Sovereign debt bubble thread

[The Minsky Moment]

I agree with the Rachman article in this respect: Germany will not do whatever it takes to make the Eurozone system work, and it is not realistic to expect Germany to do that.  On the flip side, the same thing can be said of Greece, Spain, Italy, and now La France Hollandaise.  The Euro was designed as a political mechanism to help force members into closer economic and political union, only the members once in, refused to be force.  And that refusal was underwritten by an ECB that decided to treat all member sovereign credits equally, despite the fact that manifestly they were not.  So in the place of real economic integration, there was an illusion of financial equality.

Now it all comes down to whether the euro members can muddle through the rest of this crisis with spit, string and scotch tape - but even if they succeed they are just buying a second round at some later date.

[MadImmortalMan]

Hollandaise is difficult not to screw up. Too cold and the butter coagulates, too hot and the egg separates. You have to keep stirring it constantly to make the emulsification right, and overdo it with the lemon juice and you'll curdle the whole thing. Nobody ever gets it right the first time they try. Even if you don't screw it up it has a very short shelf life and goes bad very quickly.

[Sheilbh]

I agree with Joan and the Rachman article.  I think that German official Rachman quoted in another article was right, for Germany this is a machine from hell they can't turn off. 

As I see it the Euro is stuck between policies that are impossible from a German perspective such as inflation, long-term open ended fiscal transfers (like in the UK or the US) or policies that won't work for anyone else decade long austerity and internal devaluation (as George Soros put it a vibrant German core with a denuded periphery).  Given that maybe dissolution with all the costs associated with that is most likely.

[Zanza]

100 billion bandaid here, 100 billion bandaid there; before long the cost of bandaids will add up to something resembling a bailout. Do you think Merkel has the political capital to cut off southern europe or pull off a long term solution (dissolution of the euro, genuine fiscal integration)?

She doesn't need any domestic political capital to cut off Southern Europe. That would actually be a rather popular policy here.

[Iormlund]

The problem with dissolution is that the first ones to get out will be the Greeks, and it'll be chaos.

We all seem to be in agreement that further integration is politically dubious (at least at Languish we do). So what we need is a proper exit mechanism.

[Zanza]

Merkel's current standard speech is something like "we can't share the risks without sharing the decision-making too".

[Iormlund]

Merkel's problem is she's focused on a path that at best would take 10 years to bear fruits, while we might see the Eurozone collapse in a matter of weeks.

[Sheilbh]

Merkel's current standard speech is something like "we can't share the risks without sharing the decision-making too".

I agree with that position.  The problem is that I don't think there's time for the required negotiations and treaty changes establishing further integration and shared decision making.  The markets don't trust Eurozone communiques and the rather leisurely Brussels way of doing things - I remember the response to Van Rompuy's statement that if there was time, after dinner, the Council leaders would informally discuss the Eurozone crisis

I think Germany's position is a bit like the ECB's if there's a run on Greek banks.  The current approach will probably lead to some sort of crisis that's a real and final test of Euro credibility.  The choice then is a bit like the ECB if there's a run on Greek banks.  They can either pump money in to keep it going in the Euro, though it could still fail or they can not pump money in, in which case it will definitely fail.  It's not a desirable choice.

[Zanza]

Maybe. But - in Germany's view - many of the proposed short term measures to save it have potential downsides which are considered worse in the long-term than risking an outright failure of the Eurozone. The Euro is not worth saving at any price. I know the risk perception might be different elsewhere. That just leaves a calm and measured longer-term approach.

[Sheilbh]

I don't think that goes away from what I'm saying.  My view is that Germany needs to decide what is best.  What is perhaps seen as a calm and measured approach in Germany - with your benignly growing economy and lack of populist parties - is I think actually inadequate, confused and muddled.  It is contributing to extreme and systemic economic problems in the periphery (20-25% of private sector workers in Greece haven't been paid in 3 months for example) and the hollowing out of the centre in those societies leading to the rise of populist politics - I think Hungary isn't going to be an unusual aberration in Europe.  The consequences of that policy will eventually be some sort of crisis in Europe which will effect Germany.  I actually think this approach could have the worst effects of all.  SYRIZA and Golden Dawn and the rest don't matter so much in Greece, but God help us if that sort of politics gains traction in Italy or Spain or the FN and PdG continue to do well in France.  Economically as well I think if the Euro collapsed now there could be enough effort put in to save the EU, I don't know if that would happen if things continue the way they are in some countries.  Luckily I think market pressure is starting to undermine this approach.

My view is that Germany needs to either commit to saving the Euro - which does bear significant risks and could fail - or to end the Euro.  Whatever happens there's a chance that we'll end up with a recession far more severe than in 2008.

For myself I think an ordered Euro-exit - which would basically be a German led and a coordinated Euro-exit, not Greece just failing - would probably be the best option.

But I'm amazed that that view is strong in Germany given, from my understanding, the central importance of the European project in post-war German politics.  As I say this is the party of Adenauer and Kohl, I'd find it amazing if they ended the Euro.

Edit:  In addition the short-term problem is what I think Martin Wolf said.  Right now, panic is rational.

[Tamas]

How can the end of the euro as a currency be considered? It would eliminate decades of progress in European integration, as the failure of the common currency would be interpreted by the masses as the failure of the EU as a project.

[Zanza]

I don't think that goes away from what I'm saying.  My view is that Germany needs to decide what is best.  What is perhaps seen as a calm and measured approach in Germany - with your benignly growing economy and lack of populist parties - is I think actually inadequate, confused and muddled.  It is contributing to extreme and systemic economic problems in the periphery (20-25% of private sector workers in Greece haven't been paid in 3 months for example) and the hollowing out of the centre in those societies leading to the rise of populist politics - I think Hungary isn't going to be an unusual aberration in Europe.  The consequences of that policy will eventually be some sort of crisis in Europe which will effect Germany.  I actually think this approach could have the worst effects of all.  SYRIZA and Golden Dawn and the rest don't matter so much in Greece, but God help us if that sort of politics gains traction in Italy or Spain or the FN and PdG continue to do well in France.  Economically as well I think if the Euro collapsed now there could be enough effort put in to save the EU, I don't know if that would happen if things continue the way they are in some countries.  Luckily I think market pressure is starting to undermine this approach.

The success of these extremist parties is at best slightly increased by German policies and nothing Germany can do will have enough influence on domestic policies in other countries to change that (which is good!). So frankly, if you say Europe is slowly growing more extremist, then that's an argument against binding ourselves closer to these countries.

My view is that Germany needs to either commit to saving the Euro - which does bear significant risks and could fail - or to end the Euro.

Germany has commmitted to saving the Euro - just not unconditionally. Can you name any other example of a country committing more than 10% of its GDP to guarantee other countries' debt? And ending the Euro is not in Germany's interest, but then I don't see why the initiative for that would have to come from Germany. Every other country or a group of countries can both start that and even if they want to implement it with or without Germany.

For myself I think an ordered Euro-exit - which would basically be a German led and a coordinated Euro-exit, not Greece just failing - would probably be the best option.

Will never happen. Germany is committed to European integration and will never lead an initiative to go back.

In addition the short-term problem is what I think Martin Wolf said.  Right now, panic is rational.

Germany of course considers its policy as rational too. That's the problem of the Euro crisis - the rational policy for various stakeholders is conflicting.

[Barrister]

I dunno - it sounds like you guys have a lot of reasons why you  can't do anything in particular.  You can't abandon the euro, you can't reward profligacy, you can't have inflation.

Somethings got to give.

[Zanza]

I dunno - it sounds like you guys have a lot of reasons why you  can't do anything in particular.  You can't abandon the euro, you can't reward profligacy, you can't have inflation.

Somethings got to give.

No, we'll just continue doing anything in particular and wait what happens.

[alfred russel]

I dunno - it sounds like you guys have a lot of reasons why you  can't do anything in particular.  You can't abandon the euro, you can't reward profligacy, you can't have inflation.

Somethings got to give.

No, we'll just continue doing anything in particular and wait what happens.

In the meantime though you are bailing them out, just in short term ways that keeps impending doom right around the corner.

It may be too late for the inflation fix to work, without another major initiative that no one wants.