Is Italy the Latest Failed Euro State?

[Hazir]

My big question for you, Hazir, is this: countries with independent monetary policies have the option of devaluing their currency to help ameliorate a difficult fiscal situation. The results aren't pretty, but they're often better than outright default. In what way is being a member of the eurozone (which eliminates the possibility of devaluing) a good thing for these stressed countries? They have fewer options and are forced into a managed default by the ECB... done in fits in starts in a way seemingly calculated to cause the greatest amount of damage and uncertainty. As far as I can tell, being in the ECB has only tied the hands of countries like Greece.

I'll admit they reaped some benefits from the currency union prior to the crash, but one could argue that those benefits - cheap credit in particular - were curses in disguise, since peripheral economies were either overleveraged or overheating, and independent monetary policy would have created a check on runaway indebtedness. How is this 'firewall' helping them?

Well, no, I think the problem of these countries is much bigger than their fiscal imprudent behaviour. The problems are that most of the mediterrenean countries are stuck in some sort of etatist state of mind. That is the core of their problems, not the debt or deficits. I see their prolifigacy as a symptom but not as the disease so to say.

Especially Greece squandered the opportunities the euro gave it, but also Italy, Portugal, Spain are still bureaucratic hell holes for business. Without the euro of course the could have tried the easy options that are always paraded out of 'managing their own currency' e.g. inflating themselves out of their debts or as real people know it, driving their middle class into poverty.

We have reached a very interesting point now; the old option of inflation all of a sudden shows the real ugly face it has by snapping back all of a sudden (the leave the euro-side of the debate). It wouldn't be the gentle decline into poverty as of old, it would be draconic cutting back to the bone or more all of a sudden. It's highly unappealing.

The second option is -finally- doing the right thing which is fiscal responsability on the one side. But on the other side a tenfold more important incentive to grow, make growth possible. And that would involve measures not needing any austerity or taxation at all. It would consist of opening up markets to more competition, it would mean more flexible labour arrangements (which also would end the extremely unfair treatment of young people in those countries). The firewall is what gives these countries the time to do all these things, without having to go through a phase during which the same probably would be enforced by the breakdown of society.

By the way, the ECB isn't so much involved in the demands on Greece, but is so very much in the demands on Italy and Spain. The rumours we hear about the demands on Italy make me suspect that Draghi was involved in them.

tldr: the ECB is pushing the bloody state(s) out of the economy, giving these countries a fighting change by having something that resembles a market economy.

[wiggin]

Especially Greece squandered the opportunities the euro gave it, but also Italy, Portugal, Spain are still bureaucratic hell holes for business. Without the euro of course the could have tried the easy options that are always paraded out of 'managing their own currency' e.g. inflating themselves out of their debts or as real people know it, driving their middle class into poverty.

And Ireland? They took advantage of the single currency and made a very business-friendly environment, yet too-loose policy dictated by the core screwed them over. (Also I should mention that inflation risk is normally priced into bonds when they're not euro-denominated, so the governments wouldn't have been able to run up such large amounts of debt, which in turn would reduce their problems now.) I'm really surprised you don't see that the current austerity (and the fostering of foolish policies by this so-called 'firewall') isn't just as bad for the middle class as a carefully managed devaluation.

We have reached a very interesting point now; the old option of inflation all of a sudden shows the real ugly face it has by snapping back all of a sudden (the leave the euro-side of the debate). It wouldn't be the gentle decline into poverty as of old, it would be draconic cutting back to the bone or more all of a sudden. It's highly unappealing.

I think you're missing the point. The point isn't that inflating your way out of debts is an ideal solution. The point is that independent monetary policies give a government far more flexibility to tailor monetary policy to their particular macroeconomic climate, rather than having to agree to a policy dictated for an entire patchwork of economies that are far from fully integrated.

In the Depression, those countries who quickly abandoned the gold standard (and the implied fixed exchange rates and constraints on money supply) were able to avoid deflation and curtail their recessions. Those who stuck by gold ended up in a downturn that dragged on and on. Fixing your currency to something you can't control - the supply of gold in your reserves, an exchange rate (i.e. changing the money supply on the basis of trade imbalances), or a single currency area - is a really bad idea for most economies. There's no 'protection' here, only hamstringing.

The second option is -finally- doing the right thing which is fiscal responsability on the one side. But on the other side a tenfold more important incentive to grow, make growth possible. And that would involve measures not needing any austerity or taxation at all. It would consist of opening up markets to more competition, it would mean more flexible labour arrangements (which also would end the extremely unfair treatment of young people in those countries). The firewall is what gives these countries the time to do all these things, without having to go through a phase during which the same probably would be enforced by the breakdown of society.

We all agree that these economies need to be fixed. But I'm not sure how the ECB and membership in the eurozone is making this easier, which is the salient point under discussion.

[Hazir]

You must be American, assuming that a country can always borrow in its own currency. My experience includes a country that couldn't and tried what you call ideal, but stuck with its etatism, and in the process destroyed it's middle class and its currency. When I was 7 1 dollar bought you 4 turkish lira's, 30 years later a dollar bought you 1 million turkish liras. Effectively turning Turkey in a country with 2 economies; one in dollars and deutschmarks for who could get them and turkish lira's for the slobs who couldn't. That included pretty much anybody who wasn't a dollar millionaire or didn't have family in Europe sending money back home.

Now, with that out of the way; who's going to give Greece loans in Drachma ?

[RandBlade]

Because Turkey 30 years ago had a fully modern and functional economy like the eurozone states do now? Oh wait, I see your point.

[Hazir]

Because Turkey 30 years ago had a fully modern and functional economy like the eurozone states do now? Oh wait, I see your point.

Greece today = Turkey 30 years ago. It couldn't save itself if its entire debt would be forgiven. Greece would fit nicely in the old soviet bloc economically.

[wiggin]

It's not just a question of debt, Hazir. If the government only awards contracts in their native currency, they can still reduce deficits to zero by inflating the currency even if their debt is denominated in dollars or euros. Yes, there are natural limits on how much a government can monkey with things, but I'm really only talking about moderate monetary interventions to deal with major macroeconomic problems. Governments routinely run much higher inflation than is customary in the Western world and manage to function fine, though obviously it has negative side effects.

I know all about poor macroeconomic policy: Israel had a hyperinflation issue in the early 80s due to outsized (even for them!) defense spending in the wake of the 1973 war coupled with other structural problems. They revalued the Israeli lira to the shekel and had to revalue the shekel just a few years later to the NIS (Israel's current currency). Almost all of their debt at the time was denominated in dollars, but they managed to get by without a default - in fact, the 1985 economic stabilization plan in Israel is considered a model of how to fix a country with serious debt and deficit issues. Since then, Israel has run more or less balanced budgets, has recorded fairly strong growth, and has reduced their debt burden to 80% of GDP - still high, but far lower than before. Meanwhile, the BoI has turned from a joke into one of the most respected central banks in the world. All of this happened because the government had control over its own macroeconomic policy.

Yes, using monetary policy alone to deal with a fiscal crisis is a recipe for disaster. But using it as an element of sound macroeconomic planning is incredibly useful. Being stuck in the eurozone essentially removed this option.

[Hazir]

That might work for a country with an economy as big as Italy with a strong export sector. Italy is the outlier here though; Greece, Portugal nor Spain would be able to pull of that trick. Greece trying to award contracts in Drachma only to who I would ask? Getting back monetary policies for the concerned countries just would mean a return to old ways as the pressure is off. In the case of Greece it would still mean austerity worse than anything they're experiencing now.

I didn't mention Ireland beofre because I do see them as somewhat different. They are paying for the mistakes of their government, but at least they aren't perpetuating the problem.

And if you don't mind, unlike our little Englander here I do care about the future of Europe as a whole, not just its parts.

[wiggin]

Most gov't contracts are domestically sourced; people won't have a choice. They can save their hard currency for bond repayments and foreign transactions. It's a very common mechanism.

[Hazir]

Most gov't contracts are domestically sourced; people won't have a choice. They can save their hard currency for bond repayments and foreign transactions. It's a very common mechanism.

I still have to see that happen for a country that runs a pre-interest rate deficit (like Greece).

And anyway, these governments have been using monetary policy like a bad drug for decades, it's about time they kick the habit.

[wiggin]

So... because countries have misused an important lever to control macroeconomic policy in the past, they should just stop using it altogether? Kinda throwing out the baby with the bathwater, neh?

[CitizenCain]

Kinda throwing out the baby with the bathwater, neh?

As someone who dislikes both babies and bathwater, I never saw the problem with throwing both out together. Seems like the epitome of efficiency, to me.

[LittleFuzzy]

So... because countries have misused an important lever to control macroeconomic policy in the past, they should just stop using it altogether? Kinda throwing out the baby with the bathwater, neh?

Yeah, but VERY European.

[RandBlade]

Your argument now has switched from the euro being a "firewall", which is patently false, to what can better be described as a "straitjacket" forcing the recalcitrant to finally do what they should have done all along. I would agree that fixing the fundamentals is ideal, but that doesn't mean that a straitjacket will either guarantee it will happen or that it happens correctly.

[Hazir]

So... because countries have misused an important lever to control macroeconomic policy in the past, they should just stop using it altogether? Kinda throwing out the baby with the bathwater, neh?

Yep, the next thing should be the dissolution of their ministries of finance.

[Hazir]

Your argument now has switched from the euro being a "firewall", which is patently false, to what can better be described as a "straitjacket" forcing the recalcitrant to finally do what they should have done all along. I would agree that fixing the fundamentals is ideal, but that doesn't mean that a straitjacket will either guarantee it will happen or that it happens correctly.

One function does not exclude the other. Without the euro you'd see no reforms at all. Just governments robbing their middle classes poor.

[wiggin]

Yep, the next thing should be the dissolution of their ministries of finance.

I see. Well, this is clearly our point of disagreement. RB is right - you're rebranding a straightjacket as some form of security! I find it utterly ridiculous that you think we should just ignore/forbid important aspects of macroeconomic policy just because they can be misused.

One function does not exclude the other. Without the euro you'd see no reforms at all. Just governments robbing their middle classes poor.

There are market forces at work that would never have allowed Greece to pile up so much debt in the first place. The euro has screwed over Greece's middle class just as much as the drachma would have.

[RandBlade]

Hazir must be choking in his breakfast cereal in the morning: The UK is now rated safer than Germany by the markets.

[Hazir]

Well, and in my news the interesting headlines were that Holland's AAA rating will not be affected by the eurozone rescueplans it would take some extra-ordinary event like the break up of the eurozone for the dutch AAA rating to be called in question.
Also Switzerland is pondering pegging its franc to the euro.

So, your yields are lower than the German yields, good for you, you will need low interests with the speed you're running up your debt. You realise that Japan has stands more than 50% lower again than you? Low yields are not necessarily a sign of a healthy economy, in your case it simply means people can't take your pounds anywhere else. You HAVE noticed that is not exactly part of the safe haven haven't you?

[Hazir]

I see. Well, this is clearly our point of disagreement. RB is right - you're rebranding a straightjacket as some form of security! I find it utterly ridiculous that you think we should just ignore/forbid important aspects of macroeconomic policy just because they can be misused.

Yes, after decades of abuse we need draconic measures to wean them of it. And anyway, your Keynesian solution for everything has no appeal to me.

There are market forces at work that would never have allowed Greece to pile up so much debt in the first place. The euro has screwed over Greece's middle class just as much as the drachma would have.

What you call 'Greece's middle class' are people who were poor before the euro, then were poor with a lot of credit and now are poor with their bills being paid for by others. I don't think they were screwed much by the euro, but I suppose it sucks when you dreamt you could goatherd yourself to owning a Mercedes and a villa with a swimming pool and then you have to wake up.

[Ziggy Stardust]

Excuse my ignorance, but I'm a little puzzled over this UK gloating. In the lifetime of the Euro, didn't it get stronger over the pound over the last decade wrt exchange rates?

Doesn't that mean anything?

[Hazir]

Excuse my ignorance, but I'm a little puzzled over this UK gloating. In the lifetime of the Euro, didn't it get stronger over the pound over the last decade wrt exchange rates?

Doesn't that mean anything?

It means that they could only get sclerotic growth (what they love to rub 'our' faces in) by devaluating their currency. The irony of course is that even with a 25% devaluation they are still no serious competition

[GGT]

Just curious about something, Hazir. Do you view this whole thing as a competition of currencies, or of political convergence?

Would abandonment of the pound, lira, franc, or drachma--in favor of the euro--solve all the political problems?

[RandBlade]

Well, and in my news the interesting headlines were that Holland's AAA rating will not be affected by the eurozone rescueplans it would take some extra-ordinary event like the break up of the eurozone for the dutch AAA rating to be called in question.
Also Switzerland is pondering pegging its franc to the euro.

Yes not due to the success of the euro but because they're worried what impact its going to have on their economy.

So, your yields are lower than the German yields, good for you, you will need low interests with the speed you're running up your debt. You realise that Japan has stands more than 50% lower again than you? Low yields are not necessarily a sign of a healthy economy, in your case it simply means people can't take your pounds anywhere else. You HAVE noticed that is not exactly part of the safe haven haven't you?

And the Credit Default Swap rates? Your blissfully ignorant explanation over them?

Excuse my ignorance, but I'm a little puzzled over this UK gloating. In the lifetime of the Euro, didn't it get stronger over the pound over the last decade wrt exchange rates?

Doesn't that mean anything?

I have no intention to gloat, the euro performing catastrophically is bad for us, its going to drag us down as our exports will perform worse. It is just highly amusing that for ages whatever the economic news Hazir boasts that this means the "death of London" etc but in reality the UK is proving to become a safe haven amongst this crisis. Also I'm on the record as stating that the fall in the pound was a good thing for us - and a much needed advantage of having a freely floating independent currency.

Of course it would mean a mortal blow to London

[Hazir]

Just curious about something, Hazir. Do you view this whole thing as a competition of currencies, or of political convergence?

Would abandonment of the pound, lira, franc, or drachma--in favor of the euro--solve all the political problems?

It plays out different on different levels of couse. The abandonment of national currencies for starters would make a debate about euro monetary policies possible that doesn't have to deal with whether or not national currencies should exist on a daily basis. Sort of clean out the clutter so that you can actually tackle real questions.

[Hazir]

Yes not due to the success of the euro but because they're worried what impact its going to have on their economy.
And the Credit Default Swap rates? Your blissfully ignorant explanation over them?
I have no intention to gloat, the euro performing catastrophically is bad for us, its going to drag us down as our exports will perform worse. It is just highly amusing that for ages whatever the economic news Hazir boasts that this means the "death of London" etc but in reality the UK is proving to become a safe haven amongst this crisis. Also I'm on the record as stating that the fall in the pound was a good thing for us - and a much needed advantage of having a freely floating independent currency.

Brits putting their British money into British debt, which will be paid because in the end all it takes is printing British money a bit faster. Am I surprised Brits expect to get their money back with more certainty than people putting their money in Bunds? No, not really. Does it mean the economy of the UK is healthier? No, not really, just that those Brits with their British money can't really park it anywhere else.

You see Randblade, lower yields are only a positive sign if foreigners are buying your currency, which isn't the case.

[RandBlade]

It plays out different on different levels of couse. The abandonment of national currencies for starters would make a debate about euro monetary policies possible that doesn't have to deal with whether or not national currencies should exist on a daily basis. Sort of clean out the clutter so that you can actually tackle real questions.

The euro has existed for 12 and a half years now. How much longer is it going to take before a genuine "debate about monetary policies" becomes "possible"?

[RandBlade]

Brits putting their British money into British debt, which will be paid because in the end all it takes is printing British money a bit faster. Am I surprised Brits expect to get their money back with more certainty than people putting their money in Bunds? No, not really. Does it mean the economy of the UK is healthier? No, not really, just that those Brits with their British money can't really park it anywhere else.

You see Randblade, lower yields are only a positive sign if foreigners are buying your currency, which isn't the case.

You may not have a mortgage to pay but I do. I'm kind of glad for low yields thank you.

[Hazir]

The euro has existed for 12 and a half years now. How much longer is it going to take before a genuine "debate about monetary policies" becomes "possible"?

Well, when will the Anglo-saxon press stop hitting the 'will the Euro survive?' button every time there is a problem? The whole eurocrisis is mostly based on hysteria (very useful for those who make money that way), and some problems in 3 small countries representing like 5%? of the economical output of the EMU. Yet we have to do with hysteria over Italy first, and then France the next day on 'fears that the euro will break up'. Dispite it being glaringly clear that breaking up the euro is not on the menu.

[RandBlade]

Well, when will the Anglo-saxon press stop hitting the 'will the Euro survive?' button every time there is a problem? The whole eurocrisis is mostly based on hysteria (very useful for those who make money that way), and some problems in 3 small countries representing like 5%? of the economical output of the EMU. Yet we have to do with hysteria over Italy first, and then France the next day on 'fears that the euro will break up'. Dispite it being glaringly clear that breaking up the euro is not on the menu.

The Greeks have defaulted, the "no-bailout clause" of Maastricht torn asunder, the Portugese, Irish etc have needed bailouts. Italy is in dire straits. France is in the markets crosshairs. The ECB has had to change tack repeatedly, including doing much that it ruled out previously. Merkel is facing internal party pressures and the Bundesbank aren't exactly happy. European Commission President Barroso has warned about the Euro Crisis spreading "beyond the periphery".

But its all the British presses fault. Its nothing but British hysteria.

Even you can't believe that?

Incidentally you totally fail to understand the fears over France, which I've been warning about before the markets started to panic over them. The French banks are insecure, the French government is debt-laden. If defaults continue, if even Italy needs bailing out, can France afford to do so? The problem is the total lack of a firewall, Greece should be able to collapse without bringing down France. If France fails, then I worry for the rest of us.

[Hazir]

Greece has cheated and overspent, ireland was foolish in the way it saved its banks. From there on it's all hyseria about'will the euro survive' when that's actually not so in question at all.

Also, there is no need for you to worry about france since if italy would fall e mess would be complete already. But Italy is not going to fall.

As for the lecturing on rules try again when you don't throw your own standards in front of the bus to enjoy a tiny bit of growth.