Euro war games shape financial strategy


On 13-14 September about 100+ movers and shakers took part in a conference and "war game" organised by the Breughel think tank, modelling solutions to the euro crisis. I am reliably informed this was not just a "what if?" but has - given the result - influenced crisis management in the non-war game world of Washington DC.

The full document is here. But the summary is: they saved the euro. Here's how.

In the war game the EU/IMF decided to expand the European Financial Stability Facility (EFSF) to between $3 trillion (£1.9tn; 2.2tn euros) and $5 trillion (£3.2tn ; 3.7tn euros). This was done by leveraging the 440bn euros supplied under the EFSF legislation going through European parliaments this week, plus match funding from the IMF. And by the ECB issuing "collateralised finance".

That is, by pledging around 700bn euros, they borrowed up to $5tn and then lent it to European banks and countries, starting with Greece. They got the money by mortgaging the assets of Europe basically, because $5tn is a lot. They mortgaged the EFSF money, and then the ECB borrowed money against the future tax revenues of Europe.

There were two interesting outcomes:

1. They saved the euro. Greece, Ireland et al stayed inside, now protected forever - certainly for the lifetime of the participants, who were mainly on the upside of 35 - by the wedge of money conjured from thin air.

2. It didn't solve the structural problems facing the periphery - but simply gave them more time to sort it out.

An account of the game reports: "The large new lending facility was seen by some players as free money for errant countries without sufficient conditionality."

This Breughel document is doing the rounds in Washington DC, and contains an uncanny blueprint for what might now be about to happen. However the term "war game" always summons up a defensive reaction in me. Not because I am against them: I am a bit of an addict. But they can be deceptive.

The Soviet high command shot and imprisoned staff officers who, between 1938 and 1941, argued that war game evidence suggested a mobile defence against a German blitzkrieg would be necessary. They relentlessly shaped the war game evidence towards the USSR's swift victory in a WW1-style "war of position". They did this by ignoring key facts.

Now, call me cynical but assembling 50 well-heeled types at Chateau Les Fontaines in Chantilly might not have given us the best hands-on understanding of how the actual people of Europe might take the issuing of $5tn of free money to once again save the banks.

Viz: the Germans and Finns might revolt against it, the Greek workers might take it and run with it, and Europe's trade partners/rivals might see it as a tad in breach of every global rule on the planet.

It was of course, Breughel the elder who painted this.

Paul Mason, Economics editor, Newsnight Article written by Paul Mason Paul Mason Former economics editor, Newsnight

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    Comment number 1.

    As we are talking war games is this analogous to an army telling the enemy that we have the most destructive howitzer ever but it cannot really be used i.e. bought off plan!. Surely most will see through this as a device to save the Euro without the taxpayers seeing that there is the most enormous potential liability that they have unknowingly signed up to. It is the blind leading the blindfolded

  • rate this

    Comment number 2.

    ' I am reliably informed..'


    On recent evidence, a notion that has about the value of the latest guess at the latest Euro rescue plan.

  • rate this

    Comment number 3.

    hmmmm Mdm Legarde is certainly making the right noises to support your analysis.

    They do not know how to do anything else, it is an academic response which only works within the context of a flawed model and their existing flawed deeply engrained belief systems they are trapped within.

    'sustainable growth' is an oxymoron and makes a nonsence of all their theories, models, policy and actions.

  • rate this

    Comment number 4.

    #3 cont

    They claim the academic high ground but trying to have a discussion about the simple truth wrt growth with the ruling economic elite is like trying to have a debate with a creationist about the evidence in the geological record.

    They sense the danger to their life long belief system immediately and actively their egos block it out for fear of being exposed as fools in public.

  • rate this

    Comment number 5.

    #4 cont

    The link to Breughel is only partly appropriate, we are being led by ego driven fools in denial of their own foolishness but, unlike Breughels example, they have all the instruments of power and influence at their disposal to protect their foolishness from exposure at the expense of the wellbeing of billions.


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