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So, it it all over, this Euro worry? Wolfgang Münchau in the FT today is insistent that it is not. But perhaps we should remind ourselves of the various parts that make up the "whole" crisis.
It's possible to slice and dice the euro-crisis in several ways.
The simplest one is "crisis of confidence" vs "crisis that's unavoidable in the short term".
The "euro is on the edge of a cliff" writers will point to various stats that prove, beyond a shadow of a doubt, that Italy, Spain and even France are following Ireland, Portugal and Greece on the road to hell.
But the truth is that France and Italy are no more on the edge of a fiscal disaster than the UK pension system. Sure, their economies are unsustainable in the long term -- but so is the US economy. The real crisis last year in Italy and France was one of confidence, not of unavoidable disaster next week.
If you want a list of fundamentals problem at the heart of the euro, it's a pretty long list. But if everyone wakes up and tells themselves that things are fine, then you would be surprised how long you can go on before the shit unavoidably hits the fan.
So, with confidence back in Italy and even in Spain, punters are willing to lend to these country's governments at rates which meant that the eventual fundamental crisis is a long way off. Meanwhile, in Ireland, everyone is doing their best to sort things out.
And Greece and Portugal? Well, in fact, they have defaulted; it just hasn't been called a default.
So, where's the worry?
Well, let's slice and dice it a different way. Instead of looking at it in term of economic imbalance, let's look at social imbalance. Here, things are less promising. No-one disagrees that at the heart of the matter the problem is debt, or, in other words, spending more on stuff than we produce. Countries "balance the books" by borrowing from the future. This has the effect of loading debt onto future generations.
As economies drift down to zero, social tensions mount. Eventually there is such a grave disconnect between the system and the people that the system is overthrown (not the government, but the system itself).
This sounds incredibly radical, but it's not. many western European countries have overthrown the old order since World War II. Even France changed Republics in 1958 after the Fourth, Italian-like system, collapsed under its own bloated power structure. The Fifth Republic (specifically tailored for De Gaulle) brought in the "strong leader".
One can see evidence of clueless leaders in the mode of the Weimar Republic in many western European countries. Spain and Italy are the stars here. Greece looks to me to be on the verge of some kind of state collapse.
At this kind of bottom-up "stop the social disaster" level, Münchau's talk "hidden losses" at the banks soon becoming more apparent(SNS Reaal in Netherlands had to be nationalized on Friday) is a little bit superfluous. OK, so, say the banks are undercapitalized to the tune of €1trn? Well, if confidence is high, the rules will be changed. The banks will carry on. No-one will die.
Banks and the current financial system are already a matter of belief. If everyone stops believing in the value of paper money, the economic system would grind to a halt. However, people realize that, even if the money they have has no intrinsic value, the system works best if people believe that it has.
The same applies to the "undercapitalized" banks. TBH, deciding on the "right" level of capital for a bank is completely subjective, unless you demand 100% Tier 1 capital (which even Münchau does not). You could say that the right level should be 3% Tier 1, 5%, 8%, 10% or 20%. In the grand scheme of things it makes no difference. People either believe that the banks will be open tomorrow or they do not. One way to slowly crawl out of the mess in countries where it was property speculation would be to let the banks take over the land. Hold that land at an unrealistic value, and count it as Tier 1 capital at that value. Slowly, over decades, that land could be fed back into the system.
In countries such as Greece where the problem is insolvency, the major aim is to get the level of insolvency to fall, while at the same time not having a revolution that will declare all debts dead and buried.
In this sense, the crisis is most definitely not over, but for the rest of this year, it would appear that the people looking to kill off the euro are hanging fire.
PJ
It's possible to slice and dice the euro-crisis in several ways.
The simplest one is "crisis of confidence" vs "crisis that's unavoidable in the short term".
The "euro is on the edge of a cliff" writers will point to various stats that prove, beyond a shadow of a doubt, that Italy, Spain and even France are following Ireland, Portugal and Greece on the road to hell.
But the truth is that France and Italy are no more on the edge of a fiscal disaster than the UK pension system. Sure, their economies are unsustainable in the long term -- but so is the US economy. The real crisis last year in Italy and France was one of confidence, not of unavoidable disaster next week.
If you want a list of fundamentals problem at the heart of the euro, it's a pretty long list. But if everyone wakes up and tells themselves that things are fine, then you would be surprised how long you can go on before the shit unavoidably hits the fan.
So, with confidence back in Italy and even in Spain, punters are willing to lend to these country's governments at rates which meant that the eventual fundamental crisis is a long way off. Meanwhile, in Ireland, everyone is doing their best to sort things out.
And Greece and Portugal? Well, in fact, they have defaulted; it just hasn't been called a default.
So, where's the worry?
Well, let's slice and dice it a different way. Instead of looking at it in term of economic imbalance, let's look at social imbalance. Here, things are less promising. No-one disagrees that at the heart of the matter the problem is debt, or, in other words, spending more on stuff than we produce. Countries "balance the books" by borrowing from the future. This has the effect of loading debt onto future generations.
As economies drift down to zero, social tensions mount. Eventually there is such a grave disconnect between the system and the people that the system is overthrown (not the government, but the system itself).
This sounds incredibly radical, but it's not. many western European countries have overthrown the old order since World War II. Even France changed Republics in 1958 after the Fourth, Italian-like system, collapsed under its own bloated power structure. The Fifth Republic (specifically tailored for De Gaulle) brought in the "strong leader".
One can see evidence of clueless leaders in the mode of the Weimar Republic in many western European countries. Spain and Italy are the stars here. Greece looks to me to be on the verge of some kind of state collapse.
At this kind of bottom-up "stop the social disaster" level, Münchau's talk "hidden losses" at the banks soon becoming more apparent(SNS Reaal in Netherlands had to be nationalized on Friday) is a little bit superfluous. OK, so, say the banks are undercapitalized to the tune of €1trn? Well, if confidence is high, the rules will be changed. The banks will carry on. No-one will die.
Banks and the current financial system are already a matter of belief. If everyone stops believing in the value of paper money, the economic system would grind to a halt. However, people realize that, even if the money they have has no intrinsic value, the system works best if people believe that it has.
The same applies to the "undercapitalized" banks. TBH, deciding on the "right" level of capital for a bank is completely subjective, unless you demand 100% Tier 1 capital (which even Münchau does not). You could say that the right level should be 3% Tier 1, 5%, 8%, 10% or 20%. In the grand scheme of things it makes no difference. People either believe that the banks will be open tomorrow or they do not. One way to slowly crawl out of the mess in countries where it was property speculation would be to let the banks take over the land. Hold that land at an unrealistic value, and count it as Tier 1 capital at that value. Slowly, over decades, that land could be fed back into the system.
In countries such as Greece where the problem is insolvency, the major aim is to get the level of insolvency to fall, while at the same time not having a revolution that will declare all debts dead and buried.
In this sense, the crisis is most definitely not over, but for the rest of this year, it would appear that the people looking to kill off the euro are hanging fire.
PJ
