. Then there is Italy....

However, François Hollande, the socialist challenger and likely winner, has a prescription for fixing the very crisis that Sarkozy declared finished, he confirmed on Friday. If elected on May 6, he would immediately set out to implement his ambitious plan—though it might lead to the break-up of the Eurozone.

http://www.zerohedge.com/contributed/2012-16-20/pushing-euro-brink