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Wolfgang Münchau on why the euro will survive

In his FT column, Wolfgang Münchau noted that the euro critics who predicted the immediate demise of the eurozone had been proven wrong by last week's events. George Papandreou reshuffled the cabinet, and Angela Merkel capitulated on the private-sector involvement debate, which has been the biggest obstacle to an agreement on a second Greek loan package. The events of last week produced a political economy lesson about the eurozone - events are pushing the eurozone towards further economic and political integration. Greece will eventually default (or be foregiven its debts) - of this there can be no doubt - but Greece will default into the EFSF/ESM/bilateral programmes. Three finance options will then be available, monetisation, fiscal transfer or a eurozone bond. The ECB will reject the former, the member states will reject the second. The eurozone bond will emerge as the only realistic way out. There may still be a major accident on this path, but it will not happen this month, and probably not this year either.

by afew (afew(a in a circle)eurotrib_dot_com) on Mon Jun 20th, 2011 at 06:38:35 AM EST
[ Parent ]
European Tribune: Get your policy analysis five months early.

Though of course I have grown noticeably more pessimistic since then (was that really only five months ago?).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jun 20th, 2011 at 08:52:07 AM EST
[ Parent ]
I'm also surprised at how fast this has piled up. My predictions at the beginning of the year were for the the Eurozone to survive intact for this year at least, because the current arrangement was so much in Germany's mercantalist interests.  Now we might be looking at a core Eurozone in Northern Europe stretching only from the Netherlands to Germany.  It would be interesting to know if contingency plans are being drawn up at the EC or the national government level.  Does anyone have any intelligence from the people who normally print currency?

I find it hard to believe, however, that the EU could make that transformation so quickly, given that they are only now admitting to the systematic nature of the problems. One of the fault lines is the relative speed of national developments in Greece, Portugal and Spain (especially by the Greeks who are trying to re-make democracy for us all), compared with laden-tanker-like responses of the EU.

My bet, for what it's worth, would still be on Eurobond issuance and cobbling the thing together for this year.

by Pope Epopt on Tue Jun 21st, 2011 at 04:27:19 AM EST
[ Parent ]
The people who normally print currency are the banks.

We know roughly what would happen in the event of a Eurozone breakup - we've seen it all before (Iceland, Russia, Argentina, etc.).

We also know roughly what would have to happen to make the Eurozone not break up.

If I were a betting man, I'd give it around 50/50 odds.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jun 21st, 2011 at 04:40:00 AM EST
[ Parent ]
The Richard Koo link from JakeS is well worth spending a bit of time on, by the way.

It explains how the Japanese avoided a full blown recession while their asset prices fell by 87% after their bubble burst.  And you've guessed it - the Japanese government spent and continued to spend while the private sector deleveraged and did not invest.  The national deficit grew rapidly, but they didn't cut themselves into a great depression.  In the process, various neo-classical articles of faith were shown not to hold in a time of asset-bubble hangover deflation.

Precisely the opposite of the ECB/IMF prescription.

by Pope Epopt on Tue Jun 21st, 2011 at 06:00:33 PM EST
[ Parent ]

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