The euro zone: Is this really the end?
economist.com
economist.com
This line of thinking is been pushed a lot. Its a one sided view. Why is it so difficult to understand the German point of view, or at least put it across to readers ? Germany insists that covering up the problems by printing money is just treating the symptoms not the root cause. The root cause is the bad monetary policies at some of member nations. They correctly understand than politicians guarantee of fixing the bad monetary issues (once printing is done) is wishful thinking. What they want is either go through painful process of austerity in these nation or tighter political/financial integration where member nations have say on finance budgeting in countries (in which case there could be common bonds).
I am neither a US or EU resident. I am not a finance guy. But the approach taken by Germany seems very sensible to me. What i see over and over again is the US/UK media and economist pushing for the solution that they have taken in their countries (monetary easing), to solve EU problems. Is there a agenda in this or whether its just that they want to make their policies appear right is open question.
I for one think that if Germany gets through this crisis (without blind printing) it will open the new era of EU dominance in the world. EU would come out as the most financially prudent currency and society (a more integrated union, almost like a country). In such a case the high debt, bad finance strategies of US/UK appear foolish.
Keep going Germany ! Long live EU
After all, Germany was among the first batch of countries who violated the 3% deficit-to-GDP rule in the Maastricht treaty.
The German approach is a holier-than-thou approach, believing in blindly following rules that are elevated to moral principles ("Thou shalt not have a deficit.") without regard for the implications that this has for the well-being of their people.
What the Eurozone really needs is functional finance: define your goals for the real economy (e.g. full employment, high real living standards) and then do whatever it takes to achieve that in the financial arena.
... just wish away reality by printing more Euros?
The term "printing more Euros" is rather inaccurate. When people talk about "printing money" it tends to be an indication that they either (a) don't know what they're talking about or (b) are not interested in an honest discussion.
Printing money is irrelevant. Spending money isn't.
As for the reality: The reality is that there is vast under-utilization of resources in the real economy. That's what a recession is all about, after all. I'm not a growth-fanatic, but real people are hurt by that development via the crazy amounts of unemployment, especially youth unemployment.
Furthermore, this under-utilization is an indication that if someone were to massively increase spending in the real economy, the economy would likely react significantly by adjusting the size of its production, and the reaction in terms of price level would be minimal.
So in that sense, if I indulge your misguided metaphor for the moment, it is actually the anti-printing folk who are wishing reality away: in their fantasy world, the recession will just end without any spending involved. Out here in the real world, this is not how it works.
(But note that the type of spending matters. Just throwing more money into the hands of the financial sectors is not going to help. Direct job creation is necessary, and in the case of Europe, there are some very obvious candidate projects, such as installing large amounts of solar energy capacity around the Mediterranean, along with the transmission capacity. That's just one pet idea though, there are plenty of other useful things to do.)
Germany is looking to create a rules-based system that every country follows and is accountable to, like they were supposed to when the Eurozone was created. This isn't a bad thing, but its forcing the PIIGS (Portugal, Ireland, Italy, Greece, Spain & Cyprus, if anyone ever notices how had that's getting, but its small anyway) to play chicken with the financial markets and increasing their interest rates to a point that forces them to fix the structural faults in the national budgets.
Germany rightly shouldn't be paying the costs of Greece's, or soon Italy & Spain's, pension obligations and the hundreds of billions in Euros of debt built up over the last decade or more because of poor national policy. Though that is what is happening for now. The current fight, which is being missed by most of the media, is whether Germany will be paying the future costs of the PIIGS+C as well and Angela Merkel is aiming to create a new rules-based system to force these countries to increase productivity, reduce labour regulation and stop spending on wasted projects. Good luck to her...
Right, but they're running up against a very fundamental problem: There isn't any mechanism to enforce the rules. The worse the Greeks (and others) behave the more money the Germans are expected to provide to clean up the mess in return for "This is really the last time I promise" kind of assurances.
Of course what Merkel wants is a kind of United States of Europe, where everybody surrenders enough sovereignty this sort of thing can't happen. But will the other countries go along? Paint me very skeptical.
Printing is also a fiscal policy that happens to be implemented by central banks.
Without a fiscal backing for unlimited asset purchases or printing money, no central bank is able to act. A central bank implements monetary policy transmission by controlling liquidity. They cannot provide funds to insolvent institutions or be exposed to risk of default/credit risk without backing.
To put it in Mervyn King's (head of Bank of England) words: too many people misunderstand the concept of "lender of last resort". Central banks have access to this facility or are able to print because governments back their own solvency by perpetual state existence and unlimited taxation.
Without a fiscal union, the Eurozone/EMU has no meaningful guarantee of perpetuity nor taxation. The market would recognise this sooner rather than later and nothing structural or fiscal would have been fixed.
Printing can only come after fiscal union. If you have a fiscal union, then you should not have needed to print in the first place since you should have set strict rules on leverage! But if for some reason you did need to use lender-of-last resort, it would meaningfully exist due to the fiscal backstop.
Perception is important here, either the markets (in terms of buying debt) or the populations (a run on banks) could bring things crashing down.
Meanwhile, Germany is booming on the back of a (for Germany) weak Euro, and this crisis has already claimed the governments of Greece and Italy. Fiscal rules should have been sorted when times where good (IIRC Germany were one of the first to break the rules on borrowing, years ago). As is, if someone breaks the rules others are powerless to act.
I can't say I share your optimism for a 'new era of EU dominance'.. austerity and no growth everywhere.
But it is not really Germany's fault that Italy's and Greece's leadership decided to push their heads into the sand for so long.
These issues were known for decades, the core of EU spent a lot of effort trying to bring up the subject and the usual response from the fringe was that: "We are sovereign nations, this is strictly our business and you can kindly fuck off!"
It is not Germans fault that people across south decided to vote for populist governments, while they were busy reforming their economy.
The way Germans see it probably is that if they succumb to pleas for unconditional help from south - the EU is certainly doomed in the long run. If they do not, the Euro might be doomed, but the EU has a chance of rebirth in the long run.
Europe is on a sort of crossroads the Yugoslavia was on in the late 70's, early 80's - when the Yugoslav leadership decided, that we can borrow our way out of this, the aftermath is well documented I believe.
A lot of the "virtue" of Germany is actually a vice when extrapolated globally. The current position of power of Germany can be traced back to its net exports. Quite often in the last two or three years, you could hear commentators proclaim that if everybody followed the path of net exports, the crisis would be over. There are only two problems with that:
1. It is simply impossible for everybody to be a net exporter. That's the fallacy of composition.
2. The way Germany became a net exporter was by savaging real income of the majority of the population. If you look at data for how the quotient of (real income / labor productivity) developed in the Eurozone, you will see that while the majority of countries had a reasonable development (the quotient is around 1), Germany's quotient for this development is much lower. German workers are being cheated out of their share, which means Germany is essentially price dumping in the global market.
Right now, Germany is essentially sending presents (real goods) into the rest of the world in exchange for promises (financial claims on the ROW). The majority of Germans are working their ass off and not getting anything in return, just so the top 0.01% of the population can increase its power base by accumulating financial assets.
To say that other European countries should follow this path is deeply cynical, and probably comes from not seeing the whole picture.
The point is that the exchange rate with which countries adopted the Euro was more or less appropriate when it was set. Since then, the different development of the countries has changed the level of the exchange rate that would be appropriate if the countries still used different currencies.
So the question is: has the picture of corruption in Germany vs. Greece changed significantly in the last 10 years? Has the unit labor cost (which is real income / labor productivity) changed significantly between Germany and Greece?
Those are the questions you need to ask to understand where the differential is coming from.
They managed to secure a consensus and everyone (labor, capital and the state) is reaping the rewards.
In southern and eastern Europe, the unions an "leftist forces" managed to blow a hole in any attempt to reform pension and labor markets.
The key argument is that Germany giving in to these forces would mean a perpetuation of the root problem.
The way I see it this is a family issue, where father refuses to support one of his crack addicted kids, while the mother pleads "Please, you are breaking the family apart." Forgetting that there were previous confrontations in which she sided with the kid and didn't support the fathers demand that the kid goes on a rehab.
Keep in mind that "reforming their pension system and labor market" is neoliberal code for "reducing the share of national income that goes towards workers and employees". So it is disingenuous to claim that labor is reaping the rewards these days. [1]
I mean sure, if you cut social safety nets and retirement systems, and pass the savings on to foreigners who are buying your export goods, then that will boost your exports. That doesn't make it good policy.
As for your metaphor, two can play that game.
Germany is more like the father who doesn't give a damn about the kid, thinks it's the kid's own damn fault - despite him regularly beating him/her (that's metaphor for Germany undercutting everybody else in the market, in case it's not clear), and is happy to see the kid end up unemployed, homeless, and with an abysmal life expectancy (all of these things are already literally reality or are starting to become so in Greece).
The rehab route would be to stop the insane domestic policies in Germany, install a bureaucracy that can do proper tax collections and fight corruption in Greece, and simultaneously stimulate the hell out of their economy.
Hey, nobody said rehab is easy - it requires both discipline and compassion.
[1] In terms of real income this is obvious from even a very cursory glance at the data. In terms of unemployment, the picture is admittedly not quite so obvious. Unemployment rates are lower than in the southern countries, but even the official numbers are still very high by any reasonable standard. It gets worse when you consider marginal work (part time etc.).
We were talking about economy as a whole, while you only fixate on labor market and capital market.
Greece had a plenty of raise in wages - see how well it worked out for them.
Beware of the Marxist fallacy. Nowadays in Europe anyone can join the ranks of "Evil capitalist" and secure a "bigger piece of pie" for themselves.
Essentially they just discuss problems with the shared illusion (debt, bonds etc.), but not problems with what those abstractions actually mean.
What's going to happen in a few weeks to cause everything to come crashing down? We'll still have the same people working, the same infrastructure / factories etc.
I'm not saying the issues aren't real. Just that they're always discussed through so many layers of jargon to essentially be meaningless to someone who doesn't work in finance.
Consider the times we are living in. It is likely that we are reaching a point that humanity has never faced before and will never face again (at least, not humanity as we recognize it). I like to call it "stationary phase", after the same concept that occurs in growing populations of bacteria.
Essentially, human population growth is beginning to decelerate. Changes in infant mortality and life expectancy are leading to vast demographic shifts that will most likely be permanent. What does this have to do with a fiat currency and debt?
Consider why one would take on debt. If I can acquire resources at a fixed constant rate, then it makes no sense to take on debt instead of simply saving up over time. Debt only makes sense when the means of production, and therefore resources available, accelerate over time. I can borrow now, because even though I have to pay back more later, I will have more even than what I need to pay back at that time.
So what causes means of production to accelerate? Lots of factors to be sure: more raw materials to exploit, gains in efficiency, etc. A very large factor, however, is accelerating population growth. Even if materials available and efficiency remain constant, more workers means more production and an accelerating growth in workers means an acceleration in the means of production over time.
But that's all coming to and end in the near future. So, to compensate, we could accelerate the exploitation of raw materials. Unfortunately, one of the most important raw materials for human economy, oil, is also decelerating in its rate of exploitation.
That puts the entire onus of accelerating means of production on increases in efficiency. Consider it a call to arms for knowledge workers around the world. The only other alternative is to fundamentally change the way that economies work. If we cannot accelerate the means of production, then we cannot run economies based on debt.
What makes this whole situation all the more interesting is that if population growth stabilizes at some future point (i.e. zero real growth), then we may be very close to reaching the point where current means of production are sufficient to satisfy the needs of the existing population. Ultimately, the need for debt is based on the desire to borrow from the future so that we can do what is necessary to accelerate means of production, so that the means of production can catch up with accelerating population growth. If everything gradually comes to a halt simultaneously, then we may just reach a "stationary phase" where the most important goal for economies is to remain stable, as opposed to today where the most important goal is exponential growth.
That, unfortunately, is the optimistic view. If things don't quite mesh up, expect the next century or so to be rather messy...
It's a complicated system with many moving parts that sometimes don't have any real world equivalents you can use to exemplify the issue.
Explaining a Collateralized debt obligation or a credit default swap is like explaining a Lisp macro to a non-programmer: Possibly but very hard.
A bond is a contract created and sold by an "issuer". The issuer can be a government or a company. Ownership of the bond entitles you to payments from the issuer. The specific number and size of payments varies from bond to bond. Once the issuer sells the bond to someone, that person can sell the bond to anyone else they want.
A credit default swap is a contract between two parties (neither of which is necessarily the aforementioned issuer) that are usually called the protection buyer and the protection seller. This contract is made in reference to someone called the reference entity. The protection buyer agrees to make a series of payments to the protection seller in exchange for the protection seller's promise that, in the case of a "credit event", they will give the protection buyer either some specified amount of money or some specified amount of bonds. The nature of the payments and the meaning of "credit event" vary from contract to contract, but generally a "credit event" is understood to have occurred if the reference entity (which is always an issuer) fails to make payments on some of the bonds it has sold. Either party in the contract is free to find someone else to take up their side of the trade at whatever price they can negotiate.
The only thing you needed to know to understand that was what a contract was, but if you want to understand macros, you really need to know what an interpreter is.
When it's spelled out like that, the idea seems preposterous. But the legal framework allowed it -- in certain contexts. AIG et al call them "CDOs" instead of just "insurance" so they could avoid the more-restrictive legal framework governing the insurance industry.
And given that a typical CDO is the size of a Manhattan phone book (remember those?), there obviously is a lot of nuance that a lot of people did not understand.
Also - AIG could have made the same mistake with conventional home insurance. Say they only keep 100 dollars of cash around and they decide to insure a million houses, each with a value of one dollar. If one ten thousandth of the houses burn down, AIG goes bankrupt. So it's not true that selling a dollar notional of home insurance is less risky than selling a dollar notional of CDS, because it could easily be the case that the expected payout on the CDS is higher. CDS are just harder to price. There are very robust statistics about houses burning down - the statistics on whether homeowners would default were a lot trickier to deal with.
And unfortunately, it can be a very leaky abstraction at times.
For example, most people have an implicit abstraction of money equals real things in their head, which causes them to believe certain claims about the relationship between the money supply and inflation, and this in turn leads to monetarily sovereign governments running deficits that are far too low to support a healthy economy.
Because if you only see that particular abstraction, you cannot see the effect of monetary saving. With that abstraction in mind, you can never understand the Paradox of Thrift.
"headlines like this are the cause of a recession rather than the facts behind it."
http://news.ycombinator.com/item?id=3280507
Not to be a negative nancy, but these discussions are really starting to bore me ... not because the underlying issues aren't important but because at this stage many vested parties are overhyping the issue.
That being said, the beauty of free markets is that individual agents don't have to understand macro (or even micro) economics to make good decisions: Prices provide all the information they need. Interest rates, materials cost, labor cost, dealer margin... who cares? All that matters is whether I think it's worthwhile to make a $300/month payment for this car.
That's why relatively stable prices are important. Uncertain future prices make the cost/benefit trade-off of economic decisions too complex for the average person to make rational choices.
If you tell me next thursday it will be rainy, I'll remember to bring my umbrella. But tell me interest rates go up and it doesn't really affect my decision to get a mortgage or not. Either, I've found the perfect house with a mortgage that is affordable (in which case I sign) or I haven't. At no point does knowledge of the interest rate make any difference in my decision.
I think the real reason its reported as its a nice round figure that is a barometer of sorts on the economy. Great for providing some meat around a story. Bonus points for sounding like the sorts of thing smart and respectable people would want to know. I'd be interested in your opinion about why changes in interest rates are so important for the press.
Lower interest rates mean more leverage. Increased leverage increases risk.
If they lower the interest rate, you can buy a more expensive home.. but you increase the risk you'll lose all your equity from a small change in house prices.
Right now in the US, more than 30 percent of homeowners are underwater on their mortgage.
If they decide to raise interest rates and you have a variable rate mortgage or have to renew it, your mortgage payments can shoot skyhigh.
Either way, record low rates make the system susceptible to systemic shocks and cascade failures.
Free trade and de-regulation means capital is free to flow quickly around the world. Investors can lose faith and a country can go from solvent to bankrupt in a matter of months. Interest rates shoot up and anyone caught with debt races to pay it off with dwindling incomes while the payments get bigger every day.
One thing that might happen is that some country's equivalent of our treasury dept will realize that they're not going to be able to make the next set of payments on their bonds.
As far as what's going to happen in a few weeks to cause everything to come crashing down, I think the problem essentially boils down to people making promises they can't keep, or end up not wanting to keep. This has been going on for a long time, and the sudden event at the end is basically just a critical mass of people realizing that it's been going on for a long time. The disconnect between sudden shift in the markets and no corresponding sudden shift in the infrastructure, workers, etc., is, I think, that lack of realization.
This is just how I see it, as a humble finance layman.
It's possible you're referring to the monetary system itself, which can be confusing. However, monetary issues have historically been much worse under regimes of "real" money, even when you take into account this current crisis. Illusory money done correctly has a lot of nice properties, and a big problem with the euro is that it doesn't have one of the key prerequisites--monetary, fiscal, and economic union in one. When a country can be drained of its credit supply because it's doing slightly worse than others, that's an undesirable monetary regime, and in the end threatens everyone.
Except that the four year old would be wrong when it comes to fractional reserve banking. I'm trying to imagine how a four year old would understand "You give me a piece of paper promising to pay the money back, and as long as I haven't done it too much (based on the money I have), I create money out of thin air and balance it with your promise to repay."
There is a difference between rational understanding and the way people act.
Even if a four year old would rationally understand debt, I am not sure that, if you offer a four year old a hundred sweets on the condition that (s)he will pay you back ten more sweets in a year, the typical four year old would decline.
Am I the only one here? Is there something obvious I am missing? I am usually able to learn anything I want, but economics seems quite opaque to me for some reason.
Please help me level up this domain of my knowledge :)
Here's my humble opinion for what you should look for if you truly want to understand this particular situation better. Forget about microeconomics (supply and demand and so on) and fancy mathematical models at least initially, and try to understand what money is.
What is money? What is the relation you have with money? What is the relation the government has with money? What happens when you transfer money to pay your bills?
These types of questions should be your guide initially. Look for bloggers who write on Modern Monetary Theory - there are quite a number of academics and hedge fund type people who do so, you can start e.g. here: http://neweconomicperspectives.blogspot.com/p/modern-money-p... - or go straight to the book "Understanding Modern Money" by Randall Wray (economist at UKMC).
That is roughly the path I took over the last one and a half years, though I started via Bill Mitchell's (Australian economist) blog at http://bilbo.economicoutlook.net/blog/.
As always, seek out different perspectives, but I've found that with some minor nitpicks, MMT really does seem to provide the best framework for understanding what's going on.
My current analogy of money is kind of that society is a giant vending machine capable of producing eg hamburgers, thai massage, anal lube, laptops, BMWs, etc.
Money is kind of tickets that you put into this vending machine. And then there are people loaning out these tickets (banks) and also there are different kinds of tickets (currencies) and vending machines (countries) with exchange rates.
Another analogy: money is to the bottom-level production of value (ie real goods and services) as functional programming is to assembly language. Ie you can do a lot of cool tricks and abstractions with it, but you can also shoot yourself in the foot with endless recursive data structures and what not.
Am I on the right path here? I seem to grok most things in terms of analogies and pictures btw, it's how my mind works. This isn't always a good thing, though, sometimes it's more useful to see something as sui generis (unlike anything else) rather than to say "it's like X".
When I have more time I'm going to read my copy of this book: http://en.wikipedia.org/wiki/Georg_Simmel#The_Philosophy_of_...
Money is kind of tickets that you put into this vending machine. And then there are people loaning out these tickets (banks) and also there are different kinds of tickets (currencies) and vending machines (countries) with exchange rates.
You may want to think about what contractual obligations are represented by those tickets.
A simple example would be literal tickets such as the fare tokens you can buy for many subway systems. When you own such a ticket, you have a claim on the subway system (in an accounting sense): the system is obligated to let you enter in exchange for the ticket. When that happens, the ticket is destroyed for all intents and purposes.
A deposit at a bank is also such a ticket. When you have a deposit, the bank is obligated to let you exchange your deposit for paper money. It is also obligated to let you make transfers, and that's where things become a bit more complicated.
It gets weird with paper money. Paper money is a liability of the government, but the government is not obligated to give you anything "real" in exchange for the paper money. The only thing it is obligated to do is to accept your paper money as a tax payment.
So at first sight, that might seem not ubiquitously useful.
However, it just so happens that because paper money is the way to pay your taxes, lots of people want paper money. Hence you can use your paper money to buy things from other people, even though the paper money does not represent any kind of contractual obligation between you and the seller. (An exception to that may be in legal tender laws; but for the most part, legal tender laws are unnecessary.)
Then you go back and realize that most of our monetary system actually takes place in computers and not using paper money, and you look into how deposits at banks are proxies for "government money", in particular reserves. And down the rabbit hole it goes ;)
Yesterday Belgium was downgraded by Standard and Poors, the day before Germany was unable to sell all of the bonds it offered on sale, the day before that Italy had to pay an unsustainable 7% on new bonds.
Unfortunately I have trouble seeing a short-term solution, though I hope there is one as the alternative is really really scary.
Financially there are really no safe havens. The U.S. is only able to run up trillion dollar annual deficits because its currency is the default reserve currency for the world and for now investors put up with sub 2% returns over 10 years (!) because they see no real alternatives.
Canada and Australia have ridden commodity booms to blow up their property markets to massive bubbles that will crash hard.
And the financial end game will play out soon for Japan as it has unsustainable debt levels. To date it has managed to fund those deficits internally, but it has almost saturated its domestic debt markets, and as soon as it has to start issuing debt on the international markets, it's game over.
Although the financial causes for this monetary crisis appear to be complex, IMO at heart the reason is very simple: You cannot expect to live beyond your means indefinitely and get away with it.
Yes, and there are basically two mutually exclusive, and opposite responses to this:
1) printing money (euphemism for it being "quantitative easing") and generating more debt which is just short term fix to buy yourself more time. 2) spending less and working hard to get yourself out of trouble which is only sustainable long term solution.
The way I see it is that Germany is pushing the second agenda, but it faces a great pressure to embrace the first solution. This pressuring is orchestrated by US/UK media that are creating panic and atmosphere of inevitable financial Armageddon. This, of course, threatens to become self-fulfilling prophecy if only sufficiently large number of people start to believe in it.
"...the ECB. As the lender of last resort, it must do more to save the banks by offering unlimited liquidity for longer duration against a broader range of collateral." "And since conditions are tightest in the peripheral [failing] economies, the ECB will have to buy their bonds disproportionately."
Modern economics somehow deny every amount of basic common sense. The only way to fix irresponsibility is apparently to reward it and encourage more. Nobody ever thinks about how to compartmentalize risk and failure, how to reduce the size and influence of financial institutions that threaten economic stability. I'm sure someone from Europe can better fill in the gaps on who stands to profit here and who's pulling the strings.
Can you point out a single time where intervention to prevent a disaster after irresponsible money management has eventually resulted in more responsible economic behavior?
In the end, something has to give.
1) The ECB has adamantly maintained that no banks will be allowed to fail. I assume this is because they are worried about contagion. 2) Germany, France and UK banks lent a lot of money to the PIGS. 3) In order to avoid bailing out their own banks (again), Germany and France encouraged the PIGS to take money from them (at high rates of interest) in order to recapitalise the banks of france and germany (and the UK, but they've been less active here).
It was total real politik, but unfortunately it hasn't worked, and the markets have now copped that it isn't going to work. Hence the continuing crisis.
Germany also have little incentive to fix the crisis, as they are benefiting disproportionately.
Ireland is a special case, as the reason Ireland had to ask for a bailout is the corrupt former government guarenteed a cowboy bank that was funding their previous elections.
I agree with you that its total insanity, but no-one appears to be able to say stop.
Cash is king. Conserve it.
"there will be a liquidity crisis" - Ok, yes
"IPO runways will have to be extended" - Probably
"all seed to mid-stage startups will go bust over the next 8 months" - Wait, what? How did you arrive at this conclusion? By what do you infer this? Yes, liquidity may get crunched and runways may go long, but you've taken one set of results and taken it way past the likely outcome.
I do understand the thinking that cash may dwindle, but you're assuming far too much here.
Also, they is still alot of inventory (mid stage web startups) from the 2007 funding bubble to work through.
Mid stage companies, funded in 2007, and had a 2-5 year runway, were waiting on the recent IPOs (Groupon, LinkedIn, Pandora, Zynga, ..) to raise appetite for their stock, but Groupon & LinkedIn, and Pandora IPOs are busts. So the capital markets will likely be closed off to them, and their will have to turn to the secondary markets. But once again, if there is a liquidity crisis, they will not get funding, and they will face a cash squeeze over the next 9-12months, depending on their burn rate.
So you have two web bubbles that will collapse, if the EZ fails. The 2007 funding bubble (digg, etc), and the 2010 angel funding bubble.
Of course, the rise of super angels probably played a large role in that.
In the mean there isn't a big difference to any other strong currency, like the US who comparatively has a much bigger problem and already had it for a long time.
The only thing that Europe lacks compared to the US is something like strict rules and sharing debts. A finance minister (or something similar) and Eurobonds would fix that.
Besides that it's really not like the Euro isn't worth a lot. Some years ago when the EUR/USD exchange what way lower everyone complained about the Euro being too strong and therefor causes export problems (low income). Now it is still way higher than that and everyone says the Euro is at its end.
Besides that the US as well as China devalue their currencies by printing -hardcore- and still have a lot more trust. Why?
It is possible that the common currency will crash and some countries will get out of the European Community. But the European Community will survive.
Remember, before the European Community, all the biggest wars in history either happened in Europe or were started by Europeans: Crusades, colonialism in Africa and Asia, genocide of Native Americans, Napoleonic wars, WWI and WWII, ...
After the European Community the only wars in Europe were outside of the Community and the only really big tragedy with European initiative (Stalin's big famine) was also outside of it.
It is also wrong that to say that all big wars were started by Europeans, as a quick look at e.g. Chinese history shows, e.g. the Taiping Rebellion [2].
[1] http://en.wikipedia.org/wiki/Holodomor [2] http://en.wikipedia.org/wiki/Taiping_Rebellion
Now if you're talking about people with investments in EUR who could switch that over to USD, well yeah, the exchange rate doesn't seem to have crashed. Hm, can you short a currency somehow?
With all the doom and gloom about the Euro, why hasn't it crashed against other currencies?
What effect would a breakup of the Euro zone actually have on the Euro?
...can you short a currency somehow?
(1) this does not apply to buying options.
Check out Proshares UltraShort Euro http://www.proshares.com/funds/euo.html
To wit: YTD EUR/USD is down .2% and that ETF is down 5%.
I agree that once everyone starts doing it there isn't a point, but now...geezz..I don't see what you have to lose.
Anyway if the Euro problems get solved, you would probably lose at least 10-15% of your assets. Of course maybe such an "insurance" is worth it, but it is by no means an easy decision.
However, the euro is down about 8% since June, so it's safe to say there's been a fair bit of selling.
http://globaleconomicanalysis.blogspot.com/2010/02/capital-f...
The problem is the perception of a problem and that leads to higher bond yields and that is what leads to this real problem.
I'm not a conspiracy theorist, but it seems the timing of the downgrades of Greece, Portual, and Spain by US rating agency was quite perfect to cause exactly this effect. It seems at least "dubious".
No, there is a real problem, which is the eurozone is a monetary union without a fiscal union. It's fundamentally unstable, something that can only work in good economic times. One of two things is going to have to happen to align fiscal and monetary boundaries - either national currencies will be reintroduced or fiscal policy will have to be aligned for the entire eurozone.
The problem is the cost of financing debt. That cost is high because the risk of the investment is (perceived) high.
Eh, that's semantics. The risk is high. None of these countries can afford the slightest rise in interest rates, whether that rise is associated with a loss of confidence or because there are better places to put money.
That's what the Maastricht treaty was supposed to prevent. But that was a pipe dream because there's no way for the union to keep the spendthrifts in line.
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if the ECB prints to bailout the PIIGs, it'll cause hyperinflation, and the disparity between the 99% and 1% will widen.
Already the drums of war are beating for Syria (a proxy for Iranian war, and control of the oilfieds around the Strait of Hormuz) to distract the masses from the inevitability of economic collapse, whether it be in the short, or medium run.
#occupyWallStreet is the shapes of things to come.
EDIT: The UK is only partially a member of the Schengen zone.
Also, EU Directive 2004/38/EC is not the same as Schengen and unlike Schengen is virtually unimplemented in full in any country, especially in the UK.
Border control is a very politically contentious topic in the UK. So, changes and implementations that attempt to erode borders generally fail, whether upfront or in practice (even if it is illegal according to EU laws such as the directive above).