How to go forward with the euro?
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800 years on sovereign debt
History is indeed little more than the register of the crimes, follies, and misfortunes of mankind. – Edward Gibbon 1 The economics profession has an unfortunate tendency to view recent experience in the narrow window provided by standard datasets. With a few notable exceptions, cross-country empirical studies of financial crises typically begin in 1980 and are limited in other important respects. 2 Yet an event that is rare in a three-decade span may not be all that rare when placed in a broader context. In a recent paper co-authored with Kenneth Rogoff , we introduce a comprehensive new historical database for studying debt and banking crises, inflation, currency crashes and debasements. 3 The database covers sixty-six countries across all regions. The range of variables encompasses external and domestic debt, trade, GNP, inflation, exchange rates, interest rates, and commodity prices.
Some Q&A on EU debt 1/3
7:29 p.m. | Updated On Sunday we invited your questions about the Greek debt crisis and its potential effects on markets and governments in the rest of Europe and beyond. Even as questions were being sent, the European Union moved to provide a huge rescue package intended as a “shock and awe” commitment to prevent the crisis from spreading. Markets reacted favorably, but many questions remain. To address them, Economix invited three panelists to respond to selected questions.Some Q&A on EU debt 2/3
Our panel of economists is back with another installment of answers to your questions about the Greek debt crisis and its repercussions. The panelists are Simon Johnson , the former chief economist at the International Monetary Fund, an author of “ 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown ,” and a Daily Economist here at Economix; Carmen M. Reinhart , an economic historian at the University of Maryland whose recent book, “ This Time Is Different ,” chronicles 800 years’ worth of debt crises and sovereign defaults; and Yves Smith , the financial analyst behind the “ Naked Capitalism ” blog and “ ECONned ,” who heads Aurora Advisors , a management consulting firm specializing in corporate finance advisory and financial services. What is the future of the euro?
Our panel of economists is back with a final installment of answers to your questions about the Greek debt crisis and its repercussions. The panelists are Yves Smith , the financial analyst behind the “ Naked Capitalism ” blog and “ ECONned ,” who heads Aurora Advisors , a management consulting firm specializing in corporate finance advisory and financial services; Carmen M. Reinhart , an economic historian at the University of Maryland whose recent book, “ This Time Is Different ,” chronicles 800 years’ worth of debt crises and sovereign defaults; and Simon Johnson , the former chief economist at the International Monetary Fund , an author of “ 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown ,” and a Daily Economist here at Economix. What role does financial speculation play in this crisis?
Some Q&A on EU debt 3/3
The cost of default
Sovereign debt is different. Private debt contracts can be enforced in court and court rulings enforced by asset seizures. By contrast, public-debt creditors: Lack procedures for enforcing sovereign debt contracts – partly due to the principle of sovereign immunity .
Optimum currency area
In economics , an optimum currency area ( OCA ), also known as an optimal currency region ( OCR ), is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency. It describes the optimal characteristics for the merger of currencies or the creation of a new currency . The theory is used often to argue whether or not a certain region is ready to become a monetary union , one of the final stages in economic integration . An optimal currency area is often larger than a country.The Mundell–Fleming model , also known as the IS-LM-BP model , is an economic model first set forth (independently) by Robert Mundell and Marcus Fleming . [ 1 ] [ 2 ] The model is an extension of the IS-LM model . Whereas the traditional IS-LM Model deals with economy under autarky (or a closed economy), the Mundell–Fleming model describes an open economy. The Mundell–Fleming model portrays the short-run relationship between an economy's nominal exchange rate, interest rate, and output (in contrast to the closed-economy IS-LM model, which focuses only on the relationship between the interest rate and output). The Mundell–Fleming model has been used to argue that an economy cannot simultaneously maintain a fixed exchange rate , free capital movement , and an independent monetary policy . This principle is frequently called the " impossible trinity ," "unholy trinity," "irreconcilable trinity," "inconsistent trinity" or the "Mundell–Fleming trilemma ."
Mundell-Fleming model
or to leave euro?
Many commentators now believe that Greece will end up restructuring its debt — a euphemism for partial repudiation. I agree. But the reasoning seems to stop there, which is wrong. In effect, the consensus that Greece will end up defaulting is probably too optimistic .
That being said, it enables to get over this crisis but what happen next? Southern europe social contacts won't change anytime soon. And the seeds of the next crisis are there. by May 11
jeason, agree. Or the ECB runs inflation higher to make the greek relative desinflation more socially acceptable. by May 11
May 15, 2010, 8:49 am When the idea of the euro was first broached, there was extensive debate about whether Europe constituted an “optimum currency area”; the key question was whether European nations would have an adequate way to adjust to “asymmetric shocks”, which left some economies more depressed than others. When countries have their own currencies, they can deal with such shocks, at least in part, by devaluing — an argument made most eloquently by none other than Milton Friedman (pdf). Lacking that alternative, something else is needed. So now we have a euro crisis, which — to me at least — hinges crucially on that very issue.
Ignoring The Elephant In the Euro - Paul Krugman Blog - NYTimes.
The EU announced a €750 billion salvage operation, funds to shore up economies in economic difficulty, with the program consisting of €440 billion of loans from eurozone nations, €60 billion from an EU emergency fund, and €250 billion from the IMF. There are several layers of complicating factors, however. The first is that the German electorate has signaled its unhappiness with bailouts, presumably restricting future action if this measure falls short. From the Wall Street Journal : In Germany, projections showed Ms. Merkel’s center-right alliance Sunday lost a crucial regional election amid a voter backlash against aid for Greece.
Shock and Awe plan
Barely a month ago European policymakers were talking of €30 billion as a huge show of “solidarity” towards crisis-stricken Greece. That got the financial markets to become even more worried about the euro. Then they came up with €110 billion for Greece.
... an empty shell
Exit plan for this crisis
Louisa Gouliamaki/Agence France-Presse — Getty Images Protesters at the Acropolis in Athens waved flags and hung banners in front of the Parthenon. Peter Boone is chairman of the charity Effective Intervention and a research associate at the Center for Economic Performance at the London School of Economics. He is also a principal in Salute Capital Management Ltd. Simon Johnson , the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.” The Greek “rescue” package announced last weekend is dramatic, unprecedented and far from enough to stabilize the euro zone.I like their plan. I would add one element to it: increase Eurozone inflation. This will make it easier for south countries to achieve the relative deflation they need vs. northern europe. by May 11
OK, big plan from Europe. What will it do? What won’t it do? Some initial thoughts, probably a bit heavy on jargon (I don’t have the time to do a full translation into English.)
and a pinch of inflation
Longer term: No going back?
EUROPE’S €750 billion ($950 billion) plan to defend its single currency may have been received with euphoria, but it was born of despair. When euro-zone leaders gathered over the weekend of May 8th-9th they faced the sickening reality that the fear in southern Europe’s government-bond markets was spreading to its banking system and beginning to infect global credit markets. This plan was not just about preventing Greece’s sovereign-debt crisis spreading to Portugal and Spain.May 17, 2010, 9:42 am Perhaps the most startling and frustrating thing about the debate over the fate of the euro is the way almost everyone avoids confronting the core issue — the elephant in the euro . With a unified currency, adjustment to differential shocks requires adjustments in relative wages — and because the nations of the European periphery have gone from boom to bust, their adjustment must be downward. At this point, wages in Greece/Spain/Portugal/Latvia/Estonia etc. need to fall something like 20-30 percent relative to wages in Germany. Let me repeat that:
Ultra flexible wages?
Je sais, je sais Laetsgo. De toute façon les salaires ne sont et ne seront jamais ultra-flexible. Ceci dit le point là est de montrer le coût de l'euro. Une dévaluation est une forme de baisse de salaire sur les produits importés mais elle a l'avantage de ne pas y ressembler. by May 20
Ben voyons ! Puisqu'on ne peut pas dévaluer, baissons les salaires ! c'est qd même simple ! by May 20
Outside reviews?
Or a EU fund could play this role. But how to immunize it from politicians influence? by May 12
Maybe good academic idea but how realistic is it for politicians to accept it? by May 12
Adapt social contracts?
The Economist is right but totally unrealistic. Economic policies don't drive social contracts. It's the opposite. Social contracts are the result of history. You can't throw history away... by May 11
TheEconomist : euro and the future of Europe