News Can the Eurozone Survive the Economic Challenges of Greece and Italy?

[John Creighto]

I hope that the all of you are not too bored with the subject, but the situation is getting grim. Looks like they either solve it or maybe this, maybe next, year we will see countries defaulting and possibly banks topple over.

Interestingly, that means that maybe in a year I'll be standing in line for free food?

It seems like there are lots of good plans in place. It is just a matter of getting the political will to follow them and then implementing them properly

 

[lisab]

I hope that the all of you are not too bored with the subject, but the situation is getting grim. Looks like they either solve it or maybe this, maybe next, year we will see countries defaulting and possibly banks topple over.

Boring? No way - I find it very interesting. Not interesting , more like interesting .

Interestingly, that means that maybe in a year I'll be standing in line for free food?

I surely hope not. If the Euro fails, it would be catastrophic for most large economies in the world.

http://www.reuters.com/article/2011/11/29/us-euro-zone-contingency-idUSTRE7AS0H020111129 (which is understandable - they have to manage risk). Problem is, such plans may make a breakup more likely. What a mess!

 

[Hlafordlaes]

Spain not only has an economic depression caused by the property bubble collapse, but also some insanely protectionist employment laws.

So far, correct.

Employers are requred to give up to 5 years notice of redundancies, or keep paying people their full salary for doing nothing for that length of time.

Wildly inaccurate. There are many forms of contract, but the standard and "fearsome" one is the full-time, tenured position. The employee can only be fired "legally" if caught with his/her hands in the till, or for verbally abusing the owner, or something glaring. So, after dismissal, most ex-employees will file a civil suit, declaring the firing "improper," and getting as a financial reward 45 days pay for every year worked, pro-rated. Less often, an employer can be ordered to restore the employee to his former position, although more often than not that is when the firing has been fishy or broke some other formal agreement.

Today, the average spend for firing is around 30 days per year worked, pro-rated. That's not 5 years pay, but it still is a good chunk and can force companies to hold onto less productive dolts and not hire someone better. Lotsa satisficing, iow.

Having been there and done that as both employer firing and employee getting let go, I can say that this is not the greatest of our problems here. What we all do now is give people temp contracts, and let them go when the law would force us to change them over to tenured positions (>3 years on the job). So, what labor law has wrought is tremendously precarious job positions, and poor human capital development.

The main problem is that labor contracts are negotiated by industrial sector and are currently applied nation-wide, so that a smaller, weaker company, or a fledgling start-up, finds itself required to not only follow salaries, but also work rules, that were designed for the largest and strongest in the industry. Ridiculous.

...

Lest you believe the Spanish are completely insane, this mess was created by Franco, the country's former fascist dictator. He granted all these rights and rules to labor in order to reduce strife and prevent wild cat strikes, while otoh absolutely prohibiting organized strikes, most unions, and free speech. Back then it was a good deal for employers, too, since judges and rulings were slanted in their favor. Along came democracy, and when unions were allowed to form freely, and the right to strike restored, someone forgot to eliminate the insane tenured position and mad sectorial contract rules.

 

[mheslep]

...
Ridiculous.

...

Lest you believe the Spanish are completely insane, this mess was created by Franco, the country's former fascist dictator...

Yes that's right, and US problems were created by King George III.

 

[Hlafordlaes]

Yes that's right, and US problems were created by King George III.

Actually, by Kings George I and II, as well and Ronald the Renowned, and all the magical thinking their counselors engaged in.

 

[MarcoD]

http://www.reuters.com/article/2011/11/29/us-euro-zone-contingency-idUSTRE7AS0H020111129 (which is understandable - they have to manage risk). Problem is, such plans may make a breakup more likely. What a mess!

I doubt the Euro will break up, even if banks and governments topple over, it's near impossible to return to the previous situation. Just imagine Greece would leave, or kicked out of, the Eurozone. We have free transfer of money in the EU. It would take them a year to implement the Drachme, and meanwhile all Greeks would transfer their money to northern Europe, most of the Greek banks would fall since that's equivalent to a bank run, you'ld end up with a shadow Euro economy and the Drachme would be completely worthless and Greece's government would be unable to borrow any money. It would end up akin to a third world nation where everybody prefers to pay in dollars instead of its own currency. Completely impossible.

Meanwhile, if Germany and France would start their own currency, they might impose this scenario on the south, and their loans would be worthless, and their economies a lot weaker.

Everybody keeps on talking about the Euro, but really, the currency is irrelevant. It's a government debt and bank leverage problem, nothing else.

 

[MarcoD]

The main problem is that labor contracts are negotiated by industrial sector and are currently applied nation-wide, so that a smaller, weaker company, or a fledgling start-up, finds itself required to not only follow salaries, but also work rules, that were designed for the largest and strongest in the industry. Ridiculous.

Which is why I think Spain is not that badly off. Implement some structural change and the economy will be boosted by foreign investment, and the government debt would be relatively low. The deflated property bubble is pretty bad though (but if I am right, this debt is mostly owned by UK banks, so it's not Spain, but the UK which has problems.)

 

[LaurieAG]

I wondered about the attached NYT cartoon until I noticed that Angela Merkel had a PHD in Physics.
http://www.dw-world.de/dw/article/0,,4580585,00.html

 

[AlephZero]

I wondered about the attached NYT cartoon until I noticed that Angela Merkel had a PHD in Physics.]

I don't know about the PhD. I think it's a German translation of Zeno's paradox.

 

[russ_watters]

Looks like an English version to me...and I'm not going to have to explain irony to you, am I...?

 

[AlephZero]

Looks like an English version to me...and I'm not going to have to explain irony to you, am I...?

Well, he's got a Bavarian hat and beer stein ...

I don't do irony, I send my shirts to the laundry.
-- Scott Adams.

 

[lisab]

France and 8 other European nations saw their credit ratings downgraded today -

http://money.cnn.com/2012/01/13/markets/sandp_europe_downgrade/index.htm?iid=Lead

I think this news was expected and already build into the markets. But that's just my WAG - anyone think otherwise?

 

[JonDE]

France and 8 other European nations saw their credit ratings downgraded today -

http://money.cnn.com/2012/01/13/markets/sandp_europe_downgrade/index.htm?iid=Lead

I think this news was expected and already build into the markets. But that's just my WAG - anyone think otherwise?

I agree that most of it was built in. I do feel however that some may have been surprised by France's downgrade. I had heard before (a few months ago) that it was possible, but I doubted they would actually do it, because France's debt really isn't that high. France's total debt actually went down in the third quarter (I don't believe fourth quarter has been announced yet).
I think the reason they downgraded France's rating was because they probably think that Europe is going to go into another recession, if it isn't already in one.

 

[MarcoD]

I also think it was built in. Moreover, I agree with the downgrades. The short term problems have been addressed, so now people are pooped off in Europe by the downgrades, but the long term solutions are not in place yet. Europe needs a manner, apart from financial markets, to pump money around. I.e., some process to stimulate the weaker economies, except for free trade, and not in the manner of financial abundance we did it before.

The above is more based on 'feeling' than actually studying the economic data, btw.

 

[AlephZero]

The thing that probably isn't "built in" to the markets is the fact that the Greek debt restructuring still isn't done and dusted. That time bomb is still ticking away with the deadline to defuse it about 3 months off.

 

[MarcoD]

The thing that probably isn't "built in" to the markets is the fact that the Greek debt restructuring still isn't done and dusted. That time bomb is still ticking away with the deadline to defuse it about 3 months off.

I disagree with that. There will be a haircut, everybody knows it, and there is no alternative. So it has been defused anyway.

To be honest, the last problem, if it still exists, I think now boils down to making making the bean counters happy with a financial trick which will make their balance sheets look kind-of okay. It depends on the size of the debt hole in the books, I am not sure it is even needed. If cheap liquidity doesn't do it, some clever accounting will probably solve it.

(The meltdown of the US housing market probably left a trillion dollar hole in some accountants books. But at the same time, the Euros which were invested have no other alternative except for returning to the EU zone, so it should solve itself in time.)

As far as I can see the financial problem already has been solved, maybe a structural solution for Europe's economy is now needed.

If all fails, I am kind of warming up to the idea of Eurobonds to keep the nations' debt under control. Somewhat like a yearly allowance by a central bureaucratic EU office, also with some stimulation for the weaker economies built in.

And, maybe I am clueless. No idea.

(After looking at the problem, I got the feeling the bean counters are upset, but I doubt the ECB or any economist should be.)

(To be really honest: I have the feeling the presidents of our banks have hysterical laughing fits when they hear of the Euro breaking up, since nothing is the matter according to their data.)

 

[JonDE]

I disagree with that. There will be a haircut, everybody knows it, and there is no alternative. So it has been defused anyway.

To be honest, the last problem, if it still exists, I think now boils down to making making the bean counters happy with a financial trick which will make their balance sheets look kind-of okay. It depends on the size of the debt hole in the books, I am not sure it is even needed. If cheap liquidity doesn't do it, some clever accounting will probably solve it.

(The meltdown of the US housing market probably left a trillion dollar hole in some accountants books. But at the same time, the Euros which were invested have no other alternative except for returning to the EU zone, so it should solve itself in time.)

As far as I can see the financial problem already has been solved, maybe a structural solution for Europe's economy is now needed.

If all fails, I am kind of warming up to the idea of Eurobonds to keep the nations' debt under control. Somewhat like a yearly allowance by a central bureaucratic EU office, also with some stimulation for the weaker economies built in.

And, maybe I am clueless. No idea.

(After looking at the problem, I got the feeling the bean counters are upset, but I doubt the ECB or any economist should be.)

(To be really honest: I have the feeling the presidents of our banks have hysterical laughing fits when they hear of the Euro breaking up, since nothing is the matter according to their data.)

Personally I think the Euro needs to break up. As far as I can tell, the whole thing negates one of the most important factors in a self correcting market. That is devaluation.
Normally when a country goes into a recession, their currency is devaluated, which makes it easier for that coutnry to export, and essentially bring back jobs. The problem with the Euro is that certain countries now (namely Greece and Italy among others) will have to cut spending and raise taxes, which will be a slight disadvantage for their businesses, while other countries (namely Germany), won't need to do ethier, and since their economy is not really that weak, their businesses should have plenty of cash and capital.
This allows for Germany to help steal some of the self recovery from other countries. Instead of fixing the problem, it only seems to make it worse and drag it on.

 

[edward]

It is a bit Ironic that Standard & Poor's was giving AAA ratings to packaged sub prime mortgages just a few years ago.

 

[MarcoD]

Personally I think the Euro needs to break up.

All arguments you make can be made for the US too. Does Michigan pay for California's spending (or debt level), and does the US need to break up over that?

There is no long term problem unless there isn't enough money being pumped to the deficit states from the surplus states. Until now, that probably happened with public debt, financial markets, the free commidity market, and other means.

Honestly, the system is pretty damned good since governments are, need to be, run like companies, and there's one central bank overseeing the banking system and currency.

There are only two questions: Are the debt levels of the individual economies too high to be sustainable in this system? (I would say no, except for Greece.) And second, is there enough money being pumped around between the states?

The first is debatable, if not, then Eurobonds. The second is probably okay at the moment, with the addendum that the surplus states probably will need to pay some for Greek pensions, which honestly, is a whatever. And a second addendum that part of the current mess is the result of sending too much money to the periphery, not too less.

Everything else: The balance of trade, the external debt, the amount of money, the number of assets, look okay for the Eurozone. Most of the news, therefor, is short-term humbug. It can all be solved, and since it can be solved, it will be solved.

(There's also the point that devaluing in current day markets might not work as good anymore as it used to, since everything is hedged anyway.)

(I am not an economist, so this is pretty much my layman's view.)

 

[JonDE]

All arguments you make can be made for the US too. Does Michigan pay for California's spending (or debt level), and does the US need to break up over that?

In a way it kind of does. If California was going through a recession and Michigan wasn't, California would be bringing in less then its share of federal tax. Whatever it was minus in this instance would be added to the federal deficit which the whole country is responsible for. To be the same as the countries that are involved in the Euro, in the above example, the US would have to tax California at a higher tax rate (to make up for lost tax revenue) while intentionally spending less money in California. Neither of these happen IRL.
The argument that Michigan doesn't pay for California's state debt is true and so that point is relevant, but what is state tax compared to federal tax? Federal taxes have to be at least 4X larger (couldn't find an exact number, and I'm really not going to spend time to calculate it)

There is no long term problem unless there isn't enough money being pumped to the deficit states from the surplus states. Until now, that probably happened with public debt, financial markets, the free commidity market, and other means.

Honestly, the system is pretty damned good since governments are, need to be, run like companies, and there's one central bank overseeing the banking system and currency.

I admit that this is good in theory, but are any countries actually run like companies?

There are only two questions: Are the debt levels of the individual economies too high to be sustainable in this system? (I would say no, except for Greece.) And second, is there enough money being pumped around between the states?

The first is debatable, if not, then Eurobonds. The second is probably okay at the moment, with the addendum that the surplus states probably will need to pay some for Greek pensions, which honestly, is a whatever. And a second addendum that part of the current mess is the result of sending too much money to the periphery, not too less.

Everything else: The balance of trade, the external debt, the amount of money, the number of assets, look okay for the Eurozone. Most of the news, therefor, is short-term humbug. It can all be solved, and since it can be solved, it will be solved.

(There's also the point that devaluing in current day markets might not work as good anymore as it used to, since everything is hedged anyway.)

I agree with most of this. The debts of most of the countries aren't especially high, with one or a few exceptions.
Although I disagree with one part, that since everything can be solved, it will be. Politics don't always work in the best manner to solve problems.
Also can you elaberate on the hedging part. I understand hedging from an investors standpoint, but I admit don't know anything for a country as a whole, or for an entire currency.

 

[MarcoD]

Also can you elaberate on the hedging part. I understand hedging from an investors standpoint, but I admit don't know anything for a country as a whole, or for an entire currency.

I think an economy like Greece is probably too small to protect itself against hedging. Wall Street, or London, or Frankfurt, are just too big and filled with people way smarter than me; i.e., lots of currency traders. If they feel a currency will need/want to devalue, they'll just all short it - or protect their investment in some smart manner. And since there's that much money in all western economies, even the idea of devaluing it might actually annul whatever percentage they would want to devalue it. (Hmmm, I need to think this over a bit more, now I am not so sure anymore.)

EDIT: OKAY, HYPOTHESIS: If financial markets are really smart it is impossible to get rid of your debt since smart financial markets will find manners to protect themselves against it/protect their investment.

 

[JonDE]

I think an economy like Greece is probably too small to protect itself against hedging. Wall Street, or London, or Frankfurt, are just too big and filled with people way smarter than me; i.e., lots of currency traders. If they feel a currency will need/want to devalue, they'll just all short it - or protect their investment in some smart manner. And since there's that much money in all western economies, even the idea of devaluing it might actually annul whatever percentage they would want to devalue it. (Hmmm, I need to think this over a bit more, now I am not so sure anymore.)

EDIT: OKAY, HYPOTHESIS: If financial markets are really smart it is impossible to get rid of your debt since smart financial markets will find manners to protect themselves against it/protect their investment.

Shorting and hedging are not the same thing. Shorting can be used to hedge, but so can other things. In effect if people think that a currency is going to be devalued, shorting it would only make it drop sooner, and maybe even bigger, not stop it from dropping.

 

[MarcoD]

In a way it kind of does. If California was going through a recession and Michigan wasn't, California would be bringing in less then its share of federal tax. Whatever it was minus in this instance would be added to the federal deficit which the whole country is responsible for. To be the same as the countries that are involved in the Euro, in the above example, the US would have to tax California at a higher tax rate (to make up for lost tax revenue) while intentionally spending less money in California. Neither of these happen IRL.

Not really a fair comparison I think. There are no real federal taxes in Europe; if California shrinks, it would get cheaper, that's all. There is no extra burden to keep up with.

This is actually a damned good argument against Eurobonds.

Moreover, money from the outside would poor in and buy assets, or construct factories, in California after the recession. The question is whether federal stimulus actually helps an economy, or just 'makes it lazy.'

The argument that Michigan doesn't pay for California's state debt is true and so that point is relevant, but what is state tax compared to federal tax? Federal taxes have to be at least 4X larger (couldn't find an exact number, and I'm really not going to spend time to calculate it)

I don't know the difference between what is being payed in the US by the state or by the federation, but say you need to pay 10% on health care. What does it matter who pays it?

I admit that this is good in theory, but are any countries actually run like companies?

Well, now all of them are.

Politics don't always work in the best manner to solve problems.

Most European economies are run by their financial departments, not by their politicians. And those who weren't, now are being reformed.

 

[MarcoD]

Shorting and hedging are not the same thing. Shorting can be used to hedge, but so can other things. In effect if people think that a currency is going to be devalued, shorting it would only make it drop sooner, and maybe even bigger, not stop it from dropping.

Yeah, I thought of that too. And you usually short against another (outside) party, so that wouldn't really mean a lot.

Still, I am not sure devaluing is that good a tool still given current day complex financial markets. Let's say I want to invest in a country which constantly devalues, or is going to devalue, I guess I could -or would- protect my investment by just buying real estate instead of public debt, immediately annulling any devaluing effect. And devaluing makes any debt unattractive so how good a tool is it anyway?

(Anyway, I give up. I am not an economist, I've tried to understand it, and I don't. Or rather, I don't see the problem with the Eurozone, atm.)

 

[JonDE]

Yeah, I thought of that too. And you usually short against another (outside) party, so that wouldn't really mean a lot.

Still, I am not sure devaluing is that good a tool still given current day complex financial markets. Let's say I want to invest in a country which constantly devalues, or is going to devalue, I guess I could -or would- protect my investment by just buying real estate instead of public debt, immediately annulling any devaluing effect. And devaluing makes any debt unattractive so how good a tool is it anyway?

(Anyway, I give up. I am not an economist, I've tried to understand it, and I don't. Or rather, I don't see the problem with the Eurozone, atm.)

I can understand not wanting to invest in certain aspects of an economy that purposefully devaluates their currency, especially repeatedly. My point was that the cycle of devaluation and re-valuation (probably not a word), is normal and might even encourage people to invest in that economy when the currency is devalued.

 

[AlephZero]

The thing that probably isn't "built in" to the markets is the
fact that the Greek debt restructuring still isn't done and dusted. That time bomb is still ticking away with the deadline to defuse it about 3 months off.

I disagree with that. There will be a haircut, everybody knows it, and there is no alternative. So it has been defused anyway.

It hasn't been defused yet. The market doesn't think so either. Last time I looked, the market price of short term Greek debt put the effective interest rate at over 1,000%, up more than 100% in the last 24 hours. If you really think it is going to be defused, fill your boots while you can!

But now Germany has a Plan B: http://www.bbc.co.uk/news/world-europe-16773974

 

[MarcoD]

It hasn't been defused yet. The market doesn't think so either. Last time I looked, the market price of short term Greek debt put the effective interest rate at over 1,000%, up more than 100% in the last 24 hours. If you really think it is going to be defused, fill your boots while you can!

Why? Bad debt is bad debt. Private investors will probably be last in line or part of a forced haircut.

When I say defused, I mean that everybody knows what needs to happen. You can bet a bit on the variants of the outcome, but that's about it.

But now Germany has a Plan B: http://www.bbc.co.uk/news/world-europe-16773974

Which is what I mean that everybody knows what needs to happen. This is, as far as I recollect, the same measure the British took the last time Greece defaulted on its debt.

It's a long dance, that's all. They needed to kick the can for a while, to let stuff settle down and be controlled, they need some manner of writing off some of the debt, they need to have Greece under financial restraints (or be kicked out).

Europe has been playing currency games and state debt troubles for 1500 years, there's nothing new here, except that for a change it didn't escalate into a war.

 

[MarcoD]

By now, I am constantly running into Sapir-Whorf, or linguistic relativity, on this forum.

To clarify my position a bit more: When I say need, I mean you can expect actors to act in a certain manner which -given historical, cultural, and economic necessities- will make a certain outcome become true.

The Eurozone is about creating an internal market, not -as many in the US think- about creating a competitor for the dollar. The overall aim of most in the top -even if they don't know it- is transparency, stability and accountability because without that you neither have a currency or trade. The (short-term) debt problems are secondary to that.

I am not inclined to publicly dwell on some financial trivia, except for that you cannot use my assertions as predictions on how financial markets will behave now or in the future. If you really want to bet on anything, then my opinion is that the Euro cannot fail due to some technical considerations.

 

[Astronuc]

In the last 4 months, Greece has been vacillating between rescue and crisis. The DOW was up then down.

Now - 6 reasons Spain will leave the euro first
Commentary: Spain is too big to rescue, and doesn’t want it anyway
http://www.marketwatch.com/story/6-reasons-spain-will-leave-the-euro-first-2012-05-30

 

[Hlafordlaes]

Hogwash. There is very little support for leaving the euro or the EU here in Spain. Yes, you get grumping about things having been better under Franco from some old folks, and quite a few do reminisce about the peseta. But no one in their right mind thinks leaving the euro is a good idea.

Because Spain does have a real economy, including sophisticated pharma a medical research, recent renewals of plant production plans by companies such as Nissan, indicating an improving competitive cost base, heavy weight agriculture exporting worldwide, and leading firms in telecom, renewable energy and other fields, the country feels it has a place and a role to play in the EU. Neither the PP nor the PSOE, nor even the smaller more extreme parties are calling for exiting the euro. It would be political suicide.

As recent events in Argentina and Bolivia have shown, Spain does not have a reliable outlet in Latin America, at least not a basket in which to put all its eggs.

The pundit's points are all designed to craft a message for his target market, which seems to enjoy baloney. I'll stick with my jamón de jabugo, thanks.