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A Time for Calm/Panic [delete as applicable]

Stephanie Flanders | 13:09 UK time, Friday, 21 May 2010

Should international investors worry less about the euro?

The voice for calm would say yes. True, financial markets have been spooked this week by aggressive German rhetoric - and action - against speculators. But it's hardly news that European governments want to rein in the financial system in key respects over the next few years. And, as yesterday's key US Senate vote confirmed, the Europeans aren't the only ones.

Look through the German rhetoric - the voice for calm would say - and you see the key player in the eurozone drama demonstrating that it is willing to put the future of the single currency before pretty much anything else.

The 440bn-euro special stabilisation mechanism for the euro has won support today in the German parliament.

Now assume that Eurozone finance ministers is able to give the markets enough details about that special vehicle for bailing out eurozone governments in the next week or two that investors can start to believe it really exists.

(OK, so the Eurogroup meeting to sign off on the details was cancelled today - because they, er, didn't have enough details to sign off. But assume they get their act together fairly soon.)

Assume - in other words - that the key pieces of the extraordinary support package for the euro agreed just under two weeks ago are soon in place. Then, in the short term at least, it's not clear why global investors need to worry a lot about the euro.

The Greek support programme means that the Greek government won't need to borrow money from the markets for well over two years. Markets can fret about them defaulting or restructuring their debt after that, but those doubts need not have much effect on Greece itself.

Likewise, if you were worried about Portuguese, Greek or Spanish debt sitting on bank balance sheets that they might find hard to sell - in theory, you don't have to worry about that any more. The banks have a buyer of last resort in the form of the ECB.

And if you're worried about other governments getting into trouble - well, there's a 750bn-euro support programme (the eurozone money plus the money from the EU and the IMF) as a third lind of defence.

With all these fortifications in place, it's difficult to see how you would get the kind of panic in the inter-bank markets which so rocked world markets in 2008 - and which we got another whiff of in the lead-up to those momentous negotiations earlier in the month.

Here endeth the lesson from the voice of calm. But, as I've been saying since the Greek crisis first began, all of this still leaves the central problem at the heart of the euro's troubles - which all of these frantic negotiations have not even started to resolve.

I write this from Brussels. Today's special taskforce meeting of European finance ministers is supposed to look at how governments could better co-ordinate their policies in the future - in effect, how the eurozone could behave more like a single currency area and less like a group of divergent states.

As we know, Germany is most focussed on the fiscal piece of this - tougher controls on national budgets. That is top of the agenda this afternoon. But I'm at a briefing by senior Commission staff involved with the meeting, and they say that "national competitiveness issues" - and "internal imbalances" - will also be discussed.

That's code for the fact that Germany and the Netherlands, in effect, have been playing China all these years while Portugal and the rest have played the role of the US. In other words: those North European powerhouses have been running up huge trade surpluses, while the Southern Europeans have run bigger and bigger trade deficits.

Whenever Germany tells you how much the Greeks are costing them, remember this: German exports to Greece have risen by 133% since the single currency started. Greek exports to Germany have risen by 13%. The resulting trade gap between the two countries is one reason why German banks are now sitting on so much Greek debt.

Portugal's current account gap was nearly 10% in 2009, only just below the Greek one. The Spanish current deficit was 5.3% of GDP.

These gaps have been hiding in plain view for years. But for all the talk about convergence, and "growth and stability", the Commission - and the leading eurozone governments - decided to turn a blind eye. The argument was that these deficits didn't matter - because they were caused by private-sector borrowing, not governments.

This is what Lord Lawson said in the late-1980s boom, when asked whether we should we be worried about Britain's gaping current account gap. It's also what Thailand said in the late 1990s. They were wrong. And so was the European Commission.

In the end, these imbalances always come home to roost - the private-sector bubble that was causing them bursts, and one way or another the borrowing is shifted onto the public sector. And governments have to do a lot of painful things to bring it down.

In Britain's case, and Thailand's, devaluation was the route back to competitiveness for the private-sector economy. As we know, that route is not open to the likes of Spain. And if Germany won't allow German inflation to rise above 2% (which it won't), these countries will need years of falling prices - and possibly shrinking nominal GDP - to climb their way out.

Germany is very much in favour of this kind of "convergence plan". It is not interested in making it easier - through higher German inflation, or higher German domestic demand, or higher German public borrowing.

So - with the best will in the world - this "better co-ordination process" being discussed today looks set to be an exercise in co-ordinated drudgery for large parts of the eurozone. And there will be another large part of the global economy looking to the rest of the world to provide its growth.

That is a pretty nightmarish scenario for the voice of panic to focus on.

The received wisdom, of the calming variety - says that even if it's bad, it's a slow-burn. There's no reason to panic today. But, looking at the market movements of the past few weeks, I'm not so sure.

Even if markets are not as efficient as the boom-time economic theorising proclaimed, they do have a way of turning bad news tomorrow into bad news today.

As we discovered yesterday, fears of a double-dip recession in the US have not entirely gone away, even if they are greatly reduced.

For many investors, the prospect of there being little or no European domestic demand to fuel US growth is not a pleasing one.

Slower future growth in the eurozone also means lower European stock prices today. And that is if the citizens of these countries actually allow the drudgery scenario to unfold. Investors might well start to wonder whether people will.

Remember that the grand stabilisation mechanism will offer no comfort to governments in search of an easier life. The whole idea of this mechanism, we are frequently and openly told, is that the conditions for getting the money will be so tough, no country will ever want to come to it for help.

It's true that Japan has gone through well over a decade of meagre, export-driven growth and falling prices - without riots, and without revolution. Maybe some version of that future is politically do-able for southern countries of the eurozone.

As I reported in early April, Ireland has taken its deflationary medicine surprisingly well. But I'm not sure that Spain and Portugal remind me of Japan.

I think I still believe in the voice of calm. But I find myself hoping that, this time, the markets are as short-termist as the critics suggest. If investors start to think too hard about the long-term picture for the eurozone, we could be in for some very bumpy times indeed.


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  • Comment number 1.

    Germany's calm words are kaput!

    'Perfect storm' as market tremors hit China, Europe and the US

  • Comment number 2.

    Question is why has the FTSE dropped like a dead weight this week? Could it have been that people have cottoned on to the fact we had a new bubble caused by QE and cheap money post Credit Crunch?

    Anyopne got any info on where investors are sending theirn cash? if they are selling out of the stockmarkets and avoiding sovreign debt in the eurozone, what are they investing in?

  • Comment number 3.

    The Eurozone cannot continue in it's current format, as the bail out merely postpones resolution of the underlying cause

    Germany will not make a move in either direction decisively, and is consequently complicating it

    Thank goodness we weren't stupid enough to join

  • Comment number 4.

    The banks and investment firms are trying to prevent any new rule making that might protect depositors and investors. Banking became too powerful and un-regulated and we all live with the results. Governments need to regain control of their economies and not let bankers dictate economic policies. Power is always taken away and never just given up. Banks have grown more powerful than governments and as bad as the performance of the elected has been it is still something that people can change and that is not something they can do about Bank Boards and CEO's.

  • Comment number 5.

    The problem with the US, UK and most of Europe, is governments spending more than they are earning.

    You can't build up government debt forever, but if they withdraw the stimulus all of these economies will plunge back into double dip recessions.

    The popular idea is that government spending for a short time could cause a recovery in private demand to "take root". I don't buy it.

    The UK has about a 12% budget deficit. Government is about 50% of the economy, so that is roughly 6% of total GDP being unsustainable government borrowing. So JUST TO REPLACE THAT we need 6% growth in overall GDP, which is 12% growth in the private sector.

    Anyone out there in the provate sector expecting their wages, turnover, profit etc to jump up 12%?

    Double dip it is, then.

  • Comment number 6.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 7.

    'Should international investors worry less about the euro?'

    Answer=No, because it's just a fiat currency.

    Should they worry about how much of it may be created from nothing in the near future?


    Why do I answer yes, because of my own experience of QE in the UK.

  • Comment number 8.

    "Today's special taskforce meeting of European finance ministers is supposed to look at how governments could better co-ordinate their policies in the future"

    Special taskforce? - don't make me laugh, is it VATman and Robbin? Duperman? Spiverman and of course Blunder woman?

    Lets set a few things straight shall we Stephanie?

    First of all the ability for the pound to devalue does not put us in a 'better position' than the Euro countries - I realise the media are all convinced that devaluation is a solution, but in an economy which is heavily reliant on an imported good (oil) this is a disaster waiting to happen.

    Secondly, you have mentioned (again) the relative deficits of the PIIGS and the UK, but what about private debt levels? Spains national debt was never a real problem, it had a reasonably low deficit and a low overall debt. Their problem - like ours - is one of private debt.

    Private debt created by the banks and then handed to the Government when it all went sour.
    Private debt of individuals who are teetering on the edge of bankruptcy, a fear so great that Governments around the world are keeping rates at an 'almost free' level because they know the smallest rise in rates will start the cards collapsing.

    In a world with no private sector demand, and rising unemployment which will hamper growth for years to come - the only place that can provide demand is the public sector. The same public sector which all nations are about to cut down to size following the insane baying of the greedy who think their monetary burden needs to be shared amongst us all.

    "As I reported in early April, Ireland has taken its deflationary medicine surprisingly well. But I'm not sure that Spain and Portugal remind me of Japan."

    ..and as I reported - the Irish are still in recession and just bailed their banks out for a second time - is that 'taking it well'?

    If I were you I might want to consider carefully the idea that markets won't panic - I think we lost 15% this week and the FTSE is below 5000 for the first time since the 'last' or 'current' crisis - depending on your viewpoint and desperation.

    P.s. Japan's lack of 'riots' was due to their devaluation occuring over a long period, tempered by the domestic savings attitude allowing the Government to sell their increasing debt domestically. However that has all changed and the new generation like to spend-spend-spend which is why their dire situation is getting worse by the day. It took 10 years for Japan to decline - Greece are doing it in 10 months - go figure why there are riots!

  • Comment number 9.

    Good to see that the BBC remains consistent and continues to peddle the line that Germany is bailing out Greece. Germany (or rather German taxpayers) are bailing out German and French banks. Why is this truth so difficult to understand and report.

    Here is a real economist, telling how it really is:

    Why postulate about a US double dip recession? It has never emerged from recession. Look at U6 unemployment, look at food stamp reliance, look at foreclosure rates. Why bother? Let´s just look at retail spending which is up. Why is it up? Because people have voluntarily stopped paying off their mortgages in order to buy other things. Look at the remarkable correlation between the two numbers. Ah GDP is up - but by a lot less than the amount of "stimulus"

    So Spain needs "years of falling prices - and possibly shrinking nominal GDP" Yes. It actually needs something over 30% of either price falls or productivity improvements. It self evidently cannot improve productivity by 30% (or probably by anything worth measuring). That leaves price falls. What happens to BBVA, Banco Santander and the Cajas in such a scenario. Will this be more "unforeseen" and "surprising" news?

    If the Spanish do not resist the imposition of these mad policies then pretty soon it will seem like life under Franco was one long boom.

  • Comment number 10.

    Should international investors worry less about the euro?
    The German action against speculators was taken with keen financial foresight, and I applaud the bold decision of Angela Merkel.
    As the “financial reform/regulation” poured out the Rose Garden yesterday, the US doesn't appear particularly eager to slap control on its derivatives, credit default sawps or betting against the soverign debt of other countries. The American bill is a pretty bill; it was prettyly presented by Obama – but it is a listless piece of almost worthless paper.
    I admire the planning of the EU; I admire its methodology in taking apart the European economies in order to reveal the cancerous derivative undergrowth, the negative betting against the soverignty of countries like Greece, Portual and Spain. I admire Germany for being the first country to shut out gambling in the name of "trading".
    As you yourself state, look at the mechanism that the EU has helped Greece but in place to delay borrowing from the markets. As for the Markets let them eat cake while Greece bides her time - auditing, restructuring its debt, getting financially fit. Greece is in good hands; they are no longer the hands of Goldman-Sachs and its ilk.
    All the STUPID-PIIGS now have a consistent and ready buyer of last resort = ECB. This is reform! This is economic wisdom...
    I’ve been hearing news that the Markets are falling because of worries about the Euro. Maybe at most the worry about the Euro is like 10%. The rest of the worry is about American derivatives, credit default swaps and Europe slipping away from the yesteryears' mega financial stars like Goldman Sachs and J.P. Morgan - and all of these hedging, short-selling, gambling companies that played fast and loose on the verge of decency, if not illegally.
    I’m all for economic conformity in the EU; I’m all for centralized econmic control.
    Yes, Europe, you will be okay.
    The countries without tight financial regulation, the coutnries unwilling to reform, if you look closzely, you will see they are beginning to circle the drain.
    I believe we will see much, much more from Brussels at the G20, but we are not likely to hear any of the words over the yelling and the screaming of the United States of America.

  • Comment number 11.

    In the long term, there is no alternative to the German concept of keeping inflation at bay and living within your means (i.e. don't encourage your citizens to buy stuff they can't afford on credit in order to have a consumer-growth based economy).

    I think plenty of people in Ireland will go along with this as we still remember the years of crazy inflation and high interest rates in the 1970s/80s and have just had a lesson in the unsustainability of the "increase consumption" economic model (a lot of people stuck with the debts).

    I mean really, what do people think the alternative is? Deflation of independent currencies would simply have allowed southern European countries (and Ireland) to go on avoiding tackling the fundamental issues in their economies (or in the case of Ireland, fixing the tax base sabotaged in the boom years).

  • Comment number 12.

    Stephanie: In the end, these imbalances always come home to roost

    Thanks Stephanie,
    Nice to read the only economic truth that is as certain as 'what goes up, must come down'.
    Thanks for putting it in black and white.

  • Comment number 13.

    The thing is, I don't believe that the main driver of the markets is panic. I think that the main driver is greedy people seeing an opportunity to make money out of the opportunity presented by incompetent governments allowing their fiscal and economic policy to diverge from the stated aims, objectives and targets of the Euro "club". Thus, we have major market makers taking positions against the Euro, which benefits them at the expense of the disadvantaged South European populations who will now pay for electing such crap governments in the past - as we will have to pay here in the UK.
    Its just like George Soros forcing us out of the ERM back in '92, except that this time I predict certain currencies will re-appear as their country is "pruned" out of the Euro to preserve the healthier core. Look out for New Drachmas, Escudos and Pesetas to appear to allow what is really needed - a currency devaluation.
    (Incidentally I don't buy the idea that most of our problems are down to the banks alone - the problem with the banks happened under the less than watchful eye of a complacent G. Brown, who could have listened to the warnings and stepped in to avert the crisis before it happened if he had been so minded)
    Additionally I believe that "instant trading" is a major cause - I'd like to see a sliding scale of tax on the profits these traders make, where the slope of the slide is defined by the length of time they've held a specific vehicle. Naked short selling and short selling would still be possible, but the punitive levels of tax would make them far less attractive.
    Short termism and market volatility have got far worse since computers were able to buy and sell within milliseconds. It really ought to stop.

  • Comment number 14.

    We need a change of mind-set. Long-term trade defecits and long-term trade surpluses are both equally bad for the world economy. Germany is just as guilty as Greece.

    Rather than just castigating the Greeks for being irresponsible and profligate, we should also castigate the Germans for being hoarders and misers.

    Here's a suggestion. How about introducing an export tariff on any Euro member state that persistantly runs up a surplus - then using the money from the tariff to save the rainforests or something. That way the PIGS become competative again, the Germans can continue feeling superior, and the rainforests get saved.

  • Comment number 15.

    Gosh this Euro panic is hilarious! Do these "investors" have SO little to do, that all they have to worry about is to Take Flight or Take Fright?

    Even sadder than the investors, are the entire profession of Economists whom have focussed so heavily on international "capital markets" as being the only area of Economics worthy of scrutiny.

    What ever happened to the day when Economists used to worry about whether there was enough food for people to eat, or whether there would be too many people for the food that there is?

    I am not impressed with the Tim Harfords, the Evan Davies', the Robert Pestons or the Stephanie Flanders, and they are the better journalists in this "discipline", let alone the Mervyn Kings or the bastions of dime-a-dozen Economics-educated Unskilled Spare Wheels that are working in the Accountancy, Business, Corporate areas, etc. (Who calls a street-sweeper unskilled labour? I define unskilled labour as people who get jobs in the IMF).

    So the Euro might fail. As IF we didn't know that even in 2001. There has been NINE years to build in safeguards and changes. There should be a whole future of thousands of years ahead to DO safeguards and changes, provided that humanity does not destroy the planet by short-sighted Resource-hungry Economic Management.

    I would tell these "investors" this:

    - go get a life. If you suddenly notice that you haven't got one, then read my posts for future advice.

  • Comment number 16.

    stephanie cocnluded:
    "I think I still believe in the voice of calm. But I find myself hoping that, this time, the markets are as short-termist as the critics suggest. if investors start to think too hard about the long-term picture for the eurozone, we could be in for some very bumpy times indeed."

    Agreed, but eurizone also includes sterling.

    Nobody has yet taken on board the debt levels in both the public and private sector - my computation (see earlier posts) suggests that in the UK every working person has £100,000 extra debt. This has to be de-leveraged or deflated for the economy to genuinely recover.

    The Bank of England's policy of engineering another huge housing bubble is going in absolutely the wrong direction - further: money must regain value, by being priced to reflect that it is a scarce resource that should be used with care and thought - not, as it is at present, as a worthless and free pile of junk!

  • Comment number 17.

    Some people just don't seem to get it. The Euro is through, finished, kaput. The European Project has failed, it's over. The EU itself may be over. In Brussels, they haven't given up on the latest grandiose megalomaniacal plan to unite Europe, the most recent one with a history stretching back to Stalin, Hitler, Napoleon, Caesar, and Alexander the Great. All have come to nothing as has this one. They are ready to throw whatever money they have left into the bottomless pit they dug to try to save the unsaveable. Typically irrational European mentality does not know when to give up, when a cause is hopeless. Instead of planning how to save the Euro, they should be planning on how to wind it down and devolve back to individual currencies with the least necessary chaos. But in typical European fashion, not only don't they have details of the plan they are working on, they are still scheming at the wrong plan. When the roof finally caves in, what will they do, "wing it" the way they always do? In all likelihood yes and that will only compounde the chaos, mutliply the misery. What will the PIIGS do when they find out that not only is there no baiout for them from the IMF now that the United States Senate has voted 94-0 against it, but that even France is balking against a European bailout. When the reality hits home, there will be general strkes, rioting, voilence in the streets. And when Germany and France can no longer export to Greece, Portugal, and Italy because their banks won't put up the money to finance their purchases, those economies will falter, stumble, and be a shambles as well. Europe is finished. The ship will not be sailing into port, it has crashed and been smashed on the rocks of a Mount Everest of debt, its crew having sailed a course that ignored the lesson of experience that a socialist welfare society is not economically viable in the long term no matter how large it is.

  • Comment number 18.

    If "the markets" are anything like me they're wondering where, at the end of the day, are these trillions of euros actually coming from?

    It's all very well talking about the ECB as the lender of last resort + "eurozone money" + "money from the EU" + "money from the IMF" ... but where the hell is all this money actually? In banks? I thought they were bust and, er, being propped up by sovereign states (who themselves are bust?). In taxpayers' pockets? Taxpayers are broke, if they're anything like me ... tapping in to my savings now to stay solvent.

    The whole thing sounds crackers. Surely, we're all just kidding ourselves here? Pretty soon now, more and more individuals, businesses, banks and states are either going to have to repay their debts, or go bust. Conjuring up squillions of dollars/euros/pounds from nowhere and saying that everything should be OK as a result is doing my head in (especially when the guys putting the details together, er, don't have the details to hand ... funny that).

    I think we just have to face up to a Great Unwinding From Debt era. We need to acknowledge that we've been living way beyond our means, probably for decades, and that the day of reckoning has now all but arrived. I fail to see how we're going to get through this without a certain degree of social unrest.

    No wonder the FTSE's just crashed through 5000. There's more b******t flying around these days than you'll find in the Plaza de Toros Las Ventas.

  • Comment number 19.

    Should we be calm or panic?

    It is my understanding that all government financial plans around the world are dependent/based on growth over the next few years.

    Stephanie - is it possible for you to provide some sensitivity analysis on what would happen if the second half of the double dip arrives and the world economy shrinks by 5% in the next twelve months?

    Hmmmmmm - doesn't look good eh? So what is plan B???


  • Comment number 20.

    I can understand how it is that when you are in Brussels you can get caught up in the EU rhetoric where pan Europeanism isn't just a dream, it's an industry. Maybe you have to be at some distance to see the forest for the trees and notice that the flames are in many places and that the forest is burning down, but sooner or later you should at least smell the smoke and feel the heat. It's on its way. There's no way to put it out. Throwing good money after bad when those who will receive it have already demonstrated they will only throw it away just as they have in the past because they don't know any other way is merely pouring gasoline on the conflagration.

  • Comment number 21.

    ....meanwhile - back in medialand

    "FTSE Falls below 5000 due to Euro crisis"

    ...nothing to do with the stock market bubble building up since 2009 which went unchecked by all these 'concerned Goverments'.

    Nothing to do with ultra-low savings rates forcing people to gamble their savings in the stock market or the housing market in a vain attempt to keep their hopes up of a pensionable retirement.

    Nothing to do with the mark to fantasy accounting rules being applied to assets which give a false impression of value in the stock market.

    Nothing to do with dividends being supplied directly from the taxpayer to promote a false image of heatlh and wealth in the Economy., none of those, it was all down to some badly behaved Europeans who didn't want to pay their bills.

    Interestingly the rats (sic) are beginning to leave the ship and telling us why on they way out - doesn't this concern anyone?

    Andrew Roberts, credit strategist at RBS, fears a 'perfect storm' for the world economy as the US recovery falters, the Chinese introduce credit curbs and Europe's debt crisis escalates.

    He said "Great Depression II" could now be approaching, adding: "It now has potential to speed toward its conclusion; a European $1trn package which does little and political panic tells you we are about to reach the end of the road. The world should be discussing deflation, not inflation."

    I don't agree that the worry is deflation - not when the worlds Governments are intent on following inflationary policies to ensure that doesn't happen. However who cares really - disaster is disaster whether it's an explosion or an implosion.

  • Comment number 22.

    It's a shame they didn't think of this in the first place isn't it

  • Comment number 23.

    Interesting, Stephanie
    Both your case for Calm and for Panic appear premised on the survival of the Eurozone / EU in its present form with no defaults.If I were an investor, wouldnt I be looking at a new alternative where a new smaller hardcore Federalist German-led eurozone group emerges with others disengaging and leaving the euro.

  • Comment number 24.

    A recovery in the U.S. will be slow, judging by the latest unemployment figures. And if you look at unemployment figure in Spain - it's twice as high as in the U.S. (20%).

    So here's you answer about a justification for an optimism.

  • Comment number 25.

    The Euro zone is the equivalent to a fixed exchange rate system but without the ability of a country to break out and devalue.

    As with all fixed currency systems there is a major problem when some countries have a different inflation rate, wage inflation rate etc then others. There has been a drift in competitiveness such that Southern Europe is now substantially less competitive than northern Europe. In a floating rate system that pressure is dealt with by devaluation, in a fixed exchange system (for example USA) the obvious way to deal with it is much greater movement of labour. The works in the USA with a common language and traditions but clearly does not work as well in Europe. This is the flaw in the Euro zone

  • Comment number 26.

    3. At 1:41pm on 21 May 2010, Kevinb wrote:

    "Thank goodness we weren't stupid enough to join"

    Is this where you get the ideas for your posts from?

    The failure you see all around is one of Capitalism, not of the Euro. You will notice that all previous Governments have supported Capitalism, and it matters not whether we have a common currency or not.

    Still, what do I know - I'm just a Marxist who can be safely ignored - right?
    What a shame I am right more often than wrong - doesn't bode well for the future does it?

  • Comment number 27.

    14. At 2:32pm on 21 May 2010, random_thought wrote:
    We need a change of mind-set. Long-term trade defecits and long-term trade surpluses are both equally bad for the world economy. Germany is just as guilty as Greece.
    Rather than just castigating the Greeks for being irresponsible and profligate, we should also castigate the Germans for being hoarders and misers.
    How does the view of surpluses being bad in the long term be seen with regard to the need to save in good times ready for bad?

  • Comment number 28.

    Isn't it a devil that all the Euros are in one market? The single currency was always going to be open to the domino effect. The massive debt is Europe-wide and umours abound regarding member states leaving its currency. Good scheme - individual states should have retained their own monetary systems. Countries like Greece and rely almost totally on tourism - not the best investment from outside but it was ticking along nicely under the drachma Getting involved in massive infrastructure borrowing without a manufacturing base is folly.

  • Comment number 29.

    Were you to take your comparison of Germany with China, and Greece with America, you'd find that as long as cheap deficit financing is available alongside a pegged exchange rate, it all descends to controlling costs of manufacture.

    Here's where I'd like to point out, that the Thais went bust primarily because they borrowed in dollars to finance domestic assets, which invariably lead to a highly leveraged and inflated asset market. They had to devalue eventually or break the bank, when investors pulled out. Britain was in a similar situation, operating within the ERM they had to support the exchange rate after the dissolution of the gold standard. At the end of the day, it was about the operating costs and competitiveness both in their exports and their domestic markets.

    Pairing these two concepts, I do not think the EU is going in the same direction. They do not operate on a pegged currency, they trade on the same currency and borrow on the same currency. Problem here is that when times are good Greece borrows cheaper that it should be allowed to, and when times are bad they have cut all spending. Second, deficit financing is internal, they're borrowing against a German spread, and competing against German operating costs. As buttonwood, from the economist, put it, Germany is the "gold standard".

    Risking being ridiculed by the armies of eurosceptics here, I see three possible solutions to this mess. First, a complete dissolution into the ERM. Second, a selective dissolution in an ERM; core countries with similar growth rates and fiscal propensities maintain a common currency, whereas the Greeces and Portugals are lead onto a somewhat forgiving ERM. They should be allowed to devalue. Third, produce a monitory union, and stop whining about 'federal' bail outs and ECB being the buyer of last resort.

  • Comment number 30.

    "In the end, these imbalances always come home to roost - the private-sector bubble that was causing them bursts, and one way or another the borrowing is shifted onto the public sector."

    Absolutely true. Indeed this is not only true for international trade imbalances, but also for internal wealth/income imbalances. One part of the system saving more and more while the other part of the system borrows more and more - it's completely unsustainable. But if the borrowers (be that individuals or states) stop borrowing then the economy collapses. The only way out is to stop the savers saving at the same time as stopping the borrowers borrowing. The savers need to either spend more, earn less or have their savings taken away (through taxes/tariffs). They may complain that it's unfair - but there's no other way.

  • Comment number 31.

    There's a man running around shouting 'don't panic, don't panic'. So the sell off is going calmly.

  • Comment number 32.

    10. Bluesberry

    Dear Mr. Bluesberry,

    Thank you for your thoughtful, respectful and refreshing EU standpoint. It's a welcome change from the tiring and self-righteous eurosceptic stances so common in this blog.

    Yours sincerely.
    A European.

  • Comment number 33.

    2. At 1:36pm on 21 May 2010, Anand wrote:

    'Anyopne got any info on where investors are sending theirn cash? if they are selling out of the stockmarkets and avoiding sovreign debt in the eurozone, what are they investing in?'



    Germany's 'desperate' short ban triggers capital flight to Switzerland

    Has anyone else played Pacman on the front page of Google's website?

  • Comment number 34.

    Having bailed out the banks (to avoid social disintegration) Europe is now faced with bailing our governments. However, important to rememeber that this bailout will do very little for Europe, insofar as it is NOT a stimulus package; simply a route to avoid government default. The banking crisis has already limited pulling one traditional lever for stimulus (relaxing credit), and now, due to this bailout scheme, Euro governments have now closed off another possible route (because they don't have any more money). It's like watching a man saw a branch off a tree when he's sitting on the far end....

    Governments need to cut the deficits, through the elimination of waste and the sacrifice of things we can't afford and don't need, and also to try as far as possible to cut taxes: and quickly. We would do well to remember though what has brought us here: years of squandering of taxpayers' money and capital misallocation by third raters in our governments, under the fantasy that the economic cycle had been eradicated (not an "Enron Chancellor", but "Enron Government"?). The UK has a get out of jail card, in the form of sterling, independence on interest rates, and, paradoxically, a hugely bloated state sector which can be cut. Success or failure on the next few years will come down to which government has the guts to act properly....

  • Comment number 35.

    #17 MarcusAurelius11. Yep, you seem to understand the prognosis for Europe. The problem is that Europe is not a vacuum and its collapse will presage the final collapse - that of the US.

    So, it would seem that whilst your prognosis is correct your diagnosis concerning "socialist welfare" is someway wide of the mark, assuming of course you are not referring to the socialist welfare extended to Wall Street.

  • Comment number 36.

    17. Marcus.

    Marcus, you're being tedious yet again. Have you nothing new to say other than these same old tired anti-European sentiments?

    You really want crash and burn? It's coming your way matey, with your trillions of fruadulent Wall Street dollars about to be exposed for what they are: junk.

    Europe may be far from perfect, but Disneyland it ain't...

  • Comment number 37.

    #24 powermeerkat. I think you will find that US unemployment (U6 measure) is currently around 17%. This is the number that is most comparable with Spanish numbers.

    U6 is also the measure that most accurately measures unemployment. Ask why the media are so fixated on the much narrower U3 measure and why they never bother explaining the basis on which unemployed people are excluded from the U3 count.

  • Comment number 38.


    "This is the flaw in the Euro zone"

    THE flaw? One of the fatal flaws. The ERM didn't work very well either. George Soros reportedly took the Bank of England for one billion dollars in one night because of it. That's what happens when you give up your sovereignty. Any attempt to regain it even temporarily and partially can result in bad consequences when those who see it will be lost again can capitalize on that bet. Europia's Utopia has turned into catastrophia. I think Germans are starting to get claustrophobia from it.

  • Comment number 39.

    Why, when markets fall is the cause attributed to panic, and yet panic is never used to describe wild upswings?

    Try to understand the "markets" have been poisoned with a fatal dose of toxic debt, lies and fraud. They are trying to vomint this toxic concoction out of the system. But everytime they do someone stuffs more debt, lies and fraud down their throats. Imagine what would happen if you treated a violently ill drunk with a forced injestion of whiskey and and kebabs.

  • Comment number 40.

    It seems that a country like Germany which exports things which people both do not need and then borrow in order to purchase should not be surprised if they are then required to bail out the banks which lent to the people they persuaded to buy those goods in the first place. It demonstrates that a contraction of consumerism is required in the West. This leads me to think that Europe and the US are heading for the Japanese experience - there won't be any growth, we are being persuaded not to grow (ie cut back, save more)and we don't need it anyway. All governments can do is lessen the the rate at which we cut back, but in the end we are all heading for a reduction in consumerism. I fear the result is lots of unemployment and social unease which again we cannot afford. For companies, the only growth will be in areas where they can create shortages or dictate pricing. I reckon food will be one area where things get very expensive thanks to the monopoly of our supermarkets. I just cannot see where any growth will come from and without that economic thinking needs to change.

  • Comment number 41.

    I'm curious to know who with money is propping up the Euro. I can't imagine that any private investors including institutions are, the risk is just too great. My hunch is that central banks including America's are making a quiet coordinated effort to keep it from collapsing. These kinds of efforts can succeed for a time but in the end, they usually fail as the real market overwhelms even them. What they'd prefer to see if the Euro is going a lot lower is a gradual decline, not a precipitous fall. Markets hate uncertainty and would prefer to digest and absorb the news slowly. Personally I'd prefer that they get it over with and then start dealing with the aftermath, the sooner the better. Then we can see which way the world's economies will go in the aftermath.

  • Comment number 42.

    It is unfortunate that the 'hole' or 'shortfall' that is Greece's debt (or German banks' loans) is small enough for a 'bailout' to be credible.

    The only bailout that would work is if a rich country (for the sake of argument, Germany) gave the money to the poor country in return for a balanced budget. And this would only work if all the other poor countries were responsible enough not to jump on the band waggon.

    The hole will get bigger until a 'bailout' is not credible. Then what?

  • Comment number 43.

    Perfect Storm sums it up:

    1. Europe structurally indebted and, as Stephanie says, it's been an open secret for so long.
    2. The US with it's lost mojo, growing political schisms and hopeless mission to spend it's money on foreign wars rather than invest in it's future, especially it's infrastructure
    3. After all the talk of oil price pressure easing and alternative energy, we in the West STILL remain a hostage to Middle Eastern oil.
    4. A new form of Command Captalism as practised by China. It's only a matter of when, not if, they choke off our credit.
    5. India's grab for Western manufacturers and their less than egalitarian approach to their new employees.

    There will be a train wreck, but there will also be survivors. Germany will survive, the Nordic countries too but club med will be lost for a generation. The US can but fragment in the face of all this. The UK - I wonder which way we'll swing.

    If anyone knows please advise !

  • Comment number 44.

    Putting all Euro debts into one basket will no doubt 'leave enough over for a holiday or new car' and politicians will spend it propping up the dreadful false facade they have built up.

    Germany does what is best for Germany and is happy to stuff it to London. The new hedge fund rules will not help Greece etc. but will hurt the UK.

    Misrepresenting debt merging and naked partisan competition as 'stability' action is just another political lie from failing economies.

  • Comment number 45.

    26. At 3:57pm on 21 May 2010, writingsonthewall wrote:
    3. At 1:41pm on 21 May 2010, Kevinb wrote:

    "Thank goodness we weren't stupid enough to join"

    Is this where you get the ideas for your posts from?

    The failure you see all around is one of Capitalism, not of the Euro. You will notice that all previous Governments have supported Capitalism, and it matters not whether we have a common currency or not.

    Still, what do I know - I'm just a Marxist who can be safely ignored - right?
    What a shame I am right more often than wrong - doesn't bode well for the future does it?

    You are a bore, and as a Marxist you indeed have little to offer

  • Comment number 46.

    Is one of the reasons that Irish have taken their medicine 'suprisingly well' that (because of their history) the younger generation is quite happy to get just get up and leave?

    This is the other safety valve European economies have - open borders. The quickest way for Spain, Portugal, et al to shrink their economies as Germany requires is for their people to leave. Does Germany really want a massively incresed level of immigration?

    And what of the UK? If we are the only large country in the EU following a policy of increasing internal demand, are we going to end up buying everything and importing the entire populations of southern Europe to build a economy big enough to afford it?

    Imbalances can have very practical real consequences if left unchecked...

  • Comment number 47.

    Brilliant analysis, Stephanie. Thank you so much for your helpful insights.

    Politics is the art of the possible. It is impossible that the Greek debt crisis can be solved with the consent of the people of Greece. The Greek government has been running a Ponzi scheme. This time round, this wodge of money will keep the Ponzi scheme running. In a few years time more money will be needed - much more. And the cycle will continue until there is not enough money in the world to keep the Ponzi scheme running.

    So, Stephanie, since the current solution is unsustainable in the long term, we need a different possible solution. The only course of action I can see to preserve the euro as an ongoing entity is to throw the Greeks out. Let them have the Drachma back - suitably devalued. The Greek state will collapse. They will default on their bonds. But they will not bring the euro down.

    The only question is how to sling the Greeks out when there is no provision for doing so in any European treaty. It has to be done or the Ponzi scheme they run will consume us all.

  • Comment number 48.

    Stephanie you said:

    "The argument was that these deficits didn't matter - because they were caused by private-sector borrowing, not governments.

    This is what Lord Lawson said in the late-1980s boom, when asked whether we should we be worried about Britain's gaping current account gap. It's also what Thailand said in the late 1990s. They were wrong. And so was the European Commission."

    You're spot on; as I've posted before, at the heart of things, Greece's trade deficit did for it. Any going concern, that shows an ability to pay it's way in the future, will secure credit. The scary thing about the UK or the last 20 years is that we refused to believe this.

  • Comment number 49.

    While ALL eyes will be now transfixed onto what might happen to the Euro as a Currency, other Countries within the Eurozone are counting down the Days now when they will once again be returning to their former singular Currencies.

    Therefore, expect the Euro to finally CRASH within the next coming Days and Weeks -WHY?, well the Answer is now quite simple really, since other then a massive extention of expansion in Euros in circulation through using Quantitative Easing to address future issues of sharing - out the pain of the Total amount of money needed ie: as, already ear-marked to go in loans to Greece, their is many further unknown added amounts of money needed for future Loans to others such as Spain, Portugal and Italy etc: without any clear deficit reduction Plan worked out ahead across the Eurozone to prevent the Euro from falling against over major Currencies.

    It will become increasingly impossible for Germany to be able to take the major HIT for any future Short-Falls, and if any other Country such as France was to weight-up any fledging ideas that they to could save the Euro then they to will very quicking start to realise that there is NO Gold left at the end of the Eurozone rainbow.

    Investors, in the mean time will choose to re-invest more widely throughout the Asian Markets, as well as moving across to safe havens in Gold, while the Euro, Dollar and Sterling will be firmly locked into a Race for the Bottom, being a point where today no one knows where the basement floor is.

    This will end up with all major Countries seeking to protect their own Currencies, and future investments because they ALL have got to set about the Job of re-building their own HOME Economies, and this can only start to be done AFTER the Euro is wound up permanently, otherwise the issue will continue to be centred around onwards mounting Debts surrounding the Euro which will only add to the many Years now it will finally take to re-build any Fiscal confidence throughout every major World Trading/Currency Market place, whereby once more every singular World Currency can find its own level of Currency Trading without any inter-dependency upon another Country's Currency.

    What we can learn from this is, that the Euro was a good idea all the time every Country within the Euro was Fiscally Growing, but upon the down - side the Euro as a Currency acting as an Insurance Policy is not able to cope with any combined Eurozone mounting Debts.

    As the Old saying goe's - United we stand [ in: Growth ], but divided we fall [ with personal Debts ].

  • Comment number 50.

    And where do the French stand in all of this?
    Friends living in rural France tell me that prices are vastly increased, businesses will not take on workers because of the high social charges and the same businesses prefer payments in cash to avoid the tax system.
    With France's track record of only sticking to EU regulations when it suits them when is the truth going to come out about their true financial situation?

  • Comment number 51.

    hw #29;

    "Were you to take your comparison of Germany with China, and Greece with America..."

    There really is no comparison. Much of what China produces is made in facilities owned by American corporations and much of the profits from it are expatriated back to the US. The US government owes the government of China about 800 billion dollars or about 5% of America's GDP. The profits from American investments in China are probably more than that each and every year. China only keeps about 15 cents of every dollar of GDP produced within its borders. GDP is a very misleading number. The US keeps about 83%, Germany 82%, Greece about 54%. GNI is a much more accurate indicator of the economic strength of a nation than GDP. I'm disappointed Stephanie Flanders rarely if ever refers to its importance.

    Look at the GNI numbers and GNI vs GDP on the linked chart for more insight;

  • Comment number 52.

    The markets know only too well that the rescue package for Greece only buys time (and very little time at that) and does nothing whatsoever to help reduce the budget deficit of the Greece and other PIIGS in the EU. In fact the rescue package will enable Greece to accumulate even more debt that they cannot afford to repay.

    The logical course is for banks and institutions holding the soveriegn debt of the PIIGS to sell it to the ECB as soon as possible.

    I do wonder how many citizens of the Euro Zone now realise just what a millstone their leaders have landed them with their grand European project of an ever closer union and monetary union? Half the nations of the Euro Zone are having to drastically reduce expenditure to help reduce their budget deficits (without being able to call upon monetary measures to ease the pain) and the other half are having to bail out the big debtor nations at considerable cost to themselves by loaning them money that has little or no prospect of being repaid. Trying to keep Greece (and the other PIIGS) in the Euro Zone is like trying to keep the UK in the ERM in 1992: it will be another costly mistake that is doomed to fail.

    The Euro is turning into a great big disaster which reduces the living standards of all nations in the Euro Zone. I just hope the blame is apportioned where it belongs, namely the architects of an ever closer union and a single currency when it all comes crashing down.

  • Comment number 53.

    "In Britain's case, and Thailand's, devaluation was the route back to competitiveness for the private-sector economy."

    Is this Little Englander's Gospel not starting to sound a bit tired now?

    Not just because you (and Mervyn) keep repeating it, it is going to materialise…

    "Pound falls as UK trade deficit widens"

    "On Wednesday, the Bank of England governor, Mervyn King, said the UK's economy should shift its weight towards exports, rather than relying on domestic consumption."

    ... but his extremely wise and prescient predictions (again) failed to materialise

    "The much-needed rebalancing is not happening as quickly as we would have hoped, especially given the weakness in sterling."

    I seem to think that this rebalancing is a lot of wishful thinking. Not because of the cliché "Britain doesn't have anything to export anymore" but because:

    - A lot of what Britain exports are services, not extremely price sensitive I would have thought, and Britain already enjoys a hefty superavit in services anyway.

    - Just over half of Britain's trade in goods is with the EU, the vast majority (around 90%) with Eurozone countries. Which means two things: One if the Eurozone doesn't grow, Britain’s exports to the Eurozone won't either. Two, I cannot see what the big incentive is for intra Eurozone importers to switch from an Eurozone supplier to a British supplier (as that would imply currency exchange risk, lack of price transparency and currency conversion costs) just because the pound has devalued against the euro.

    Another possible contributor to this "rebalancing myth" that the dynamic duo Mervyn-Flanders keep going on about is foreign investment. I am not sure but it could well be that the glorious days of the UK absorbing the lion's share of direct foreign investment in Europe are over. One anecdotal trend that I keep seeing is companies relocating from the UK to Switzerland, apparently on tax grounds, but this seems to me to have increased since Switzerland joined Schengen in 2005. This makes Switzerland, as well as a lower tax base, a place at the heart of a borderless, truly free movement (not the British version) area of ca. 500m people.

    "Any business person looking outward to the Schengen market of 500,000[,000] consumers would be crazy to site his head office/sales centre/distribution centre in the UK. His staff would spend most of their time wrecking their productivity targets in disorganised queues waiting for the four available HM Revenue and Customs operatives in their fancy new uniforms to let them cross the "UK Border" – emblazoned on the wall behind them."

  • Comment number 54.

    #27 Kit Green "How does the view of surpluses being bad in the long term be seen with regard to the need to save in good times ready for bad?"

    Imagine what happens if you have increasing surpluses. If absolutely everyone were to start saving 10% of their income (say hiding it under the mattress), then you'd just have lost 10% of the money supply, which would be highly deflationary. If on the other hand one sector of society saves more and more while another sector borrows more and more then you don't get deflation but you do get an unsustainable debt build-up.

    I don't think the Germans are saving money with the intent that in a couple of years (or even in twenty years) they can all retire and go on a spending spree. Similarly the richest 2% of our population aren't saving with the intent of splurging everything they've got at some point in the future.

    Certainly, on an individual basis, it is sensible to save during a certain period of your life for your retirement - but when you sum up all the individuals of various ages within a country or within a particular sector of society, then you don't want the level of savings in that country/sector to be continually increasing, while other countries/sectors are getting further into debt.

  • Comment number 55.

    Basically the ECB/Fed is going to print up lots of euros/dollars and give them to the least creditworthy countries and the worst bankers. Makes perfect sense doesn't it / sarcasm off/

    We've all got into this problem by too much debt (don't call it credit) so pushing more debt is not going to fix it.

    Of course we are going to see demands for tighter economic & political integration/control because that's what bureaucrats do.

    There is no alternative to living within your means and the sooner we get to grips with this the better. We are just about broke so we should stop all foreign aid right now, today - no new technology required; forget this nonsense of ring fenced. Many other pet areas will also need to be scrapped no matter how loud the squeals.

  • Comment number 56.


    We will survive

    Maybe the celeb culture, text everyone every 5 mins, buy everything you want on credit, might have to take a back seat for a bit

    So it could be good all round

  • Comment number 57.

    Along with many others here I'm afraid the problem is not one of the symptom - Eurocrisis etc but one of the core human values underlying capitalist society.

    To sell anything other than necessity means you have to make people greedy or fearful. Greed fuels borrowings fuels the crisis. Consumerism fed by greed and fear means everyone is scared to face a drop in their standard of living. Why? Let's all take a drop in living standards. The more you have the more it should drop - not a flat percentage because 10% of not very much is an awful lot but 10% of £150k is a reduced investment portfolio. They are not the same.

    Get over the growth issue. Let's stick at a reasonable standard of living when we reach it. Let's pay properly for commodities imported from the developing world. It would gradually become fairer but only if the "poor" are looked after. As for everyone else go out and work hard, get a second job in your local if you need that third holiday every year. Too many people are sat around imagining they are doing something useful when they simply aren't.

    But when we do all have to cut back take pride in it! Be a happy frugal person and a happy grafter. And so long as you have your health and happiness and enough to keep you warm and well fed then never ever complain.

    Consumerist capitalism is on it's way out. We need something new. A big society for instance!

  • Comment number 58.

    Ms Flanders. I listen to all the voices – from stock markets the world over, financial commentators like yourself, Mr N Blythe, Mr R Peston and Mr M Clark from the mostly print media and I wonder. And then wonder some more.
    Where it not for these same voices alleged reactions in the so called “better times” for the Markets – it would be an easy call. But did we mend roofs whilst suns shone? Did we squirrel away reportedly vast profits – at least on paper – for the next rainy season or six? Did money men and women forgo their bonuses – which to some individual seemed more than enough to pay off a very very VERY small nation’s National Debt – all by itself?
    But I think because of what I believe the answers to those questions are – it all make me rather suspicious of Money Markets allegedly testing the EU’s resolves about the Euro in general and Greece in particular.
    I await more information.

  • Comment number 59.

    "The problem is that Europe is not a vacuum and its collapse will presage the final collapse - that of the US."

    That remains to be seen. Some American industries may suffer if the Euro collapses, especially those who export to Europe but I think on the whole America and Europe are competitors and that Europe's demise will be beneficial to America's economy. Contrary to European expectations that a very weak Euro will give them an advantage, Europe imports much that it needs from world markets where products are sold in US dollars such as energy, raw materials, and technology. The cost of these will become much higher for European manufacturers and they will be paying higher taxes as well to help foot the bill for the bailouts. There is also the possibility of social unrest in Europe, the result in substantially decreased buying power. Strikes to demand higher wages, a restoration of benefits could impact industrial production and deter foreign investment. We'll see if and when the time comes and the Euro does fall substantially. I'd still prefer to see it happen quickly rather than gradually. I don't like the drip drip drip of things because you never know when or where they will end.

  • Comment number 60.

    In the world of Creating Money as Debt to be repaid with both capital and interest, there are only three options:

    Default on the debt.
    Satisfying the debt, by the creation of more debt.
    Printing money to satisfy the debt.

    Everything so far points to either debt slavery for the masses or printing more money, which is the devaluation of the income and savings of the masses.

  • Comment number 61.

    Ms Flanders

    Great piece, that.

    I'd say the question is one of needing a voice of calm to change panic into concerted action. But it's not going to happen.
    1. The original architects of the EU built a tower of Babel on the premise that it wouldn't matter if people didn't understand each other's culture, economy, attitudes to credit, work ethic and politics - it would all be alright in the end. It clearly isn't.
    2. The EU has a systemic financial arrangement about as confusing, exceptional, loose and contradictory as it's possible to imagine...with the added ingredient of politicians interfering with it. It's a mess, and would take years (not months) to sort out - IF the political will was there to do it, and the hard-up citizenry were prepared to buy into it. I think this very doubtful.
    3. Ultimately, given an appalling outlook for taxes, benefits, consumption levels (and private sector growth outside Germany and the Low Countries) what tribes always do is revert to their tribe. When Gordon Brown tried in 2009 to make all the G20 promise not to build siege economies, he was being both optimistic in his endeavour, and naive in his interpretation of the response. The G20 pulled this off when it was just the banks...but at a cost which is today building Crash II. When it's the G20 themselves, they will bow to the riotous wishes of their individual electorates.

    Something will have to give: the membership level of the Eurozone, lax deficit government, German intransigence, Christine LaGrande's la-la overconfidence, Brussels hubris, personal liberties, capitalist aims, the EU itself - or a combination of these things. But I can tell you as a retired but still in touch market realist, the face being presented to the markets and dealers now is Jekyll one minute and Hyde the next. And the markets don't like schizophrenics: they prefer soundly financed economics.
    Google me at nbyslog, aka The Slog at Blogger.

  • Comment number 62.


    "With France's track record of only sticking to EU regulations when it suits them when is the truth going to come out about their true financial situation?"

    We know what their true financial situation is because Sarkozy told us shortly after he took office and his government had a chance to assess the sitution. The French government is bankrupt. That's what he said. In the intervening years, it's only gotten broker.

  • Comment number 63.

    If I have to hand over £1 every second of every day of every week of every month without missing a single long will it take me to get rid of ....£1 Million, Billion , Trillion?

    With £1Million If I started roughly 11 and a half days ago I am cleaned out now.

    If I start with £1billion; to be cleaned out now I would have to start handing the £1s over every second around the start of October 1978.

    This election's famous "£6 Billion of cuts" would mean my ancestor starting the £1 a second spree in early spring 1810.

    If I have a Trillion to hand over then someone needed to start handing over the inflation adjusted pound coins in the last ice age around 29,700 BC or so.... It's no wonder people are getting worried now as A trillion is a big number, the wonder is they didn't get worried a bit earlier.

  • Comment number 64.

    Oh Stephanie.....

    I'm afraid you sum up the core problem (inadvertantly?) in your second paragraph..:

    "and you see the key player in the eurozone drama demonstrating that it is willing to put the future of the single currency before pretty much anything else."

    In that one scnetence you encapsulate everything that governments across Core-Europe have got wrong; that they believe that the Euro must exist in its current form even when fx, CDS, Equity and bond markets, and far more importantly their own voters and taxpayers, are all telling them it can't...

    The post-Kohl generation of politicians are ultimately going to have to accept that the Eurozone structure imposed upon them by the great ignorant, corrupt elephants of Kohl and Mitterand/Delors cannot hold and that to protect their peoples they are going to have to re-structure the Euro-Zone to a core group of countries which get somewhere close to complying with Maastricht treaty provisions and which are prepared to accept the ECB operating to the actual rules under which it was established (and which the Bundesbank and German electorate agreed) rather than the club Med printing press status it has been reduced to.

    It is not merely passing convenient that the ridiculous bail-out structure this same group of politicians has attempted to cobble together; the most efficient scheme possible with which to infect the economies of Northern Europe with the sovereign risks of the South imaginable, comes at the expense of the tax-payer and to the benefit of (especially) french banks. Nor, are the moves by Italy to follow Spain (Santader stock anyone...?) to remove the obligation (which those dastardly Anglo-Saxon banks have to work under) to report the actual mark-to-market values of their Eurobond portfolios as opposed to some fantasy their management come up with...this is state sponsored fraud which will ultimately lead to further socialising of private-sector banking losses..

    I'm no left-wing radical; I work in the private sector, in a london-based Investment Bank and consider this utterly unconscionable.

    German, Dutch and Scandinavian taxpayers should, in my humble opinion take the same view and tell their so-called political leaders to take a running jump at the soonest opportunity...

    Yours, trying desperately to remain positive, Acient Fullback

  • Comment number 65.


    May I comment from the workshop floor as it were in terms I find perhaps directly relevant. Or indeed after a smoke with that fairy at the bottom of the garden.

    It did not take a sage to predict that the Euro club would split a seam if not haemorrhage. For generation after generation a nation’s economic status in the world has been largely represented by the global value of its currency. If you have no currency that is fine so long as you are fiscally solvent or potentially so, and can adopt a currency that is recognisable and good for business.

    Anyone with a modicum of perception would have seen that, in drawing together a hotch potch of nations to abandon their currencies in favour of the Euro, it was essential to ensure that the economies of prospective members were reasonably compatible. Otherwise when times are hard, weaker economies will find it a fierce struggle to keep up its ‘euroworth’. Consequently the Euro will be debased, tempered only by the will of fellow members to bail them out. But by real aid not just words.

    With Greece leading the way, what of the others? Portugal, Eire, Spain, Italy? Lack of growth, nation by nation, is seriously widespread and one imagines these ailing countries to be just around the corner with their penitent hands out. Do the lead Euro nations have the will or moreso the ability to accommodate them all. Of course they do not. They did not expect to because they had not done their homework when they opened the club! How silly was that!

    So, as we see, and because it seems fashionable, ailing nations will be mercilessly plunged into debt. That dead donkey of debt. Debt that they cannot digest and their citizens will take to the streets. It is that feature that should concern every well meaning inividual around the world. Sadly, the ‘tragic’ demise of the Euro will take preference. If we are on the brink of its permanent demise however, the Banks must not be allowed to handle the rebirth of currencies. They may well be rubbing their hands at the prospect but these guys are only good at ticking bonus boxes on just one side of a dodgy arrangement. Transparent Government bodies acting as independent agencies should take over the task and there should be no commissions or foreign exchange dealers. Parity should be determined at international level and there will be no 'open' money market. All this under global scrutiny too. We will rue the day when money was lifted from its original purpose of being a direct representative of the intrinsic value of the things we need in our lives and treated rather as a commodity for wheeler dealing.

    Anand has written: Why has the FTSE dropped like a dead weight this week? The answer is simple. It should never have risen. Its like a kite. The wind is strong but in all directions and to get the kite on high is a momentary delight to be shattered in seconds as it crashes to the ground. I am afraid there are nutters playing the markets and there are so many punters not wishing to miss the boat. They chip in to find it full of holes.

    Until the phantom dead donkey of debt is tackled then we can expect no real sustained growth anywhere. We are all inter dependant but the impoverished users of the Euro cannot even have the cosmetic comfort of printing their own money! Are we not just so lucky!

  • Comment number 66.



    Good Thought and said with feeling.

    We need to take a good look at ourselves and see if we like what we see in the mirror. I doubt we do.

    Things have a very fin de siecle feel.

    There is a genuine chance, IMHO, for our changed politics to lead us away from our fame academy gluttony, but only if we suspend our cynicism and give those we chose to be our leaders the chance to lead.

  • Comment number 67.

    Sorry but apart from institutional investors playing with large numbers who gives a flying toss what happens on the markets?

  • Comment number 68.

    45 Kevinb wrote

    'You are a bore, and as a Marxist you indeed have little to offer'


    ...and you are venal.

  • Comment number 69.

    Ailing nations will be plunged into debt if and only if they learn no lessons from Japan. All this will do is delay the inevitable for 20 years or so. The ultimate conclusion is failure of private retail banking as the source and regulator of money.

  • Comment number 70.

    The key question Stephanie poses is. (How can the eurozone behave more like a single currency and less like a group of states)
    Its very simple ,each state gives up complete control of its economy to Brussels,so that in effect you only have one state(EUROPE).
    How likely is this? In my opinion not very likely.But untill the eurozone becomes one state the problems will persist.

  • Comment number 71.


    Thank you

    I agree

    However the extreme left, the right, and the MSM seem to have a demolition agenda

    Rather sadly

  • Comment number 72.

    67. At 6:42pm on 21 May 2010, Oblivion wrote:
    Sorry but apart from institutional investors playing with large numbers who gives a flying toss what happens on the markets?

    Everyone, as it affects everything

  • Comment number 73.

    68. At 6:49pm on 21 May 2010, DebtJuggler wrote:
    45 Kevinb wrote

    'You are a bore, and as a Marxist you indeed have little to offer'


    ...and you are venal.

    And how do you come to such a conclusion?

  • Comment number 74.

    69. At 6:49pm on 21 May 2010, Oblivion wrote:
    Ailing nations will be plunged into debt if and only if they learn no lessons from Japan. All this will do is delay the inevitable for 20 years or so. The ultimate conclusion is failure of private retail banking as the source and regulator of money.

    What lessons from Japan?

    Japan is worse than Greece in many ways

    Japan's debt is 217% of GDP

    It will have a deficit of just under 10% this year

    Also needs to refinance debt equivalent to 54% of GDP

    So which lessons did you have in mind?

    They have no natural resources either of any consequence

  • Comment number 75.

    Here's a suggestion:

    Several years ago, in the 80s, I racked up rather a lot of debt on credit and store cards. Fortunately, my wife took control of our finances and today the only debt we have is our mortgage.

    Might help if governments encourage people to live within their means by setting an example. And they could start by ditching grandoise schemes (eg ID cards, unnecessary IT projects).

    The amount of money wasted on projects that either get cancelled or runs years behind schedule is shocking.

    I hate how certain industry figures warn of bad times, when they themselves are unaffected since some have contributed to the mess while pocketing some nice bonuses.

  • Comment number 76.

    Are we there yet?

  • Comment number 77.

    Really good article! I feel informed.

  • Comment number 78.

    75 wrote

    Might help if governments encourage people to live within their means by setting an example. And they could start by ditching grandoise schemes (eg ID cards, unnecessary IT projects).

    Not sure if you have been watching the news.....

    ID Cards have been scrapped

  • Comment number 79.

    Constant growth with non renewables getting replenished I think it's time to think independently of governments and start being as far as possible self sustainable. The high birth rate worldwide needs to be addressed.

  • Comment number 80.

    @ 70 The key question

    (How can the eurozone behave more like a single currency and less like a group of states)

    It can not. I think it is the point. or (oil and water do not mix)

    Some one here blamed the Germans for they problem because they were not enough like the Greeks. So if all EU countries acted like the Greek one problem solved I do not agree.

    You fellas had a model that worked and changed it, then all heck broke out. Fixes to a bad idea continue to be bad.

    Go back to the way it was will work.
    Stay where you are wont
    Going forward more trouble not less.

    Good luck

  • Comment number 81.

    All this user's posts have been removed.Why?

  • Comment number 82.

    #74 Kevinb

    Precisely. The public debt to GDP ratio in Japan now is pretty high.

    But scroll down here to the first three graphs:

    What do you see? Precisely. Over two decades, after the initial banking crises that threatened to consume the Western world, the Japanese government managed to convert the private debt problem into a public debt problem.

    So, now you see and understand. The real problem is total debt, of which now the majority is private, and these states will only be swallowed by debt if they do not learn the lessons of Japan, which is that their bailout programmes only result in a conversion of private to public debt, without solving the fundamental problem of total debt to GDP sustainability.

    Sure governments might default on t-bonds because of public debt levels..but the more real and present danger, despite the headlines and distractions, is private debt level and bank defaults. The governments can only be blamed for their debt levels if you agree that the banks should have been left to collapse and (through government regulation) never allowed to invoke such high private debt levels in the first place.

    But anyway, I feel like I am wasting my breath. I at least hope others looking at these graphs and this post will take something from it.

  • Comment number 83.

    #73 kevinb - The answer is most likely contained within the question,

  • Comment number 84.

    I said it before:
    - The EURO needs to devalue, it helps the exporter nations (eg: Germany) export.
    - We can expect Merkel to cause confusion because it will devalue the Euro
    - This is a test. It must be seen to be a test, and the more so the better, because a survival will make the EURO stronger.
    - Don't believe the hype, because now signals are very important.

  • Comment number 85.

    Oh Stephanie, you're so lovely.

  • Comment number 86.

    #69 Oblivion. Surely you must know, no-one has any intention of learning anything from the Japanese experience.

    That is what money printing and mark to fantasy accounting is all about. That is why the BBC and others talk about Germany bailing out Greece, when in fact it is obvious that German taxpayers are being dragooned into bailing out German banks with the Greeks just playing the part of "useful idiots"

    We have systemic insolvency - but absolutely no-one is going to admit this. That is just the way it is.

  • Comment number 87.

    #86 Arma

    Well, yes, but I do hope that this 'bailing out' will amount to 'seizure of'.

    I feel charitable enough to think that Merkel understands that nationalisation of the banks is a foregone conclusion here. Or am I being naive?

  • Comment number 88.

    If the financial crisis were the only problem Europe faced, that would be bad enough but it is compounded by a plethora of others. Racism, a culture that expects rewards without the work it takes to earn them, societies that do not reward inventiveness and enterprise but tax it to death, irrational expectations, and incessant lying. Lying to the world, lying to its own people, and lying to itself. This irrationality is a prescription for sure disaster. And that is how it got here and why it cannot get out. They never tell the truth because if they did, those telling it would be run out of town. Anyone born in Europe who was not born to a rich family and wants to get anywhere in life inevitably goes elsewhere. In short, Europe places no value on human capital, the only capital that really matters.

  • Comment number 89.

    Being from New York makes me a American a US American

    Being from Vermont makes me a American a US American

    Being from Nova Scotia makes me a American a Canada American

    People from Canada get all fussed when we say we are American’s like there is only one kind.

    The question is then is being a Brit make you a European it does not change the fact that you probably cant cook.

    No one here would mistake a Texan, from a Floridian these differences are what is important (and interesting) not the similarities.

  • Comment number 90.

    #72 Kevinb

    Maybe large numbers on big markets do affect things, but why should they? These bankers and fund managers are just throwing numbers around, and these numbers were generated mostly by people borrowing to buy homes (and stuff...) from banks.

    Let it fail. Let the whole shebang go boom. Screw them. We'll figure out a new way without them.

    And yes, it's a class struggle in the Marxist sense, but not social classes, economic classes - and there's the key difference. It's plain unhealthy that finance experts from finance families with finance backgrounds and finance education can get access to finance to gamble on financial markets, which does nothing for society but suck up savings and hopes and futures and lives of everyday people so that finance experts can pay for those everyday people to satisfy daily chores to give meaning to the word 'luxury'.

  • Comment number 91.

    I really couldn't give a flying for the Euro zone. The arrogant European political class deserves every possible financial disaster that comes it's way. But what I do care about is the capitlaist society I used to live in. After all, the only alternative is communism and we've seen what happens then.

    This is Bear Stearns, Dubai was Northern Rock. As a number of contributers have already outlined, the system is bankrupt, kaput. The UK is next and the US shortly after. Who bails out the 'bailer out'?

    Unpayable debt has been bleeding out of every orifice of the world's banking system for the last 3 years. That debt has to be expunged before we go forward again.

    And it should start with letting the current banking system fail. Sounds ridiculous? Not as ridiculous as it will be if we don't.

  • Comment number 92.

    This crisis, all of the problems, both personal, corporate and sovereign, relate back to one thing, uncontrolled fractional reserve banking.

    There have been too many banks, creating too much money, against promises to pay, that are worthless.

    Ultimately it falls to the average working Joe and Jane to somehow turn this mess around.

    It is the average Joe and Jane that have to cope with ‘austerity’, and keep on going.

    And all the derivative trades, credit default swaps, shares, deals and absolutely everything else finically speaking, are wholly and completely worthless, it they stop.

    The Joes and Janes of this world create everything that there is, everything that there ever will be, and deserve a better financial system than that they which they are currently being bled to death to keep afloat.

  • Comment number 93.

    #91 Bluematter

    Absolutely ###### right.

  • Comment number 94.

    Its looking more and more like the Mayans were out by 2 years.

  • Comment number 95.

    #92 Dempster

    Those derivatives and financial products really are worthless, but it is not immediately clear to many people exactly why.

    These instruments just shuffle risk, but risk management is a more tricky science than these instruments perport to deal with. This is demonstrated by a simple, empirically verifiable fact:

    Through bailouts during crises, despite their conservative image, banks have lost more money than they have ever returned.

  • Comment number 96.

    There is one way out which is rarely mentioned, that is for the Greek government to collect the money necessary to balance its books from the rich, not the poor.

    The rich do not go in for rioting in the streets, so that would not be a problem. But evasion might be.

    There will always be some successful evasion, but with reasonable diligence by the officials, spurred on by the knowledge that the alternative would be losing their jobs, some will be caught and successfully prosecuted. The general principle should be applied that those caught should pay fines at a level which more than covers the cost of catching and prosecuting them, plus the taxes of those who have escaped. The government would then get the revenue due to them, and those who might be tempted to evade would realise that even if the chances of being caught are small, the penalties are so large that betting on successful evasion is a very poor bet.

    Residence rules should also be made difficult to avoid and retrospective, so that it is where you lived and/or owned property over past few years, while government debts were accumulating, that counts, not where you might be planning to move to.

  • Comment number 97.

    92. Demster
    "Ultimately it falls to the average working Joe and Jane to somehow turn this mess around. "

    Nope, it doesn't HAVE to be done that way. Co-ordinated government actions could instead give the banks and investors a serious haircut instead and there is little they could do about it. Let the pain fall on the architects of this mess not the hapless citizens.

    A co-ordinated worldwide sovereign default would do the job pretty well, as long as there was an underlying plan to handle the instability caused.

    Losses have been made, all a government can do is steer where that loss falls, and up till now they have steered losses onto icelandic fishermen or Greek bar owners. They COULD steer it onto the bankers themselves, but strangely they are immune and getting fat bonuses AGAIN.

    Time to let them have some pain in large dollops...

  • Comment number 98.

    #87 Oblivion. From a theoretical standpoint I agree with pretty much everything you say. However practically you probably underestimate or don´t realise the raw power and malignance of the ruling kleptocracy.

    Banks will not be nationalized, because that is not in the best short term interests of the kleptocrats.

    Consequently we will proceed to full spectrum meltdown, cheered on all the way by mainstream media.

    The only force that can prevent this outcome is the power of the people. The people must rise up, as they are showing signs of doing in Greece and Romania. My fear is that the people of western Europe and the US are too indoctrinated, too docile and too fat to do anything. Maybe the Spanish - we will see, but I am not confident.

    Those with power (and others besides) care nothing for reason. That is the problem.

  • Comment number 99.

    And here is one that would no doubt delight JadedJean, but offers clues about this banking crisis too:
    [Unsuitable/Broken URL removed by Moderator]

  • Comment number 100.

    #98 Arma

    The Greeks will make these bankers pay in their own blood, and I will support them to the last drop. They will make sure that Greece defaults, and this is a good thing.

    In this climate, the banks will not be able to raise capital, and the price of seizure will be low.


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