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We have a euro currency crisis, but the problem is that the euro is too strong!
Presumably you find a contradiction there? Let Krugman clear it out for you: The Strength of a Failing Euro (Wonkish)
So what about the European periphery? Well, those are economies in big trouble -- but they also offer very high interest rates. And more to the point, the relevant arbitrage in the foreign exchange market is between bunds and Treasuries; if the euro zone does splinter, the question is what the value of the remaining core will be, and it's presumably quite high.

The only situation in which you would expect the troubles of Greece et al to mean a weak euro would be if you expected the ECB to help resolve the problems by pursuing an inflationary policy. There's actually a pretty good case for doing that -- but the Germans would never allow it.

So the euro is strong even as the euro system, the euro as a project, turns into a train wreck.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Jun 3rd, 2011 at 06:45:14 AM EST
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debate.

I think this is not a "euro" crisis, but a political crisis about how much solidarity and commonality there should be between the "core" and the "periphery." The core is currently strongly tempted to go it alone and put the responsibility of the breakup on the periphery.

There will be transfers from the core to the periphery, whether it's organised cleanly or whether it's triggered by a serious depression in the periphery which drags down the core.

I don't think we disagree too much on this.

I think we only disagree on what the focus for the solution should be - ie how the transfers should take place - via the monetary framework and policies or the broader political deal on what the EU is about.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Fri Jun 3rd, 2011 at 07:01:08 AM EST
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The two are complementary.

At the risk of sounding like a broken record, if you do not remove the threat of punitive policy rates against defaulting €-zone economies, you will have a better than even chance of not having a European Union to implement fiscal policy in by this time next decade.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Jun 3rd, 2011 at 07:06:14 AM EST
[ Parent ]
by Jerome a Paris (etg@eurotrib.com) on Fri Jun 3rd, 2011 at 07:17:25 AM EST
[ Parent ]
Meanwhile, Trichet proposes an EU finance minister without a budget whose only role would be to IMF member states. Some European construction, that.

Incidentally, I think we should start calling this "ECB riots" and "to ECB a country". Smearing the IMF is getting old.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Fri Jun 3rd, 2011 at 07:22:40 AM EST
[ Parent ]
The cause of the current crisis is the macroeconomic nonsense that makes up the Euro institutional framework and fills the heads of the EU economic policy apparatus. That's a crisis of the Euro, the "asymmetrical shock" that was predicted by its critics in the 1990s.

The EU's political crisis makes it impossible for the EU to deal with

  1. the immigration crisis stemming from the Arab revolutions - EU solution: scrap Schengen
  2. the E.Coli crisis - EU solution: import bans and nationalistic chest thumping about produce quality
  3. the Euro crisis - EU solution: let's cause IMF riots in the periphery.

The fact that the Euro trades at a high exchange value doesn't make the Eurozone healthy.

So there may not be a Euro crisis, but there is a Eurozone crisis.

And an EU crisis.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Fri Jun 3rd, 2011 at 07:20:36 AM EST
[ Parent ]
There may be a strong Euro, but there isn't a strong Europe.

Member states are acting as if membership is an inconvenience rather than obligation - and in the case of Ireland and Greece, that's certainly not untrue.

There is no political crisis because there is no politics.

There's a currency, and there's a parliament, and there's a constitution, and there's an impressively large number of apparatchiks and commissioners. But there's no plan, no strategy, no momentum, and no leadership - and that has left a power vacuum which has left the lunatic wankers running the ECB the de facto European sovereigns.

The irony here is that the main British criticism of Europe - that's it fundamentally undemocratic - has turned out to be correct.

Of course the UK isn't any more democratic itself. But it's become obvious that in its current form the EU is now a project by bankers, industrialists, and billionaire investors, for same.

The only way ordinary people can influence it is it by turning up in tens or hundreds of thousands, shouting, and setting fire to things.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Jun 3rd, 2011 at 07:57:06 AM EST
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I think we only disagree on what the focus for the solution should be - ie how the transfers should take place - via the monetary framework and policies or the broader political deal on what the EU is about.
The ECB, in concert with the markets, can shoot down any broader political deal through recalcitrant monetary policy.

Hey, when Ireland was claiming they could hold out for 9 months on a cash basis without resorting to the bond markets the ECB threatened to crash their banks, and Ireland folded. They are doing the same with Greece as we speak: "any debt writedowns for private investors and we'll instantly crash the Greek banks by refusing to discount their Greek bond holdings for liquidity".

There is truly no hope whatsoever here, politically.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Fri Jun 3rd, 2011 at 08:21:08 AM EST
[ Parent ]

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