Fixing the Euro?


It’s ground hog day again. Do you remember last Spring when the EU came up with a package of loans for Greece which would solve the Greek problem? Do you remember the EU package for Ireland, to recapitalise their banks and to prevent contagion spreading? Do you recall the Portuguese package, to ensure problems did not get to Spain or Italy?

So this week the EU meets again to consider a second package of loans for Greece and to see if it is going to say and do anything for the other weaker  Euro states just in case.

On previous occasions the EU has implied that each country or banking system is short of money for a short period, so  loans to tide them over  will resolve the difficulty. It is true they also seek to  impose longer term answers to deficit and banking problems, but the immediate concern is to supply extra cash at interest rates the market will not offer. Each time they say that come another year those self same countries will be able to borrow in  the normal way in the markets at sensible rates.

The borrowing countries reassure themselves that their problem  is a European problem. They expect the other member states to help them out. They do not like German or EU lectures on the need for austerity.

The markets currently think other wise. Yesterday Greece had  to pay 18% per annum for 10 year money, and a show stopping 38% per annum for two year money. In other words the markets think Greece will default on her debts. The markets have no wish to lend to Greece.

Ireland yesterday was offered 10 year money at 14% and 2 year money at an eye catching 21.85% per annum.  Portugal faced rates of 12.7% for 10 year money and 18.6% for 2 year money. Again, markets were saying they are  not keen to lend.   These countries remain barred from borrowing in  the normal way.

The officials charged with drawing up options to mount another Euro rescue, have not been able to come up with much. They are looking, we are told, at three options. The first is a European bail out fund which buys up distressed debt of countries in trouble, and guarantees the repayments on the remaining bonds. The aim is presumably to kick the markets into believing in these troubled countries by forcing up the price of their bonds and standing behind them.

The second is  a version of the French idea. Private sector banks and other bondholders would be encouraged to re-lend the money they have already lent to the distressed sovereigns, for a longer time period at a realistic rate for the borrower. This raises the question would enough  do this without some compulsion? Is the implied requirement to do it tantamount to default?

The third is to impose a tax on banks and to provide more money to distressed countries based on this new source of revenue.

All three schemes have drawbacks. None of them tackles the lack of competitiveness in the underlying economies. Distressed Euroland countries still have to get costs down sharply to compete in foreign markets more successfully, as they cannot devalue to do so. Lending them more money one way or another does not cut spending or raise tax revenues to curb their deficits. They still need to tackle the underlying problem, which is they are spending too much or raising too little in tax.

The first scheme¬† could prove expensive, as markets are likely to want to see substantial money committed to tackle the problem of unloved Greek debt. The second scheme may require banks to be propped up by more state money in some cases, as there will be effective losses and the likely declaration of a partial or technical default. The third is wildly unpopular with banks, and unfair on the banks who have not committed themselves to too much dodgy debt. It also will require more state money to be put into the weak banks to replace the lost money from the tax. All three “solutions” in practice stumble towards a way of more subsidy being routed to the financially challenged economies. None of them solve the underlying problem of the weak banks and the large deficits. None of them stimulate more economic growth which would help.

So what should they do? They should have a frank discussion about the magnitude of the task ahead. They need to move faster and more boldly than markets expect. They can do so by uniting to control the total European deficit for Euroland and standing behind the collective debt. They can do so by ejecting weak members from the currency.

The IMF has to be able to see funding in place for the ensuing year to carry on lending to a state. The EU has to ensure this remains true for the problem countries. If they persist in seeking a third way, something  which falls short of single country guarantees for all the debts or  reducing the membership of the currency, they need a convincing way of  allowing wayward sovereigns to rat on their debts. Then market forces will   discipline the wayward states. Setting it up would prove dangerous, threatening the spread of bond and interest rate  pressures and banking weakness. Not setting it up allows more countries to become wayward over borrowers. If Greece gets away with it, why not others? On this occasion friendly compromise is not kindness but cruelty.

The extraordinary thing is that most European governments seem to think it is just fine that a rich EU nation should be contemplating not paying all its bills. There are three simple options to put matters right. Greece could spend less. Greece could tax more. The other Euroland economies could give Greece the money to overspend. Not paying interest or capital back to lenders is reneging on contracts,  a kind of theft, and may include short changing people, institutions and countries less well off than Greece.


  1. Stuart Fairney
    July 21, 2011

    “Is the implied requirement to do it tantamount to default?”

    No, it IS default, according to at least one credit agency.

    Quite how this is supposed to reassure future lenders escapes me.

    1. lifelogic
      July 21, 2011

      Indeed could Cameron and Osbourne tell us how much “profit” we have made on the Irish loan so far as was promised by then.

      Here in the South of France it occurs to me that Huhne’s idotic PV roof cells should be put on a south sloping field in Spain rather than the roofs of houses in England. It is debatable that they save any C02 at all but at least they would get perhaps 2X the sunshine. So the mad subsidy would be less, land cheaper and the UK houses would remain prettier. He can buy the tiny amount of electricity they produce for about 10% of the cost of these mad subsidies off French nuclear.

      Also they are a bit easier to maintain in one place on the ground rather than on roofs all over the place needing scaffolding. And it will limit the mis-selling claims.

      1. Stuart Fairney
        July 22, 2011

        Yes, I saw Herman Van R vaguely explaining that the Irish loans were rescheduled to have lower interest rates in some way which was not explained. What loans, what rates or how this was achieved is unclear, as is Mr Osborne’s original claim.

        And can anyone seriously believe this is an end to it? Is this anything other than good money after bad?

        So assuming the Euro elite are, to pass moderation, lets say, making mistakes, can we at least agree:

        – No more bailouts to countries, the EU, the IMF or anyone else
        – NEVER sign up to a Euro wide/ECB bond redemption type scheme where countries can dump their bonds because it would be wildly irresponsible as well as illegal

      2. Bazman
        July 22, 2011

        The windmills on houses are in an urban environment do not work and even in a wind swept isolated place are an energy source of last resort, but I suppose you could argue that this and solar is not really viable in Britain, but is very visible and real. This sows the seed of energy conservation ideas and less reliance on fossil fuels from unstable regimes. Showing the public that energy does in fact have to come from somewhere. How many parents argue with their children about wasting electricity, even if they mean money?
        What next an engine that runs on food? How absurd. How about a diesel engine running on cooking oil? A human though not an engine, but a very efficient fuel cell, could run about 1000 miles drinking a gallon of cooking oil, about 35000 calories. What as yet unimagined technology lies ahead?

        1. lifelogic
          July 23, 2011

          Most humans would have some trouble running 1000 miles at all and do not eat just a gallons of oil. Efficient cars are more efficient on c02 when you look at typical humans and typical diets and consider the full system. They also go faster carry more and save time. Also safer by a considerable margin and much cheaper to maintain than humans. No sensible scientist could argue with this nor the nonsense of pointless house bling regardless of you views on the C02 exaggeration.

  2. Martin
    July 21, 2011

    Is much of the analysis of current world economic problems missing a key problem – the Chinese currency? This is fixed to to the dollar. China is an economic super power yet with a currency that behaves like an ex-colonial enclave.

    The Chinese worker can’t afford to go the Florida theme parks or Club Med beaches because his Chinese currency is undervalued.

    If China’s currency floated it would have risen 25% in the last year against the Dollar, Pound and Euro. It can’t. So we end up with asset price inflation and other problems like borrowing costs for Greece etc or America’s debt problems (another wayward over borrower?).

    1. Andrew Smith
      July 21, 2011

      Only authoritarian governments still think they can ignore markets and free decisions by individuals and businesses which make up the makets.

      While China has been running a bureaucratically determined exchange rate and sought to control inflation by directive while pumping credit into their own economy, the EU has been doing – – – much the same!

      It is clear that the current interest rate on the Euro is unrealistic for any of the defaulting member states for internal economic and financial reasons. But it is also unrealistic because of the effect it has had on supporting an uncompetitive exchange rate for the weak southern member state economies.

      So there we have it; the EU and the Chinese regime are running non-market based financial policy. At least the Chinese one is consistent and internally enforceable. The EU policy (for want of a polite but more accurate word), changes every time Sarkosi and Merkel speak and it cannot be enforced.

      While no one expects China to default because of their huge reserves and low spending the opposite is true of Euroland, where nobody now seems to believe that fewer than 3 Euro members will default.

  3. Gary
    July 21, 2011

    The bureaucrats think that they can solve a debt problem with more debt. It is insanity. On this path collapse is assured. All because they cannot bring themselves to allow the banks to fail. Well, they are unwittingly guaranteeing their failure, and the failure of a good few sovereigns. This problem goes back to at least 1971 when lending was cut from its gold tether. Pyramiding
    irredeemable paper loans on irredeemable paper deposits. This trick had always led to economic collapse. See the history of the French Revolution and its aftermath.

    I wonder how the treasury now feels about the prospects of “getting back Irish loans with a profit” ? The only constant is the folly of govt.

    1. norman
      July 21, 2011

      Thank goodness we had the Great Helman’s hand on the tiller steering the good ship Britannia using his golden rules to abolish boom and bust and ensure that we stayed in calm waters.

  4. Mike Stallard
    July 21, 2011

    Whenever banking and money get complicated, as Hermann Goering once did not say, I reach for my pistol.
    This is getting very complicated indeed.

    Greece cannot pay her way because that is what Greeks do – and always have done. Remember wily Odysseus? The Portuguese I know personally are lovely people with a nice slow smile and a very relaxed attitude to work. In no way are they anything like the tense, handsome Baltic people, who I was also with last night.

    As you imply, this is not a temporary blip. It is in the DNA.

    So what do we do about it? Make the banks pay up? How? Why? Banks are market forces and you accurately describe what the market thinks. I cannot see that they will be happy bunnies if they are forced to be even more stupid with other people’s money.

    A magic fund? But who will pay into it? We are broke here in UK, so I hope we do not put one penny in the hat. No doubt good old German Hans will put in the overtime……

    I hope they get this right before the end of September when my wife and I go on holiday to Oviedo, Spain. Or I shall be really cross!

    1. Gary
      July 21, 2011

      ” Banks are market forces”

      But they are not subject to market forces. That is assumed by the taxpayer. And that is the beginning and the end of the problem.

      Before we lay the blame on feckless Greeks, we have to ask the question how much of the sovereign debt of ANY country is indeed transferred banker debt ? I think you may find that answering that question leads to resolution of the conundrum.

    2. Denis Cooper
      July 21, 2011

      I suppose that unless another vehicle is set up, the “magic fund” will be the European Financial Stability Facility or EFSF:

      which issues bonds to borrow money on the capital markets.

      Obviously it is a small point that there is no identifiable legal base in the EU treaties for a group of EU member states, namely the eurozone states, to set up any such facility, and that to get a AAA credit rating for its bonds they’ve structured it in a way which is blatantly illegal under the EU treaties.

  5. Alison Granger
    July 21, 2011

    In the end the only answer to debt that cannot be repaid is default. That is what will happen however it is dressed up. If the Greeks are given the money to pay their debt it is merely shifted to someone else and the deficits continue. If the ECB buys up all the Greek bonds then it will be insolvent and the Greeks have in effect defaulted. What should happen is the institutions stupid enough to lend the money should lose it and no taxpayers should be asked to bail out anyone. The Euro should break up and then individual governments should take responsibility for their own incompetence and greed. That last bit is obviously fantasy because very few politicians have ever taken responsibility for anything.

    1. Simon
      July 21, 2011

      “In the end the only answer to debt that cannot be repaid is default. ”

      Those clever boys in the International Banking cartel have saddled the World with derivative products to ensure that this natural course of events cannot be allowed to happen .

      The principle of milking the tax-payer is so entrenched that now everyone wants there cut of it .

      I bet that consultancy firms have sprung into being to cater for this growth industry .

      There is something nauseating about babies being born into debt slavery to serve the International Banking cartel .

    2. Stuart Fairney
      July 21, 2011

      The ECB cannot buy sovereign bonds as I understand it because this would be ilegal under the treaty.

      Reply It does buy them

      1. Denis Cooper
        July 21, 2011

        The ECB is prohibited from buying bonds DIRECTLY from EU governments, but there is no prohibition on buying them indirectly, eg buying them from private investors in the secondary market.

        Article 123 TFEU:

        “1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as “national central banks”) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.”

        Maybe one reason why during the period of “quantitative easing” the Bank of England didn’t buy new gilts direct from the UK government, but instead bought previously issued gilts from private investors, who then used the money to buy new gilts from the government.

        Under a pending amendment to the EFSF Framework Agreement the EFSF would be allowed to buy bonds direct from governments.

        1. Mark
          July 21, 2011

          Banks will surely protest at the loss of opportunity to take a slice of the action for acting as a sleeve, conduit or condom (so that governments and the ECB don’t get pregnant from direct contact!) – which after all allows them some profits to help with recapitalisation.

      2. Mr Leslie Smith
        July 22, 2011

        The EU Accounts have also not been audited, adding to the illegality of EU finanical processes. I hope that a computer somewhere is keeping a record of which Euro Civil Servant is signing off on an of these bond purchases, so that they may be tried in a Court later and jailed.

  6. Alan
    July 21, 2011

    I agree that for a nation or others not to pay interest or capital back to lenders is ‚Äúreneging on contracts, a kind of theft, and may include short changing people‚ÄĚ. However that is what nations do when they cannot meet their debts. A lender is being naive if he lends money to a nation without knowing that. Many bankers appear to have been naive and it seems reasonable to me that they should pay for their naivety.

    It is analogous to a Conservative government re-indexing pensions already in payment to the CPI rather than the RPI. That too is reneging on a contract, a kind of theft, and may include short changing people. Pensioners, like me, who put their faith in these pensions were being naive and we will pay for our naivety.

    1. Gary
      July 21, 2011

      But what if you got your loans from an entity that had monopoly license to create that loan out of thin air(or at least on vanishingly small reserves) ? What if that entity could grow its profits infinitely by making as unlimited numbers of loans as possible, and some that were impossible, and that entity knew that it would have no consequences to itself, that the risk would be assumed by the taxpayer ?

      By the fact of exponentially growing loans in a finite world, under that asymmetric deal, eventually, default by the borrower is inevitable.

    2. sm
      July 21, 2011

      mmm…. a kind of theft. Who allowed the money bubble to grow in the first place?

      QE, ZIRP devaluation and inflation. Banking bailouts…with no structural changes bondholder losses etc…bonus policies intact/distribution allowed.

      We need to revisit the structure of money creation and consider moving it away from private sector- to an open and transparent central bank function which can monitor, report publicly to the people/parliament and control the money supply as openly directed by the government.

      Savers, fixed income or those dependent on modest capital are being crushed by inflation. As capital diminishes they will become dependent on the state.The vice will tighten for many…but for some ¬£14bn in banking bonuses?

      I hope you have a good well deserved holiday.

  7. Andrew Johnson
    July 21, 2011

    “Someone must pay, but not me.” That’s socialism for you.

  8. Pat
    July 21, 2011

    In the end since Greece etc. cannot pay their debts, either money is given to them or the debts don’t get paid. If Greece etc. had any prospect of paying their debts in the future, then private borrowing would be possible- so unless the markets have it spectacularly wrong, they will need repeated gifts for decades.
    Are the less indebted countries of Europe repared, long term, to borrow money to give to the poor?
    Perhaps I am being too cynical whenn I wonder if the money isn’t being given to the Greeks at all, but is rather being given to the banks which foolishly lent them money in order to cover for the actual default.

  9. Javelin
    July 21, 2011

    I have noticed a shift in analysts opions this week from possible options to consequences to an acceptance that something is going to happen. “Eurogeddon” as the American traders are calling it.

    The bottom line from the tangled web of legal, political and financial contraints is the simple fact the the Euro is as weak as its weakest currency. If Greece goes the whole lot goes. Greece cannot exit because of the legal entanglements without a really, really huge mess. So the Euro exchange rate needs to come down to the level of its lowest sovereign. Its a bit like putting the slowest cyclist at he front of the peleton because all the other cyclists will be struck down by illness if they let them drift off the peleton.

    So how does the Eu lower its exchange rate and pay its debts off – basically by printing money.

    I don think they will take this option forpolitical reasons. That’s why I think then politicians will let this drag on under the voters put them out of their jobs and inject smoe reality into the system. The Eu leaders are not going to cause Eurogeddon any time soon, but when the next election in Germany or Greece rolls around it will. So it will be up to the markets, and if the growth rates continue to fall they will simply charge so much to lend them money that it will become a death spiral.

    I’ve always believed Italian banks will be the final straw – they refuse to lend to the Italian Government at 7.5% and the Italian Government will not be able to pay their bills. The Government will resign, Berlisconi will go begging and receive nothing. Government salaries will not get paid. This will spread to Spain, Ireland, Greece and Portugal. We will see salaries and benefits cut across the PIIGS – but not go unpaid completely.

    … and, just like the other countries who default, the world will go on. The sun will rise in the morning. Government workers and beneficiaries will wake up with the salaries their country can afford. I prefer to think of this as the fall of big Government. I think about this positively. It’s like the fall of the USSR. I’m sure if you were a politican at the time it would feel like armageddon – but guess what the world moved on and it was a better world.

    They will wake up in the morning and have to deal with a lower income. The Euro will set new rules about Government spending, the old guard of politicians and central bankers will be swept away and the Euro will survive and get stronger.

    1. Electro-Kevin
      July 21, 2011

      “‚Äď but guess what the world moved on and it was a better world.”

      Doubtless theirs became a better world but I don’t think that ours did. Since then -in order to maintain our living standards – we’ve become ever more reliant on credit, hence the problems which we face to day. This is further exacerbated by officials who put the success of the EU project above all else and protect the single currency against all prevailing logic.

      It’s quite simple. If you have an exclusive club and then make it less and less exclusive it goes downhill fast.

  10. Andrew Duffin
    July 21, 2011

    “Not paying interest or capital back to lenders is reneging on contracts, a kind of theft… ”


    As is debauching the currecy in order to make it easier to pay back your debts.

    As Alan says, pensioners – like him, or me – who put their faith in paper money have been naive, and are paying for their naivete.

  11. m wood
    July 21, 2011

    The main reason for the economic crisis is that ‘make-believe money’ was invented by letting asset prices (especially house prices) rise above their real value, banks lent too much without secure assets, and governments spent money they didn’t have.

    In the long term the financial system will correct either by – devaluing currencies, – or wiping out debts, ie default.
    It seems right that default, which destroys some of the ‘make-believe money’ should be part of the solution. Why shouldn’t those who lent money to reckless spenders not pay part of the price for their errors?

    1. norman
      July 21, 2011

      Part of the problem may be that those who will be paying the price for their errors had no idea their money was being lent to reckless spenders. My pension is set up as a 80/10/10 split between the stock market, property and bonds but when I was setting it up I was told this was very risky as bonds were the safe option and I should opt for more into bonds.

      How do you think people will feel when they log in to their online pension site and see that the value of their pension has gone down by 25%? Not too happy I’d imagine.

      Of course, the reckoning has to come so we may just have to accept that in one way or another we’ll all have to pay our ‘fair share’ but you can see why politicians want to defer this day as long as possible.

  12. oldtimer
    July 21, 2011

    The solution will be theft – it is what governments do. Loan default and ejection from the Euro is the form it should take. It looks as if the Eurocrats are looking at the other form of theft, taxation. The German taxpayer is obviously and understandably reluctant to be skinned in this way. Hence the banks are fingered because they are seen as an easier and more popular target. It will all be dressed up in splendid language, of that we can be sure, but it will still amount to theft.

  13. stred
    July 21, 2011

    Pardonnez moi. Espagne.

  14. rose
    July 21, 2011

    Whenever I see a photograph of Frau Merkel and Monsieur Sarkozy walking together in their matching trouser suits, I think of the words, “Startrite – and they’ll go on walking happily for ever.” The painful looking gait must have something to do with the fact that the euro project didn’t.

  15. Gary
    July 21, 2011

    According to today’s Telegraph, Britain is now the most indebted nation in the world.

    “As can be seen, taking all debt together, private, public and financial sector, Britain (top orange line) is the most indebted nation in the world, far exceeding the eurozone countries now in so much trouble.”

    So, while we line up to bemoan the Eurozone, it turns out that we have debts that dwarf theirs. Ah, but we can print our way out(to default by devaluation of the currency), we are virtuously told. Something does not add up, our long term govt debt is cheaper than that of the PIIGS. I wonder if central bank selling of put options(derivatives) effectively capping the rates is a factor ? Another “virtue” of having our own central bank. Of course we cannot know for sure, because we are not allowed to see the books of the central bank.

  16. StronghodBarricades
    July 21, 2011

    I can’t help feeling that this is just all whipped up brinkmanship so that the politicians can emerge at the end of the day with a piece of paper that exclaims that they saved the world.

    1. OnHoliday
      July 22, 2011

      I have in my hands a piece of paper…

  17. Denis Cooper
    July 21, 2011

    I’m not in a position to know whether the government of Greece will ever be able to repay its debts, and I don’t assume that the markets always get everything right.

    On the other hand it was clear from the start that the euro was above all else a political project, part of the wider “ever closer union” project, and that economic considerations were of secondary importance.

    Therefore I give no credence at all to euro-federalist politicians who now argue that the position of the Greek government is retrievable if only it is lent more and more money “to tide it over”, and who have moreover shown their complete lack of honesty and integrity by knowingly committing major breaches of the EU treaties to that purpose.

    It’s not good enough for Osborne to stand on the sidelines and tell the eurozone political leaders that they must “get a grip”, and it’s even worse when he presses them to undertake the further integration which the euro-federalists have always wanted and have always hoped would be the result of a crisis – “a beneficial crisis”, from their point of view – but which self-evidently cannot be in the long term interests of this country.

    “In the interview, Osborne called for greater economic integration in the single currency bloc and said that the idea of euro-zone bonds was “worthy of serious consideration”.

    However, he argued that the loss of sovereignty implied by solutions such as eurobonds justified the UK’s refusal to join the euro.”

    What prospect will there be of the UK remaining outside the euro indefinitely, if the present eurozone is preserved and allowed to expand – no country can ever leave it, and apart from the UK and Denmark all of the present EU member states are under a legal obligation to join it, and that legal obligation is imposed on all new EU member states – until finally our position is deemed to be untenable and we too are engulfed?

    Rather than calling for greater economic integration in the present eurozone, Osborne should be calling for it to be cut down to a size where greater economic integration is not necessary to ensure its future stability.

    And if it is impossible to identify a set of countries which could successfully share a currency without any need for them to form a full federation, then the eurozone should be broken up and all the countries should revert to their national currencies.

  18. English Pensioner
    July 21, 2011

    As the Daily Mail said yesterday, the real scandal in this country is that Parliament and MP’s are totally ignoring what is going on in Europe, whilst being quite happy to spend hours both in committees and in Parliament discussing the phone-hacking scandal.

    Whatever the outcome of discussions currently taking place about the Euro and the possible default of some countries, it will have a profound effect on this country. These are issues that MPs should be discussing as the whole future of our country is at stake. Surely Parliament should have postponed its recess to have a full debate on economic issues.
    Rather than knowing how many times Cameron met News International, I’m more concerned about how many times the cabinet and treasury ministers have met to discuss the European financial crisis and what plans they have made to cope with the various contingencies which might arise..

    But then the Mac cartoon in the Daily Mail today says it all!

  19. Stephen Gash
    July 21, 2011

    Here’s a novel idea. How about the British government actually diverting just a fraction of the money it spends on foreigners to England for a change?

    England is the government’s target for swingeing cuts merely for savings to be spent elsewhere in the UK or abroad.

    Greece’s population is about 12 million. If 1953-style floods occur again 16.5 million people along the whole of England’s east coast will be devastated. That is more than the populations of Scotland, Wales and N. Ireland combined.

    Just one year of Scotland’s extra funding, ¬£7-11 billion, would pay for 21st century flood defences to protect England from North Sea inundation for centuries. Similarly, just one year’s s EU rebate, tamely surrendered by Blair.

    Think of the financial, economic, social and political costs of not doing anything now and the east of England being flooded again. One thing for sure is, the EU will not bail England out either with buckets or money. Rather it will blackmail England into signing away more sovereignty in return for any “help”. Just look at Barroso’s attitude to previous floods in England and compare that with his lavishing money on Greece after fires there, if you don’t believe me.

    What English people want is for the UK parliament, not just government, to look at the necessities for spending and get on with making provisions of those necessities free of party dogmas. We do not want petty party squabbling of the present Coulson-Cameron kind to detract and distract from real government and proper polity.

  20. David Burch
    July 21, 2011

    I knew you were right when you spoke against joining the Euro and the fudge that those now in trouble performed to join. This is bigger than the phone hacking scandal.

  21. Denis Cooper
    July 21, 2011

    Greece should never have been allowed to join the euro, and although it would be extremely painful in the short term the best option would be for it to revert to the drachma, and for the Greek government to default on all its debts by declaring that it would make the scheduled payments to its creditors but in drachma, and using the EMU entry conversion rate of 340.750 drachma to the euro.

    As the central bank of Greece could create as many drachma as necessary the government could be sure of keeping that promise, but of course if the drachma fell to say 700 to the euro, as it might, foreign creditors would uniformly lose about half of their money in euro terms.

  22. forthurst
    July 21, 2011

    A useful paradigm for the PIIGS would be the re-unification of Germany in 1990. One people separated by the victory of Bolshevism in Europe were reunited and being of the same stock and therefore of the same intellectual and psychological characteristics lived happily ever after – except they didn’t. The worthless Ostmark fit only for purchasing Trabants was declared of equal value to the Deutchmark and thus, at a stroke, the East was condemned to economic stagnation: there were no significant competitive businesses in the East, and West German businesses were not attracted to setting up subsidiaries in a country with similar costs but lower skill sets and poorer infrastructure. After the War, West German businesses regrouped and prospered capitalising on the specialized skills built up over generations. In the East, businesses and their skills were lost such that after re-inification, there were no skilled people or businesses who could coallesce to re-ignite the German genius for technological accomplishment.

    But of course, the people of the PIIGS are not Germans and with the exception of the Northern Italians do not have the businesses which could compete successfully with them, nor like the East Germans do not they offer lower costs to entice inward investment. The situation for the PIIGS within the Eurozone is dire; the only way in which less developed economies can catch up is by offering lower costs, as East Asia has done so successfully, and by being members of the Eurozone, they cannot. So should Germany consider offering to the PIIGS the same ongoing transfers which they make to East Germany to compensate for not only, as in the case of East Germany, their poor manufacturing capability, but also their habits of work and habits of honesty when it comes to tax matters?

  23. Freeborn John
    July 21, 2011

    JR: “They can do so by uniting to control the total European deficit for Euroland and standing behind the collective debt. They can do so by ejecting weak members from the currency.”

    I don’t believe the first option is viable in the long-term. The population of the uncompeteive countries, Spain, Italy, Greece, Malta, Cypress and Ireland is well over 100 million. To that one will probably have to add Belgium whose debt is already over 100% of GDP and possibly France in due course. The population of the countries with a surplus; Germany, Netherlands, Finland, Austria is only about 100m; the competeiveness gap between these two groups is still growing so the funding requirements of the deficit countries are only liekly to grow, especially considering that the will be tempted to spend more of other countries’ money in the future than they would their own. Germany is a country with a falling population and slow long-term growth which will have a smaller economy than the UK by 2030. Therefore the size of increasing load the German locamotive would be expected pull is too much, and the imbalance will only get worse in decades to come based on known demographic and economic trends.

    That leaves only ejecting weaker members from the eurozone as a sustainable policy going forward. It is therefore disappointing to see Geroge Osborne recommending your first option when it is unsustainable in the long-run and will therefore lead to a bigger disruption when the inveitable happens. Let’s hope he has a more realistic sense towards policy options for the UK economy.

    Reply: If they all felt they belonged to one country and were happy with the transfers it could work. London, afetr all, is in a currency union with a much larger rest of the country and is a lot better off per head with a faster growth rate.

  24. uanime5
    July 21, 2011

    Perhaps they should only give Greece more only in exchange for Greece introducing a better tax system. Hopefully this will reduce some tax evasion.

    But ultimately Greece will default and all the EU can do is try to mitigate this default so that it doesn’t cause other EU countries to default.

  25. Gary
    July 21, 2011

    That was the sound of a can being kicked.
    EU decides :

    Draft EU summit conclusions call for “Marshall plan” of investment, growth stimulation for Greek economy

    Collateral will be part of new Greek aid deal according to Eurozone draft

    Draft EU summit conclusions says three options for private sector role in second Greek bailout remain on the table; debt buyback, rollover and swap

    Draft EU summit conclusions says EFSF will be able to recapitalise financial institutions through loans to governments,including non-programme nations

    Cost of recapitalising Greek banks estimated to be total of EUR 25bln according to Eurozone document

    Draft EU summit conclusions see rate of around 3.5% on new EFSF loan for Greece

    Draft EU summit conclusions says EFSF will be able to intervene in a precautionary basis

    Draft EU summit conclusions see extension of EFSF loans from 7.5 years to at least 15 years, according to a Eurozone document

    1. Denis Cooper
      July 21, 2011

      That’s the EFSF for which there is no identifiable legal base in the EU treaties, and which has been structured it in a way which is blatantly illegal under the EU treaties.

  26. rose
    July 21, 2011

    “The third is wildly unpopular with banks, and unfair on the banks who have not committed themselves to too much dodgy debt. ”

    I’m a bit concerned about your insertion of the words “too much”.

  27. Norman Dee
    July 21, 2011

    What we need are more people with some knowledge of finance and some management experience, and less politicians with no experience of either. Being rich does not make you good at financial or any other kind of management, and it would appear to be Cameron’s only qualification. Getting clear of the falling masonry of the collapsing Euro is going to cost us, but it will be a lot less than if we are still underneath it when it finally tumbles. This is the time for hard management, not appeasement ( * a politicians only contribution normally), Get out from under, no negotiations that would last for ever and achieve nothing (see *) but decisive action, what can be worse than where we are now ? Most european politicians don’t like us anyway, for whatever reason, so that won’t change but we will survive as a free country.

  28. rose
    July 21, 2011

    How dignifed the Turks are looking. Similar climate, similar produce, but own currency, and national integrity intact.

  29. Paul H
    July 21, 2011

    And while all this is going on, Mervyn King is hard at work watching cricket. Having spent quite a bit of time at Wimbledon. No wonder the BoE has lost the plot.

  30. Bazman
    July 21, 2011

    Who should a government default payment to when push comes to shove? Benefit claimants or bondholders? Warren Buffet thinks bondholders should forgo their cheques for the obvious reason that many people live hand to mouth. A fact lost on many.

  31. Suze Doughty
    July 21, 2011

    Assuming they haven’t got the money to do this and are printing more euros to facilitate, does this mean yet more quantitative easing money will pour into my broker account? I suspect that means the money I had before is all worth a little bit less

  32. Andrew Smith
    July 21, 2011

    I see that Osborne suggested he is attempting to balance taking part in negotiations with keeping ‚ÄúBritain out of the Greek mangle‚ÄĚ. Crucially, he also said, ‚ÄúI think we have to accept that greater Eurozone integration is necessary to make the single currency work and that is very much in our national interest‚ĶWe should be prepared to let that happen.‚ÄĚ

    If you decode that he means he is on the sidelines and trying not to annoy anyone. He is cap in hand hoping to avoid further big costs on Greece (ignoring the rest). But crucially he is saying that the coalition will allow treaty and other changes to facilitate whatever France and Germany want without getting anything back in return.

    These people do not deserve to hold office as they are clearly not interested in wielding power in the interests of the UK.

  33. rose
    July 21, 2011

    Young Dr Djankov may be on to something. He says Bulgaria could inject some fiscal discipline into the Eruozone.

  34. BobE
    July 21, 2011

    Do Greeks still retire at 50 on full pay?
    Is it true that Greek taxation is voluntary?
    With luck the whole debacle will colapse over the next few years. Wheeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeee!!!!!!!!

  35. Ross J Warren
    July 21, 2011

    Greece owes more than it is paid in a year. In fact that is not nearly as much as most young couples owe. We tolerate long mortgages, but then there is a tangible asset.
    Greece will have to pay its debt over a longer term, which will be less of a problem once interest rates rise. Greece will still be there tomorrow, and the truth is it has Art valued in the hundreds of trillions. We need some tangible asset transfer to demonstrate the good will of Greeks over rich polyorcs.

  36. Colin Hart
    July 21, 2011

    Where’s Mr van Rompuy? I thought ‘we’ had put him in charge of all this.

  37. Robert George
    July 22, 2011

    Greece amounts to about 1.9 % of Europe’s economy. Would it be such a bad thing if Greece was destroyed economically? I have my doubts. It would at least be a lesson to the rest of the world that no nation can lie and steal its way to economic success.

    It would be unpleasant for the Greeks, but bluntly, they are not sufficiently important to warrant all the attention being given to what structurally is a bankrupt nation of small time (people of questionable financial skills -ed).

    Sacrificing Greece’s over inflated government, economy and ego is perhaps a necessary prerequisite to fiscal discipline throughout southern Europe.

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