How to save the euro. By Cyrus Sanati FORTUNE -- The elections in France and Greece over the weekend have created a crisis of confidence that could eventually drown the euro and push the continent into a deeper recession. Talk of tearing up past agreements and a return to profligate spending is not what Wall Street and the markets need to hear right now and will simply serve to encourage further capital flight out of the eurozone. All this uncertainty confirms that a more concrete solution to the euro crisis is needed, one that involves a much tighter economic union -- something that regrettably looks increasingly untenable. But before a permanent solution could ever possibly take root, market confidence needs to be restored to the eurozone.
Wall Street is looking for the new governments to say that they will at the very least work within the framework of the agreements set up by their predecessors and that they are committed to the euro. MORE: 'Austerity' isn't an evil word That would be a mistake. "Is Europe on a Cross of Gold?" by Barry Eichengreen. Exit from comment view mode. Click to hide this space ROME – Increasingly, one hears predictions that the euro will go the way of the gold standard in the 1930’s.
And, increasingly, the reasoning behind such forecasts seems persuasive. But does that mean that the euro doomsayers are right? Following the 1929 stock market crash, Europe was hit by a massive deflationary shock. Today, Europe has been hit again by a massive deflationary shock. I wrote the book on Europe and the gold standard. Yet I am reluctant to believe that things will turn out the same way this time. First, mounting an appropriate monetary response is easier when you have a single central bank.
By contrast, were the ECB to adopt decisive measures, it could reflate the entire eurozone and obviate the need for countries to act unilaterally. A second difference is that, notwithstanding recent cuts in social programs, the unemployed receive more extensive public support than in the 1930’s. "The Euro’s Latest Reprieve" by Joseph E. Stiglitz. Exit from comment view mode. Click to hide this space NEW YORK – Like an inmate on death row, the euro has received another last-minute stay of execution. It will survive a little longer. The markets are celebrating, as they have after each of the four previous “euro crisis” summits – until they come to understand that the fundamental problems have yet to be addressed.
There was good news in this summit: Europe’s leaders have finally understood that the bootstrap operation by which Europe lends money to the banks to save the sovereigns, and to the sovereigns to save the banks, will not work. It is deeply troubling that it took Europe’s leaders so long to see something so obvious (and evident more than a decade and half ago in the East Asia crisis). What is now proposed is recapitalization of the European Investment Bank, part of a growth package of some $150 billion. The hope is that markets will reward virtue, which is defined as austerity. Germany seems surprised by this. The Value of European Currencies if the Euro Breaks Up, RealClearWorld - The Compass Blog. April 03, 2012 From a paper authored by Jens Nordvig and Nick Firoozye, an estimate of how European currencies would be valued following a break-up of the Eurozone. Via Business Insider. (Click on the image for a larger picture.)
A Tale of Two Currencies by Stefano Casertano. The Euro crisis resembles a Shakespearean tragedy: Despite the obvious deficiencies of the monetary union, all alternatives are decidedly worse for Germany. The German idea of an exit from the Euro is gaining popular support. According to an “Emnid-Institut” poll, 56% of Germans would favor a return to the “Deutsche Mark,” the country’s old currency. The poll was ordered by “Bild,” a populist newspaper that periodically chastens (with bold headlines) politicians for helping out other EU countries in dire straits – hence, some may suspect the poll to be biased.
But other prominent voices have also started to come out of the closet and now speak against the Euro. Among them is Wolfgang Reitzle, head of the gas and engineering company Linde, who expressed his worries about staying within the monetary union and about attempts to fix it. Someone dies and someone survives Much can be said about the disadvantages of the Euro. Overall, Germany would be a “safer” haven for people’s savings. Europe is Not the United States - Martin Feldstein. Exit from comment view mode. Click to hide this space CAMBRIDGE – Europe is now struggling with the inevitable adverse consequences of imposing a single currency on a very heterogeneous collection of countries. But the budget crisis in Greece and the risk of insolvency in Italy and Spain are just part of the problem caused by the single currency.
The fragility of the major European banks, high unemployment rates, and the large intra-European trade imbalance (Germany’s $200 billion current-account surplus versus the combined $300 billion current-account deficit in the rest of the eurozone) also reflect the use of the euro. European politicians who insisted on introducing the euro in 1999 ignored the warnings of economists who predicted that a single currency for all of Europe would create serious problems. Neither history nor economic logic supported that view. Indeed, EU trade functions well, despite the fact that only 17 of the Union’s 27 members use the euro. The Eurozone’s Fork in the Road - Mario I. Blejer and Eduardo Levy Yeyati. Exit from comment view mode. Click to hide this space BUENOS AIRES – Many observers have recently declared that the eurozone debt crisis is practically resolved, or at least on hold for a few years. The falling yields at the Italian government’s last bond auctions in 2011 suggested a significant reduction in the perceived sovereign-default risk.
Since Italian bonds are regarded as the bellwether of the crisis, many interpret this is a sign that the European debt market is normalizing. The “solution” to the crisis was putatively facilitated by the European Central Bank’s decision to lend unlimited funds to commercial banks for three-year terms at very low rates. The immediate answer is that national banks will now use the scheme to borrow cheaply from the ECB and invest in short-term sovereign bonds, using the interest-rate spread to create a profitable “sovereign carry trade.” At the core of the problem is currency. The prognoses for each case are starkly different. The Erosion of the EU. Understanding developments in the European crisis has become rather like Kremlinology, trying to figure out the meaning of subtle changes in wording and rearrangements of the Politburo on the podium for May Day parades.
One example is Mario Draghi of the European Central Bank (ECB). Sometimes the bank president suggests that he will do what nearly everyone else can see is necessary for the survival of the euro: print lots of them and use some to buy EU government debt, following the example of the Fed and the Bank of England. At other times, it’s as if Jean-Claude Trichet, a former bank governor who boasted of the ECB’s “impeccable” performance in sticking to its 2 percent inflation target, is doing a ventriloquist act, with Draghi in the unflattering role of dummy. In one respect, last week’s EU agreement was anything but subtle.
Second, the German public (and some others) believe that they are being made to bail out a bunch of feckless Southerners. Does the Euro Have a Future? by George Soros. The euro crisis is a direct consequence of the crash of 2008. When Lehman Brothers failed, the entire financial system started to collapse and had to be put on artificial life support. This took the form of substituting the sovereign credit of governments for the bank and other credit that had collapsed. At a memorable meeting of European finance ministers in November 2008, they guaranteed that no other financial institutions that are important to the workings of the financial system would be allowed to fail, and their example was followed by the United States. Angela Merkel then declared that the guarantee should be exercised by each European state individually, not by the European Union or the eurozone acting as a whole.
This sowed the seeds of the euro crisis because it revealed and activated a hidden weakness in the construction of the euro: the lack of a common treasury. The crisis itself erupted more than a year later, in 2010. Unfortunately the euro crisis is more intractable. Europe's currency crisis: How to save the euro. The Ticking Euro Bomb: What Options Are Left for the Common Currency? - SPIEGEL ONLINE - News - International. This is the final installment, comprising Parts 3 and 4 of SPIEGEL's recent cover story on the history of the common currency. Be sure to read Part 1 and Part 2 as well. Act III: The Euro Crisis (2010/11) How Greece becomes a pawn in the hands of investors. How the European Central Bank goes astray. Why the world no longer makes sense to the Greeks. How the Maastricht bet goes bad. In October 2009, Marko Mršnik's analysts at rating agency Standard & Poor's computed that Greece's debt would increase to 125 percent of economic output in 2010.
A few people had also become nervous at the headquarters of the Pacific Investment Company (PIMCO) in Newport Beach, California, about an hour's drive south of Los Angeles. PIMCO is by far the world's largest investor in government bonds. PIMCO controls more than $1.3 trillion (€1.05 trillion) on behalf of its customers. That's why almost all governments maintain close ties to PIMCO. In the last few weeks of 2009, PIMCO sold all of its Greek bonds. The Challenge for Mario Draghi at the European Central Bank. The anxiety surrounding the G-20 meeting in Cannes this week only deepened when Greek Prime Minister George Papandreou called for a popular referendum on the debt agreement reached between his country and its foreign lenders, placing the deal in jeopardy. Although Papandreou soon called off the vote, fears of a Greek default highlighted a critical transition at the top of Europe’s banking system. The accession of Mario Draghi, the former governor of the Bank of Italy, to the presidency of the European Central Bank will help decide how the Europeans will address the fundamental problems at the root of the current debt predicament.
Draghi is replacing Jean-Claude Trichet, who is stepping down after eight years on the job. Trichet made the ECB a respected and powerful institution. Only the U.S. Under Trichet, the ECB undeniably helped to alleviate Europe’s economic troubles. To continue reading, please log in. Don't have an account? Register Register now to get three articles each month. Central Bank Loans May Ease Europe’s Crisis. Yves Herman/Reuters Mario Draghi, the central bank's president, second from left, had resisted calls to stand directly behind debtor governments by buying their bonds as necessary, without limit. Though it is too soon to gauge any longer-term benefits, the move, by the , could be a turning point in the Continent’s — a cascading problem that for nearly two years has plagued financial markets around the world and now threatens global economic growth.
American officials and global economists have long urged the Europe’s central bank to take just such an aggressive stance — even as European political leaders have repeatedly failed to devise concrete near-term plans to address Europe’s debt problems and deteriorating finances. Carl B. The three-year loans the central bank made Wednesday come with a bargain-basement interest rate of 1 percent, providing the region’s financial institutions with the kind of cheap financing they can no longer get from the market. Europe’s Next Nightmare - Dani Rodrik. Exit from comment view mode. Click to hide this space CAMBRIDGE – As if the economic ramifications of a full-blown Greek default were not terrifying enough, the political consequences could be far worse.
A chaotic eurozone breakup would cause irreparable damage to the European integration project, the central pillar of Europe’s political stability since World War II. It would destabilize not only the highly-indebted European periphery, but also core countries like France and Germany, which have been the architects of that project. The nightmare scenario would also be a 1930’s-style victory for political extremism.
Fascism, Nazism, and communism were children of a backlash against globalization that had been building since the end of the nineteenth century, feeding on the anxieties of groups that felt disenfranchised and threatened by expanding market forces and cosmopolitan elites. As my Harvard colleague Jeff Frieden has written, this paved the path for two distinct forms of extremism. Europe’s Last Best Chance - Michael Boskin. Exit from comment view mode. Click to hide this space STANFORD – The resignations of Greek Prime Minister George Papandreou and Italian Prime Minister Silvio Berlusconi have highlighted how Greece, Italy, and many other countries obscured for too long their bloated public sectors’ long-standing problems with unsustainable social-welfare benefits.
Indeed, for many of these countries, meaningful reform has now become unavoidable. The social-insurance systems in Europe, as in the United States, Japan, and elsewhere, were designed under vastly different economic and demographic circumstances – more rapid economic growth, rising populations, and lower life expectancy – from those prevailing today. Governments (the focus is on Greece and Italy at the moment, but they are not alone) have promised too much, to too many, for too long.
My 1986 book Too Many Promises pointed to the same problem with America’s social-welfare system. It is not an impossible challenge. Fiscal Union Cannot Save the Euro - Derek Thompson - Business. It might have five years ago. Or five years from now. Not right now. WFARBY/Flickr After a weekend of panic over the fate of the euro, European stocks soared Monday morning. The reason? There's just one problem. Fiscal union means France and Germany exercise control over the budget and taxes of countries like Greece.
The European debt crisis in a nutshell is that poorer peripheral countries have large imbalances that ought to be solved by devaluing their own currency. To understand why the euro has turned into such a disaster, let's revisit why it exists in the first place. And that's basically what happened. The euro arrangement either worked out horribly, or a little too well, depending on how you choose to look at it. As Paul Krugman (who shared this graph) explained, these capital inflows caused a boom in the periphery that raised costs and prices dramatically. But now the tide is out, and the PIIGS's finances have been revealed as unsustainable.
The future of the EU: Two-speed Europe, or two Europes? What Can Save the Euro? - Joseph E. Stiglitz. Is the European Dream Over? - Ian Buruma. The ECB Fear Factor - Philippe Legrain. The Decline and Fall of the Euro? - Daniel Gros. Europe’s Dying Bank Model - Gene Frieda. Euro Struggles Can Be Traced to Origins of Common Currency. As European Austerity Ends, So Could the Euro. Keep the IMF Out of Europe - Mario I. Blejer and Eduardo Levy Yeyati.
Winning the European Confidence Game - Raghuram Rajan. Why the euro needs Eurobonds: Hundreds of years of reasons. Simon Johnson: The End of the Euro: A Survivor's Guide. "The Euro Awaits Its Verdict" by Peter Boone and Simon Johnson. Europe, Heal Thyself - Daniel Gros. Disaster Can Wait - Barry Eichengreen. A Summit to the Death - Kevin O'Rourke. "Is the Euro Ending or Beginning?" by Jean Pisani-Ferry. Deep Dive can europe be saved? Briefing: Can ecosystems show how to fix the euro? - science-in-society - 10 November 2011. "A Centerless Euro Cannot Hold" by Kenneth Rogoff. Why America Should Care About the Collapse of European Unity. "The next reserve currency" by Alexander Görlach.