Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Display:
Is it worth distinguishing between effects caused by the Euro and those caused by the Single Market?

(Forcing Germany out of the Euro vs out of the EU)

by Metatone (metatone [a|t] gmail (dot) com) on Mon Apr 9th, 2012 at 07:24:33 AM EST
I think, in that connection, this paragraph is important:
First, the collapse of the  Bretton Woods system of fixed exchange rates pegged to the US Dollar, and by proxy gold, presented the threat of competitive devaluation for intra-European trade.  The experience of the 1930s, in which countries attempted to decrease the cost of their products in foreign markets through currency devaluations, haunted the policymakers of that time.  Thus you get an attempt to restore  a system of fixed exchange for intra-European trade after the  loss of a global system provided as a public good by the US government.
In other words, it's the fact that EEC "partners" didn't trust each other not to engage in an exchange-rate race to the bottom... and they still don't, to this day.

Where there is no trust, how can you have a monetary union, let alone a political union?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon Apr 9th, 2012 at 08:37:38 AM EST
[ Parent ]
Except, of course, that an exchange rate race will not be "to the bottom." All it does is create a spurt of inflation while the competitive devaluation shakes out and the participants discover the exchange rates that can be sustained without challenge. As long as you do it continuously rather than in one big, messy chunk, it doesn't terribly hurt anybody except bondholders. And fuck them.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 9th, 2012 at 10:03:27 AM EST
[ Parent ]
If countries commit to defending their currencies against appreciation only, it's impossible to engage in a race to the bottom. Suppose that Greece wants to game the system and its central bank buys lots of German securities with new fiat Drachma. If the Bundesbank had an obligation to defend the Mark against excessive appreciation, they could just buy off all those drachma with new fiat DM. The net result would be an increase in DM holdings by the Greek Central Bank and Drackma holdings by the Bundesbank. But there need not be any upwards pressure on DM asset prices or indeed on the exchange rate or on German inflation. And the Bundesbank is much bigger than the Bank of Greece.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Apr 10th, 2012 at 04:31:48 AM EST
[ Parent ]
If the Greek CB wanted to put downward pressure on the D-Mark/Drachma exchange rate, they would sell into the open market, not bilaterally to the BuBa. And if the BuBa defended against it, the spread between the Greek attack bid and the BuBa defense bid would go to some arbitrageur, who would accumulate some combination of D-Mark and Drachma, which he would then either spend on goods (giving him a free lunch at the expense of the Greek and German citizens), or (more likely) exchange for other currencies in the open market, putting downward pressure on the D-Mark/Drachma couple.

Eventually one of the principal participants would bow out, the other would set whatever discount it wanted relative to the rate at which the former stopped defending its discount. You would have discovered the exchange rate which neither central bank could feasibly attack (and since the central banks, collectively, have greater pricing power than any speculator, by inference also from speculative attack).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Apr 10th, 2012 at 04:59:38 AM EST
[ Parent ]
But a Germany outside of the Euro is at far less threat of competitive devaluation than a Germany in an EU of a large number of sovereign currencies.

Which suggest that perhaps Germany stepping outside the Euro causes less risk of an outbreak of competitive devaluation than forcing the peripheral countries out one by one.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Apr 11th, 2012 at 06:32:38 PM EST
[ Parent ]
Yes, that is an extremely relevant distinction. A common market with fixed exchange rates will end up with the countries who are least willing to accept inflation as structural surplus countries, while a a common market with floating exchange rates will end up with balanced foreign accounts or, at worst, the countries most willing to accept inflation as structural surplus countries.

In the European picture, the latter is a much healthier construction, because the pro-inflation states lack the political power - both individually and collectively - to collect on such surpluses. And if the diary's central thesis (that anti-inflation inanity is a luxury made possible by political and industrial power) is correct, then this result will generalise.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 9th, 2012 at 10:09:28 AM EST
[ Parent ]
Yup. But the ill will caused by the failure of the single currency will probably render the survival of the common market politically difficult in the short to medium term.

If we do not throw out the water soon, the baby will go with it.

by cagatacos on Mon Apr 9th, 2012 at 10:25:07 AM EST
[ Parent ]
Given that the historically dominant failure mode of gold standard economics is fascism, I guess I can live with losing the single market if that is all we lose.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 9th, 2012 at 10:28:21 AM EST
[ Parent ]
I doubt that the single market is all that is lost.  Remember that the European project began as an economic solution to a political problem.  The integration of European coal and steel markets was to make war unthinkable between European states.

Moreover, intra-EU trade is as often in components as in finished products.  Supply chains cross national boundaries.  Restablish border controls and tarriffs and you wreak havoc on the whole economy built upon the assumption of open borders.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Mon Apr 9th, 2012 at 02:23:30 PM EST
[ Parent ]
The integration of European coal and steel markets was to make war unthinkable between European states.

True, and from a German perspective the current arrangements make war, already see as wasteful, now totally unnecessary. They have preferential access to and economic dominance over the bulk of the continent and they have a de facto veto over any political challenges from other countries as their second line of defense, the first line of defense being the intellectual capture which includes the vast preponderance of the elites of the member states of the EMU. And few can see any fingerprints indicating how this came to be.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 9th, 2012 at 04:10:53 PM EST
[ Parent ]
The question is whether the rollback would be chronological or not. One could roll back to the Single European Act plus Schengen and then what would be lost would be the layer of political integration since 1990, and none of the economic integration.
With hindsight, everything since the Single European Act was a bridge too far, politically. The Common Foreign and Security Policy and Cooperation in Criminal Justice never quite took off, the Euro is imploding under the weight of unrestrained internal trade imbalances, and Schengen is in the process of being rolled back.
(September 21, 2011)

Alternatively, the political layer could be retained and the economic union jettisoned. This would keep the useless Common Foreign and Security Policy, the Cooperation in Criminal Justice (including the European Arrest Warrant), the undermining of "the Community method" in favour of the "Intergovernmental Method"... But this is highly unlikely because the economic integration is deeper.

None of this will happen, the most likely scenario is the creation of a new layer of Kommissars (ECB President, EuroGroup Chairman, Council President, EFSF/ESM Chairman, Trichet's award-winning budget-dog-in-the-manger czar...) to the detriment of the "Community Method", a disempowerment of the European Parliament, more police cooperation to clamp down on popular discontent, a beefed-up Bolkestein directive to usher in an EU-wide labour race to the bottom, and the general penury that Merkel has promised us "for decades". I even foresee Merkel being Chancellor for 16 years (until at least 2020).

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Tue Apr 10th, 2012 at 04:53:40 AM EST
[ Parent ]
In the immortal words of Jean Claude Juncker: "the Euro will outlast us all".

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Apr 9th, 2012 at 10:29:00 AM EST
[ Parent ]
There is, however the question that I would ask is why the decision to start dismantling things would end at the euro. European integration is a project carried forward by momentum, e.g. Monnet's bicycle. Unless you keep moving forward, you fall off. Moreover, forcing Germany out of the euro does nothing to solve the underlying divergence between the core and periphery.  It simply provides a mechanism to close the gap which is not without cost.  Devaluation forces up the cost of imported goods.  This is equally true of inputs, fuel and other natural resources, as well as finished products.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg
by ManfromMiddletown (manfrommiddletown at lycos dot com) on Mon Apr 9th, 2012 at 02:18:32 PM EST
[ Parent ]
Well, currently "industrial policy" inside the EU is largely against EU law. At least if the EU is dismantled, the periphery could try to rebuild their economies. Without that they are sunk.

So I guess I agree, the European Union is a dead man walking.

More interesting is the realisation that there's no reason to believe that Chinese and Indian economic growth will not start to bite into the low end of Core country manufacturing.

And without the captive market of the periphery, it's hard to see how they prosper. They'll be on the sharp end of trying to out-mercantile China, but with much reduced influence at the WTO.

I'm not normally a purveyor of doom, but I don't see how things get better without some realisation that what will be needed is a rebalancing of world trade and Europe can only be part of influencing that if they stand together...

by Metatone (metatone [a|t] gmail (dot) com) on Mon Apr 9th, 2012 at 03:16:05 PM EST
[ Parent ]
Well, currently "industrial policy" inside the EU is largely against EU law. At least if the EU is dismantled, the periphery could try to rebuild their economies. Without that they are sunk.

I disagree. I think that you are thinking of industrial policy in terms of protectionism, or more innoccously, trade policy, which is most often thought of as a zero-sum game.

Another way of thinking of industrial policy is considering how to create the institutional conditions that allow firms to compete more effectively. The EU does this in spades, what else is the purpose of cohesion and structural funds?  Moreover, the point of a broadened market is to allow an increased division of labor. Specialization matters.

Prior to the arrival of the NICs on the scene in the 1970s, the content of trade, where the volume was highest between developed countries, lay in intra-industry exchange. Rather than exchanging carrots for cars, trade was in things like catalytic converters for chasses. I would say the question is how to build a better chassis or catalytic converter rather than how to market than how to protect a domestic market for them.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Mon Apr 9th, 2012 at 11:35:26 PM EST
[ Parent ]
One requires the other. In order to develop the institutions and technology, you need a production infrastructure. If your current comparative advantage is vacation homes, hotels and tropical fruit, such production will not be possible unless protectionist measures are part of your industrial policy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Apr 10th, 2012 at 04:17:33 AM EST
[ Parent ]
What you need is import substitution. The periphery's dependence on imported hydrocarbons is going to weigh on the economy like a stone. And manufacturing is not the biggest culprit here, but the dependence on road transport.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Apr 10th, 2012 at 04:21:06 AM EST
[ Parent ]
Yet another case of neo-lib malaise.

In Portugal, as a "cost saving" measure public transport is being dismantled. Trains, but also buses.

The collectivist thing of public transport... it not modern, it is not individual. Trains are seen as an "expensive" anachronism from the past. The future, you see, is cars, cars cars.

Despair

by cagatacos on Tue Apr 10th, 2012 at 06:52:03 AM EST
[ Parent ]
And putting luxury taxes on fancy cars is not allowed.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Tue Apr 10th, 2012 at 07:05:16 AM EST
[ Parent ]
Of course not, that's against the single market.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Apr 10th, 2012 at 07:10:23 AM EST
[ Parent ]
  1. Show me a nation (not a region) who has grown their industrial base without either mineral wealth or protectionism - then we can discuss if the periphery can take up that route.

  2. Right now EU law prevents individual companies subsidising companies beyond a certain level of tax breaks.

As such, the chances of say Greece, developing an indigenous solar industry (which the desperately need and they have the climate for) are low...

When you have a low industrial base, the only meaningful way to grow it is either from some advantage (e.g. low labour costs, convenient transport links, etc.) or by subsidy measures that help some portion of the supply chain of companies get off the ground to the point where you have a cluster.

That's the unmentioned part of your "institutional conditions" which I know you're very well aware of. The auto industry is a classic example, which you've talked about before.

by Metatone (metatone [a|t] gmail (dot) com) on Tue Apr 10th, 2012 at 08:55:12 AM EST
[ Parent ]
We keep running circles around the elephant in the room, which is that the EU needs to fund accumulation of productive capital in the periphery in ways that imply net fiscal transfer from the core, or "surplus recycling", or "repatriation of surplus".

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Apr 10th, 2012 at 09:04:10 AM EST
[ Parent ]
Well, yes. That is what solidarity implies.

But in my first post I was trying to make the point (about Europe standing together) why solidarity is good for the core as well as the periphery.

Sadly, I don't think anyone from the core countries would believe it.

And that's why Europe is a dead man walking.

Finally though, I'd make the plea that we don't forget that at some level this current crisis is artificial. There are structural problems and they are what we've been talking about (fiscal transfer, solidarity, etc.) but the crisis of the moment is pretty simply the failure of the ECB to act as the lender of last resort. As such the markets are attacking countries one by one, simply because they can...

by Metatone (metatone [a|t] gmail (dot) com) on Tue Apr 10th, 2012 at 12:01:21 PM EST
[ Parent ]
Well, yes. That is what solidarity implies.

Instead, what's being proposed is that structural funds be used to pay down debt to the core countries. That's the extent of solidarity in Europe.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Tue Apr 10th, 2012 at 12:25:12 PM EST
[ Parent ]
Finally though, I'd make the plea that we don't forget that at some level this current crisis is artificial. There are structural problems and they are what we've been talking about (fiscal transfer, solidarity, etc.) but the crisis of the moment is pretty simply the failure of the ECB to act as the lender of last resort. As such the markets are attacking countries one by one, simply because they can...
If you wanted to attribute nefarious intent rather than just ideological blindness, the Shock Doctrine narrative would fit like a glove.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Apr 10th, 2012 at 12:27:55 PM EST
[ Parent ]
Ah, the old stupidity vs evil question.

Very hard to resolve that one - especially given the neuroscience of recent years about facts, changing opinions etc.

Although of course, one might question if there's a bias there as well, isn't it to the advantage of conservatives to suggest that it's hard to get people to progress? Doesn't that elevate their attitude to "state of nature"?

by Metatone (metatone [a|t] gmail (dot) com) on Tue Apr 10th, 2012 at 04:18:27 PM EST
[ Parent ]
It is amazing how difficult it can be for smart people to understand simple things that go against their interests or undermine their self image.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Apr 11th, 2012 at 12:26:25 AM EST
[ Parent ]
We keep running circles around the elephant in the room, which is that the EU needs to fund accumulation of productive capital in the periphery in ways that imply net fiscal transfer from the core, or "surplus recycling", or "repatriation of surplus".

You can give a man a fishing pole, but unless you teach him how to fish..... ?

BTW, isn't what you are suggesting basically an enhanced version of structural and cohesion funds?

The problem that I see is that there is an underlying issue of ability to compete that is going to require either massive emigration from the periphery, or the development of a domestic ability to compete in those countries.  The dilemma is not entirely unlike what happened as the US market was integrated in the 20th century.  The South couldn't compete, so there was massive emigration to the North. Finally, the development of a strong federal government allowed the redistribution of wealth from the North to the South.

But that sort of redistribution required a strong federal government, which the EU does not currently have.........

Let's be honest, the development of that sort of capacity in Europe was basically mean the end of the sovereignty of the nation-state in Europe.

Do we really believe that the Czechs and other euroskeptics will allow that?  

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Tue Apr 10th, 2012 at 07:25:41 PM EST
[ Parent ]
Well, let's destroy the economies of the Mediterranean, the Baltics, and whoever else...

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Apr 10th, 2012 at 07:28:37 PM EST
[ Parent ]
Monetary union means the loss of sovereignty, because the state is no longer definitionally solvent and can thus not engage in a number of tasks conventionally considered a requirement for sovereignty (such as domestic macroeconomic planning).

The only viable options are to dismantle the monetary union or create the federal institutions necessary to perform those tasks. If the latter is politically unpalatable, the former will happen - voluntarily or messily, but it will happen. Because there are quite good reasons for sovereigns to exist, and those reasons don't go away just because you legislate neoliberal fantasies that assume away all the reasons for sovereigns to exist.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Apr 10th, 2012 at 09:48:25 PM EST
[ Parent ]
Monetary union means the loss of sovereignty, because the state is no longer definitionally solvent and can thus not engage in a number of tasks conventionally considered a requirement for sovereignty (such as domestic macroeconomic planning).
As well as

  • deposit insurance for banks
  • granting limited liability to businesses
  • disaster relief
  • access to health care
  • access to education
  • access to legal redress
  • public safety
In other words, monetary union leads to failed states. Greece, for instance, wasn't one three years ago and may well be one a year from now.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Apr 11th, 2012 at 02:03:05 AM EST
[ Parent ]
companiesstates subsidising companies

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Apr 10th, 2012 at 09:05:10 AM EST
[ Parent ]
Oops. Thanks.
by Metatone (metatone [a|t] gmail (dot) com) on Tue Apr 10th, 2012 at 11:53:11 AM EST
[ Parent ]
Well, currently "industrial policy" inside the EU is largely against EU law.

As long as it's not export "vendor finance" followed by government bailouts of the private providers of said finance.

The whole thing is a sick joke.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Tue Apr 10th, 2012 at 04:19:13 AM EST
[ Parent ]
There is, however the question that I would ask is why the decision to start dismantling things would end at the euro.

It won't. You'll see a rollback at least to Maastrict, if not to Rome. Possibly with the partial exception of Schengen, because people have gotten used to being able to travel hassle-free throughout Europe. But the Rome institutions have enough institutional depth and a long enough history that they will probably survive.

European integration is a project carried forward by momentum, e.g. Monnet's bicycle. Unless you keep moving forward, you fall off.

That was true a generation ago. It is not obvious that it remains true today.

Moreover, forcing Germany out of the euro does nothing to solve the underlying divergence between the core and periphery.

Nobody's billing it as a solution to the lack of industrial policy. It's a solution to the current account imbalances, not the industrial underdevelopment.

It simply provides a mechanism to close the gap which is not without cost.  Devaluation forces up the cost of imported goods.  This is equally true of inputs, fuel and other natural resources, as well as finished products.

Yes, they will have to pay full price for imports. That sucks, and you can argue that it's unfair. But getting a discount on your imports by maintaining an overvalued currency gives the countries who support your currency political leverage over you. And as it happens, in contemporary European politics, that's a bad trade.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 9th, 2012 at 04:29:10 PM EST
[ Parent ]

Display:

Occasional Series