I've made similar posts before and I am glad to say that I have not been wrong so far *grin*. However, I haven't been as precise as I will be in this post, I think.
Right now I am quite confident that I can predict three precise scenarios of the future of the European Union, more specifically of the European Monetary Union, the Euro.
(1)
This is the least likely scenario. The large Mediterranean countries, Italy, Spain and France, consolidate their finances. A low, but stable economic growth sets in. China continues to grow fast for at least the next 10 years (unlikely). With support of all institutions, including the ECB, speculators are less and less able to create panic. Eventually the crisis will be over and Europe will mostly look like it looked five years ago.
(2)
This is the second likely scenario. The crisis hits us hard within the next 18 months. Germany has to choose between chaos and Eurobonds. In this scenario our current government, supported by most of the opposition, will draw all jokers and push through Eurobonds, no matter what the population thinks about it. This may be political suicide for the currently governing (conservative) parties, but it will instantly solve the current crisis.
If badly done it will also create a lot of moral hazard that will come back a decade later and kick our asses. Anyway, the current crisis is solved by Eurobonds. In fact, Europeans will find out that the interest rates for the Eurobonds will be as low as the one for U.S. bonds, because it just doesn't make sense to speculate against the Titanic while you are on it. U.S. bonds' interest rates would, however, raise slightly, because there's suddenly an alternative. In my opinion, this is the best scenario. Most people would agree with me a few years later.
(3)
This is the most likely scenario, unfortunately. Somehow the crisis is held at bay with the help of the ECB and inflation. However, it lingers in the background for years to come. Eventually it will turn out that one of the large Mediterranean countries is insolvent. However, the long time that has passed, has allowed many Euro-sceptic parties to take seat in the national parliaments. They will not introduce Eurobonds, because that's the prime reason they have been elected by an ignorant population. The monetary union will dissolve and economic consequences around the world will be drastic. Germany's GDP temporarily drops by 20-30%. Political consequences are unpredictable. A third European/world war, however, is impossible due to globalized trade.
We return to the patchwork landscape Europe is famous for. Two decades later most European countries have a nice standard of living, maybe even higher than under scenario (2). European influence on global politics, however, shrinks to an all-time low and remains there for the rest of the century.
One word about a potential forth scenario that includes the creation of a northern European monetary union or the forceful exclusion of Greece. This scenario would cause great harm to all Mediterranean countries and serious harm to the rest of the world; it would transform Greece into a third world country.
Most Germans think that Greece only has to blame itself. That may be so. However, after starting two world/European wars, Germany would never want to have this on its conscience. Historians would rightfully note that Germany blew up the European project. It's morally unacceptable - unthinkable.
A northern European monetary union might be created in the aftermath of scenario (3). But that's pure speculation.
Scenario (2) is the current direction of German media. Even traditionally euro-sceptic newspapers are reassessing the potential of Eurobonds. It is also for reasons of pride that I favour it.
No matter what happens, this is the world's history in the making!
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* Note: A "Eurobond" within the context of this crisis is a bond that is issued and guaranteed by all countries inside the Eurozone. That is how the newspapers use the term. Wikipedia defines the term differently.
The other day I saw the idea of splitting the Eurozone into two parts, or maybe three. The more stable countries, centered on Germany, would create a strong Euro region. Countries with weaker finances, such as Spain, would switch to a weaker Euro-lite which would deflate away many of the debt problems and encourage foreign capital. The really awful places, like Greece, would deal with their own problems.
ReplyDeleteIt has a few problems. Germany would take an export hit with a stronger Euro. The bank contagion problem wouldn't be dealt with directly. But it seems like a less-than-disastrous solution, which puts it pretty far ahead of many other plans.
"It just doesn't make sense to speculate against the Titanic while you are on it." You give speculators too much credit and underestimate their ability to form life rafts from giant bales of cash.
Klep, reintroducing the Deutsche Mark would devastate the German economy. The Mark would raise in value some 50% or so. Germany would remove much of its medium-sized businesses. It's not just "a few problems". It's an almost-Armageddon.
ReplyDeleteAn alternative to a 50% raise would be heavy inflation, of course. Try selling that the Germany population whose elders still remember the hyper-inflation before and after the Third Reich.
Add a cascading banking crisis. The Mediterranean countries have issued bonds already. These bond must be served in Euros. If they are not, the banks need to write them off ...
Any splitting up of the European union doesn't actually solve any problems. It's just the political aftermath of an economic disaster.
About the Titanic ;). Look at U.S. bonds! U.S. fiscal problems are arguably worse than Greece's ones. I know, U.S. media don't say this, but the numbers speak for themselves ..
The reason the bonds are still treated as AAA (even if they are not), is that there is no alternative. It's a curious thing, really, but in a way the inflowing water stabilizes the Titanic. Until it eventually sinks over-night. But this won't happen until U.S. reach Japan-like debt levels or worse.
You just pointed out the great irony: If Germany using its own currency would cause a rise in value, that means that the EU is holding down the value of German currency. In effect, the dysfunctional parts of the EU have been subsidizing German economic growth. Perhaps it's time to pay that back.
ReplyDeleteIn their current form Treasury bonds are a pyramid scheme. We can pay off one by selling a few more. This obviously isn't sustainable, since people eventually notice such schemes and leave. But let's imagine that we got our budget to the point that we could stop it growing and even pay it down, something that Clinton managed. Even if we ran an impressive half-trillion dollar surplus, it would take over a generation to pay it back. That assumes nothing happens in the intervening years to bump it back up, such as another recession (or five) or another war (or ten). And running that surplus would be next to impossible since if we have a deficit certain people want to fix it with economic growth through lower taxes and if we had a surplus they'd want to lower taxes again.
But we could reduce the time to balance the budget if we pulled out of our wars, spent the savings on upgrades and restructuring of the military, and then defaulted on all debt owed to countries I don't like, such as China, Austria, and Russia. At this point the improved military comes into play, because I don't think they'd be happy.
You just pointed out the great irony: If Germany using its own currency would cause a rise in value, that means that the EU is holding down the value of German currency. In effect, the dysfunctional parts of the EU have been subsidizing German economic growth. Perhaps it's time to pay that back.
ReplyDeleteIt's not so simple. If New York declared independence the new currency would appreciate as hell, too.
Moreover, the German population already paid for their (relative) succes. Salaries are very low here.
And the main reason our currency would appreciate is that German bonds would look extrenmly safe; just like Switzerland bonds right now.
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But we could reduce the time to balance the budget if we pulled out of our wars, spent the savings on upgrades and restructuring of the military, and then defaulted on all debt owed to countries I don't like, such as China, Austria, and Russia. At this point the improved military comes into play, because I don't think they'd be happy.
Don't be ridiculous, Klep.
The resulting depression in China would spread to the world and especially the US and probably cause riots all over the planet. In addition, nobody would like to buy US bonds ever again if he knew that you default when it is convenient. Beside, defaulting on your debt is forbidden by your constitution.
Even if you ignore the moral aspects of this idea, it's economical suicide. China wouldn't declare war on you. That's absurd.
They would just stop shipping electronic components to you. Not because they want, but because their businesses that once produced these parts are bankrupt.
And within a few weeks you couldn't repair your computers and military equipment etc anymore. This would threaten not just your economy, but your civilization.
The world is connected nowadays. Economically, and even culturally, we are all in the same boat. There are no easy, radical solutions.
Our Constitution also says some things about wars and separation of church and state. Somehow those got ignored for no benefit.
ReplyDeleteAs for Chinese manufacturing, this isn't an idea for tomorrow. Over time we could rebuild manufacturing here.
"It's not so simple. If New York declared independence the new currency would appreciate as hell, too."
Have I mentioned before that I think the concept of multiple currencies is ridiculous? Ideally we'd all use one currency, one not based in a country. It would eliminate currency speculators and even the playing field around the world. And no more deflating away debt or keeping currencies artificially low to capture exports.
Regardless of how connected world trade is, it won't stop an elected body from throwing up protectionist measures whenever convenient. It usually takes a year or more for the true effects to be felt, by which time you can point to some random action the other side has done recently and blame them for it.
ReplyDeleteSo I wouldn't rule out another war on that factor.
Don't want to get involved in foreign politics, but...
ReplyDelete> Perhaps it's time to pay that back.
I'm with Kleps on that.
We have the same in Switzerland where less wealthy cantons get money from the more wealthy. I'm sure you have the same in Germany with the richer south compared to the rest of the country.
If you have a nonuniform distribution of wealth you to pump wealth from the richer part to the poorer parts to keep your country stable. Otherwise to much wealth is accumulated in one place and the system breaks apart.
I think that if you would like to have something like the EU, Germany will have to pump money into Greece and other less wealthy countries - forever. If you would like to be one entity, you have to act like one entity and support your weaker parts.
And I think it's not less wrong to send money to Greece from the south of Germany then to send it to the north or east of Germany. Or is it?