Breakup of the Eurozone

[Godwynn]

I first laughed at the idea back in December of 2008.

Saxo Bank, who cares about them right?

I was cruising Bloomberg and to my horror...

Hayman Advisors LP, the firm that earned $500 million betting on the U.S. subprime mortgage-market collapse, says Europe’s monetary union is about to fall apart.

Richard Howard, a managing director for global markets at Dallas-based Hayman, said Germany may opt to shore up its own economy, Europe’s biggest, rather than bail out fellow euro nations such as Austria, Italy and Spain as their banks sag under the weight of bad debts. That might lead to defaults and compel Germany to renounce the euro, he said.

In this week's issue of The Economist it delves further into the issue.

Yet if a country such as Hungary or one of the Baltic three went under, west Europeans would be among the first to suffer (see article). Banks from Austria, Italy and Sweden, which have invested and lent heavily in eastern Europe, would see catastrophic losses if the value of their assets shrivelled. The strain of default, combined with atavistic protectionist instincts coming to the fore all over Europe, could easily unravel the EU’s proudest achievement, its single market.

Indeed, collapse in the east would quickly raise questions about the future of the EU itself. It would destabilise the euro—for some euro members, such as Ireland and Greece, are not in much better shape than eastern Europe. And it would spell doom for any chance of further enlarging the EU, raising new doubts about the future prospects of the western Balkans, Turkey and several countries from the former Soviet Union.

Will the European Union look to the Germans to save them?

Its place on the map once worried its generals. Now Germany feels encircled by economic menace. To the east lie ex-communist economies suffering from tumbling currencies and a drying-up of foreign capital. To the south and west are countries that are in the euro but have kept their profligate ways. Their cost of borrowing has shot up, stirring fears of default. Some now talk of a possible break-up of the euro area.

At times like these people turn to Germany, the biggest and most creditworthy economy in Europe. Austria, where the banks have risked more than most in eastern Europe, wants the European Union to provide €150 billion ($191 billion) of aid, part of it to countries that are not even members of the EU. Robert Zoellick, president of the World Bank, thinks east European banks need €120 billion of fresh capital, much of which may have to come from western Europe. The clamour for assistance to weaker countries in the euro is almost as loud.

Will the Germans offer their hand? Will they renounce the Euro? Bring back the Deutsche-Mark?

yikes

 

[crabapple]

When it comes to the EU, dont look to the economist for objective view it always been a EU sceptic paper, understandable when its a British paper

 

[Rossiya]

I always thought Germany was the strongest advocater of da EU.

 

[Godwynn]

When it comes to the EU, dont look to the economist for objective view it always been a EU sceptic paper, understandable when its a British paper

It's not so much I believe them (I don't) but I've seen a worrying uptick in stories being printed about this. The financial mess so far has been far worse than expected, so I don't glance over anything but the most outrageous of claims, anymore.

 

[Yoda Power]

People are overreacting.

The euro is still the best way to have growth, since it makes transition of money easier.

 

[Yoda Power]

I always thought Germany was the strongest advocater of da EU.

You're kidding right? The euro was basicly introduced to reduce Germany's power. The only reason they accepted it, was because otherwise their reunification wouldn't be accepted by France and southern Europe.

 

[kronic]

That we now have to bailout Eastern Europe is a nightmare. It basically means that the hundreds of billions of Euros that were directly or indirectly transferred from Western to Eastern Europe in the last 20 years are bascially sunk. They helped creating an unsustainable (yet praised) model of growth without laying a proper fundament. And Western governments, banks, companies were dumb enough to actively promote this. What's the cure? Apparently dumping even more money into Eastern Europe. I'm really beginning to wonder how they are going to sell this to the German and French public. Nobody here has yet realised what's going to happen.

Apparently, there are only two choices left: a) go bankrupt without aiding Eastern Europe and b) go bankrupt because of aiding Eastern Europe.

Another nice idea is the creation of the Eurobond. It follows the same logic: make those pay who are still trusted and give everybody else a free lunch. Let us all promote fiscal irresponsibility...after all, there's still someone who's gonna pay the bills!

Really, I'm sick of this crap. It's time to change the rules and drawing political conclusions (that is, if we survive this at all): Those who provide the money, must get to call the shots now. You want a bailout? Then shut up already!

 

[Till]

You're kidding right? The euro was basicly introduced to reduce Germany's power. The only reason they accepted it, was because otherwise their reunification wouldn't be accepted by France and southern Europe.

Both the German chancellor and the secretary of finance at the time of the Euro introduction were huge fans of a common currency. Especially Waigel, the secretary of finance, had made it his pet project.
And they weren't fans because of altruism, but because the Euro greatly benefited Germany:
A common currency made exports easier, and it prevents other export oriented members from gaining a competitive advantage by deprecating their currency.

I can't see how you could possibly argue that the Euro was
a) going to diminish Germany's influence
b) forced on Germany
c) a) + b)

 

[dutchfire]

I don't think anyone is actually considering breaking up the Eurozone. All member states are still profiting a lot from the open borders and easy free trade it brings. I also don't think it would be possible to let the Euro die without severly diminishing other aspects of european corporation as well, basically setting us years back.

 

[kronic]

Both the German chancellor and the secretary of finance at the time of the Euro introduction were huge fans of a common currency. Especially Waigel, the secretary of finance, had made it his pet project.
And they weren't fans because of altruism, but because the Euro greatly benefited Germany:
A common currency made exports easier, and it prevents other export oriented members from gaining a competitive advantage by deprecating their currency.

I can't see how you could possibly argue that the Euro was
a) going to diminish Germany's influence
b) forced on Germany
c) a) + b)

The Bundesbank however was always against it.

As I've argued before, the extreme export orientation, even more emphasized since the introduction of the € as a result of bad economic policies is one of the causes of Germany's misery. Wrong economic policy in Germany contributed a lot to the European and global economic imbalances that are at the heart of today's economic problems.

Furthermore, at the end of this decade it'll be hard to say that the € had a positive impact on German growth. Just look at GDP. 2009 will eat up most of the GDP gains made in 2006-2008. At the end of 2009 we might stand where we were at the end of 2005. The years before we had little or no growth at all. 2000 was the only good year before 2005/06. But if 2010 is going to be bad (which has to be feared), then we might even lose the welfare gains of 2000. The 2000's essentially are a lost decade for Germany economically, that's obvious by now. And we can see the consequences everywhere, on the labour market, in real wages, wealth distribution etc.
Given these developments how are we going to attribute a positive economic effect on the monetary union?

 

[dutchfire]

The Bundesbank however was always against it.

As I've argued before, the extreme export orientation, even more emphasized since the introduction of the € as a result of bad economic policies is one of the causes of Germany's misery. Wrong economic policy in Germany contributed a lot to the European and global economic imbalances that are at the heart of today's economic problems.

Furthermore, at the end of this decade it'll be hard to say that the € had a positive impact on German growth. Just look at GDP. 2009 will eat up most of the GDP gains made in 2006-2008. At the end of 2009 we might stand where we were at the end of 2005. The years before we had little or no growth at all. 2000 was the only good year before 2005/06. But if 2010 is going to be bad (which has to be feared), then we might even lose the welfare gains of 2000. The 2000's essentially are a lost decade for Germany economically, that's obvious by now. And we can see the consequences everywhere, on the labour market, in real wages, wealth distribution etc.
Given these developments how are we going to attribute a positive economic effect on the monetary union?

Well, really, this economic crisis would have hurt as much (if not more) if you hadn't adopted the euro.

As for the 2000's being a lost decade, the AEX (Amsterdam stock exchange) just hit the lowest point since december 1995.

 

[Jan H]

uhm, the only Eastern(*) European countries that have joined the Euro AFAIK, are Slovenia and Slovakia

(*) or Central or South-Eastern or whatever you want to call them

 

[Rossiya]

We all consider those countries as eastern European on this forum.

 

[Verbose]

Furthermore, at the end of this decade it'll be hard to say that the € had a positive impact on German growth. Just look at GDP. 2009 will eat up most of the GDP gains made in 2006-2008. At the end of 2009 we might stand where we were at the end of 2005. The years before we had little or no growth at all. 2000 was the only good year before 2005/06. But if 2010 is going to be bad (which has to be feared), then we might even lose the welfare gains of 2000. The 2000's essentially are a lost decade for Germany economically, that's obvious by now. And we can see the consequences everywhere, on the labour market, in real wages, wealth distribution etc.
Given these developments how are we going to attribute a positive economic effect on the monetary union?

That's of course unfortunate, but it doesn't follow that any of it is the Euros doing. Rather the opposite would seem to be the case. Only there's of course always a risk that in a crisis people start casting about for an external scape-goat.

Is that what's brewing in Germany? Surely the mighty German Wirtschaftswunder and the solid DM could never have been brung low, unless there was some nefarious foreign conspiracy at work?

Germany has had a lacklustre economy for quite some time, and would have had it just as much without the Euro afaik. Maybe it could have made its export industry a bit more competitive by depreciating the DM some, if they had stuck to it, but that has never been a road to riches for anyone.

 

[Riffraff]

Has any somewhat senior politician even hinted at this possibility?

I really doubt it.

 

[Till]

The Bundesbank however was always against it.

As I've argued before, the extreme export orientation, even more emphasized since the introduction of the € as a result of bad economic policies is one of the causes of Germany's misery. Wrong economic policy in Germany contributed a lot to the European and global economic imbalances that are at the heart of today's economic problems.

I don't disagree with you, but can't see the connection to the common currency. Our export fixation predates the Euro, and i can't think of a way that sticking with the D-Mark might have led to a paradigm shift in our economic policy. It figures that the Bundesbank would object, given that it lost power to the EZB. I'm not familiar with the objections in detail, but there can be no doubt that the EZB did a good job at keeping inflation low, which used to be the primary objective for the Bundesbank.

Furthermore, at the end of this decade it'll be hard to say that the € had a positive impact on German growth. Just look at GDP. 2009 will eat up most of the GDP gains made in 2006-2008. At the end of 2009 we might stand where we were at the end of 2005. The years before we had little or no growth at all. 2000 was the only good year before 2005/06. But if 2010 is going to be bad (which has to be feared), then we might even lose the welfare gains of 2000. The 2000's essentially are a lost decade for Germany economically, that's obvious by now. And we can see the consequences everywhere, on the labour market, in real wages, wealth distribution etc.
Given these developments how are we going to attribute a positive economic effect on the monetary union?

Again, i agree on the numbers but don't see the connection to the Euro. I didn't claim that it would make Germany recession proof, just that there would be a benefit for Germany, by boosting the export industry. A quick google search didn't produce any numbers, but i seem to recall that export was growing, even during the years of overall (near) stagnation.
Unless you think that keeping the D-Mark would have prevented the current global financial malaise, i don't see how comparing GDP numbers from before the Euro introduction and now is relevant to the evaluation of the Euro.

 

[Yoda Power]

Both the German chancellor and the secretary of finance at the time of the Euro introduction were huge fans of a common currency. Especially Waigel, the secretary of finance, had made it his pet project.
And they weren't fans because of altruism, but because the Euro greatly benefited Germany:
A common currency made exports easier, and it prevents other export oriented members from gaining a competitive advantage by deprecating their currency.

I can't see how you could possibly argue that the Euro was
a) going to diminish Germany's influence
b) forced on Germany
c) a) + b)

I actually mostly agree.

Genscher wanted the euro. But Pöhl did not. When I say the euro would reduce Germanys power I'm thinking of the Bundesbank, which had a very dominant role because of the EMS.

a) It did so, because the Bundesbank no longer had the monopoly on rates.
b) Forced is a strong word. Germany became a pro-euro after some time, but they weren't the driving force to begin with, France and the Delors Commission was.

 

[mrt144]

That we now have to bailout Eastern Europe is a nightmare. It basically means that the hundreds of billions of Euros that were directly or indirectly transferred from Western to Eastern Europe in the last 20 years are bascially sunk. They helped creating an unsustainable (yet praised) model of growth without laying a proper fundament. And Western governments, banks, companies were dumb enough to actively promote this. What's the cure? Apparently dumping even more money into Eastern Europe. I'm really beginning to wonder how they are going to sell this to the German and French public. Nobody here has yet realised what's going to happen.

Apparently, there are only two choices left: a) go bankrupt without aiding Eastern Europe and b) go bankrupt because of aiding Eastern Europe.

Another nice idea is the creation of the Eurobond. It follows the same logic: make those pay who are still trusted and give everybody else a free lunch. Let us all promote fiscal irresponsibility...after all, there's still someone who's gonna pay the bills!

Really, I'm sick of this crap. It's time to change the rules and drawing political conclusions (that is, if we survive this at all): Those who provide the money, must get to call the shots now. You want a bailout? Then shut up already!

When are you going to march on Poland?

 

[innonimatu]

As I've argued before, the extreme export orientation, even more emphasized since the introduction of the € as a result of bad economic policies is one of the causes of Germany's misery. Wrong economic policy in Germany contributed a lot to the European and global economic imbalances that are at the heart of today's economic problems.

I believe that Germany had an export-oriented economy long before the Euro was introduced. That it grew during the late 1990s and 2000s was only a natural consequence of the end of the Cold War divide and the EU's expansion.

Still, it seems that France, having followed a policy of supporting both local production across as many economic activities as they could and an internal market, is doing better. So you're probably right - Germany might have benefited from the extra jobs (and supposedly better support for wages) created by an export-oriented economy, but when the international crisis came it suffered more.

Furthermore, at the end of this decade it'll be hard to say that the € had a positive impact on German growth. Just look at GDP. 2009 will eat up most of the GDP gains made in 2006-2008. At the end of 2009 we might stand where we were at the end of 2005. The years before we had little or no growth at all.
...
Given these developments how are we going to attribute a positive economic effect on the monetary union?

I think that the euro itself was a mistake, at least how it was introduced. The member states were very different, economically, and required different economic policies. The EU's budget, and power's, was too low for it to play the role of a "federal government" in coordinating those states. It didn't have to cause the debt bubbles it did in some countries, but once governments fell for the "free-market" fairy tale of non-intervention (let the bankers regulate themselves – hah!) that outcome was guaranteed.

As for the eurobond idea, the only way it makes any sense is if the EU plans on defaulting - paying debt with newly created euros. Copying the americans again... Doing anything else raises the question of who will pay the debt later, and how, one which is politically intractable. In the end, debt will be defaulted on anyway, the discussion is only about whether to do it openly or stealthily.

The other thorny issue is about how to do it for Eastern Europe. Creating eurobonds will not prevent western banks holding bad loans in Eastern Europe from collapsing. How would the money raised (created…) be channelled to the banks? Bring the whole of Eastern Europe into the Euro, and have those bonds somehow issued on behalf of governments there? Or have western governments nationalize those banks and keep them afloat?
Frankly I don’t thing that the eurobond idea is about bailing out Eastern Europe at all – that’s just the current excuse, to hide a far more scary truth: in the end it will be about sustaining western european governments, and the new debt issued even by those governments fails to find buyers!

 

[TheLastOne36]

We all consider those countries as eastern European on this forum.

no we don't...

Central Europe is Poland, Slovakia, Czech, Hungary and sometimes austria, germany and slovenia.

Posting that as reference to all new posters before they get sucked into ross's wrath.