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Two-Track Euro? LQD

by melo Sat Feb 20th, 2010 at 11:42:50 AM EST

Beppe Grillo's Blog

Yesterday, Francesco Giavazzi was talking about the crisis in Greece and debating the possibility of the crisis spreading to Italy. He soon found just the right knight on a white steed that will rush to this Country's aid. That's right, none other than the man himself, Berlusconi, the economist "who immediately understands such things" and who has plunged this Country into debt. "But if what makes the level of debt unsustainable is the lack of growth, I cannot see where Italy's strength lies: we are not growing either and our debt to GDP ratio is still the highest in the Euro zone. At last week's European summit, Silvio Berlusconi -- who immediately understands such things and has a healthy scepticism for the vanity of Brussels -- asked that the management of the crisis in southern Europe be delegated to the International Monetary Fund...Berlusconi must insist at all costs, because his intervention could be crucial in terms of saving the Euro." Can a two-track Europe (or even three-track) continue to support a one-track Euro? Or to have a single currency for that matter? I have some very serious reservations. Now over to Eugenio Benetazzo.

excerpt below...


Beppe Grillo's Blog

Text of the interview.

"Today I'm going to try to shed some light on what is one of the most strongly denied monetary policies out there, namely the establishment of a so-called Euro 2, of a monetary split within the European currency zone that would result in the introduction of a second currency unit, providing for the circulation of two currencies within certain Countries.
Those of you who read my 2006 economic essay entitled "Tough and pure, awaiting the new 1929" will remember that, on the cover, there was a picture of a Euro coin breaking in two. Many readers asked me at the time: "But why didn't you use the Dollar instead of the Euro, wouldn't it have been more justified considering what happened thereafter?"
No it wouldn't, because the original idea was precisely that a Euro 2 could be created within the Euro zone, a second, so-called baby currency that could be used in certain Countries. But which Countries are these precisely? They are the so-called PIGS (Portugal, Italy, Ireland, Greece and Spain), to which I would add Malta and Cyprus. But why have a Euro 2? Because, 10 years after the birth of the Euro, we are beginning to realise that the European Union was born as a result of extreme pressures and forces that were senseless and bordering on criminal because a number of Countries, ours amongst them, are forced to deal with structural deficits that will be difficult to overcome even in the long term.
The famous Maastricht parameters have now been relegated to history because, in the past two years, almost everyone, from Germany through to Greece, has exceeded them. What use is a Europe in which the economic harmonisation process that should have demanded standardisation in terms of the ratio of public debt to GDP and then resorting to budget deficits in order to keep the Countries afloat, when we are faced with a huge question mark with regard to Greece, namely, "Will Greece manage to save itself by re-defining its tax system or will the Country be saved by Germany acting in concert with other Countries?" This is a real worry for the financial markets, but there is more. If Greece was to be bailed out, it would create a precedent. Down the line, Spain would also have to be bailed out and perhaps Ireland too, and don't forget about Italy? Except that from an economic point of view, Greece is a relatively minor problem. The biggest question mark hangs over Italy and Spain because there simply aren't sufficient available resources to bail them out too. That is why the financial markets are particularly nervous, both about trading in Government bonds and about the trend in the Euro-Dollar exchange rate, which has become the real driving force behind the financial engines and the reason for the so-called "mini-recovery" that we witnessed until a month ago, which was precisely due to the Euro-Dollar exchange trend. After all that has happened (to Greece, Ed.), the Euro - Dollar exchange rate narrowed significantly and, from a high of 1.50, it is expected that it could drop as low as 1.30 or even 1.25. The financial markets are anxiously looking at the future of Europe compared to that of the United States of America because of the structural differences as regards the deficits, the growth and the credibility of European Countries.
The Euro is a disguised currency, a currency that the Germans wanted and indeed demanded because Germany was a Country with great potential for exports, particularly to other European Countries, and therefore needed a currency that was strong and a fixed exchange rate that would ensure commercial stability.
The potential of Countries such as Italy, Spain and Greece, however, is very different to that of Germany. For example, Italy exports far more product outside of the European Union than Germany does and would need a competitive currency, which is precisely what is happening in China at the moment, where the Yuan is kept devalued in order to make Chinese exports more attractive.
In these terms, we have to rethink our monetary policy for a number of European Countries and that is why the idea of a so-called Euro 2 is beginning to emerge, in other words to split the current Euro, thus creating a new currency unit. However, we must keep in mind that, for this very reason, one of the first Countries that would oppose such a move would be Germany, which would find itself faced with partners whose potential and appeal would make life difficult for Germany. The introduction of the Euro created many additional benefits for certain Countries, but it also put incredible strain on the account books of other Countries and that is why the markets are now rather dubious about the future of Europe and the Euro. Greece with its 0.3 trillion Euro debt is a joke. The Country could easily be bailed out by means of a joint intervention by the other European Countries, but what about a Country such as Spain? Or Italy for that matter. Who will bail them out?"

Ok, get out the dissecting tray, microscopes and scalpels!

Poll
Is Greece the tip of the iceberg?
. Greece is fortunate to be the first, while funds still remain. 0%
. Ireland, Portugal and Italy will jump to proactively head off similar fates. 25%
. Germany will take responsibility for being europe's economic powerhouse, and support the rest of the EU on some form of welfare. 0%
. None of the above. 25%
. Other. Please elucidate in comments. 50%

Votes: 4
Results | Other Polls
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There is certainly a two track fiscal policy. Well heeled nations like Germany, France and the UK get deficite spending to prop things up in hope that it will all get better. However, the prescription for any country in need of outside help is austerity and deflation. This has traditionally been the approach taken by the IMF. Stiglitz has provided a good analysis of it in the past.

The only prediction that I'm prepared to make is that this is too big of a mess for the traditional approach of papering it over with fudge to suffice. The EU/EMU is going to look substantially different as a result of this.

by Richard Lyon (rllyon@gmail.com) on Sat Feb 20th, 2010 at 01:07:58 PM EST
fudge paper eh?

it will certainly make all europeans rethink what the EU means and stands for, beyond a common currency and less border protocols.

it think it's a time where the original concepts will be re-examined and all countries will have to weigh up seriously the advantages of Brussels' interplay with their own nation states.

Iceland sees the advantages of joining, after years of dithering.

fence sitting will be much less of an option.

certain countries would benefit enormously from more 'rational' guidance in their politics, not just their debt restructure.

what fudge is there? cutting back on social services for the poor, shutting hospitals, slashing pensions, IMF style?

or taxing the well-heeled, when they can easily move their gains offshore and out of reach? disincentivising them from keeping their factories in the EU, with cheaper labour markets on their knees for investment too?

 how we can keep this crisis intra-european, when so much of our wealth creation is already geared to foreign markets and labour?

the EU' problem on how to regulate itself will be meaningless if others use guile to game their own systems, like china with her currency now, so even if we did enact legislation to over-ride individual nations and keep our aquis more pure, the fact that others can take advantage of this suggests that until we can get a global currency and regulation system, we are stuck with cowboy capitalism from the atlantic, commu-capitalism from china, energy realpolitik from russia, and slash and burn growth from brazil, india, and the other 'second world' economies.

it's very confusing, and some-one has to lose the way it's set up and going.

i think if all nations concentrated on making their own clean energy, and balancing their energy budgets by reducing the costs through correct investment, europe could prove something important, while serving her own needs and setting a global example.

exports are great, but we need to think more longterm, and foreign markets are too dependent on fuel prices and free trade agreements being honoured.

free trade has not benefitted many people, and consumerism has allowed so much waste, feeding profits for the few, and leaving pollution.

thanks for your comment.

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Sat Feb 20th, 2010 at 02:29:15 PM EST
[ Parent ]
Electric Politics | Screwing Greece

Greece got into the jam it's in because joining Europe made it sucker bait. Krugman at least, faintly, acknowledges that. But Krugman fails to consider the implications of what he's saying. Unless and until Europe and the U.S. can police international capital markets at least two things will happen, and not just in Greece. International banks will conspire to set up smaller Eurozone countries to fail. And then the banks will use those smaller countries as speculative piñatas.

Krugman dismisses out of hand the notion that Greece can (or should) exit the Eurozone. "A breakup of the Euro is very nearly unthinkable," he writes. But note that there's a huge difference between breaking up the Euro and having Greece and/or other small countries exit the Eurozone. From the Greek perspective, if Greeks don't want to be penurious debt-slaves to international banks for the next several decades it makes perfect sense to exit the Eurozone, tell the banks to fuck off, print money, kick-start their economy, and invite the tourists back at cheap rates. If Greek priorities are to put Greeks back to work in Greece, they should drop the Euro. The Eurozone would survive.

But the idea of national borders, national identity, protectionism, and possibly profoundly anti-capitalist development models are such anathema to "liberals" like Paul Krugman that they won't be part of the policy conversation. Not, that is, unless the Greeks make them so.

The other thing generally to keep in mind as we watch the Greek crisis play out is that a corrupted government in cahoots with insanely corrupt international banks will everywhere and always contrive to wreck its economy in terms of the interests of the vast majority of its citizens, while the rich get richer. True in Greece. Also true in the US of A.

true dat.

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Sat Feb 20th, 2010 at 02:51:26 PM EST
[ Parent ]
Krugman is mostly relying on Barry Eichengreen for an analysis of the problems of Greece exiting the euro.

http://www.voxeu.org/index.php?q=node/729

It could probably be done if it were executed with the care and long term planning that was done when the euro was established. However, such an approach in the midst of a financial crisis is highly unlikely. I find the argument that such action would likely result in a far bigger mess than anything that might be done to stabilize the present situation convincing.

There may well be some virtue for a certain amount of protectionism for some countries in some situations. However, trying to erect protectionist barriers against countries with whom you share a common currency sounds like a thoroughly impossible undertaking. So far, extreme autarchy has never worked anywhere.  

by Richard Lyon (rllyon@gmail.com) on Sat Feb 20th, 2010 at 05:19:17 PM EST
[ Parent ]
thanks for the link, Richard, it was very interesting.

the logistics and expense of changing back to an old national currency are very daunting.

can the euro only survive in a period of economic growth, though?

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Sun Feb 21st, 2010 at 12:11:11 PM EST
[ Parent ]
Yes, very interesting....

You can't be me, I'm taken
by Sven Triloqvist on Sun Feb 21st, 2010 at 12:22:41 PM EST
[ Parent ]
That all depends on what conditions the members of the EMU set for its survival. Neither the euro nor any other currency can expect to navigate the upheavals of major global economic crises without fluctuations in exchange rates. The euro probably needs some different management arrangements than what it has at present to cope with such.
by Richard Lyon (rllyon@gmail.com) on Sun Feb 21st, 2010 at 12:56:56 PM EST
[ Parent ]
Richard Lyon:
The euro probably needs some different management arrangements than what it has at present to cope with such.

ok, what kind of approach do you see as being most hopeful to achieve this?

if we can't shuck off slacker countries because they're adding drag, why did we take them on board in the first place?

here's where i'd like to imagine it was for noble reasons, i guess events will tell.

when the tide goes out, you can tell who was swimming naked. (warren buffet)

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Sun Feb 21st, 2010 at 02:04:29 PM EST
[ Parent ]
oops, i meant 'if we can', not 'can't (shuck etc..), duh, sorry!

"We can all be prosperous but we can't all be rich." Ian Welsh
by melo (melometa4(at)gmail.com) on Sun Feb 21st, 2010 at 02:07:02 PM EST
[ Parent ]
I think that one reason that the EMU was expanded was because it supported Germany's strength as an exporter within the EU. That was probably also a big reason for the expansion of the EU to the east. In the immortal words of May West: "Goodness had nothin ta do with it."

The short answer to your question is that the regulatory institutions of the EMU need greater powers of control. However, if you look at the US where such institutions have powers and fairly clearly established traditions of using them, you see a situation where they lacked the political will and judgment to use them and the shock has swamped the world.

The curious thing about the EU is that it is fairly new and in some fundamental ways different from governmental arrangements that have come before it. That makes it interesting to watch. I think that because of this the people dealing with this situation are genuinely unsure of what options are available to them. That is something that can be clarified a good bit. That still leaves the question of how much responsibility the rich and powerful have for the people who aren't. There's never a conclusive answer to that whether those people are separated by national borders or are nominally part of the same nation.  

by Richard Lyon (rllyon@gmail.com) on Sun Feb 21st, 2010 at 02:35:34 PM EST
[ Parent ]
Richard Lyon:
The curious thing about the EU is that it is fairly new and in some fundamental ways different from governmental arrangements that have come before it

because it operates through consensus rather than party politics?

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Mon Feb 22nd, 2010 at 03:24:16 AM EST
[ Parent ]
No, I don't think so. Any "consensus" is reached in the back room among politicians. While that is true of most supposedly democratic systems, in the EU there is a curious lack of any kind of trans-national popular political sentiment. When political leaders have been forced to provide popular referenda on EU issues things often don't go their way so instead of listening to them they look for a way to get around them.
by Richard Lyon (rllyon@gmail.com) on Mon Feb 22nd, 2010 at 09:51:09 AM EST
[ Parent ]
Richard Lyon:
in the EU there is a curious lack of any kind of trans-national popular political sentiment

it is curious, i agree.

maybe there should be a european football club.

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Mon Feb 22nd, 2010 at 02:07:16 PM EST
[ Parent ]
When political leaders have been forced to provide popular referenda on EU issues things often don't go their way so instead of listening to them they look for a way to get around them.

And that's different from any other institution ... how?

;-)

Getting an elite decision maker to rescind a decision is fairly close to impossible.  

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Mon Feb 22nd, 2010 at 02:27:17 PM EST
[ Parent ]
I guess is that what is different from single nation systems is that some people sometimes get a vote and others don't. It's the lack of any semblance of a uniform political process, no matter how rigged it might be, that is unusual.  
by Richard Lyon (rllyon@gmail.com) on Mon Feb 22nd, 2010 at 04:39:31 PM EST
[ Parent ]


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