The Eurozone, or Potential Lack Thereof

[redtail896]

So, I don't know how many other policy wonks there are here, but anybody want to talk about Europe?

Crisis in Italy Deepens, as Bond Yields Hit Record Highs - NYT

It looks like Italy is bordering on default, and there's no way the rest of Europe could possibly bail it out. Commentators are talking about the death of the euro here. I have no idea what the practically means, especially for other big economies (USA, China, India, etc.). Thoughts? Is this a long-term good thing for Europe?

[shaft.ed]

Definitely not an economics wonk, but having a bunch of separate nations using the same currency while setting policy independently just seems like a recipe for disaster. I think in the long run it will be a good thing to get countries back on to independent currency. In the short term, I have no clue what the growing pains will be like.

[IceGuy]

I don't think the euro will disappear completely, since the European currencies were interconnected before the euro (and even the EU/EC).

From an economical standpoint, the euro should've been dissolved or reduced a long time ago, and Greece never let into the eurozone. But as the end of the euro would mean the end of the EU, at least in its current form, you also have to take the political angle into consideration. The EU has already lost majority support in most of the member countries, and anti-EU parties are gaining traction in almost every one. After the end of the euro no politician would be able to justify the EU.

In the short term, there'll be even more bailouts, especially as Germany currently has a vested interest in keeping the euro alive - they get loans practically for free as they are one of the few eurozone countries not on the verge of collapse.

In the long term, the euro will likely survive as a common currency for Germany, France, Austria, Finland and the Benelux countries, give or take a country.

Let's hope we get through this century without another war in Europe.

[diginova]

I like some of the ideas of the eurozone, specifically the no-passport travel between countries, however they should have been a LOT stricter on acceptance for the Euro. Require all Eurozone countries to be able to *take* the Euro / convert with no fees, sure, that helps with the free trade they're promoting -- but don't give every country control of decisions that can effect an entire *continent*.

I think the United Kingdom did the right thing all along by refusing the Euro as a currency. The pound is healthier for it.

[IceGuy]

I like some of the ideas of the eurozone, specifically the no-passport travel between countries, however they should have been a LOT stricter on acceptance for the Euro. Require all Eurozone countries to be able to *take* the Euro / convert with no fees, sure, that helps with the free trade they're promoting -- but don't give every country control of decisions that can effect an entire *continent*.

No-passport travel is Schengen area, not eurozone. You don't need a passport to travel to Switzerland or the UK, but you'd still have to change your euros. On the other hand, Ireland has the euro but is not part of Schengen.

[shaft.ed]

why does europe have to be so complicated

[Max]

Definitely not an economics wonk, but having a bunch of separate nations using the same currency while setting policy independently just seems like a recipe for disaster. I think in the long run it will be a good thing to get countries back on to independent currency. In the short term, I have no clue what the growing pains will be like.

This.
A lot of people compare the Euro to the 50 states the differences are many but the key ones are too many languages. In theory people should be able to move around wherever they want where wages are better in comparison to costs etc and that should keep inflation down to a relatively stable level across the Euro-zone but it doesn't work like that.
Because of this when some countries need growth, others need increased interest rates. For example atm Germany needs higher interest rates to lower inflation but Italy and Greece need lower interest rates to increase growth. Unified monetary policy with the lack of labour mobility is a big problem.


Iceguy, UK isn't in the Schengen area. It follows the same policy of Ireland. You need a passport from one of the EU nations to not require a visa.

[mykonian]

Definitely not an economics wonk, but having a bunch of separate nations using the same currency while setting policy independently just seems like a recipe for disaster. I think in the long run it will be a good thing to get countries back on to independent currency. In the short term, I have no clue what the growing pains will be like.

I don't think that's likely. The euro simply gives too many economic advantages. The fact that banks were no longer as able to roam off profits of international traders via currency exchange is known to have a large positive effect on a lot of European economies. The Euro promises monetary stability, apromise they are trying to keep now. I doubt that the Euro will disappear, everybody benefits too much from it. I think (or hope) that it'll go the other way. More power to Europe would solve the problem too.

That promise of stability partly gets Europe into trouble too. Where the USA can print money to get inflation, reducing their states debt, Europe hardly can.

A lot of people compare the Euro to the 50 states the differences are many but the key ones are too many languages. In theory people should be able to move around wherever they want where wages are better in comparison to costs etc and that should keep inflation down to a relatively stable level across the Euro-zone but it doesn't work like that.
Because of this when some countries need growth, others need increased interest rates. For example atm Germany needs higher interest rates to lower inflation but Italy and Greece need lower interest rates to increase growth. Unified monetary policy with the lack of labour mobility is a big problem.

How is this different from the USA? There are states who would like a lower interest rate, and states which wouldn't mind the economy to slow down. California is no nebraska. If they were individual nations, they would have a different monetary policies.


It is a problem that one country can muck up the for the entire zone, but that's a solvable problem. The nations could get less rights, and Europe more.

[IceGuy]

A lot of people compare the Euro to the 50 states the differences are many but the key ones are too many languages. In theory people should be able to move around wherever they want where wages are better in comparison to costs etc and that should keep inflation down to a relatively stable level across the Euro-zone but it doesn't work like that.

It doesn't even work within countries. See, for instance, the Western/Eastern Germany or the northern/southern Italy divide. Still, the currencies "worked", but only because the stronger part was willing and able to subsidize the weaker one.

Iceguy, UK isn't in the Schengen area. It follows the same policy of Ireland. You need a passport from one of the EU nations to not require a visa.

My mistake. I confused the UK with Norway (that's probably the first time somebody has said this).

It is a problem that one country can muck up the for the entire zone, but that's a solvable problem. The nations could get less rights, and Europe more.

And here we're back at the support problem. You won't get a majority for "more rights to the EU" in most of the EU countries.

[Otolia]

So all you guys find to jerk about is that EuroZone is a bad idea because it's based on the idea that countries shouldn't be able to artificially manipulate currency in order to tackle economics failure. I think that was a great idea, and it's still is.

@IceGuy : Nationalism, right extremism and anti-european feelings are strongly bound together in most countries (bar the UK) of the EU. Yes there is a growth of interest for these parties but that's the direct consequence of having a low educated workbody in various precarious situations. On the other end of the spectrum, more and more people are asking for an Europe of people rather than an Europe of nations (id est more people to the union and less to the states) Eventually that will be achieved. In the mean time we are still at the mercy of a retarded system which allows people to trade money that they don't have nor will have (in term of concrete value and not currency).

When the banking system was put together in Europe back in middle age, countries couldn't afford to go against them because they needed money to wage wars. In a peaceful Europe, banks have literally no power. A state cannot go bankrupt, if it can't pay was it owes to a bank then that bank can go fuck itself. Unfortunately the EU economists are way too worried about how the world would shake in despair if they ever did that to even talk about it publicly.

@IceGuy : Just shut up ! I don't know where you live but you are wrong.

[redtail896]

And here we're back at the support problem. You won't get a majority for "more rights to the EU" in most of the EU countries.

So, this just strikes me as a temporary thing. Right now, partially because of the economic crisis, support for the EU is low. But ten or fifteen years from now I see no reason to suppose that it couldn't bounce back. Like everything else, I think it ebbs and flows.

The problem is whether this particular ebb is enough to shatter the eurozone. I understand that Germany and the other biggies don't want it to collapse, but Italy is large enough that it could toss a wrench in the whole thing, right?

[Max]

All of the problems stem from the first due to a lack of labour mobility.
The US has automatic stabilisers acting across state borders. The Capital mobility is probably lower in America than in the European Union, however the OCA in America works due to complete commonality of interests. With one Federal government the interests of the nation are unquestioned by lower down states. The political system in Europe means that there is not commonality for the most parts.
German politicians are not concerned with the well-being of French citizens, because they don't vote for them. There would evidently be a level of interest but ultimately the concerns of a foreign person are not as pressing as the needs of a national one. In America if everyone detests their state government the electorate should factor this in to their decisions.
As for giving Europe more powers, that isn't going to happen any time soon. Mainly because Europeans don't want it. So would go against self-determination etc.

IceGuy, again. Automatic stabilisers acting within a nation makes the currency stable. Over time people have moved away from areas of low wages to higher areas. Obviously this isn't an immediate thing and its main effect is on people who have yet to start families. Also, it isn't a strong/weak divide it's a whole nation directly responsible for itself being weak. Normally when this occurs other nations aren't so dependent on it. Now the stronger nations must subsidise but as they don't have any political responsibility there they can do nothing.

Otolia, agreed.

redtail896, this isn't a temporary thing. In ten or fifteen years there won't be any more support. Give it 20 years as an optimistic estimate for more rights to the EU.
As for Italy collapsing, if that happens. The Euro will be over.

[IceGuy]

So all you guys find to jerk about is that EuroZone is a bad idea because it's based on the idea that countries shouldn't be able to artificially manipulate currency in order to tackle economics failure. I think that was a great idea, and it's still is.

Except this only works when you're either ready to go bankrupt and face the consequences (being bossed around into the recession like Greece is) or when you have a sympathetic companion to bail you out (as in Germany and Italy). The eurozone does not allow any of those ways out.

@IceGuy : Nationalism, right extremism and anti-european feelings are strongly bound together in most countries (bar the UK) of the EU. Yes there is a growth of interest for these parties but that's the direct consequence of having a low educated workbody in various precarious situations.

I'm not just talking about those right-wing populist and extremist parties, I'm also talking about general anti-EU sentiment.

The EU is a great idea, but the execution is bad. Currently, the EU has the powers of a political union, but still mostly the structure of a purely economic union.

The bad image of the EU won't go away until it becomes more democratic and citizen-centric, and governments will stop having the EU make unpopular decisions for them.

On the other end of the spectrum, more and more people are asking for an Europe of people rather than an Europe of nations (id est more people to the union and less to the states) Eventually that will be achieved. In the mean time we are still at the mercy of a retarded system which allows people to trade money that they don't have nor will have (in term of concrete value and not currency).

The problem is that we're moving AWAY from an unified Europe. Nationalistic sentiment has mostly been on the decline since 1945 until the last ten to twenty years. Now it's rising again.

When the banking system was put together in Europe back in middle age, countries couldn't afford to go against them because they needed money to wage wars. In a peaceful Europe, banks have literally no power. A state cannot go bankrupt, if it can't pay was it owes to a bank then that bank can go fuck itself. Unfortunately the EU economists are way too worried about how the world would shake in despair if they ever did that to even talk about it publicly.

Unfortunately a default would mean this country will have huge problems taking loans in the future.

In 1917, the Bolsheviks stopped paying Imperial Russia's debt. The Soviet Union couldn't take out loans until 1990, when it paid them back.

If we want privately-owned banks to stop having so much power, we must stop giving them that power by a.) letting them operate how they please and b.) loaning money from them.

@IceGuy : Just shut up ! I don't know where you live but you are wrong.

Wow! That's what I call a superior argument!

And here we're back at the support problem. You won't get a majority for "more rights to the EU" in most of the EU countries.

So, this just strikes me as a temporary thing. Right now, partially because of the economic crisis, support for the EU is low. But ten or fifteen years from now I see no reason to suppose that it couldn't bounce back. Like everything else, I think it ebbs and flows.

The problem is that the EU needs those rights in the crisis. We need it most when we don't want to have it.

IceGuy, again. Automatic stabilisers acting within a nation makes the currency stable. Over time people have moved away from areas of low wages to higher areas.

Except, you know, it doesn't work that easily. Some move away, but too many people (economically speaking) stay. East Germany and southern Italy still need massive subsidies, and it doesn't look like that's going to change. The homo oeconomicus would move, but the homo sapiens doesn't.

[Yosarian2]

Neah, the long-term economic advantages of the Euro zone are just too great. 40 years ago, if you had a company that went across Europe, you would have had to work in 15 or so different currencies, and every time you change one currency to another that costs you money. It was just incredibly inefficient.

The long-term solution is probably going to be increased European interdependence, not less. The EU itself is going to get more powers; it is right now, in response to this crises. I realize that's not especially popular in a lot of parts of Europe right now, but it probably will be. I think there is going to come a tipping point where people realize that they can't avoid European politics, so instead of demanding less interference from Europe, they start demand that their representatives (people in the European Parliament, who right now have little real power) start having more influence in Europe to protect their interests; I think as the European government starts to become more democratic and the Parliament starts having more influence in decisions that affect all of Europe instead of individual powerful national governments, it's going to become more accepted.

In the short term, it is entirely possible that Greece may drop out of the Euro zone for a while to reorganize it's economy and finances. That's a relatively small economy though, compared to the rest of Europe, and it probably won't stop the rest of Europe from becoming more economically integrated. Italy will probably be fine; it's got a huge debt, but it's running a pretty low deficit and has a much larger economy then Greece. It's really just jitters that are making everything go nuts now. Of course, if crazy market panic or really poor decision making on the part of the Italian govenrment actually forces Italy to default on it's debt, then we're talking

2.6 trillion dollars

of investment money pretty much just vanishing into thin air, which would put a giant gaping hole into the side of the world economy big enough to make Greece and Lehman Brothers put together look like small potatoes. I don't think that's going to happen, though; there's really no reason for it, because unlike the Greek government, the Italian government is basically fiscally sound.

Max, I also think that there is currently a fair amount of labor mobility in Europe. Not as much as in the US, true, but a lot more then there was 20 years ago.

[mykonian]

It is a problem that one country can muck up the for the entire zone, but that's a solvable problem. The nations could get less rights, and Europe more.

And here we're back at the support problem. You won't get a majority for "more rights to the EU" in most of the EU countries.

PAY ATTENTION.

Just look at how the EU started out. Look what it's tasks are now. Europe is growing more important through time.

they are doing it behind your back, it's a conspiracy against democracy!

[TDC]

Max, I also think that there is currently a fair amount of labor mobility in Europe. Not as much as in the US, true, but a lot more then there was 20 years ago.

Yes, it is certainly a factor, but the primary difference is one of budget. The US Federal Budget is bigger than that of all US states taken together. The average citizen of a weak state will pay less federal tax than that of a strong state, so even if the federal spending is not aimed specifically at weaker states this will act as a form of redistribution.

The EU budget (the vast majority of which is spent as agricultural subsidies) however isn't much bigger than that of Greece.
As an example, Greece was estimated to receive about €25 billion in net benefit from the EU budget over the period 2007-2013. Greece had a trade deficit of about €30 billion in 2010 alone - most of which within the Eurozone.

The only way this can work in the long run is continuous transfer payments or a bigger version of the Marshall Plan.

If anything the by comparison limited mobility of labor (due to language barrier) in Europe is a good thing, because it means the money drain is not necessarily followed by a brain drain which would certainly fuck up Greece for good.

[Hiraki]

Let's hope we get through this century without another war in Europe.

[Empking]

Germany, Austria and similar (not France) should leave the Euro to give the Euro a more representative exchange rate along with stopping the German's ability to screw over the Greeks by whining about Weimar and then allow the Central Bank to do the job of a central bank.

They'll probably go the way of ever closer union (which is the EU's fundamental goal) but the current method of crying and maliciously punishing the "feckless" Greeks is unworkable (and the recent events make it clear which of the EU and the Greeks have power over the Greek parliament.) I'm not at all sure that the northern countries are willing to have a proper fiscal union where one helps those less fortunate.

[Yosarian2]

Max, I also think that there is currently a fair amount of labor mobility in Europe. Not as much as in the US, true, but a lot more then there was 20 years ago.

Yes, it is certainly a factor, but the primary difference is one of budget. The US Federal Budget is bigger than that of all US states taken together. The average citizen of a weak state will pay less federal tax than that of a strong state, so even if the federal spending is not aimed specifically at weaker states this will act as a form of redistribution.

The EU budget (the vast majority of which is spent as agricultural subsidies) however isn't much bigger than that of Greece.
As an example, Greece was estimated to receive about €25 billion in net benefit from the EU budget over the period 2007-2013. Greece had a trade deficit of about €30 billion in 2010 alone - most of which within the Eurozone.

The only way this can work in the long run is continuous transfer payments or a bigger version of the Marshall Plan.

Yeah, that's a bigger problem.

In the long run, though, (once we get out of this crises) I'd expect the more economically poor Euro Zone countries to have a lot of economic growth and eventually catch up with Germany and France on a wealth per capita basis, so long as the countries have good governance. It was already happening with Ireland, Spain, and Portugal, although of course the current recession is going to reverse that in the short run, probably not in the long run.

If anything the by comparison limited mobility of labor (due to language barrier) in Europe is a good thing, because it means the money drain is not necessarily followed by a brain drain which would certainly fuck up Greece for good.

It can go the other way, though. In this country, we've had a lot of people moving south in the past few decades because the cost of living is so much less in southern states (and because people want a warm climate).

[Kise]

It must be bad when the only thing I can agree on is Hiraki's pic.

[TDC]

In the long run, though, (once we get out of this crises) I'd expect the more economically poor Euro Zone countries to have a lot of economic growth and eventually catch up with Germany and France on a wealth per capita basis, so long as the countries have good governance. It was already happening with Ireland, Spain, and Portugal, although of course the current recession is going to reverse that in the short run, probably not in the long run.

I wouldn't be that optimistic. While bad governance certainly played a role in getting the Greeks where they are now, I doubt they can reform their way out of this on their own, especially considering the ridiculous austerity measures forced upon them.

[shaft.ed]

especially considering the ridiculous austerity measures forced upon them

the whole world is shrinking its way to prosperity. It's maddening because it's so obviously stupid.
Either morons or evil bastards are running the world right now. Possibly both

[ortolan]

especially considering the ridiculous austerity measures forced upon them

the whole world is shrinking its way to prosperity. It's maddening because it's so obviously stupid.
Either morons or evil bastards are running the world right now. Possibly both

Normally evil bastards implement policy and then morons defend them.

[CooLDoG]

Ohh, I'm not sure if you guys are aware of this, but Berlusconi was forced to resign yesterday. I'm not particularly fond of him, glad to see him go.

[Yosarian2]

In the long run, though, (once we get out of this crises) I'd expect the more economically poor Euro Zone countries to have a lot of economic growth and eventually catch up with Germany and France on a wealth per capita basis, so long as the countries have good governance. It was already happening with Ireland, Spain, and Portugal, although of course the current recession is going to reverse that in the short run, probably not in the long run.

I wouldn't be that optimistic. While bad governance certainly played a role in getting the Greeks where they are now, I doubt they can reform their way out of this on their own, especially considering the ridiculous austerity measures forced upon them.

Mmm. The thing is, normally it is better during a recession to borrow money and stimulate the economy, but no matter what the rest of Europe did or didn't do, i just don't think that was an option for Greece at this point. After they defaulted on 50% of their debts, there's just no one in the world, public or private, that is going to want to lend Greece that kind of money again. No matter if it stays in the Euro zone or not, no matter if it defaults on the rest of it's debts or not, Greece is going to have to run a balanced budget or close to it for a while, just because it's not going to be able to borrow a whole lot more money. Which is going to mean higher taxes and less government services then Greeks have been used to. (shrug) I just don't see any way out of that.

Anyway, I still think that Greece is kind of a special case.