Latest euro developments

[peterbirks]

There were some interesting comments by Wolfgang Schaeuble this morning in Handelsblatt the German business paper. He said that "the (German) government has always said that, before we start talking about debt management, we need real fiscal union".

Schaeuble, of course, is talking for what he imagines is a German audience, but the readership of Handelsblatt is not the same as the readership of Die Welt. They might be Germans, but they are business Germans. And there's also a significant international readership. What's said in Handelsblatt will be repeated in the business papers worldwide.

But, as the various G7 finance ministers meet for "crisis" talks (all talks for the past four years have been "crisis" talks) there begins to be a glimmer of hope for a solution. Schaeuble doesn't spot it, or, if he does, he certainly doesn't mention it. Indeed, Schaeuble blathers on with this nonsense when he is put on the spot about the high interest rates Spain is having to pay at the moment.

"We need to manage this ... through close and trusting co-ordination"

he said. Yeah, well, no shit Sherlock, but what does that mean when it's at home. "Close and trusting co-ordination" is the one thing that has been lacking. So in effect he's saying "we need to practise close and trusting co-ordination to get to close and trusting co-ordination". Meaningless.

So why do I think an avenue of solution has opened up? Because I can see an answer that fulfils the basic tenet of any eurozone agreement at the moment -- it's a fudge that kicks the can further down the road. And, more cleverly, it's a new can.

The current disagreement between Germany, Austria, Finland, the Netherlands and "the rest" now rests on a simple disagreement of timing. Germany won't accept eurobonds without being able to exhibit more fiscal control. France (and the others) wants the eurobonds without the fiscal control -- more of the "trust the individual governments to act sensibly". As Germany (correctly) observes, that didn't seem to work so well last time round, so why should the German taxpayer be more on the hook without any guarantee that it won't be more of the same? Or, more bluntly, "there's no way we can sell this to the electorate".

The fudge, therefore, just has to be somewhere in this "fiscal union" agreement. Some kind of eurobond is issued (the name will be fudged and the details will be fudged, but, at heart, eurobonds is what they will be) that entails some kind of mutual guarantee (i.e., some kind of German guarantee).

As part of this agreement, a new body will be created, in which Germany will, somehow, be the dominant player. This new body will have decision-making control over the financial decisions of other governments. It will have to be structured so that France and the rest can pretend that this does not entail any sacrifice of sovereignty, while Germany can pretend that the new mutual financial support mechanism does not entail the German taxpayer being on the hook for the more profligate peripherals.

And thus is the euro saved.

Well, except for Greece, of course. As part of this whole shebang, Germany will need something to show its voters, to show that it's not pissing around here. Greece will be the sacrifice. It will be out of the euro. The trick will be to announce the mutual agreement at the time of the greatest crisis - that being when Greece is chucked out of the euro. As we have seen, steps dforward to greater integration have usually been at times of crisis, scaring the governments and electorate into taking something they don't really like because the alternative is worse. If the eurozone governments can time it right, announcing the new bonds and the new "oversight" (German-dominated) body just as the markets are trying to work out what to do about Greece, then there is a way out.

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I'd meant to write something else above about the nature of cash or, rather, the nature of means of exchange. As was shown by the Long-Term Refinancing Operation last December, "money" is not as clear-cut an object as we think.

Let's take two examples of "money", both theoretical. Suppose I am a sole trader. I have an important supplier. Over a typical year I might owe the supplier money at some times, while at others I owe him nothing. To "solve" this, I print my own banknotes. When I take delivery, I give my supplier the banknotes to the value of the goods he supplies. When I sell my goods, I swap my own banknotes for the banknotes I am paid by other people, at one-for-one.

What is the difference between the two? Well, in the first case, the supplier can only "spend" those banknotes with me (this, you might recall was one of the disgraceful distortions of money after the end of slavery, when ex-slaves were "paid" in "money" that could only be spent at the company store). In the second case, he can spend the money with many other people.

But not all other people. Suppose I am a sole trader in China, and the money is in Yuan. Even though the supplier can spend this anywhere else in China, he can't spend it elsewhere, because of currency controls. Or suppose we were in Zimbabwe. Here, there's not so much difference between the banknotes I print and Zimbabwe dollars.

At the other extreme, imagine "perfect" money, that being a means of exchange that everyone, everywhere, accepts. Some people might mention gold here. I recommend that you try buying a used car with 6oz of 24ct gold and see where it gets you.

"Perfect" money is perfectly fungible, whereas the banknotes that I print to deal with my supplier have zero fungibility.


What point am I moving towards here? It's that the legal restrictions imposed on the ECB rest on discrete definitions of items that are not actually discrete. In case one above, I might just as well write an IOU to my supplier. Or we might just keep the amount owed in the books as a "debt". Money merges into debt and vice-versa. You can obviously see where I'm going here. The ECB can print "money" denominated in euros, while the sovereign nations can't print "money", but can create euro-denominated debt.

But while euro-denominated money has a constant value throughout the eurozone, euro-denominated debt does not. It's a bit like Richard Dawson's ancestor paradox. Although the debt and the money cannot "interbreed" at 1-to-1, one can create a number of intermediaries that are close enough to the euro-debt to exchange at 1-to-1 or close enough to euro-cash to trade at 1-to-1.

The LTRO was an interesting example of creating something that wasn't cash and wasn't standard debt. And, for a few months, it did the job. Unfortunately the time that was bought was not used to solve the fundamental economic disconnects that are still operating. It doesn't matter how many eurobonds are issued that are mutually guaranteed if the eurozone continues to be in economic imbalance. The crisis will eventually re-emerge.

But, if you want to create a new can and you want to kick that can a long way down the road, the creation of a new governing body with a fudged governance, plus the creation of a new form of debt with some fudging in the definition, offers all eurozone governments an opportunity to claim that they have "won".

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Comments

[real-aardvark.livejournal.com]

But ... can the new can can-can?

"Try buying a used car with 6oz of 24ct gold and see where it gets you."

Not, I think, your best example. I would estimate that it will get you a BMW 320, 2003 model right now. Of course, you'd have to go down the local pawnbrokers (or as they say these days, "money shop") to check the details and possibly assay the gold, but it's quite fungible stuff. I've added in a 10% charge for the assaying/exchange/etc, but on the whole the problem with paying in gold isn't that it's not fungible, it's that it's a freaking pain to carry around.

Which is fascinating, in a way.

Fiat currency is without a doubt the best we have (and anybody who wants to return to the Gold Standard is a loon. The example of Zimbabwe - substituting the world reserve currency for gold, which I think is fair in this case - suggests that you only do this when you are desperate. The example of Argentina in the 1990s (substitution, ditto) suggests that no matter how desperate you are, it's still possible for it to blow up in your face. In ways that would probably have happened with a fiat currency, in fact.

But gold, like many other commodities (scale it and platinum is probably even more reliable), is an excellent parallel or shadow currency; rather more so than government bonds, I would suggest.

Anyhoo, where was I? Oh yes, the can. Can we find somebody to carry the can?

Three years ago, I'd have agreed with your analysis. Surely the entire collective intellectual might of European bankers, politicians, and macro-economists in think tanks - approximately in that order of worthiness - couldn't be so ferociously blind?

Apparently they were. No amount of dressing this up is going to work. Greece is out before the end of the year, not as a sacrificial goat, but just because it has to be. Spain is probably next, which is a little unfair on Spain, but there you go. Whether it's Spain or Italy, however, the whole thing is up for grabs after that. It's going to take about five years to sort the initial mess out, and only after those five years can we begin to look forward to the Japanese two lost decades.

You, Peter, are eternally young. Me, I'm too old for this crap.

[real-aardvark.livejournal.com]

Or, alternatively, what I really meant to say is that if you kick the can far enough down the road, you are inviting one hell of a lot of Black Swans.

I'm quite serious about that. Any number of nasty unpredictable surprises can come up now, but if things carry on in Europe as they are at the moment, we're in for mass hysteria at unpredictable moments.

[real-aardvark.livejournal.com]

Aww.

So, this "new can?"

It's a CDO on the "old cans," I assume.

Looking forward to the slicing and a-dicing.

[peterbirks.livejournal.com]

Well, it's kindo f a CDO on the old cans. Yes. But, just as the CDOs were new products from the old debt obligations (you only have to look at the effect they had to see that!), so the slicing and dicing of the debt so that smoke and mirrors can be used to make it look as if a solution has been found, make it a new "can" for which the eventual apocalypse is a few more years down the line.

None of it solves the fundamental economic imbalance between the north and the south. That, I suspect, is unsolvable.

PJ

[jellymillion.livejournal.com]

Isn't all "money" essentially an IOU? "I promise to pay the bearer on demand the sum of twenty pounds" is what it says on the note I just took from my pocket. Twenty pounds of what, is not stated, unless my presbyopia has made me miss something in the even smaller print. So your supplier, if strapped for spendable cash, may find it possible to exchange your personal money for something more generally acceptable by swapping it (at a suitable discount - or credit spread) with a third party. That's pretty much how money came to be, isn't it? All hugely interesting. Which, sadly, says all too much about us and our increasing irrelevance. You know you're getting old when bank managers and prime ministers are young whippersnapper upstarts.

[peterbirks.livejournal.com]

Well, this is a large can of worms, Michael. Let's just sort of say that all money is debt and all debt is money, without going too deeply into the chicken and egg situation. Your line (one which is accepted by many) is that debt caused money. Others claim that barter came first, and that money was created to facilitate more complex exchanges. From this came the opportnity to "delay" settlement, and thus debt came into being.

But neither of these allows for the "state" view - whereby money could be seen as a neat way for governments to create spending power for themselves. This, as it were, is why governments often demand a monopoly on printing bank notes -- they want to be the people doing the owing (a brief look at the details of the first BoE issuance of bank notes in the late 17th century is interesting here - and I believe the Stephenson Quicksilver trilogy actually refers to it).

IOW, (and, as I say in the original piece) rather than there being "debt" and then "money", or "money" and then "debt", or "states creating a whole new form of debt va fiat money", all three emerged together in a bit of a sludge of debt and liquidity control. However, it's the "state" part of it that causes people to see debt and money as two distinct items, rather than something which merges in the middle, if it's allowed to.

PJ

[john-f-hopkins.livejournal.com]

Surely, whilst a central bank remains on the gold standard (i.e. whilst the currency is fully convertible), it cannot create money? Debt can, exogenously, be created, with assets valued in pounds or troy ounces or Ningis. And such debt (subject to limitations in fungibility) can, up to a point, be used as though it were money.