The November-full-moon issue of the Financial Times of London carries a column that moves Martin Wolf, the paper's chief economics commentator, into the euroscepticism camp. -- Wolf said that "Only fear of the consequences of a break-up is now keeping [the eurozone] together" and drew on an unpublished paper by Nouriel Roubini. -- Last week Daniel Knowles of the London Telegraph complained that unlike a satisfying disaster movie, the plot of the European financial crisis just keeps getting "messier, more complicated, and, frankly, more boring. Instead of coming together to a logical conclusion, new subplots break out daily. Previously, it was relatively easy to explain: Greece is bankrupt and we don't know what to do about it. But then we bailed Greece out and it's still not over. Now it's something along the lines of: Greece is bankrupt, but then French and German banks own Greek debt, so they might be bankrupt too. Then Italy has lots of its own debt, which Germany would like it to pay off, just in case that markets start worrying that Italy is bankrupt too." -- To clarify things, Knowles helpfully posted a chart by a JPMorgan analyst that explains the eurozone crisis using... Legos....
THINKING THE UNTHINKABLE
By Martin Wolf
Financial Times (London)
November 8, 2011
http://www.ft.com/intl/cms/s/0/1299d48c-0a01-11e1-85ca-00144feabdc0.html#axzz1dB8qahl1 (subscription required)
Will the eurozone survive? The leaders of France and Germany have now raised this question, for the case of Greece. If policymakers had understood two decades ago what they know now, they would never have launched the single currency. Only fear of the consequences of a break-up is now keeping it together. The question is whether that will be enough. I suspect the answer is, no.
. . .
The fundamental difficulty throughout has been the failure to understand the nature of the crisis. Nouriel Roubini of New York University’s Stern School of Business makes the relevant points in a recent paper. ["Four Options to Address the Eurozone’s stock and flow imbalances," unpublished.] He distinguishes, as I did in a column on October 4, between the stocks and the flows. The latter matter more. It is essential to restore external competitiveness and economic growth. As Thomas Mayer of Deutsche Bank notes, “below the surface of the euro area’s public debt and banking crisis lies a balance-of-payments crisis caused by a misalignment of internal real exchange rates.” The crisis will be over if and only if weaker countries regain competitiveness. At present, their structural external deficits are too large to be financed voluntarily.
Mr. Roubini discusses four options for addressing these stock and flow challenges simultaneously: first, restoration of growth and competitiveness through aggressive monetary easing, a weaker euro and stimulatory policies in the core, while the periphery undertakes austerity and reform; second, a deflationary adjustment in the periphery alone, together with structural reforms, to force down nominal wages; third, permanent financing by the core of an uncompetitive periphery; and, fourth, widespread debt restructuring and partial break-up of the eurozone. The first could achieve adjustment, without much default. The second would fail to achieve flow adjustment in time and so is likely to morph into the fourth. The third would avoid both stock and flow adjustment in the periphery, but threaten insolvency in the core. The fourth would simply be the end.
Alas, huge obstacles exist to all of these options. The first is the most likely to work economically, but is unacceptable to Germany. The second is politically acceptable to Germany (despite the bad effects on its economy), but would ultimately be unacceptable in the periphery. The third is politically unacceptable to Germany and is even likely to prove unacceptable in the periphery, too. The fourth is unacceptable to everybody, if only for now.
. . .
In the long term, the first and last of Mr. Roubini’s options seem most likely: either the entire eurozone adjusts, or it breaks up. Germany should accept the risks of the former path. I know that its nightmare is the hyperinflation of 1923. Yet the brutal austerity of 1930-32 finally brought Adolf Hitler to power.
The question is whether exit would be feasible without blowing up the world. Start with a decision that, for a severely uncompetitive country, such as Greece, exit would be co-operative. Greece would introduce a currency -- the “new drachma.” New contracts executed under Greek law and taxes and spending in Greece would be in this currency. Existing contracts would stay in euros. Banks would have legacy euro accounts and new drachma accounts. The exchange rate of the new currency against the euro would be set in the market. It would depreciate rapidly. But that is desperately needed.
. . .
A eurozone built on one-sided deflationary adjustment will fail. That seems certain. If the leaders of the eurozone insist on that policy, they will have to accept the result.
-- Martin Wolf is associate editor and chief economics commentator at the Financial Times. He joined the FT in 1987 as chief economics leader writer and became chief economics commentator in 1996. His column appears on Wednesdays and alternate Fridays.
EURO ARMAGEDDON IS APPROACHING, BUT IT'S TOO BORING AND COMPLICATED TO EXPLAIN
by Daniel Knowles
Daily Telegraph (London)
October 26, 2011
There's a good reason no one makes disaster movies about financial crises. In disaster movies, there is always a solution which a crack team of miners/scientists/politicians can get to work on, just as soon as one boffin has explained it. The obstacles are horrendous, but they're simple (we have to get past that yeti, etc). The tension builds as the final battle approaches, and it then it arrives, easy to understand. And everyone knows when the battle is won: the enemy is defeated and the heroes share a laugh.
With the European financial crisis, it's the opposite: with every day that passes, it gets messier, more complicated, and, frankly, more boring. Instead of coming together to a logical conclusion, new subplots break out daily. Previously, it was relatively easy to explain: Greece is bankrupt and we don't know what to do about it. But then we bailed Greece out and it's still not over. Now it's something along the lines of: Greece is bankrupt, but then French and German banks own Greek debt, so they might be bankrupt too. Then Italy has lots of its own debt, which Germany would like it to pay off, just in case that markets start worrying that Italy is bankrupt too.
And that's before we even get into the the proposed solution (mostly it seems to be that Germany should throw money at everything, which the Germans understandably aren't too keen on). How big does the bailout fund need to be? Who pays for it? Who do we (well, the Germans) bail out: the Greeks, or the banks? Should the European Central Bank be allowed to buy government bonds? No one is sure of any of this. Not even the people whose job it is to understand it. Is it any surprise that one JP Morgan analyst got so frustrated he tried to explain it all with Lego?
The problem is that this applies to our politicians too. This afternoon, the leaders of 27 European countries will get together in a big room in Brussels, and they are expected to agree on a solution to a crisis so complicated that we don't even know who we can't agree to bail out any more. The coffee will taste bitter and they won't have slept much. Each has a different electorate, different newspaper headlines to wake up to and different political allies at home to appease. Few are economics specialists, or have the time to research this properly: they are all dependent on advisers, each of whom will say different, confusing things.
Unfortunately, we cannot expect successful solutions from a meeting like that. We will have a day of frantic speculation, reporting, and comment today, and in all likelihood, tomorrow, everyone will emerge even more exhausted and no closer to agreeing on anything. The best we can hope for is enough to delay armageddon for a few more months. That will at least give us time to build more fall-out shelters.
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