ARmy Rumour SErvice

Originally Posted by Wordsmith

...
Seems to me that the real fear is Greece exiting the Euro and, after a period of economic turmoil, starting to recover.

Then the dominoes would start to fall...

Wordsmith

He's entirely wrong to compare Greece with Iceland, they burnt their banks and took the pain but didn't have to swap currencies, with a population that's stockpiled the old one.

One of the things that's been reducing the pain inflicted by austerity in the PIIGS is a ballooning grey economy, a secondary brown envelope system beyond the reach of the state, so revenues sink, investment disappears and crime rises but folk rub along as the country crumbles about them.

Yerman Yanis was saying on the BBC this morning attempting to return to the Drachma you'll get a twin track economy, a bit like Turkey in the 90s, a grey one for the better off in Euros and another running on increasingly valueless Drachmas, a transition could be long and very bumpy.

The rest of the Eurozone could well have gone up in smoke within months, the banks look increasingly jittery. With the rest of Europe already depressed a tourism boom is even less likely than one in ship building, in those conditions folk'll return to subsistence agriculture or flit to brighter prospects. Not that things look bright for the Bubbles within the Euro, a high degree of austerity is a given but not helping them exposes the richer nations' banks to increasing risk so they are not without leverage, at least until a bigger one of the PIIGS defaults.

If you start looking at a post euro Europe things start to be allot less frightening then if you just fixate upon the demise of the Euro.

Euro area is viewed as a high risk investment at this time but that has not been the traditional view of Western Europe. Something has entered the picture recently that has altered risk level from the normal low risk level that Europe has been for past 50+ years. It's fairly clear that Euro is in fact what has changed Europe into a high risk with medium at best returns investment.

That would lead to the answer that dumping Euro is the fastest way to restore confidence in Europe. There will of course be a bloodbath caused by death of Euro. But removing euro and taking the consequences is the only way to move past current crisis.

The big fear is massive devaluation once countries leave euro but I doubt you will see devaluations of more then 30%. Europe needs it wealth to finance its economies it needs it wealth to pay off all pensions that are coming due. The above will limit devaluation to what is required to restart these countries economies while at same time limiting the amount of wealth destruction to as little as possible. There will also be a upward increase in some European countries currencies as compared to prior euro exchange rate. That will allow for very rapid shifts competitiveness between European countries as the upward increase of some European currencies reduces the size of devaluation in others. If you use USD as measuring point then northern European currencies increasing 20% versus USD while southern European currencies drop 20% against USD should restore economic balance to Europe economies without need of causing a massive bout of wealth destroying inflation.

The worst part of dropping euro is the uncertainty caused by waking up one day and finding all the assets and debts you own and owe are no longer priced the currency that you had originally agreed to when you acquired both. The above idea is just massively distaste full to everyone involved in finance. But just because people hate the idea doesn't change fact that it's the only viable course.

The bankers that will have there euro assets and debt converted into drachma and marks again have all been in same situation prior to the creation of euro. The intertwined nature will turn many investments into basket investments in European economies. Once there correctly weighted in regards to there currency mix they will be liquid again. Memory of a pre-euro Europe still exists and system will re-adapt fairly quickly to the return of the old order.

Politically it will mean the current France/Germany dominance of EU will end. European bankers will also be knocked down a few pegs because of the loss of euro. But Europe's economies should finally be positioned to recover and EU while weakened will still be there.

Good to see posters thinking about it.
What really changed was a financial stress test without par.
It has tested every economy in the developed world, and the only difference between the Eurozone and others, is the speed and dynamics of papering up the cracks.
The clever question to ask would be what would the situation be if 17 countries had their own currencies still? I was hoping somebody would.
The modeled answer is a sequence of national bankruptcies without par, and a highly variable final outcome based on freezing markets. With size and diversity comes stablility, despite weaknesses.

Eurogeddon is not going to happen, even the Greeks leaving (and the risk has only gone from circa 25 to around a 30% chance - so a possibility rather than not likely) would only result in flood of ECB money. Painful, but ultimately manageable in EVERY realistic scenario.

I would have to disagree with your last point. The EU structure is what has been shown to have weaknesses, not the Euro itself which has proven remarkably resilient.

I think the next thing to get stress tested will be Merkel.

Germany isolated as Latin Bloc calls the shots - Telegraph

The eurozone's 'Latin Bloc' is in full revolt. The trio of French, Italian, and Spanish leaders - backed by world powers - are to push for a radical shift in Europe's economic strategy at crucial summit on Wednesday. The package of measures includes an EMU-wide guarantee of bank deposits aimed at halting a slow bank run across southern Europe, as well as demands for full activation of the European Central Bank as a lender of last resort.

They will propose eurobonds to finance an infrastructure blitz, a sort of Marshall Plan to revive confidence even if long-term benefits will take years to feed through.While the moves are couched in diplomatic language, the clear aim of French premier François Hollande, Italian premier Mario Monti, and Spanish premier Mariano Rajoy is to wrest control of the EU's governing machinery from Germany.Mr Monti said over the weekend that Mr Hollande's "entry into the game" had changed Europe's political dynamics. He has an ally "on the same wave-length".

At the risk of blowing my own trumpet, I did flag up some time back this might happen if Hollande got in. So now Germany is about to find its going to be expected to hand over large sums of money to bail out France, Italy and Spain. That'll go down well in the 'latin bloc'. Somehow, I don't think it'll be viewed too happily in Germany. They've done handsomely out of the euro in the last decade or so - the bill is just arriving.

From Merkel's perspective, she faces an election next year. Agreeing to hand over German dosh to Club Med might well be electoral suicide for her - and she might need to call a referendum on the German constitution to get round the hurdles placed in her way by the German constitutional court. I can't see a relaxation of the German constitution in order to hand out German cash being too easy a referendum to win.

I'd give good odds Merkel digs her heels in.

Matt King, credit strategist at Citigroup, said Italian banks lost €160bn in deposits last year and Spanish banks lost €100bn, based on the ECB's Target2 payments data. The pattern seen in Greece, Ireland, and Portugal -- where deposits have together fallen 52pc -- is that a haemorrhage is hard to halt once it begins. "Capital flight, is a self-reinforcing process. It will stop only once there is decisive policy intervention. The longer investors have to wait, the more decisive it will need to be," he said

Target2 data is publicly accessible, so I'll assume Citigroup have got their sums right. It would be appear to be yet more evidence of what one commentator has christened the 'bank jog'. Money is not exiting southern Europe fast enough to be called a bank run, but the slow sapping of confidence in the euro is leading to investors progressively moving their money to safer areas.

Italian 10 year bond yields are 5.75%, Spanish ones 6.25%. I would have thought both figures were high enough to cause concern, particularly as the Spanish figure is now above 6% and staying there. Of the smaller economies; Portugal's 10 year rates are 12.1%. Irish rates to be fair have fallen back from their peak, but have recently started on a gentle upward trend again and are currently at 8.2%. I don't think either of those two countries is going to be back in the long term bond market any time soon.

As some point the ECB is going to become involved again. The last time it did was late last year with the LTRO. The 1 trillion euros it pumped into the euro area was the biggest injection of liquidity in the euro's history. It brought roughly 6 months of respite. There is a pattern of ever bigger injections of cash buying ever less time.

We're now in the position that there are no easy options left, only painful ones. And as the time for painful decisions nears, countries will increasingly look to protect their own national interests.

Wordsmith

I have grown much more pessimistic about euro recently really just in the past few weeks.

When issues started in Italy my views were basically in agreement that ECB would just print money. They have done so but not to the degree needed to end crisis. My question would be if they will? then why haven't they already? Making matters worse by waiting while Europe falls back into recession doesn't seem like a wise plan.

I also agree in theory that euro should have been a source of stability not instability but clearly at present time its not. I actually would have thought euro would have taken much longer for under lying faults to grow to crisis proportions another twenty years are so. I expect that euro was badly mauled by US financial crisis and not helped at all by Obama's massive expansion of US government debt sucking up a large amount of world available capital.

I would disagree about things being worse without euro. Had euro not been around Greece and Portugal would have hit the wall years ago. Contagion would have been fire walled by fact them still having there own currencies. Ireland and Spain would not have been flooded with as much foreign into there real estate markets giving them the strong likely hood of avoiding crisis outright. France and Italy along with rest of Europe would have had much higher restraint in there spending over the last decade. German mark would have increased in value over the decade reducing its trade surplus with the rest of Europe.

Now I agree if you use starting point of exactly the same position as those countries were in at start of Greek crisis but without euro then yes they would be worse off, But they would have never been in that position to start with without the euro and would have been better of because of it.

I do see a very good chance of reforging Euro again in near future with a better structure that provides benefits with out the current extreme downsides.

Here's am interesting story from Ekathimerini.

ekathimerini.com | Tsipras takes message of solidarity to Europeans

Coalition of the Radical Left (SYRIZA) leader Alexis Tsipras began his brief tour of Europe on Monday by telling his French audience that his party’s opposition to austerity is in the interests of all Europeans. Tsipras held talks in Paris with the leader of France’s Left Front, Jean-Luc Melenchon, who won 11 percent in the country’s recent presidential race. In a show of unity, the two men sat side by side at a news conference. Tsipras is due to meet with German leftists on Tuesday, when he is expected to continue his criticism of Greece’s EU-IMF loan deal.

“This is a European experiment to inflict a neoliberal political shock on a country which will lead to an unprecedented humanitarian crisis,” he said. “We are here in Paris and we will be in Germany tomorrow to explain to European people that we have nothing against them. We have no differences to settle. "In Greece, we are fighting on behalf of Germans, French and all European people.”

Tsipras said: “Financial capital, bankers and capitalists have joined forces in a European union against Greeks. They want to destroy Greece so they can attack Europe.”

Tsipras referred to New Democracy chief Antonis Samaras as an “imitation” of defeated conservative French President Nicolas Sarkozy and called on the latter’s successor, Socialist Francois Hollande, to live up to promises about growth. Hollande turned down the chance to meet Tsipras, citing protocol.

“[Hollande] should know that he will soon have to answer crucial questions,” said the Greek leftist. “He will mainly have to answer whether all he said before the elections is valid after the elections because the French people sent Mr Sarkozy to vacation in Morocco not so he could be replaced by someone that will implement the same policy but by someone that will change that policy.” Tsipras underlined that he has no intention of renegotiating the EU-IMF memorandum but intends to reject it. “The dilemma at these elections is catastrophic austerity or the prospect of hope by canceling the memorandum,” he told reporters. “The memorandum cannot be negotiated because hell cannot be negotiated.”

Tsipras is giving every appearance of being a very canny politician, well able to read the political winds and trim his sails accordingly. His message of "I want to stay in the euro, but I also want to save Greece" is gaining real resonance and his poll lead is holding up well.

And this charm offensive is a clear attempt to dispel the image that he's a mad left wing ideologue. Instead, he's (successfully in my mind) managing to convey the impression that he's a heavyweight politician capable of meeting other European politicians as an equal.

Syriza are looking a good bet to be the biggest party in the re-run elections.

Wordsmith

Edited to add: found a good comment from Tsipras in the Athens News:

“if the Germans want to sell washing machines to Greece then they have to pay for the single currency”.

Pithy but accurate.

Originally Posted by Siddar

I do see a very good chance of reforging Euro again in near future with a better structure that provides benefits with out the current extreme downsides.

But then you come back to an old debate in this thread.

1) You could make the euro workable with political and fiscal union.
2) You would have to have a transfer union with subsidies going from north to south
3) Those options are going to be politically unpopular in the extreme - and would be thrown out in a referendum in many countries

So how do you square the circle of what's financially necessary is politically impossible?

Wordsmith

The above questions would have to answered in advance. If not then forget the whole idea.

Every country would have to decide if joining was in there interests after knowing what the answers to above question were.

Compared with current euro that just ignored the questions and charged ahead.

I still see a broad desire among Europeans for a euro that provides the stability that was promised for current euro. In fact entry into a new euro as a reward for reform would likely have much more of a chance at succeeding in producing reforms then the current austerity path. The key is to not bend entry rules in order to speed things up like was done with current euro.