If Spain had its own currency, this would be a good time to devalue; but it doesn't.
The reality is that finance is based in London and the US, and somehow discount the relevance of the devaluation of their own currencies, because it doesn't translate into immediate losses (if anything, devaluation of the pound or the dollar boosts domestic profits of companies with international operations, and the returns of investments in foreign-denominated securities...). So the 10+% deficits of the UK and US (not to mention the near-bankruptcy of many US States) don't seem to create all that handwringing... - or only inso far as to have calls for Social Security oe pensions or social transfer cuts... In the long run, we're all dead. John Maynard Keynes
what currency crises were like only 25 - nah, make that 15 - years ago
As I mentioned in another comment, Iceland's currency was destroyed in a day in 2008.
Not to speak of the Argentinean corralito crisis in 2001, Russia in 1998, and the Asian Tigers in 1997.
It's just that, in a typically smug fashion, the Angloamerican Masters of the Universe from the City and Wall Street thought it could never happen to us. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
I just read an economist tell an old joke about two pilots that fell into a jungle. They hear a lion roar and one of them puts on running shoes. The other says to him, "You can't outrun a lion." The first guy says, "I don't need to outrun the lion, I need to outrun you."
Greece is like the latter. In the midst of a global meltdown, and really in the midst of a global market, they became complacent. It's not the recession that has caused this but a race to the bottom. When you're competing with the third world in an increasingly competitive market, you better figure things out quickly or you will get picked off. The problem is, humans aren't equipped to go from eating steak to cabbage so quickly. And therein lies the problem.
Given European political support for lower income workers over the last two centuries, this wouldn't normally be a problem because welfare and wage policies would reverse the transfer back to such workers. But Krugman is arguing that the Euro puts obstacles, perhaps deliberately, in path of the welfare state model because it reduces the available options to mitigate poverty to those of a politically explicit nature: Only if governments have both the fiscal capacity and political will to increase net welfare/wage transfers can high unemployment and resulting deprivation be structurally addressed. Where that capacity and will have become limited, it's workers who lose, not bankers and traders.
If a European country with persistent high unemployment had its own currency, even if political authorities were unable to address the problems of deprivation themselves, market forces would eventually do the job for them by devaluing the currency to the point where domestic industry and exports grow again. Krugman's argument is thus that the euro is a more neo-liberal policy framework for much of Europe than a floating currency regime would be. It benefits traders, bankers, and funcionarios at the net expense of many common people.
Why should Greek debt suddenly have become more trustworthy because it was in euros? Is Californian debt more reliable because it's in dollars than in local IOUs?
The markets made a mistake, which meant a massive windfall for Spain, Portugal, Ireland and Greece for 10 years, now coming to an end. it's back to normal evaluations, and more realistic debt prices for these countries, but it's not the end of the world. In the long run, we're all dead. John Maynard Keynes
In theory, as I understand it, interest rates in the in the PIIGS countries should rise to meet investor's default risk assessment. Meaning, eventually, a flow of funds to those countries from lower interest rate countries within the euro. This intimates macroeconomic 'convergence' within the euro countries and, possibly, the EU as a whole. And this was one of the arguments presented for the introduction of the euro.
Or am I full of it?
interest rates in the in the PIIGS countries should rise to meet investor's default risk assessment
The European Central Bank sets a single base rate for all of the EU.
However, you are right that there are credit spreads between the different Eurozone sovereign debt issues, as well as between firms in different sectors and countries.
It is possible that, because of monetarism, too much importance is attached to the single base rate set by the ECB where it is the other market-set interest rates that matter.
Meaning, eventually, a flow of funds to those countries from lower interest rate countries within the euro
This intimates macroeconomic 'convergence' within the euro countries and, possibly, the EU as a whole.
I think the macroeconomic convergence must come from local inflation differentials which cannot be compensated by the various Eurosystem central banks by means of different local "base rates". En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
The problem is that a country with a good social welfare system that also has a first class education and training system may pass by training workers to compete in this highly competitive atmosphere. Greece is not that country. It's lack of diversification is it's problem.
I know this is not going to happen, but if it devalued, Greece would also find that the lack of diversification would be a big boon to the welfare of average citizens. Tourism and Int'l Shipping still make up more than 50% of GDP, and then there's trade in agriculture etc. With the flight of capital from the country, the fourth pillar of the economy (Banking) is about to be brought to its knees) but nonetheless, Greece's three main industries are still competitive and they bring in lots of outside dollars. Unless the shipping owners re-register their ships elsewhere--in an incredible show of cowardice--Greece has the easy means of improving the situation of its citizens. A cheaper tourist destination would help people internally. Transferring shipping dollars into a devalued currency would also help. The problem of course is that you'd totally scare away foreign investment (but if you look at the statistics, foreign investment is abysmally low in Greece) and that you'd lock Greeks inside the country, just as they used to be when Greeks used to go on vacation to Bulgaria.
I'd say that Greece is more like Argentina than it is like Haiti.
I wonder what that would have done to the peseta if we still had it.
What would likely have happened is that less would have gone toward US treasuries and more would have gone toward the stronger currencies among the largest European trading partners of Spain. Exchange rates are more a function of one's largest trading partners than anything else, with speculator activity being more like random "noise", even when it is deemed a crisis.
Krugman is arguing that the Euro is a policy framework whose purpose and effect has more to do with making the jobs of international bankers and economists easier and more rewarding than making the lives of working class people better. It's still a good argument.
A single market begets a single currency which begets a single economic policy. Birth pangs... En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
I wonder what that would have done to the peseta if we still had it.What would likely have happened is that less would have gone toward US treasuries and more would have gone toward the stronger currencies among the largest European trading partners of Spain.
But still, Exchange rates are more a function of one's largest trading partners than anything else holds in normal times. This here is a flight to safety by "foreign direct speculators" (and some domestic speculators seeking safety abroad) and has nothing to do with trade flows or central bank reserves. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
Viewed this way, it is easy to see why many economists viewed the Euro as an essentially German scheme to sustain a positive structural trade balance with the rest of Europe, with resulting wealth benefits for German workers, indefinitely.
The longer term planning and budgeting of real industry combined with industry's access to credit markets means that momentary flights to quality have little impact on employment or production decisions.
I disagree.
The Indonesia currency collapse of the late 90s thrust the firms whose currency-of-account was the rupiah into the bargain bin and those firms were snapped-up by those whose currency-of-account (US dollar, mostly) became more 'valuable' in relation. This switch in control definitely had an impact on "long term planning" of those firms.
Perhaps a 10% drop doesn't seem like much of a change. But I do remember one or two comments about its significance at the time.
The larger issue with Indonesia from what I remember is that, perhaps like China today, it was trying maintain a given, unsustainable rate that currency speculators sniffed out and moved on, forcing the government to free the exchange, at which point everyone dumped the currency because the arbitrage profit opportunities were over.
I'm not sure that we can say that change in ownership or control really has an impact on long-term planning regarding employment or production.
If this is the case, then the whole of Irish industrial policy since the '60's has been a waste of time because it was predicated on attracting the EU HQ, R&D and other high value activities of key global firms into Ireland on the basis that more investment would then follow. Thus Microsoft, Oracle, Google, Intel, IBM, Motorola, and a host of big pharma and biotech companies located here, employed thousands, and added billions to our corporate tax take (despite low 12.5% rates) and laregly kickstarted the Celtic Tiger.
They have not left and are still huge employers and value adders, and tax revenue generators and have led to many spin-off investment and expansion decisions because key management were located here - even thought the Irish cost base gradually rose to one of the highest in the world.
As a former long term of an iconic Irish firm taken over by a British one I can also vouce for the fact that slowly, over a decade or so, all top management functions, decision making and corporate biases gradually became British resulting in many illogical pro-British decisions when functions/investments would more cost effectively have been made in Ireland.
Likewise, I would argue, that much of the "City" financial services industry is now located in London purely for historical/cultural/management bias regions and should much more logicically and cost effectively be re-located to Frankfurt, Dublin, or some Swiss Canton.
Change of owner/management control is a vital factor in economic development and investment decisions and cn defy all commercial logic almost indefinitely. It is an economists conceit that cultural, managerial, political, and organisational factors are not key aspects of location/investment decisions. notes from no w here
If this is the case, then the whole of Irish industrial policy since the '60's has been a waste of time because it was predicated on attracting the EU HQ, R&D and other high value activities of key global firms into Ireland on the basis that more investment would then follow.
Two things: 1) There is, indeed, a very large literature in economics, urban planning, policy studies, and other fields that argues precisely that trying to attract employers, especially with subsidies, is usually a worse strategy compared to simply investing in education and transportation infrastructure and attracting employers on the basis of superior efficiency or value added.
But, 2) What you are listing are not, in fact corporate HQ's -- that is, native or resident ownership of production facilities. The firms you describe are all foreign-owned companies, or at least public companies with majority foreign ownership and NO embedded local control over business strategy and policy. So, if other capitalists suddenly took over Google or Motorola because it could pick up their shares for cheap due to the collapse of the US dollar or other currency, there is no reason to think this should have any effect on employment in Ireland whatsoever, particularly if Irish facilities were profitable ones for the larger firms.
One can point at evidence to argue either way. If the purchaser is Warren Buffet, or like him, who is interested in a long-term cash flow from ownership/control then there is little to no impact on employment and production -- operation, if you will. If the purchaser(s) are only interested in looting the company for a one-shot, short term, gain then there will be a major impact on the long-term up to and including the existence of the company over the long-term.
At least as I understand the matter.
Correction requested.
Given that, at the height of the Asian crisis of 1997, Krugman advocated capital controls and fixed exchange to protect local economies from the capital flight of foreign direct "investors", the Euro has to be a policy win. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
Then, if a crash does occur, how bad is it really for working class people compared to the trans-nationally active banker and merchant class? In most cases, where, unlike Iceland, a manufacturing and agricultural sectors exists as does the infrastructure for some expansion, even massive depreciation of currency can still be a net stimulus for employment and thus result in a net transfer of wealth from the bankers, merchants, and capitalists to the workers in a given country. A lot depends on the case-by-case particularities, but I don't think we can make a blanket statement that the euro is a policy win for everyone in Europe, particularly the average wage laborer in many countries.
massive depreciation of currency can still be a net stimulus for employment and thus result in a net transfer of wealth from the bankers, merchants, and capitalists to the workers in a given country.
It might be, but it's odd how it never seems to work like that.
I'll remind you that massive depreciation of currency is reliably used an excuse for severe monetarist spending cuts, offshoring, and financialisation.
What has happened in practice is that in countries like Greece the required cuts are far lower than would have been 'required' otherwise.
You seem to imply upthread that it is possible for these devaluations to be good for workers while hurting the "internationally active firms". If the salutory effect on workers comes about from more favourable terms of foreign trade, how can the sudden bankruptcy of banks and import/export firms due to their foreign-currency liabilities blowing up be a good thing? En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
And it's not that there is a transfer of wealth from "firms" to workers, but that there is a transfer of wealth from bankers, traders, and firm owners to workers. Clearly if firms go out of business, workers are hurt as well or more than owners. But what I argue is that there is no reason to believe that a flight to the DM in today's Europe would result in the closure of any Spanish manufacturing firms. (It might result in a few banks and merchant houses closing shop, but that's part of the transfer of welfare.)
Spain is not Indonesia, so it's pretty questionable whether currency speculation could result in anything but a very temporary change in the exchange rate. The daily flow of huge amounts of goods and services over borders would have to eventually push rates back to levels consistent with country's current account balances. However, under a fixed rate regime like the euro provides, an imbalance such as high unemployment might only be solved through transfers of wealth from richer countries or migration, both of which are also highly restricted.
I think a large part of the dissonance on this topic comes from two different ways of defining what the EU really is. For many, particularly here, the EU is an institutional framework for international governance, which puts it against the neo-liberal narrative. However, for many others, the EU is primarily a free trade agreement, epitomizing the victory of merchants over the medieval militarists who established castles every few kilometers on the Rhine River to soak the traders on their barges. This view places the EU project squarely in support of the neo-liberal narrative. Generally, common currencies and currency pegging are pro-neo-liberal policies meant to support the welfare of traders and bankers at the expense of workers and local governance, so the establishment of the euro ahead of a stronger, continental welfare policy framework can look alot like the neo-liberals are winning.
And it's not that there is a transfer of wealth from "firms" to workers, but that there is a transfer of wealth from bankers, traders, and firm owners to workers.
Citation needed.
Preferably more than one.
Legal persons own things. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
The question is - what evidence do you have that proves your contention that wealth is transferred from owners to workers?
The same question goes the other way: What evidence do you have that wealth is transferred from workers to owners when a currency crisis occurs? It might just as easily be a transfer of wealth from capitalist-owners to capitalist currency traders and thus have only minor welfare effects in terms of workers and other more vulnerable populations.
Sweden had in 70ies and 80ies fought unemployment with a series of devaluations, all the while having a high inflation which ate the gains of the devaluations. This had several effects, one of them was creating a generation with next to no mortgages on their houses, as inflation had been higher then interests rates for a long period.
On the other hand Sweden had a currency crises in the early 90ies which served as the starting point for neoliberal reforms and the socdems taking the third way. Similar crises, same country, different result. A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!
For many, particularly here, the EU is an institutional framework for international governance, which puts it against the neo-liberal narrative. However, for many others, the EU is primarily a free trade agreement, epitomizing the victory of merchants over the medieval militarists who established castles every few kilometers on the Rhine River to soak the traders on their barges.
I like that description of the debate. In the long run, we're all dead. John Maynard Keynes
It is also questionable whether a 6% stock market drop could result in anything but a very temporary loss of loan collateral for shereholders. And yet the political class is in a panic over "investors" because the dominant ideology tells them to. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
It's not for nothing that I sometimes say that the Brussels Consensus is taking the place of the Washington Consensus with much the same effects. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
This is like when you were claiming a housing bubble followed by a wave of defaults is a net transfer of wealth from financiers to homeowners. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
I got the same gist from living through a few of them. After first continuing to drop, employment will pick up in their wake, but the spread of poverty will be a more lasting effect. And the next crisis will come certainly, especially after tax cuts. *Lunatic*, n. One whose delusions are out of fashion.
Although in fact a wave of deliberate defaults would be an efficient way to make that happen.
E.g. In the UK, many credit card agreements are legally unenforceable. Many mortgage companies in the US and the UK - and probably elsewhere - are unable to supply proof of ownership or proof of debt.
And so on.
many credit card agreements are legally unenforceable. Many mortgage companies in the US and the UK - and probably elsewhere - are unable to supply proof of ownership or proof of debt.
"What is it?" I asked, imagining that he was about to come out with yet a new junk mathematics formula? "The poor are honest," he said, accompanying his words with his jaw dropping open as if to say, "Who could have guessed?" The meaning was clear enough. The poor pay their debts as a matter of honor, even at great personal expense. Unlike Donald Trump, the poor are less likely to walk away from their homes when market prices sink below the mortgage level. In today's neoliberal Chicago School language, the poor behave "uneconomically." That is, they make choices that do not make economic sense, but rather reflect a group morality. This sociological gullibility is what made them rich pickings for predatory lenders such as Countrywide, Wachovia and Citibank.
"The poor are honest," he said, accompanying his words with his jaw dropping open as if to say, "Who could have guessed?"
The meaning was clear enough. The poor pay their debts as a matter of honor, even at great personal expense. Unlike Donald Trump, the poor are less likely to walk away from their homes when market prices sink below the mortgage level. In today's neoliberal Chicago School language, the poor behave "uneconomically." That is, they make choices that do not make economic sense, but rather reflect a group morality. This sociological gullibility is what made them rich pickings for predatory lenders such as Countrywide, Wachovia and Citibank.
Economic View - Will More Borrowers Walk Away From Their Mortgages? - NYTimes.com
A provocative paper by Brent White, a law professor at the University of Arizona, makes the case that borrowers are actually suffering from a "norm asymmetry." In other words, they think they are obligated to repay their loans even if it is not in their financial interest to do so, while their lenders are free to do whatever maximizes profits. It's as if borrowers are playing in a poker game in which they are the only ones who think bluffing is unethical.
The problem with devaluation as a strategy for small countries' currencies is that it results in only a short term re-adjustment of the cost base, to be rapidly eroded by inflation, and carries a huge "exchange risk" price tag in the form of higher interest rates almost on a permanent basis.
The Euro in large part caused and also ended the Celtic Tiger. Businesses used to high and fluctuating interest rates could now plan on the basis of low and stable German style interest rates. This led to rapid expansion and inflation which should have been counter-balanced by fiscal policy in the absence of independent monetary policy levers.
Unfortunately the Government, for political popularity reasons acted in a pro-cyclical fashion, and the ECB rates - at first far too low - were then raised just as we were going into recession and needed them reduced. So we are always going to pay a price for ECB rates being determined by the Franco-German business cycle and need to use fical policy to counterbalance this.
However, otherwise, we benefit greatly from having a common currency with most of our main tarding partners, and from the protection the sheer size of the Euro gives us from speculators. notes from no w here
I think everyone was paying double-digit interest rates for mortgages in the 1980's, not just "peripheral" economies. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
Anyway, Volcker raised interest rates above 20% in 1982 and that propagated to the whole world... En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
In addition, the Irish banking sector would be a 20-times-bigger smoking crater than Iceland's were it not for the Euro. The fact is that just the impossibility of an attack on the currency has allowed the Irish government to get away with a blanket guarantee of all liabilities or all banks (which adds up to several multiples of GDP) without having to actually make good on it or accounting for it explicitly as government debt. If you had had the punt, the reaction of the markets would have likely turned that massive contingent liability into a disaster. But the markets can't attack the Deutsche Mark so the Irish government gets to make promises they can't possibly keep because they won't likely be forced to make good on them.
NAMA is a different issue - that's an actual, not contingent, liability. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
NAMA is a different issue - that's an actual, not contingent, liability
Nah - its off balance sheet - in a special purpose vehicle - so its not really real in the world of "modern" accounting.
If there is a negative with the Euro for us, it is that it made the lunacy of the bank guarantee to bond-holders possible. Otherwise we would (presumably) have let the banks go into into examiner-ship (our Chapter 11) or some such purgatory, and reconstituted them as new banks the next week - with shareholders and non-senior bond-holders and not taxpayers taking the hit. notes from no w here
Like I said, the Irish banking sector would be a 20-times-bigger smoking crater than Iceland's were it not for the Euro. It's a mixed blessing. I'm not sure what's worse for ordinary people. Systemically, in the long term, maybe the smoking crater is preferable. But zombie banks are less immediately painful. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
