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Post 23 Jun 2013, 11:15 pm

Partly because we had lower 'structural' unemployment before the Euro. Also I'm not convinced that deficits cause unemployment either (the relationship would tend to work the other way).
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Post 24 Jun 2013, 6:33 am

The conservative view in the US is that high European unemployment is primarily a function of over-regulation of business (esp., employment policies) and an over generous safety net. Perhaps it works for Germany and prosperous Nordic countries, but it doesn't seem like southern Europe can afford it given its level of economic development.
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Post 24 Jun 2013, 9:04 am

Partly because we had lower 'structural' unemployment before the Euro. Also I'm not convinced that deficits cause unemployment either (the relationship would tend to work the other way).


What happened over the last 10 years or so is that borrowing costs in the weaker Eurozone members were artificially low thanks to Euro membership. This led to a shortlived boom in construction and similar industries, which generated a lot of jobs in those sectors and produced tax revenues for the state at the cost of unsustainable credit expansion and overall indedtedness. It was also possible for governments to overborrow at cheap rates so they could splurge on unnecessary infrastructure projects (the Spanish ghost airport for example) and create millions of cushy public sector jobs. Everything was great for a while, but throughout this period the economies of Spain, Italy, Greece etc were becoming less competitive with the likes of Germany. Then the crash happened. All of a sudden bond investors started to doubt that a Greek bond was worth the same as a German bond just because it was issued in the same currency. Bond yields surged in the weaker nations, ramping up the cost of financing all that lovely debt and driving them to the brink of bankruptcy. Meanwhile the bubble-induced boom years had completely gone. Construction industries collapsed and took millions of jobs with them. The governments of these nations desperately needed bailouts to keep them afloat, but nobody was willing to fund them without strict conditions attached to the loan, which meant slashing the bloated public sector and pushing up taxes across the board, which in turn led to economic depression.

The point is that without the Euro and it's artificial and unsustainable business environment the initial boom probably wouldn't have happened and the evental bust would have been much less severe. They could have devalued their currency to offset the relative lack of competitiveness, they could have engaged in QE like we did to keep bond yields low and stave off the threat of a debt crisis, they would have had much more leeway to engage in inflationary stimulus measures. As it is they're locked into the straightjacket of the single currency, with a common interest rate that primarily suits Germany, no means of competing with the more efficient German industries and very few (if any) tools available to try and influence their own economic destiny. This was always going to happen
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Post 24 Jun 2013, 2:49 pm

Ray Jay wrote:The conservative view in the US is that high European unemployment is primarily a function of over-regulation of business (esp., employment policies) and an over generous safety net. Perhaps it works for Germany and prosperous Nordic countries, but it doesn't seem like southern Europe can afford it given its level of economic development.
Thing is, the northern countries (particularly the nordics and Germany) tend to have both the most regulation and most generous saftey nets, while the southern countries, especially Greece and Portugal were among the lowest on both scores.

Seems like the US 'conservative' view is ideological and based on assumptions made to back.otself up.

Sass - the main 'booms' that were unsustainable were property booms which happened in Spain, Ireland and... Britain.
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Post 24 Jun 2013, 3:34 pm

Yes, our economy was also very badly managed, based on erroneous assumptions and propped up by cheap credit. There's more than one way for an unsustainable boom to kick off. The difference is that the popping of the bubble hasn't been so bad here, because we've been able to take advantage of all the monetary tools that are denied to Eurozone members.

Come on Dan, you know all this. Is it really so hard to admit that the Eurosceptics were right all along ?
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Post 24 Jun 2013, 5:22 pm

danivon wrote:
Ray Jay wrote:The conservative view in the US is that high European unemployment is primarily a function of over-regulation of business (esp., employment policies) and an over generous safety net. Perhaps it works for Germany and prosperous Nordic countries, but it doesn't seem like southern Europe can afford it given its level of economic development.
Thing is, the northern countries (particularly the nordics and Germany) tend to have both the most regulation and most generous saftey nets, while the southern countries, especially Greece and Portugal were among the lowest on both scores.


However, is it not correct that the Nordic Countries are starting to reduce their safety nets? I have read a number of articles in the past month that all seem to say so, i.e. Denmark is reducing UC benefits from 4 year to 2 years and that Sweden is changing its retirement benefit from a defined benefit to a defined contribution plan.
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Post 25 Jun 2013, 6:25 am

Sass - our crash was pretty bad, and we still haven't made back the lost GDP, let alone seen a sustained recovery. Despite auserity, the deficit has stopped shrinking and went up slightly, so I think we are in for a rough time.

While the Euro has hindered more than helped, the political imperitive to maintain it has meant countried having to work together. I'm not sure that a monetarily independent Greece would have had much success trying to inflate away debt, a lot of the debt is external and a falling drachma would just have caused internal inflation to be greater than it is today. The Euro itself is (to my mind) less of a problem than the use of orthodoxy like imposing Austerity, which even the IMF is questioning the extent of for Greece (and the UK).

ARJ - Indeed they are, but they will still be among the most generous terms in Europe (and the world) and these countries do not have the unemployment problems of less generous southern countries. Your point is valid in that it shows there are challenges to the nordic systems, but not proof of the thesis that RJ gave us as from US conservatives.
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Post 25 Jun 2013, 8:51 am

So it seems Sass thinks the Euro has failed, but is kept alive for political reasons, and that the failure is less about a hard currency and more about the economic crisis that a monetary union has caused.

If I may conflate things: There is a small group of people who keep saying that the US needs a gold standard because electeds can't be trusted not to abuse the monetary system. Would it be fair to say that the Euro is acting, if not as gold standard, but at least as hard money to the people of Greece, Italy, Spain and Portugal?

Continuing to conflate: There are countries around the world that use other currencies because they could not handle their own. Zimbabwe, for instance, uses the US dollar, as does Ecuador, and a handful of others. Argentina did for a while after its financial collapse, but then went back to its own currency and now sees mid-double digit inflation and a big difference between official and black market exchange rates. So I guess what I'm saying is that while there is certainly a downside to not having control over one's own currency, there is also an upside. Would Greece be any better off today 100,000,000 drachma bank notes and the capital flight that would cause? Or would they be better poised to recover with people knowing that their currency is relatively hard and their politicians can't devalue to get out of their jams?
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Post 25 Jun 2013, 9:28 am

danivon
ARJ - Indeed they are, but they will still be among the most generous terms in Europe (and the world) and these countries do not have the unemployment problems of less generous southern countries. Your point is valid in that it shows there are challenges to the nordic systems, but not proof of the thesis that RJ gave us as from US conservatives


A little "fine tuning" around benefits packages should not be translated as a sudden repudiation of the Nordic economic systems...
What should be more relevant is the Swedish crash of the early 90's where Swedes had to come to the realization that if they wanted a generous social package they would need to pay the taxes that provided that package. And they have done so. Also relevant is the fact that the recession didn't hit Sweden or Germany as hard, in part because their domestic economies didn't retract as much because their unemployed continued to have decent incomes to spend, due to their generous social nets. In effect the social nets acted as an immediate brake against a crash.
Although the European collapse is complex, one element that we shouldn't forget is that Wall Street Financiers were responsible for packaging and marketing sovereign debt from Greece and others ...in the same way they package and marketing mortgage backed securities. This fantasy of down streaming debt until it was supposedly gone .... failed with sovereign debt as well as mortgages .
I think there is also some misunderstanding of the Swedish economy. 90% of industries and resources are privately owned and the country is a bastion of capitalism. It has a very strong exporting economy. As does Germany.
Economies that are less dependent on domestic consumption are more resilient.

A separate currency is a useful tool in managing an economy. But it can't make up for fundamentals being completely out of whack. It seems to me that if a small country is willing to surrender the financial independence from the use of a foreign or shared currency they have to gain from the stability of the major currency.
When Ecuador uses the US dollar .....that makes sense.
Greece and the Euro may make less sense. But Greece's use of debt mechanisms to hide a system that was corrupted from within by tax avoidance .... instead of facing their need for austerity as the Swedes did in the 90s .... doomed Greece. Not the loss of the drachma. That only took away one fairly weak tool .... that would probably not have helped the domestic economy with immediacy or significance. It was just too small a currency .....
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Post 25 Jun 2013, 10:47 am

If I may conflate things: There is a small group of people who keep saying that the US needs a gold standard because electeds can't be trusted not to abuse the monetary system. Would it be fair to say that the Euro is acting, if not as gold standard, but at least as hard money to the people of Greece, Italy, Spain and Portugal?


It's not a great comparison really. The Euro is seeking to be to continental Europe what the Dollar is to the US. Even here it fails though, because in the US you have full fiscal union to go along with a common currency. Some states certainly have a competitive edge over others, which manifests itself in greater prosperity. The difference though is that the federal government is free to offset that with huge fiscal transfers from the richer to the poorer states. This is the only reason the dollar works as a currency. That doesn't exist in Europe and isn't ever likely to.

Interestingly though, there's a school of thought which says that the designers of the Euro were well aware of this flaw and in fact were counting on it as a convenient spur to bring about full fiscal and political union in the EU, imposed from the top down in response to a manufactured crisis such as the one we're living through. I may have posted this old article before, but it certainly bears repeating (and repeating again...). The author is a guy called Bernard Connolly. He used to be chief economist to the European Commission before he was sacked in the mid 90s for writing a book expressing his concerns about the single currency project. This was written in August 2007, right at the very beginning of the crisis before Lehman, before the great crash and certainly before the Euro crisis had even come onto the radar. It makes for fascinating reading:

http://www.telegraph.co.uk/finance/comm ... icane.html

The root cause of a credit bubble is not financial market greed (though that has certainly been present) but an inappropriate level of real interest rates that sends misleading signals about the feasibility of continuing to consume today while ignoring tomorrow. In the US in the mid-1990s, the former Fed chairman, Alan Greenspan, ignored the message of the 1920s and failed to engineer a rise in real rates to match a rise, driven by optimism about productivity, in the expected rate of return on investment in the US economy.

The late-1990s result was, as in the late 1920s, a frenetic stock market boom, massive business over-investment financed by credit, not by postponed consumption (saving), and an inevitable collapse. Greenspan did manage to avoid, or at least to postpone, a re-run of the early 1930s by slashing interest rates in 2001 when the US economy threatened to fall off the edge of a cliff. That is a performance his successor is going to have to repeat now that the US housing and credit booms have collapsed.

In the US, the Fed is belatedly recognising that what is now happening is not a "healthy correction" of the previous under-pricing of risk but a virulent infection running rapidly through the financial system, threatening to inflict severe structural damage on the real economy. Its decision announced last Friday to cut the Discount Rate, the rate at which financial institutions can borrow directly from the Federal Reserve Banks, was a step in the right direction. But it will not be anything like enough.

The Fed is going to have to make very substantial cuts in the general level of interest rates if it is going to have any chance of preserving financial stability and avoiding an extremely serious recession. It will do that, even if it does not yet realise just how much it is going to have to do, because its mandate will make it do it. The Fed was created, in response to the 1907 financial crisis in the US, precisely to try to avoid further crises. And, whatever mistakes Greenspan may have made, he just got it wrong: he didn't deliberately set up this Greek Tragedy.

In contrast, the EU quite deliberately created the most dangerous credit bubble of all: EMU. And, whereas the mission of the Fed is to avoid a financial crisis, the mission of the ECB is to provoke one. The purpose of the crisis will be, as Prodi, then Commission president, said in 2002, to allow the EU to take more power for itself. The sacrificial victims will be, in the first instance, families and firms (and banks and investors) in countries such as Ireland and Club Med. Subsequently, German savers (or British taxpayers) will bear the burden of bailouts that a newly-empowered "EU economic government" will ordain.

The mechanism is plain to see. Germany entered the euro with an overvalued exchange rate. It then faced a long period of high unemployment that drove wages down and restored its competitive position. But Germany was also helped at the beginning of this process by the newly-established ECB, then dominated by the Bundesbank president, Tietmeyer, and his acolyte, Trichet, then governor of the Banque de France. The ECB initially set interest rates where Germany needed them - far too low for most other EMU countries - and allowed extreme euro weakness.

That combination, and Germany's initial uncompetitiveness, created booms in many other EMU countries. But, as in the US in the 1920 and again in the 1990s, inappropriate interest rates and temporarily booming growth totally distorted perceptions of today versus tomorrow. The result has been that firms and families in these countries have massively over-borrowed and banks and investors have massively over-lent, often on the illusory security of inflated house prices.

Several of these countries have built up enormous current account deficits. They are now the ones that over the next decade will have to restore competitiveness. But, trapped in EMU, they can do that only through unemployment and wage reductions. Very high unemployment and deflation will make debts simply unpayable. But, trapped in EMU, these countries cannot do for themselves what Greenspan did and Bernanke will have to do - slash interest rates. And Tietmeyer's successor, Weber, will be striving to ensure the ECB does not do it for them. The resulting carnage in the financial system of the whole euro area will make the present global financial crisis, serious though it is, seem almost insignificant.

Eventually, when things have got bad enough, the German public will be forced to acquiesce in lowered interest rates and high German inflation. But by then the EU will have taken the opportunity to seize control of the financial system (cheerfully punishing the London financial "casino" in the process), dictate budgetary policies, extort bail-out transfers from countries such as Britain and impose exchange controls with the rest of the world (and even, as reportedly threatened in a 1998 meeting of the EU Employment Committee, impose exit taxes - expropriation of life savings - on people seeking to flee the EU). And it will seek to "democratise" this power grab by instituting an emergency "European government".


Pretty much everything he wrote has subsequently come to pass. The last stuff about emergency European governments and the like hasn't gone quite so far as he envisaged, but we have seen the toppling of democratically elected governments in both Greece and Italy in favour of unelected technocrats and lets face it, the Euro is not out of the woods yet.

The Euro has failed because fundamentally it was never an economic project, it was a political one. The goal was always first and foremost to tie the nations of the EU together so firmly they could never break free, and to pave the way for further, much deeper levels of integration down the track that people would never vote for in advance but which they would struggle to oppose once the inevitable logic of a common currency without common economic governance was made plain to them. I do believe that it was always intended to fail, just not to quite such devastating effect as has actually happened.
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Post 25 Jun 2013, 12:25 pm

Thanks for that article. That was great. I understand that Connolly has taken refuge in my fair city. I'll have to keep an eye out for him. ;-)

I suppose that my comparison is less about the US and its states, and more to other countries that use the US dollar (and the Euro for that matter) as a currency, or have their own currency, but its value is tied to the US dollar (or Euro). In short, if we follow your logic, Ecuador (a country bigger than Greece in population) and Panama, El Salvador and the others should be failing even faster than Greece because their economies are even less competitive to their European counterparts and they don't receive Federal support that states might.

Might the crisis have less to do with the Euro itself and more to do with the abuse that the PIIGS undertook when they were allowed to feed at the trough of unlimited hard money debt? (Sorry, couldn't resist that one!) Which puts it more as a political failure endemic to those countries rather than something fundamental to the Euro, which I think is an idea you already put forth here. For instance, why hasn't Malta had the same crisis seen elsewhere in southern Europe? Why haven't the West African nations that peg to the Euro failed long ago?

In short, it is, I believe, because the Euro and the Dollar function as hard money in these countries. Now, I don't think hard money is necessarily a good thing, but there is nothing inherently bad about it either. Hard money forces the countries that use them to be more accountable to both income and expenditures, but if you're using hard money as a soft currency, then some day the chickens come home to roost (or the pigs come back to their pens?)

http://en.wikipedia.org/wiki/File:DOLLAR_AND_EURO_IN_THE_WORLD.svg
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Post 25 Jun 2013, 1:34 pm

Well of course it shouldn't be forgotten that several countries which peg to the dollar have suffered spectacularly as a result. Argentina is the obvious example. It's going to be interesting to see how China fares too. Some of the stories starting to leak out of there in recent years suggest that China right now is the world's biggest speculative bubble. Whole towns have been built by property speculators that nobody lives in, all built on credit.

I don't really know the answer to your question, I'm not an economist, but I do know that pegged currencies are fraught with risk. Both Britain and Italy were brought to the brink of bankruptcy by the old Exchange Rate Mechanism in the early 90s and both eventually had to leave it before they could recover. The likes of Ecuador and the West African nations are hardly the poster boys for economic management and general prosperity it should be said, so maybe they're really not doing so great with their current arrangements. The problems facing Greece and Spain are rather different though, given that they have German levels of pay and social benefits without German productivity or an equivalent industrial base. This is the root cause of their lack of competitiveness. I'm guessing you wouldn't want to be unemployed in Ecuador.
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Post 25 Jun 2013, 3:02 pm

Sassenach wrote: The problems facing Greece and Spain are rather different though, given that they have German levels of pay and social benefits without German productivity or an equivalent industrial base. This is the root cause of their lack of competitiveness.


I think we agree, but this is a political failure, not a failure of the currency. Using the Euro takes away ability of the PIIGS to fix their financial imbalance through inflation and dilution, but is not the cause of the underlying problem.

Seen that way the Euro is a success, though the cost of that success is very real in the lives that its harmed.

I don't know where it's going to go from here, but my expectation is that this will be a battle between the haves and the have-nots. The haves will want to keep the Euro because it keeps nationstates from inflating away their wealth, the have-nots will want to pitch it for the same reasons. If the US is any model, don't bet against the haves.
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Post 25 Jun 2013, 4:49 pm

Sassenach wrote:The problems facing Greece and Spain are rather different though, given that they have German levels of pay and social benefits
Do they? Do you have a link to the figures to substantiate that claim?

This: http://en.wikipedia.org/wiki/List_of_co ... erage_wage suggests that Spain's average wage is about 3/4 that of Germany, while Greece's is someway less than half.
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Post 25 Jun 2013, 11:43 pm

Well yes, that was probably a slight exaggeration. I note that those figures are all from fairly recently though, it would be interesting to see data from just before the crash and very interesting to see data showing the changes over the last 10-15 years. Obviously we're not going to b seeing much in the way of wage inflation when countries have upwards of 25% unemployment but I suspect you'd see that wages grew much more quickly in the likes of Greece and Spain than in Germany over the period leading to 2008. It would also be interesting to see data for 'real' wages, taking living costs into account.