Euro trick or treat?

 

             Finance Ministers are considering what further steps they need to take to tackle Europe’s debts and deficits, and wayward currency union. It is time to review the options that face them.

1. Germany leaves the Euro, recreating the DM. The other countries would devalue against Germany. easing some of the trading tensions and imbalances. The smaller Eurio zone would take stronger powers to control debt and deficits. They would still need to fix the banks.

2. Greece, Ireland, Portugal and Spain leave the Euro. They would devalue, and have to sort out their own deficit problems more quickly to reassure markets and allow them to borrow at lower rates.  They might need more help or some help from the IMF. The individual states would have to act as gurantors of their leading banks where needed.

3. The peripheral countries persuade the Euro authorities to buy in more of their bonds to get the interest rates down, and to print more Euros to allow some devaluation of the common currency. In return the stronger countries take more control over borrowing and debt totals for all Euro members.

4. The German scheme of demanding more haircuts for bond holders in over borrowed countries and poorly financed banks prevails. The EU quickly enters the next phase of the Euro crisis, with market attacks on other countries and banks leading to bigger guarantees and ECB intervention. More powers are taken in the centre to control debt and deficits, but the rules are rapidly broken to allow bail outs.

5. The European authorities rapidly come of age, agreeing to issue more EU sovereign debts. The member countries have to accept more common taxation, more transfer payments around the Union, and mutual guarantees of the EU debt.  The EU develops a proper financial government, with central decisions on how much common debt to issue and where to spend the money raised.

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59 Comments

  1. Posted December 7, 2010 at 6:44 am | Permalink

    Yes those are certainly the main options – rather difficult to predict which route they will attempt. The main thing is for Cameron not to waste and more UK money in the process as the end game develops and to use the position to advance the interests of the UK.

    I have however not met anyone who believes he will.

    • Posted December 7, 2010 at 2:18 pm | Permalink

      Off topic –

      “Lord Patten applies for BBC Trust chairman job” well he would no doubt agree with almost all of the BBC agenda – I doubt he has learned anything useful from his stay in Hong Kong.

      Could we not have, just for once perhaps – a science graduate, who is sceptical of global warming and wind farms (as nearly all are), preferably an atheist, who dislikes big government and endless tax distributions from the responsible to the state and the feckless. Perhaps one who sees the EU as hugely damaging to democracy and the interests of its members and one who thinks that the role of the BBC should be to uplift the spirit, entertain and educate.

      Not to dumb down, indoctrinate viewers and their children, and turn almost everything into a game show or a moronic soap opera. While all the time selling things too us with endless trailers and back door adverts.

      Perhaps even one who thinks most employment and equality legislation is often counter productive – but that might just be too much to ask perhaps.

      • Posted December 7, 2010 at 9:14 pm | Permalink

        I dare John to start a topic about BBC bias

  2. Posted December 7, 2010 at 8:11 am | Permalink

    For the PIIGS (B), setting the value of a new currency would be disastrous. If debts owed are in the Euro for example, and the new currency was much weaker, well then conceivably it could be an overnight doubling of their debt. If they converted their debt to their new currency, their debtors would most likely react badly. Also, if their home grown wealth has little confidence in the forthcoming currency, there could be a capital flight on a grand scale. In short, devaluation of an old punt or peseta is not straightforward.

    Conceivably if Germany were to do the samem they might suffer the opposite problem. Investors would flock to the new currency, and German exports would suffer badly as there currency was valued higher than the Euro.

    John, you should have included the option of burying our head in the sand and hoping bond speculators do the same. Joking aside, Merkel was being playful [as she seems to be developing a habit for, these days].

    I was born in Eire and still have family there. The anti-Euro sentiment is gathering pace.

    • Posted December 7, 2010 at 10:52 am | Permalink

      “If they converted their debt to their new currency, their debtors would most likely react badly”

      The response is “tough” – it’s a form of default, and is the payback for not doing due diligence on whom you loan to. It’s one of the options for a necessarily catharsis to manage/eliminate bad debt from the system. With some such catharsis, you have a zombie economy. Forever.

      • Posted December 7, 2010 at 2:19 pm | Permalink

        Without. (sorry for poor checking of post)

    • Posted December 7, 2010 at 10:55 am | Permalink

      PS – anyhow, what does “react badly” mean ? As I think Mr. Redwood implied, the prospects for new loans would depend on the credibility of the new reality after a default, which would them be under the control of the country concerned.

    • Posted December 7, 2010 at 11:14 am | Permalink

      Amazing isn’t it how the option of default, unilateral restructuring and no further borrowing is not even discussed by a debt-addicted political class.

      This is actually the best thing anyone could do, since the constant borrowing and debt cycle, with the value of the debt eroded by inflation is just easy choices for politicians and krypto theft from the public. ever wonder why inflation is endemic?

      It’s designed to be.

      • Posted December 7, 2010 at 1:46 pm | Permalink

        So true and so depressing! No coincidence that Gold and Silver are at record highs – Gold now $1430, £904, and Euro 1067 an ounce. Silver is $30.63 , £19.38 and Euro 22.88 an ounce. These prices are all up sharply this year. The ECB, the B of E and the Federal Reserve are all culpable. They are all actively debasing their respective currencies and leading more and more people into debt. In fact, we should all take on debt – that is the message they are giving us. How irresponsible is that and all of our politicians are complicit in this outrage.

  3. Posted December 7, 2010 at 8:32 am | Permalink

    How appropriate that the coming of age of the European superstate is born from a financial meltdown and currency crisis. Because any Eurocrat reading your five options would definitely favour the fifth. Why, oh why, did we ever get tangled up with the EU in the first place?

    • Posted December 7, 2010 at 9:05 am | Permalink

      Good question. I often wonder why and I often wonder why our political class don’t see the EU for what it is – an embryonic Fascist State.

      • Posted December 7, 2010 at 6:28 pm | Permalink

        Because our political elite are not Democrats; they don’t belive in Democracy. They like a sham version in which they control the selection of prospective Parliamentary Candidates; an electoral system which results in a large number of safe seats, so their favoured candidates will be guaranteed to win; an electoral system which also ensures that minority parties are permanently marginalised; a Whipping System which ensures a Party’s MPs do what their Leader wants and not his electorate and a system in which Manifesto promises can be broken at will because they are not enforceable.

        Now why WOULDN’T a political elite which thinks this is an acceptable way to run the country be keen on an embryonic Fascist State. It gives them even more power and control.

        That is why the political elite which conspire to keep this system in place must be ousted. That means voting for a minority party – anyone other than Lib/Lab/Con – but preferably UKIP.

        • Posted December 8, 2010 at 6:35 am | Permalink

          Yes, exactly correct. This is a post-democratic age where polticians say what they think people want to hear pre-election (vote on Lisbon, jail for carrying knives etc) them simply abandon the pledge afterwards and continue with the same Eurocentric liberal agenda.

          Farage put it very well when he said that we get to change the personnel at elections but not the policies.

    • Posted December 7, 2010 at 9:51 am | Permalink

      May i offer you my apologies as i am old enough to have voted for the Common Market. I was conned and have been annoyed about this ever since.

      • Posted December 7, 2010 at 11:17 am | Permalink

        Me too.

        • Posted December 7, 2010 at 1:41 pm | Permalink

          Me three

        • Posted December 7, 2010 at 1:48 pm | Permalink

          Me too!

      • Posted December 7, 2010 at 1:58 pm | Permalink

        Fortunately I was an 18 year old ‘know it all’, who voted to stay with the Commonwealth and can now say ‘told you so’. But, I can assure you it doesn’t help the situation – I still feel angry. So, I’d move on if I were you and do what you can to remedy the situation.

      • Posted December 7, 2010 at 2:24 pm | Permalink

        I’m younger, but no apology needed for falling for the initial “common market” con. It’s the ongoing tolerance / denial of many once it became obvious to anyone with a brain that it was a con, that I have problems with.

      • Posted December 7, 2010 at 6:06 pm | Permalink

        Me as well.

        I should have listened to my brother who said a main reason for the Common Market’s momentum was that people in government usually want more of it.

      • Posted December 8, 2010 at 11:45 am | Permalink

        Like you Ken I voted for the EEC. It was the proverbial good idea at the time. What neither of us realised was that the perfidy of politicians in the EEC and some here in the UK would lead us towards an EU. That is something that I would never have voted for.

  4. Posted December 7, 2010 at 9:01 am | Permalink

    You’re missing one. Ireland does an Iceland.

    It simply walks away from its debts. All of them.

    With no debts, it is a more attractive place to lend to than a basket case like Greece.

    It would certainly mean another bail out for the nationalised banks taken over by that (fool-ed) Brown

  5. Posted December 7, 2010 at 9:01 am | Permalink

    For the PIIGS (B), setting the value of a new currency would be disastrous. If debts owed are in the Euro for example, and the new currency was much weaker, well then conceivably it could be an overnight doubling of their debt. If they converted their debt to their new currency, their debtors would most likely react badly.

    ================

    So, you just repudiate all debt. What are the creditors going to do? Sue in an Irish court?

  6. Posted December 7, 2010 at 9:30 am | Permalink

    Mr. Redwood, One wonders whether your five options were done in order of ‘most likely’? Were I a betting man number one would be my choice. Probably like you and I Germany can see no end to the number of bail out’s coming along with other countries still to join membership for Germany will get more and more expensive.
    Indira Gandhi is credited with the statement “A nations strength ultimately consists in what it can do on its own, and not what it can borrow from others”. How many members of european governments appear not to have read Gandhi?

  7. Posted December 7, 2010 at 9:47 am | Permalink

    “Trick or treat” is last month’s metaphor. I see the Eurobus sliding on ice, out of control because the brakes have been slammed on. It has already damaged the outer bodywork (Greece, Ireland) though the German engine is still intact. But the driver (ECB) is transfixed and bombarded by advice from back seat passengers so cannot sensibly engage the engine before negotiating the looming turn in the mountain road (bond market). The Italian job beckons. “You’re only supposed to blow the bloody doors off, Merkel!”
    JR: “Hang on, lads; I’ve got a great idea”.

    • Posted December 7, 2010 at 2:00 pm | Permalink

      Brilliant !!

    • Posted December 7, 2010 at 7:50 pm | Permalink

      The gold went into the abyss long ago. Thanks, Gordon!

  8. Posted December 7, 2010 at 9:53 am | Permalink

    I was interested to read in today’s Daily Mail that “‘General consensus’ is the currency unions ‘eventually fail’, said Professor Steve Nickell, a senior member of the Office for Budget Responsibility”.
    Regardless whether he is correct or not, whether one is pro-EU or anti-EU, it is surely the duty of our Government to consider this possibility and for the Treasury to carry out and impartial study of how such a failure might affect our economy, and what steps we might take to ameliorate any situation that might arise.
    It would be nice to think they are doing something to prepare contingency plans, but I suspect that they are all so pro-Euro, that they can’t possibly envisage such a situation arising, an have no thoughts other than how we might support the status quo.
    .

  9. Posted December 7, 2010 at 9:53 am | Permalink

    Eurocrats want your option 5. Whether German taxpayers, or the German Constitutional Court, will wear this is another matter. I conclude that resolving the internal German arguments will act as a ball and chain on rapid progress to the Eurocrats realising their dream.

    In my opinion, your option 1 of Germany leaving the Euro and recreating the DM would be the best outcome. (Perhaps one or two other countries would follow them). This would, as it were, help kill two birds with one stone. The DM would appreciate strongly, as it should given Germany`s immensely strong trade balance – second only to that of China. This would be beneficial for the balance of international trade and to help Germany keep inflation down and to reward Germany with lower cost imports. It would leave the residual Euroland participants to sort their own mess out , as indeed they should without resorting to handouts from others.

  10. Posted December 7, 2010 at 10:18 am | Permalink

    France and Italy have to leave the Euro as well for it to survive. As previously written it needs to become the super DM for a Greater Germany. It is almost impossible to see the German Nation bailing out 7 or 8 economically naive or reckless countries. The EU has developed beyond the will of the people into a seriously anti democratic organisation.

  11. Posted December 7, 2010 at 10:23 am | Permalink

    Option 5 is the ONLY one acceptable to the colleagues.

    Every crisis is an opportunity, and is always used to advance same aims:

    One unitary state, one government (self-appointed, and self-perpetuating, not elected), the removal of all democratic oversight/accountability, and the final extinguishing of all nation-states.

    • Posted December 7, 2010 at 2:05 pm | Permalink

      I doubt that the ‘extinguishing of all nation-states’ would be the final, ‘happy ever after’ ending. It would be just the beginning of the next phase – the road to freedom. In fact, maybe that is one reason to welcome number 5 option – no more plotting from them, instead, the plotting for independence begins.

    • Posted December 7, 2010 at 6:31 pm | Permalink

      And that is when the revolts will start. (thinks there could be violence etc)

  12. Posted December 7, 2010 at 10:52 am | Permalink

    Merkel is a touch more right wing in her economics than she is given credit for. Maybe there are forces that are not interested where dishonest money might lead so long as the political dream continues but I suspect the Germans are not ready to sacrifice their strong economy at the alter of European solidarity.

    My money would be on Germany departing the Euro and leaving the bondholders to take their hair-cut.

    • Posted December 7, 2010 at 2:28 pm | Permalink

      Merkel is under political threat from the SPD, not from the right. So …

  13. Posted December 7, 2010 at 11:22 am | Permalink

    Nick,

    Default is an option yes, but who would lend to ROI in the future? ROI’s multi-nationals would be tempted to re-locate and ROI would face serious EU sanctions. all of that is more trouble than it is worth.

    • Posted December 7, 2010 at 2:30 pm | Permalink

      Eoion,

      A loss is a loss. The evaluation of the creditworthiness of Ireland post-default is depends on their finances post-default. It might well be better.

  14. Posted December 7, 2010 at 11:57 am | Permalink

    Mr Redwood’s options are as usual spot on, although I’d suggest option 1 could be modified to include the Netherlands, Austria and possibly Finland joining a smaller D-Mark zone.

    What is I think the most interesting question is which would be best for Britain. Our long-term interest must rest in becoming at most a (very) semi-detached associate member of the EU, with mutual rights of free trade but little else. We would thereby escape the EU’s anti-democratic politics and socialist/corporatist / protectionist economics, and in particular prevent the French and Germans wrecking the City with malicious over-regulation. However, we would still want to be able to trade freely with prosperous EU member states and not have an economic wasteland on our doorstep. So the ideal outcome from this crisis must be one that wrecks the confidence of federalists and destroys the myth that ever-closer union is an historical inevitability, and gives us scope for fundamental renegotiation, but one that doesn’t do lasting and long-term economic damage.

    It is clear that Ireland, Greece and Portugal, perhaps Spain, would be best served in the short and longer-term by a return to national currencies, devaluation and default, so they could be free to grow and compete again (see Argentina). So if they left the Euro, and a smaller German block remained, the longer-term ecomomic outlook for Europe would be brighter all-round, despite short term dislocation. There are plenty of precedents for countries issuing new currencies (Brazil being a good recent example) – the practical issues are much overdone. The federalists would also have been dealt a lasting philosophical and practical blow. The UK would have ample opportunities to demand a new basis for our relationship with the EU. Some form of loose association would also be an ideal alternative model to full membership for Turkey, Ukraine, and others. It might also be attractive for the remaining members of EFTA, plus Sweden, Denmark, and perhaps others in Eastern Europe. Finally, I’m not sure that many in the EU wouldn’t welcome such a renegotiation with Britain, enabling the rest of them to federalize to their hearts content.

    Of course, with the Cast Iron Cameron and Clegg regime in place, all of the above will remain opportunities ignored.

  15. Posted December 7, 2010 at 12:13 pm | Permalink

    Option 5 is the only realistic move and the one that promotes the prime directive of the EU Committee of the Regions (CoR); but the Germans wont like it much.

    One fiscal and monetary mechanism for the Eurosystem 16. One debt management office issuing E-Bonds. One Chancellor of the Exchequer in Brussels. The member states will be broken up into Regions (NUTS 1; 2 and 3 style).

    CoR never gets media attention, but it has quietly been furthering the EU mission from the bottom up. Gradually worming its way into local government and spreading the gospel of the EU federal state.
    http://www.cor.europa.eu/pages/HomeTemplate.aspx

    • Posted December 7, 2010 at 7:41 pm | Permalink

      JR; in my economic studies, I have been trying to understand the thinking behind debt maturity structure of governments. I am struggling. For instance, the following link says that in these times of low interest rates, governments should be issuing more long term debt, not getting their central banks to buy it in. Have you published anything on the matter?
      http://www.voxeu.org/index.php?q=node/5900

      Reply: No, I haven’t. They could indeed fund their debt for longer time periods at low interest rates which makes their debt position a bit more secure.

  16. Posted December 7, 2010 at 12:35 pm | Permalink

    The remedy you frequently ask for, i.e. “More powers are taken in the centre to control debt and deficits” cannot work. Spain and ireland had excellent debt and deficits during 2000-2008.

    The problem in Ireland and Spain (if not Greece) was private sector debt, accumulated under too-low (for them) eurozone interest rates which fuelled a private-sector asset bubble. By the time the bust showed up in public sector debt or deficit figures it was already years too late to prevent the inlfationary boom and bust. So “more powers to the centre to control debt and deficits” is the proverbial lock on the stable door after the private sector horse has bolted. The solution you recommend would only work for countries like Greece whose government deliberatly cooked the books to hide their borrowings. It cannot solve the euro problem in general and that of Ireland & Spain in particular who were the ‘star pupils’ of the Growth & Stability Pact for most of the last decade.

  17. Posted December 7, 2010 at 1:04 pm | Permalink

    We mentioned here 2 weeks ago after meeting several interested Germans on our Red Sea holiday that our new found friends were restless on their country’s exposure to the debts of other Eurozone members.
    They asked us if the court challenge to the German constitution by EUROPOLIS had been covered in the UK press. We’d not heard of it. Apparently 50 members of their financial community, led by Prof Markus Kerber, believe the German exposure and intended imput to a bail-out violates their Constitution.
    Jeff Randall covered the matter last night. His UK guest believed that the implications are so far-reaching that he doubted it will be upheld in the German courts today.

    We have not seen the matter covered here, or elsewhere in Britain, so wonder if John or other contributors have a view?

  18. Posted December 7, 2010 at 2:28 pm | Permalink

    Re Option 5: there are already huge transfer payments within the EU namely the Common Agricultural Policy and Regional Development funds.

    I suspect the German Taxpayer (and the British too) consider that there is already enough transfer payments.

    Bond holders have only themselves to blame for previously lending at too low a rate of interest relative to the risk to Ireland etc. Now they are pricing in the risk.

    There is of course Option 6: Cut back public sector wages and benefits to the same as the private sector. In the case of Ireland Mr Ryanair has some ideas as to which public sector bodies should be scrapped or sold off.

  19. Posted December 7, 2010 at 3:00 pm | Permalink

    I think you present Option 4 too negatively. Of course it would require a grand reckoning – banks would have to announce immediately their losses as a result of the haircuts. But why should there be attacks on such countries? Holders of, e.g. Greek bonds would take a loss. Holders of bonds in European banks with a large exposure to, eg, Irish banks would convert 10-20% or so of their holdings into equity. The equity holders would of course take a loss, but need not be wiped out. The sky need not fall in – although it would of course mean an end to such fictions as ‘the government could make a profit on its holdings in RBS and Lloyds’. When AIG went down, many depositors – inc in the UK – were obliged to accept a haircut on a proportion of their ‘cash’ holdings. Of course they were not happy. What we need is an end to the distortion of the price of credit through implicit and explicit state & Eurozone subsidy. Someone always pays somewhere, just as they do when any other industry is subsidised. Mrs T was right: ‘You can’t buck the market’.

    • Posted December 7, 2010 at 5:06 pm | Permalink

      You can’t buck the market, but you can destroy it. QE is already corrupting it.

  20. Posted December 7, 2010 at 3:04 pm | Permalink

    I was having dinner in Dubai last week and a set of Germans was on the next table. I reminded the nearest man (aged 40?) of the Great Inflation of 1922 when the Mark lost all value and asked if he was at all worried about the euro inflating likewise.
    “No,” he replied in his slow thoughtful German way,”I am in business selling things and the low Euro helps me.” We agreed that fear of inflation was a generational thing.
    After that the talk was all about stopping immigration into the Fatherland.

  21. Posted December 7, 2010 at 4:10 pm | Permalink

    Will the Euro- and State still be seen as creating peace in Europe in 25/50 years? Or will it itself trigger events and internal /external civil disputes in the future.
    High reparations were said to be the cause of other serious disputes.

    and Democracy?

  22. Posted December 7, 2010 at 4:18 pm | Permalink

    The whole Euro business is heading inexorably towards default. The only question is how long it takes. What all in authority are trying to achieve is default in slow motion. Wouldn’t it be better just to get it over and done with quickly ?

  23. Posted December 7, 2010 at 4:27 pm | Permalink

    1 and 2 – The treaties provide no mechanism for any country to leave the eurozone, voluntarily or otherwise.

    Therefore these routes would involve either amending or just tearing up sections of the treaties, and what would replace them?

    And would the UK government persist with its “nothing to do with us” line, rather than insisting on a substantial quid pro quo for allowing other countries to have the treaty changes they wanted?

    3 – Article 123 TFEU on page 99 here:

    http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2010:083:0047:0200:EN:PDF

    forbids the ECB to buy government bonds directly from governments:

    “… shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.”

    There is no explicit prohibition there on indirect purchases of government bonds – which of course is what the Bank of England did, to the tune of £198 billion – but doing so does seem contrary to Article 124 TFEU prohibiting any measure to establish “privileged access” to financial institutions, as well as to other articles committing the EU institutions and the member states to “the principle of an open market economy with free competition”.

    4 – Governments having responded to the emergency situation in September 2008 by directly or indirectly guaranteeing that the private investors holding bonds issued by the private banks wouldn’t suffer any losses, two years later it seems that those private investors have got too used to the idea that the taxpayer will always be there to protect their investments, and any suggestion that a government might force them to accept losses provokes the reaction that in that case they won’t buy any more of the bonds which that government will need to sell to cover its budget deficit and roll over its existing debts.

    I don’t see how that kind of blackmail or “demanding public money with menaces” can be tolerated.

    5 – Once again, to be done legally such measures would require treaty changes.

    • Posted December 7, 2010 at 11:19 pm | Permalink

      Let’s face it, the legality of any of this is a mere technical detail when judged against the greater plan of ever closer integration. It can be finessed.

      The breaking of the rules would give a UK government a point of leverage should they choose to use to use it in the national interest. On present and past showings, whatever they say, they see coercing an ever more reluctant UK public into ever closer union as the national interest.

      When push comes to shove, the details of the treaties won’t amount to much at all.

  24. Posted December 7, 2010 at 5:48 pm | Permalink

    EJT,

    Perhaps. But how much notice do you give? You can’t keep it secret, and you risk a capital/asset flight in the meantime. Rememebr for an economy like ROIN, inward investment is manna. It is one of the reasons every single party on the island [Sinn Féin] included support low corporation taxes. But to lose all credibility with your debtors would frighten investment away?

  25. Posted December 7, 2010 at 5:55 pm | Permalink

    What if non of the options apply?

    I cannot see any one country living with Germany in a currency union apart from the Netherlands. The French may like to try, but tied to a strong New Euro, they could not pay the price. Austria cannot afford to lose its tourist business to Eastern Europe and would also fall out of a strong group so it will not happen. There will be no ordered retreat from the Euro, but a precipitate collapse with Germany spinning off from the rest. They cannot and will not prop up the Euro just to have a weak Euro at the expense of massive transfers. The Germans lived for years with a rising currency. They could do so again.

    There may be some sovereign debts and a lot of hair cuts.

  26. Posted December 7, 2010 at 7:44 pm | Permalink

    All of these options are variations of where to place the deckchairs on the Titanic. That is to say, there are unrepayable debts, and the only issues are how will the burden of that be split between countries (including creditors outside the EU) and segments of their populations, and on what timescales. It is necessary to start with that understanding, rather than imagining that there is a magic solution that avoids the question.

    It might actually help if there was some real transparency about the real ownership of the risks and how their wealth has evolved in recent years. We know that in several countries (UK, Eire, Spain, Portugal, US…), housing booms have led to a notional increase in wealth: deflating such booms is only a real cost for those who borrowed or lent against inflated values. The only good reason to soften such deflation is where it risks causing a systemic problem rather than simply a higher than normal rate of repossessions among those who unwisely bit off more than they could chew. The real beneficiaries of the MBS are less clear. It was revealing to see the list of counterparties for the AIB bonds that was dominated by wealth funds rather than pension funds. Protecting pensions ahead of general wealth might seem to be preferable.

    So what to choose? If Germany exits the Euro, the problems remain that PIIGS are not all in the same boat, as is reflected in their different risk premia. As they already have bypassed the discipline of central control, they are not a strong group to coalesce under a single weaker Euro. If PIIGS leave the sty it will still fester in the eyes of the Germans, although judicious default would at least make a clean break divorce with a chance to establish functioning economies from there. EuroQuE would lead to high inflation and remind the Germans of the early 1920s. Angela Merkel’s pudding basin styling of bondholders will lead to arguments about alternative coiffure. Seizing central control would require dictatorship – wasn’t that where we came in to all this EU thing anyway? Every which way the Germans are snookered. etc etc

  27. Posted December 7, 2010 at 8:07 pm | Permalink

    I’ve visited other websites, and seen similar presentations, but your presentation of options is good becuase it is detailed, and because it covers the breadth of what needs to be addressed.

    I see a combination of both four and five in the future. Here is a real bombshell: EuroIntelligence reports, today December, 7, 2010, FT Deutschland as reporting that Wolfgang Schauble said, “that he could image the Bundestag would be ready to curtail its sovereignty over fiscal policy, and transfer it to another institution, provided other countries do the same.” That is a wow.

    Being a christian, I believe that the bible prophecy of Daniel 2:31-35, relates
    that the revived Roman Empire, that is Euro-Germany, the Eurozone, is about to be crushed, and simply be dust blowing in the wind, along with the previous four kingdoms:
    4) Fourth, Roman, Legs of Iron …
    3) Third, Greek, Belly and Thighs of Bronze …
    2) Second, Medo-Persian, Chest and Arms of Silver …
    1) First, Babylonian, Head of Gold …

    The feet of iron and clay, that is the fifth kingdom to govern mankind, is the last kingdom, before the beast system of Daniel 7:7 and Revelation 13: 1-4, rises from the sea of humanity to govern worldwide, through mankind’s seven institutions in ten regions of global governance, as called for by the Club of Rome in 1974.

    Soon the beast system of global corporatism will have an apparent fatal wound, Revelation 13:3. This prophecies an apparent fatal death of the world’s economic system. But this catastrophe will be healed.

    Such a catastrophe will come out of rising sovereign debt interest rates, further global competitive currency devaluations at the hands of the currency traders, resulting in the common-currency, bank-sovereign debt symbiosis finally imploding, resulting in the European Financial Institutions, EUFN, quickly falling in value, taking the entire global financial system down, resulting in Götterdämmerung, an investment flame out, bringing forth a new age, with a Sovereign-Chancellor, Revelation 13:5-10, such as Angela Merkel or Herman van Rompuy; and a Seignior-Banker, Revelation, 13:11-17, such as Wolfgang Schäuble, Olli Rehn, or Jean-Claude Trichet, having fiscal sovereignty to control deficit spending, enforce internal country devaluations, provide a common EU Treasury for both taxation and transfer payments, assure mutual guarantees of the EU debt, and as Timothy Geithner called for, implementatin of unified regulation of banking globally. All seigniorage, both credit and fiscal will come and go through the Seignior who will make decisions on where money is spent.

    I foresee national sovereignty passing away throughout the world, as Leaders’ Framework Agreements establish ten regions of global governance as called for by the Club of Rome in 1974; hence people will no longer be citizens of sovereign nation states, rather residents living in a region of global government.

  28. Posted December 7, 2010 at 9:19 pm | Permalink

    Option 1 as described, involves Germany leaving the Euro by by general agreement within the EU. I don’t see that happening because of the damage it would do to the political project of the EU, and also some factions in Germany has gained much by sheltering behind a weak Euro. Conceivably, Germany could break away because of domestic pressures, generated by the fact that the political project of the EU is not sufficiently strong to resist the pressures it is attempting to contain.

    Option 2 also involves a huge amount of damage to the political project and will be fought every inch of the way.

    They have to attempt option 5, fully in keeping with the EU mission of ‘ever closer union’ but it’s a huge gamble as the attempts to force it collide with the forces of nationalism which won’t put up with external dictation of what are seen as national affairs. Possibly a government such as that of Ireland will be forced to default by popular will.

    Options 3 and 4 are a way of softening the blow of option 5.

    All very interesting but secondary to the question of how the UK behaves and what our future is. I suggest we should have nothing to do with propping up the Euro. If we do we will be drawn further into being a powerless province of a single European state. If we don’t it will lead to complications and pain. It’s really time to make a decision on whether we want in or out of the EU rather than keep up the pretence that we can have a make-believe, semi-detached status. A cost benefit analysis of EU membership would be an interesting exercise and could help cut through the sheer flannel likely to be generated to inform the discussion.

  29. Posted December 7, 2010 at 9:29 pm | Permalink

    I reckon all of your options will come to pass in this order: 5 (will fail due to unpopularity/no co-operation), 4, (oh, skip 3, the game will have been up by then), 1 and lastly 2

  30. Posted December 7, 2010 at 9:38 pm | Permalink

    If a Company continues to trade knowing it is insolvent, its Directors are usually banned from holding any more Directorships for a few years.

    Should not the same thing/rule apply to Politicians??

    If you knowingly run a Country into Bankruptcy, should you not be made to resign your position, be excluded from Politics for a few years, and a General Election be called.

    Why is it that Politicians can be exempt from almost any responsibility no matter what their actions.

  31. Posted December 8, 2010 at 1:35 am | Permalink

    Probably option 1 – Germany leaving the Euro zone – would eventually lead either to the end of the Euro or to its becoming a weak, inflationary currency. I can’t see any other Euro zone Member State having both an anti-inflationary policy and the clout to prevail.

    Options 3 and 5 move in the Federal direction – no thank you.

    We should have our own foreign policy and insist on linking 2 and 4 when talking to the PIIGS; no bondholder haircuts without leaving the Euro and reinstating your national currency.

    Let us all remember that whatever policy is adopted, the PIIGS will have to address their fiscal deficits and overall indebtedness. None of them should let their maximum government debt exceed 150% of GDP and all of them should look to borrow over a longer time period. I know of three instances where government debt exceeded 200% of GDP. In Cote d’Ivoire, there was a civil war when austerity was introduced to deal with the problem. In Japan, most of the 200% has been borrowed internally, so there is no sense of crisis. Nevertheless, growth has been sluggish for a long time. And in Zimbabwe, their common currency is …………… the US dollar.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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