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You also need to improve German domestic demand, of course.

The point is that the wage differential between core and periphery, and the current account imbalance, is not going to go away unless you do all of these things.

Blowing the Eurozone apart would work too, of course, if and only if it is replaced by a floating exchange rate system.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa

by Migeru (migeru at eurotrib dot com) on Thu Aug 30th, 2012 at 02:53:18 AM EST
[ Parent ]
It would certainly add a lot of financial fees and intermediates to inter-eurozone trade, as european industry tries to insure its supply chain against unpredictable currency shifts. Im not sure if this entirely predictable negative would be larger than the positives, but I do know that massive shocks have a strong tendency to not work out well for the common citizen, so as a solution, it sucks.

More constructively: It ought to be pointed out to the german people that what is needed is higher real german wages. I see arguments for more higher wages in germany in the press on occasion, but mostly this is phrased in terms of higher inflation, which is the worst possible rethoric one could possibly choose to sway the german public opinion.
What we need are arguments for a virteous cycle exit from the crisis that are as effective, intuitive and persuasive as the false "swabian housewife" analogy is.
"Economic austerity in a crisis is like tightening your tie because your pants are falling off. It doesnt help, and makes it very hard to breathe"

by Thomas on Thu Aug 30th, 2012 at 06:53:39 AM EST
[ Parent ]
It would certainly add a lot of financial fees and intermediates to inter-eurozone trade, as european industry tries to insure its supply chain against unpredictable currency shifts.

Have the CB act as market maker in currency swaps, at no charge.

Im not sure if this entirely predictable negative would be larger than the positives, but I do know that massive shocks have a strong tendency to not work out well for the common citizen, so as a solution, it sucks.

If you have the CB buy foreign currency in sufficient volume to match gross outstanding domestic hard currency liabilities (and take any bank that helps a Soros attacker naked short your currency out back to be shot), you won't get massive exchange shocks. Unless you have a massive supply-side shock. But if you have a massive supply side shock, the alternative to an exchange rate shock sucks even worse.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Aug 30th, 2012 at 07:46:04 AM EST
[ Parent ]
If instead of the usual exchange-rate-mechanism "snakes" or "bands" each country had a commitment to not allow its currency to appreciate more than x% with respect to any of the other ones, then you would have a system essentially invulnerable to Soros attacks. You can make x% as narrow as you like, though considering FX volatility is about 1% per day, anything narrower than 2 to 3% would require too frequent intervention by the central bank as a market maker (usually seller) in its own currency. Then you can add Jake's idea that the central bank could also be a market maker in currency swaps to help their domestic banks hedge the FX exposure of the domestic import/export sector.

And then you can have actual employment-oriented economic policies in each member state instead of a race to the bottom and games of chicken (always won by the central bank with the undervalued currency) when exchange rates get close to the edge of the "snake".

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa

by Migeru (migeru at eurotrib dot com) on Thu Aug 30th, 2012 at 08:46:06 AM EST
[ Parent ]
Both of these suggestions assume central banks that are competent and non-malign. And if we had central bankers like that, the eurozone would not be in trouble.

The fix you are suggesting is to first break up the eurozone, and then replace the boards of the national banks with people who give a frack about the real economy and employment. But if you are willing to fire central bankers, why exactly do you need to break up the eurozone? Just go directly to the part of your perscription that is actually helpful, and sack the board of the ECB on grounds of incompetence.

by Thomas on Fri Aug 31st, 2012 at 09:34:40 AM EST
[ Parent ]
Well, duh.

Which is to say, we actually agree on the fundamentals.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa

by Migeru (migeru at eurotrib dot com) on Fri Aug 31st, 2012 at 10:01:55 AM EST
[ Parent ]
But if you are willing to fire central bankers, why exactly do you need to break up the eurozone?

Because sacking the board of the ECB is not legal under federal law, and changing the federal law in question requires 50 % +1 of the vote in even the most backwards, recalcitrant member state.

Whereas firing the national central bankers after withdrawing from the Eurozone would require only 50 % +1 of the vote in any state which wishes to adopt a sanity-based policy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Aug 31st, 2012 at 10:19:22 AM EST
[ Parent ]
I'm not sure that's the case, though. The appropriate articles of the EU treaties apply to all EU member states as EU member states, not to Eurozone member states.

Which is why the EU could complain about Hungary infringing on Central Bank independence last year.

If you are not convinced, try it on someone who has not been entirely debauched by economics. — Piero Sraffa

by Migeru (migeru at eurotrib dot com) on Fri Aug 31st, 2012 at 10:21:46 AM EST
[ Parent ]


Friends come and go. Enemies accumulate.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Aug 31st, 2012 at 10:29:10 AM EST
[ Parent ]
But there is another option then sacking the board. The Governing Council could issue new instructions and see what happens. To do that 50 % +1 of the vote is needed to replace CB managers in six to twelve member states, since the six members of the executive board also are members of the Governing Council.

Starting that and preparing for a withdrawal can be done at the same time, since grabbing control over the central bank is important in both cases.

And as usual I suggest firing the CB boss for taking part in a conspiracy to subvert the EU treaties, which probably constitutes treason under national law. Let the CB boss appeal that to the Court.

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

by A swedish kind of death on Fri Aug 31st, 2012 at 12:51:28 PM EST
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