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An interesting thought experiment, and perhaps even a good negotiating ploy challenging the Euro to reform its structures or face a credible threat of a Seuro unless there is significant reform of the Euro.

From an Irish point of view, the Seuro would probably not be seen as attractive. The main attractions of the Euro were:

  1. Access to core Euro markets making it very attractive for mainly US multinationals to locate here without exchange risk.

  2. Much lower inflation and interest rates a la Deutschmark

  3. Much greater exchange rate stability and reduced exchange risks generally. (Remember, it is possible for a medium sized shadow bank, hedge fund or venture capitalist to totally game a small currency like the punt - and almost impossible for an Irish central bank to counter such relatively large scale manipulation).

  4. Greater integration with "strong" economies like Germany and reduced dependency on the UK.

  5. A mistrust of the ability of the Irish Government to manage an Irish currency independently and in the interests of the Irish people as opposed to influential financial sector interests. Rightly or wrongly, people were more inclined to trust Germany not to debase their currency.

Ireland has very little trade with (say) Greece. Whatever optimal currency area advantages that might apply with Germany would apply much less with Greece. A more likely scenario in the event of a Euro collapse would be for Ireland to seek some kind of semi-formal link to Sterling or the dollar. I'm not sure small independent currencies are possible any more for small open economies many times smaller than the big financial corporations.

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by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 23rd, 2013 at 05:24:16 PM EST
I felt the same about Ireland, which is why I did not emphasize Ireland as a member of the Seuro. They would, IMO, sooner join the UK pound sterling.
Remember, it is possible for a medium sized shadow bank, hedge fund or venture capitalist to totally game a small currency like the punt - and almost impossible for an Irish central bank to counter such relatively large scale manipulation.

This expresses clearly and concisely what I repeatedly referred to as a need for economic greater weight for any country that might need to leave the Euro. A small country would be like chum thrown into a pool full of sharks. Were the Seuro zone to include Italy or Spain the threat to the Euro would be explicit due to the amount of Euro denominated debt either country holds. In either case that debt is of an amount that the debt becomes not the country or the Seuro's problem but the EU's problem. The ideal goal would be to end up with one monetary union run on acceptable principles.

To me this seems preferable to continuing to have displayed the studied obtuseness and denial of responsibility coupled with the economic impossibility of the proposed solutions which Merkel, the German banking establishment  and the ECB offer to and display towards the suffering of the peripheral countries occasioned by the actions of core country banks acting without restraint in peripheral countries. Confronting those worthies with the fact of a Seuro would be like Alexis Tsipras walking up to her and hitting her between the eyes with a 2x4 -- most satisfying. But I guess most just prefer the status quo.    

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 23rd, 2013 at 09:21:54 PM EST
[ Parent ]
While a central bank has limited options for countering downwards pressure it can always counter upwards pressure (as demonstrated by Switzerland). What currency speculators can mainly do - and profit by - is break links.

Frank Schnittger:

Remember, it is possible for a medium sized shadow bank, hedge fund or venture capitalist to totally game a small currency like the punt - and almost impossible for an Irish central bank to counter such relatively large scale manipulation

I guess I am a bit at loss here. Yes, they can decrease a currency's exchange rate. But is this something that happens? Are there any examples of how they profit from this?

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by A swedish kind of death on Tue Sep 24th, 2013 at 04:05:12 AM EST
[ Parent ]
Of course the gaming gets a lot easier if you're trying to maintain an exchange rate peg...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Sep 24th, 2013 at 05:05:39 AM EST
[ Parent ]
But then you're shooting yourself in the foot...

In the Neurozone, there can be only one.
by Migeru (migeru at eurotrib dot com) on Tue Sep 24th, 2013 at 05:10:06 AM EST
[ Parent ]
Depends on who "you" are. If "you" are the national interest, then that is perfectly true. If, however, "you" are the interests who favor making the world safe for international banking, then "you" are shooting someone else in the foot.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Sep 24th, 2013 at 05:14:03 AM EST
[ Parent ]
Currency pegs are only to the benefit of the local comprador class.

In the Neurozone, there can be only one.
by Migeru (migeru at eurotrib dot com) on Tue Sep 24th, 2013 at 04:09:21 PM EST
[ Parent ]
Remember, it is possible for a medium sized shadow bank, hedge fund or venture capitalist to totally game a small currency like the punt - and almost impossible for an Irish central bank to counter such relatively large scale manipulation.
Remember, it is always possible for a sovereign central bank to accumulate enough foreign reserves (by "printing money") to cover its domestic economy's gross foreign currency liabilities, ensuring financial stability. Can you describe what you mean by "totally game the currency" and why it would matter?

In the Neurozone, there can be only one.
by Migeru (migeru at eurotrib dot com) on Tue Sep 24th, 2013 at 04:44:43 AM EST
[ Parent ]
In the 1980's the punt had lost a lot of value relative to Sterling based not on trade or competitiveness issues, but because the rating's agencies etc. decided that a small currency always constitutes a greater risk of volatility and were generally dismissive of such a small economy/currency.

From a consumer point of view my newly acquired mortgage was at 14% interest and inflation was similarly high. Industrial relations was bedeviled by disputes because everyone was trying to catch up/leapfrog over everybody else. Companies didn't like a high inflation environment because it played havoc with budgets.

There was quite significant exchange costs associated with all foreign transactions - especially for consumers. People lose track of what is a reasonable price when "everything keeps going up so fast" and become hyperanxious about prices. Overall the economy was paying a price for uncertainty, volatility, and exchange margins.

I'm not saying that the Government/Central bank couldn't have managed all of this a lot better, but the fact is they didn't. The value of the punt was probably too low for much of this period, but there seemed to be little the CB c/would do about it. It became part of the folk memory- a bit like German hyperinflation, and so the Euro was welcomed with open arms.

The Euro associated low interest rates where a large part of the reason for the emergence of the celtic tiger. The problem was that when the time came when we need much higher interest rates to curb the emerging  the ECB did nothing because it was far more concerned with German recession post re-unification. It was this failure to act in the interests of the broader eurozone and the almost complete lack of bank regulation either in Ireland or in Europe which led to the subsequent crash.

So we've seen both the good and the bad sides of the currency union to date. I don't think the majority want to ditch the Euro at this stage, but we need an interest rate regime more suited to the entire zone and much better bank regulation and resolution mechanisms which, in an integrated financial market, can only be done properly at a Eurozone level. Hence the current frustration with Germany wanting to have it's cake and eat it - to have the Eurozone run in it's own interest and then do nothing when the inevitable fall-out happens in peripheral zones.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Sep 24th, 2013 at 07:24:24 AM EST
[ Parent ]
In the 1980's the punt had lost a lot of value relative to Sterling based not on trade or competitiveness issues, but because the rating's agencies etc. decided that a small currency always constitutes a greater risk of volatility and were generally dismissive of such a small economy/currency.
And that had no impact on trade or competitiveness between Ireland and the UK?

In the Neurozone, there can be only one.
by Migeru (migeru at eurotrib dot com) on Tue Sep 24th, 2013 at 09:21:36 AM EST
[ Parent ]
It is remarkable the degree to which Ireland's trade surpluses both now and then had little relevance to exchange rates then or GDP growth now


Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Sep 24th, 2013 at 12:09:28 PM EST
[ Parent ]
But Ireland was running a current account surplus back then?

In the Neurozone, there can be only one.
by Migeru (migeru at eurotrib dot com) on Tue Sep 24th, 2013 at 03:25:05 PM EST
[ Parent ]
In the 1980's the punt had lost a lot of value relative to Sterling based not on trade or competitiveness issues, but because the rating's agencies etc. decided that a small currency always constitutes a greater risk of volatility and were generally dismissive of such a small economy/currency.

Yes, in a floating currency regime the currency of the weaker and less powerful country will generally trade at a discount.

Yes, this is unfortunate for the weaker and less powerful country, and represents a tribute payment to the more powerful.

No, you do not avoid paying this tribute by attempting to maintain a hard currency peg. You just force the more powerful countries to break your peg and loot your strategic hard currency reserves to collect it. That leaves you still paying the tribute, but with greater collateral damage.

From a consumer point of view my newly acquired mortgage was at 14% interest and inflation was similarly high.

This is a domestic political matter that has only tenuous connection to the exchange rate regime.

Yes, you can use a currency peg (and accompanying threat of chaos if it is abandoned) to cut through the internal political discussions of your domestic democracy. The cost of that is that you cut through the internal political discussions of your domestic democracy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Sep 24th, 2013 at 09:21:45 AM EST
[ Parent ]
The value of the punt was probably too low for much of this period, but there seemed to be little the CB c/would do about it.
One should not defent one's currency upwards. That way lies a currency crisis.
I don't think the majority want to ditch the Euro at this stage, but we need an interest rate regime more suited to the entire zone and much better bank regulation and resolution mechanisms which, in an integrated financial market, can only be done properly at a Eurozone level.
We need a fiscal union, otherwise the Eurozone will be a machine to generate unemployment.

In the Neurozone, there can be only one.
by Migeru (migeru at eurotrib dot com) on Tue Sep 24th, 2013 at 09:33:19 AM EST
[ Parent ]
We need a fiscal union, otherwise the Eurozone will be a machine to generate unemployment.

And just what is your confidence level that, given the givens in EU and EMU politics and popular received opinion today, that such a union formed this year would be anything other than a mechanism for further looting of everyone in the EMU other than the dominant fiancial elites?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Sep 24th, 2013 at 10:50:57 AM EST
[ Parent ]
Lower than 5%.

In the Neurozone, there can be only one.
by Migeru (migeru at eurotrib dot com) on Tue Sep 24th, 2013 at 04:08:14 PM EST
[ Parent ]
I would say 'vanishing'. Which is why I think it essential to introduce something that disrupts the status quo. It would have been better to have had a major disruptor two or three years ago, before public opinion had shifted so far right.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Sep 24th, 2013 at 07:25:20 PM EST
[ Parent ]
Eurozone survival is a tail event, a black swan...

In the Neurozone, there can be only one.
by Migeru (migeru at eurotrib dot com) on Tue Sep 24th, 2013 at 07:50:56 PM EST
[ Parent ]
On the current course -- agreed! Likely the next major financial disruption, if it is not due to the collapse of the Eurozone, will trigger the collapse of the Eurozone. We have had five years to fix the problems that cause the 2008 collapse but have only temporized. The problem is that the only real solution is to write down the bad debt. But that debt represents a lot of the wealth of the 161 individual to whom Bill Mitchell referred here.

My worst nightmare is that such a collapse will come and go and that 161 will only continue to consolidate their wealth and power.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Sep 24th, 2013 at 11:47:36 PM EST
[ Parent ]
The Euro is of great interest to the power elites, thus I would raise its chance of survival by quite a lot...

Globalization (always) entails concentration of power. They dismissal of the Euro would be a big set back in that direction. Count thus on massive opposition from the people that count.

And, by the way, if the Euro falls that might be an extra disaster: If the interest of the power elites on each country becomes misaligned on a global scale then the usual strategies will be pursued (see e.g. Europe in the 30s/40s of the previous century).

While I see the Euro as mostly a power grab from the powerful, I do not know if I want to live through the era of its dismissal.

In the long run, the end of the Eurozone is of course a good thing. Of course, in the long run we are all dead.

by cagatacos on Wed Sep 25th, 2013 at 04:39:23 PM EST
[ Parent ]
A fiscal union requires a political union, because otherwise nationalist demagogues will always have an easy target such as "lazy Greeks" to exploit for local political advantage. Do you want your hard earned cash to be used to support inferior/lazy/inefficient/spoiled [insert country of choice du jour here] people

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Sep 24th, 2013 at 12:14:49 PM EST
[ Parent ]
A monetary union requires a political union, because money is a token of power.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Sep 24th, 2013 at 12:55:37 PM EST
[ Parent ]
A fiscal union requires a political union, because otherwise nationalist demagogues will always have an easy target such as "lazy Greeks" to exploit for local political advantage.


In the Neurozone, there can be only one.
by Migeru (migeru at eurotrib dot com) on Tue Sep 24th, 2013 at 04:06:45 PM EST
[ Parent ]
I think you are missing the point. "Lazy Greeks" and any other potential targets for nationalist demagogues don't have a vote in the Bundestag, but they do have a vote within the EP. If the centre of power were to incrementally move from the Bundestag to the EP as part of the development of a political union, it gives such potential outsiders a voice and a vote where it matters increasingly more.

It won't stop nationalist demagoguery, but it can help to contain it, and make it less productive especially if potential outsider groups align more within the EP and develop common positions. It is very difficult to sell fiscal transfers from Germans to Greeks in the Bundestag: Less so in a more empowered EP especially if it is part of a deal where German interests also get part of what they want.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Sep 25th, 2013 at 05:08:17 AM EST
[ Parent ]
We're not on a path where any of that can happen.

In the Neurozone, there can be only one.
by Migeru (migeru at eurotrib dot com) on Wed Sep 25th, 2013 at 05:09:23 AM EST
[ Parent ]
Access to core Euro markets making it very attractive for mainly US multinationals to locate here without exchange risk.

Exchange rate risk is generally overrated.

Much lower inflation and interest rates a la Deutschmark

The latter is a decision the CB can make on its own, the former is not a good thing.

Much greater exchange rate stability and reduced exchange risks generally. (Remember, it is possible for a medium sized shadow bank, hedge fund or venture capitalist to totally game a small currency like the punt - and almost impossible for an Irish central bank to counter such relatively large scale manipulation).

This is a governance problem. You can always protect yourself against unwanted appreciation, and you can always protect yourself against unmerited depreciation. Because depreciation just for the sake of it requires somebody to naked short your currency, and the CB has final authority over who gets to naked short your currency. All it takes is the political will to screw over the hedge fundies.

And if the depreciation is merited by the state of the foreign account, then you don't want to defend against it in the first place.

Greater integration with "strong" economies like Germany and reduced dependency on the UK.

Would have been a real benefit, if Germany hadn't bought a one-way ticket to the crazy-train.

A mistrust of the ability of the Irish Government to manage an Irish currency independently and in the interests of the Irish people as opposed to influential financial sector interests. Rightly or wrongly, people were more inclined to trust Germany not to debase their currency.

Because obviously inflation is Ireland's big problem...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Sep 24th, 2013 at 04:55:06 AM EST
[ Parent ]
See my response to Mig above

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Sep 24th, 2013 at 07:28:04 AM EST
[ Parent ]
Exchange rate risk is generally overrated.

Yes, and nowadays there are such things as futures contracts to hedge these kind of things.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Fri Sep 27th, 2013 at 06:32:04 PM EST
[ Parent ]


Friends come and go. Enemies accumulate.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Sep 28th, 2013 at 01:09:04 AM EST
[ Parent ]

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