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But for some reason when these same principles are implemented by Europeans through the EU

Yes, the problem is that we have far-right policies. The euro need not be managed in a far-right manner - and again, "balanced budget, generally" and "lower taxes" are NOT the same thing.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Thu Jun 2nd, 2011 at 08:34:28 AM EST
[ Parent ]
The Euro was badly designed.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Jun 2nd, 2011 at 09:17:37 AM EST
[ Parent ]
It was designed for the core, and it would have worked for the core. It was not designed to include the periphery without additional political gimmicks.

The periphery was brought in in the 90s, after the "proved" they could make the efforts to join, but the discipline stopped as soon as they were in, and no political changes were made to the design.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Thu Jun 2nd, 2011 at 09:31:14 AM EST
[ Parent ]
the discipline stopped as soon as they were in

Here's your impression of a German dining room table again:

We talk about the euro crisis. They say, "Clearly, this was about fiscal irresponsibility, and we need to enforce much stricter rules." I say,

No fiscal rule would have constrained the Spanish housing bubble and its consequences.

And they say, "Thank you for your contribution. Clearly, this was about fiscal irresponsibility, and we need to enforce much stricter rules."

...

... The blue line is Germany; the red line is Spain.

The Euro rules never constrained the private sector. Constraining the public sector without constraining the private sector, and without instituting negative feedback mechanisms for trade imbalances, and allowing free movement of capital, leads to the private sector of the surplus countries financing the deficit of deficit countries through private sector debt.

The Euro has three flaws at least:

  1. an explicit anti-public-sector bias (which, if Minsky is to be believed, removes the ability to constrain budding depressions to recessions)
  2. no surplus-recycling mechanism
  3. free movement of capital


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Jun 2nd, 2011 at 09:38:15 AM EST
[ Parent ]
Well, that might have meant that, in the existing framework, the periphery should have been running large surpluses to prevent the external imbalances. Not the best policy, admittedly, but one that was possible.

But discipline is not just about budget policy (and in any case, budget policy is not just about the balance, but about how taxes are raised, and what they are spent on) - more stringent regulation of the banking sectors (something Spain did to a decent extent) and of asset sectors.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Thu Jun 2nd, 2011 at 10:06:57 AM EST
[ Parent ]
Well, that might have meant that, in the existing framework, the periphery should have been running large surpluses to prevent the external imbalances. Not the best policy, admittedly, but one that was possible.

I don't think that was possible. Surpluses by whom?

In the short run, the trade deficit is a given. If you run a public budget surplus (rather than the tamer 3% deficit allowed by the GSP) you only make the private debt grow faster.

The alternative is a serious recession in all of the periphery. So much for Growth and Stability. Martin Wolf again:

The eurozone was supposed to be an updated version of the classical gold standard. Countries in external deficit receive private financing from abroad. If such financing dries up, economic activity shrinks. Unemployment then drives down wages and prices, causing an "internal devaluation".
Münchau calls "internal devaluation"
a euphemism for a depression
Strong money regimes such as the Gold standard cause depressions. We thought the lesson had been learned in the 1930s and the economic theory for it existed.

Here's another statement of the same by Yanis Varoufakis:

The idea was pure brilliance: Combine a twin (trade and government) deficit with a strong capital account surplus. Suck into the US other people's exports and a tsunami of other people's capital. Thus my term for the period after 1971: The Global Hoover: From the late 1970s until 2008 the US acted as a gargantuan vacuum cleaner that sucked in the trade surpluses of Germany, Japan and, later, China while, at the same time, attracting into Wall Street something in the order of $3 to $5 billion net on each working day.

...

The euro, it must be remembered, was conceived at the height of the Grand Hoover's reign. Germany thought that it could extend its growth model to the eurozone. Convinced that the Grand Hoover would continue to suck in its surpluses, Germany thought that its surpluses could expand further within Europe if deficit countries like Greece, Spain, Italy etc. were given a strong DM-linked currency. Germany's condition for sharing its currency with the rest was that nothing else would be shared except for the common currency: Debt, taxes, government expenditure would be all nation-state-specific. Each euro of debt would belong to one country only and no surplus recycling mechanism would be set up.

...

Of course, while the Grand Hoover worked its magic, sucking up the German surpluses and keeping alive the worldwide glut of cheap private money, all seemed well. While the imbalances within Europe were getting larger, cheap private money allowed deficit states to cover the gap by borrowing. But when the Grand Hoover splattered and died, Europe's underlying imbalances came to the fore.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Jun 2nd, 2011 at 10:26:58 AM EST
[ Parent ]
Well, that might have meant that, in the existing framework, the periphery should have been running large surpluses to prevent the external imbalances.

That's the IMF recommendation.

It only works if you crater your economy so hard that it stops importing altogether.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jun 2nd, 2011 at 02:46:40 PM EST
[ Parent ]
  So, though you don't seem to want to admit it, apparently the upshot of your comments is, we're going to see the European Union reduced to what you call "its core"-- and that this will in effect resemble what was once the case, the power-center, Germany, with one to three others big enough to hold their own, playing along in a situation where Germany's economic predominance effectively sets the terms.  The rest may watch.

   Why then were these others "allowed in" in the first place?  It seems it served "someone's" interests to do that.

   So, as I see it, we have a 'family':  Mom or Dad (or both) are drunks.  But, it's imperative that we always keep ample quantities of liquor handy for them.  We can't have one without the other.  Meanwhile, we "enlarged the family", adopting other kids --who, with the original offspring, now suffer from the drunk parents.

    And your plan to ameliorate the situation is to let the weaker kids who don't bear up well under the rule of the drunken parents go off and fend for themselves so the other, rather stouter kids, can get on with daily life with Mom and Dad, because, no matter what, we're gonna have parents, they're gonna be drunk, we can't take their liquor away and we can't grow up and move out.  But we can congratulate ourselves for paring down the number of offspring living at home to those who are the hardiest, the most resilient in a drunken home.

  Have I missed something?

    Lovely.

   BTW, don't look now, but, it would appear that not everyone lives in a household run by drunk parents.  Some have sober parents--not perfect parents, but sober ones.

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Thu Jun 2nd, 2011 at 09:48:27 AM EST
[ Parent ]
When forced to bite the bullet, Euro apologists seem happy to fall back on "the EU is France and Germany, the rest is negotiable". I think we're all about ready to wake up from the European dream.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Jun 2nd, 2011 at 09:54:10 AM EST
[ Parent ]

  And that awakening is going to be a very rude one.

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge
by proximity1 on Thu Jun 2nd, 2011 at 10:22:12 AM EST
[ Parent ]
No, it would not have worked for the core because the core would have had to contend with strong revaluation pressures on their currencies vis-a-vis the non-Euro currencies.

The common feature of the European Exchange Rate Mechanism and the Euro is the shifting of the burden of depressing the DM exchange rate from the Bundesbank to the deficit countries.

It appears that the 1992/3 crisis of the European Exchange Rate Mechanism was used by the Bundesbank to assert itself as the most powerful institution in Europe, already. In a recent diary of mine I quoted
this third-person account by the Bundesbank itself:
Crises in the ERM. In 1992, investors lose confidence in the stability of the pound sterling, in particular, and then, in 1993, in the French franc, resulting in speculative selling of the pound and franc; in 1992, the United Kingdom and Italy leave the ERM; in 1993, the fluctuations margins around the bilateral central rates are expanded sharply. The Bundesbank with its commitment to price stability had refused to lower interest rates massively. The partner countries are forcibly reminded of their responsibility for their currencies; the process of convergence needed for monetary union is strengthened.
(links in the original)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Jun 2nd, 2011 at 09:48:44 AM EST
[ Parent ]
  "It was designed for the core, and it would have worked for the core."

    In that case, I see the virtues of all but "the core" leaving the E.U.--IOW, "getting rid of Germany" in a manner of speaking--and joining instead a trade & currency alliance with China, India--maybe Brazil, Indonesia, and Canada would like to belong, and, perhaps Russia, though personally I think Russia more naturally belongs with "the core" you refer to.

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Thu Jun 2nd, 2011 at 09:57:53 AM EST
[ Parent ]
China wants to revalue its currency just to make some smaller european countries happy.
by IM on Thu Jun 2nd, 2011 at 12:49:05 PM EST
[ Parent ]
Uh, no.

But China might want to allow its currency to appreciate against a few small European countries, if that means it gets to use them as bridgeheads into the Common Market. Sort of like how the US used Britain as a Trojan horse into the EU.

Mind you, that won't do anything good for European solidarity. But I think we passed the event horizon on that around the time the Troika started suggesting selling off the Acropolis.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jun 2nd, 2011 at 02:54:42 PM EST
[ Parent ]
Has the countries in the core balanced trade with each others? Otherwise, I doubt very much that it could work for the core either.

Structural trade imbalances would have built up, the surplus recycled to the trade deficit countries through the finance sector and then when recession hits, it turns into depression through the budget deficit ban, the vultures start attacking the debt of the trade deficit countries as the ECB demands shock therapy and demands that the finance sector of the trade surplus countries be protected at all costs.

Methinks inhabitants in the countries in the core that has a structural trade deficit against other members of the core should be very happy that they got away with a warning thanks to the admission of the periphery.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu Jun 2nd, 2011 at 03:24:15 PM EST
[ Parent ]
Can we fashion that argument into an LTE to be sent to newspapers in surplus countries having a deficit within the group of surplus countries?

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Jun 2nd, 2011 at 03:49:38 PM EST
[ Parent ]

  "Can we fashion that argument into an LTE to be sent to newspapers in surplus countries having a deficit within the group of surplus countries?"

    I like it.

   Please also see my query at:

  http://www.eurotrib.com/comments/2011/5/30/133913/924/237#237

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Thu Jun 2nd, 2011 at 04:21:22 PM EST
[ Parent ]
European Tribune - Submit New Story
I say yes, we can.


Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Fri Jun 3rd, 2011 at 12:58:46 PM EST
[ Parent ]
That linked wrong. New try:

European Tribune - LTE draft: the periphery protects the weaker parts of the core

I say yes, we can.


Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Fri Jun 3rd, 2011 at 01:30:50 PM EST
[ Parent ]
Has the countries in the core balanced trade with each others? Otherwise, I doubt very much that it could work for the core either.

It might, if they ran an overall foreign surplus. And the incentive to allow the currency to depreciate in value to protect the currency-wide foreign surplus is greater if you have fewer participants. Because fewer participants means fewer partners suckers on whom you can externalise the unemployment cost of deflation. A point that goes double if those partners are themselves high-status countries deliberately pursuing a foreign surplus.

Or, in simpler terms, the Netherlands is less likely to roll over and play dead in a Ger+Fin+BeNeLux currency union than Greece is to roll over in the €-17 currency union.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jun 2nd, 2011 at 04:04:55 PM EST
[ Parent ]
"balanced budget, generally" and "lower taxes" are NOT the same thing.

But "balanced budgets" and "deflation" are the same thing in a growing economy. And deflation kills economies.

Balanced budgets. Economic growth. Pick at most one.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jun 2nd, 2011 at 02:46:26 PM EST
[ Parent ]

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