Monday, November 21, 2011

A Few Thoughts On The Euro Crisis

Just as a communist might argue that "true communism" has never been tried, dismissing the Soviet Union, China et al as flawed implementations that don't invalidate the basic model, you could argue that there's never been such a thing as "true capitalism" or "free market" outside of say the local car boot sale. To a greater or lesser degree governments have always put their oars in, special interests wielded their baleful influence - and individual capitalists done their best to establish monopolies or cartels, destroying the market.

But, at least as far as the post-war period's concerned, all that pales into insignificance compared to today's interventions. For at least the last four years, all investment decisions have turned on what governments will do. As Jonathan Weil put it three years back :

"... the clearest path to making money in the public markets is to know in advance what the government plans to do next ... and when - and then trade on it. Let there be no doubt: Plenty of people with access to such inside information are enriching themselves this way now."

Prime example in the UK - the Bank of England Pension Fund, who moved the bulk of their assets into inflation-proofed securities when they started printing money.

Today's big question - will Germany either

a) print ?
b) bail out Southern Europe ?
c) neither - at which point defaults start, absent
d) Euro-area fiscal union - with Germany running the show hands-on, because while they may trust the Irish, Dutch and Finns, they can't trust the Greeks or the Italians, and maybe even the French ?

Now either a) or b) will see a surge in global stock prices - even though it won't actually address the "structural imbalances" - a PC way of saying that the Germans are German and the Greeks are Greek. It's just kicking the can down the road for another few years - but when have the markets worried about the long term ?

c) will see a collapse of prices, the break up of the eurozone and perhaps 2008 all over again, until the realisation dawns that the sky hasn't actually fallen and that Spain, Italy and Greece are better off with their own currencies (though leaving would be seen in all of those as a national humiliation). But the "imbalances" would at least be fixed.

d) - "now this is the d you can't see, said the cat" - can you really see German civil servants and Bundesbank officials sitting in Greek government offices and out enforcing tax collection ? Not at all sure I can. If anything was likely to cause major friction 'twould be that - and I don't think the Germans want to be Europe's police and civil service. They'd just like the Greeks and Italians - well, to be more like Germans. We can all dream.

And, talking of major friction, I'm yet again impressed by the UK left - for the last 20 years we've been hearing from them how much more sensible and better-organised the Europeans are, and how the awful little Englanders just don't appreciate how much better off we'd be in a closer European embrace.

But now they're warning that if the Euro breaks up, the continent faces descent into war. I heard Richard Horton, editor of the Lancet (of "Everyone Dead in Iraq" fame) on Any Questions (in Ely) a few weeks ago. Asked about the possibility of the Greeks leaving the Euro, he launched a hysterical rant on the subject of 50,000 Jews being deported from Greece during WW2 and implied that a replay was on the cards in the event of a Greek exit. Apparently the lovely Europeans, who we should all strive to emulate, are only restrained by the EU from slaughtering each other ... looks like a late conversion to the Peter Hitchens thesis (written, admittedly, before Britannia went on crack and started working the streets) that "Britain is the only virgin in a continent of rape victims".

To be fair, the left is being given ammunition by a host of Eurocrats fearful for their jobs. I'm not at all surprised that Herman van Rumpy-Pumpy waves the grisly spectre. Where else would he get so much money and power ? But I think the Polish Finance Minister needs to take an aspirin and have a lie-down, rather than warning, as he did last Monday, that Euro breakup would lead to a European war.

Now all the way along Germany's been saying "we will do what we have to do to support the Euro" at the same time as saying "we won't print or bail out". Does not compute.

The conventional wisdom is that the Germans won't print because they're scarred by the memory of Weimar and wheelbarrows, although that took place nearly 90 years ago. Not so, according to a commenter at FT Alphaville.

"the Weimar hyperinflation is often cited as the main reason for Germany's 'obsession' with sound money. But visiting Germany frequently on business and speaking to Germans I doubt that. Most people alive today did not live through that period.

The real reason is that post WW II-Germans got used to their DM as a reliable store of value and kept on doing that with the Euro. Only 40% of Germans are home-owners, as indeed, under a stable currency renting often makes more financial sense. Germans don't invest in the stock market but prudently put their money in cash in a savings account.

Hence, the typical German family is completely unhedged against inflation, and is therefore worried about it.

For the average German who has worked and saved 20 to 30 years, it is actually a better prospect to live through a deflationary depression and have a 30% chance of being out of work as opposed to seeing his life's savings wiped out through currency debasement. That's what's driving German politics, not the Weimar memory."

In the buy now, pay never UK the chancellor can take a political decision to bail out borrowers by printing, to the detriment of savers - because borrowers massively outnumber savers. In Germany the prudent ARE the electorate.

So will Merkel print ? IMHO yes - once a big enough disaster has happened - maybe a Greek default or euro-exit. She'll remember all the promises that were made to the electorate when they lost their beloved DM - then she'll break them.

But that's predicated on the guess that she won't want to be the one bringing the Euro down. And I might be wrong (to be honest, I think that massively ripping off the responsible and sober German electorate is far more dangerous than Greece or Italy defaulting).

Any ideas ?

15 comments:

Anonymous said...

I think they will print if they can get away with only Greece going down, but surely if Spain and Italy continue to be revealled to be in worse and worse condition too much printing would be required to have any effect?

Yaffle said...

The Euro-militaries (with the possible exception of France's) are so emaciated, they'd have a hard time waging any kind of war against each other, even if they wanted to

John F said...

The Germans will print.
It is unavoidable.
It is merely a question of when: before or after the euro breaks up?

They will be compelled to do so EITHER to prevent the euro breaking up OR as a consequence of a brakup.

To prevent it: bailouts on sufficient scale imply "eurobonds" which effectively means printing, fiscal union alone is not quick enough to outpace the collapse.
Direct massive ECB purchase of bank and govt. debt is required.

As a consequence: because euro breakup and related defaults and finance crises would imply disaster for the German banks alongside a massive collapse in German exports.

The German banks are massively exposed to PIIGS bonds directly (figures north of €68bn IIRC) and even more so indirectly via inter bank debts to French, Austrian and Dutch banks (many of which are effectively bust now) and in turn their governments. Never mind the question of who is left holding the ECB debt baby.

And as Pepijn says, the Germans money is in their banks. No German government will let those savings be wiped out.

So, either the banks are 1)nationalised outright or
2)the Bundesbank supports them.
(And fudging the issue by saying "OK, we let the banks fold but protect the depositors" makes no difference.)

And the huge debt finance obligation for the German govt. of 1
(on top of a fiscal crisis due to collapsing tax revenues and rising unemployment benefit bills), ensure that either 1 or 2 mean in effect: the presses must and shall roll.

We are way past the point where there are any real choices left.

Gallovidian said...

If there is another European war can we opt out this time?

The last two did not do us the slightest bit of good.

bensix said...

Rompuy says...

In every member state, there are people who believe their country can survive alone in the globalised world. It is more than an illusion: it is a lie.

I've never been to Norway but from what I've heard it's not a charred wasteland, stalked by gibbering madmen.

Anonymous said...

Rompuy et al are setting up straw men of course but we expect that from them anyway.

"Continent of rape victims"

And they have been raped again with the single currency.

Anonymous said...

The term "Little Englander" was invented at the time of the Boer War to describe the kind of liberal-left people who thought that Britain should not have an empire, and should merge her identity in Europe. In short, people like the Lib Dems or the BBC Euro-toadies of today.

In those days, the pound sterling was the world's strongest currency and was backed by gold -- hence the Boer War, to ensure our control of the world's largest goldfields.

These days the US dollar, backed by nothing, is the world's reserve currency. It is Uncle Sam's printing presses we should be worrying about, not Cousin Fritz's.

Foxy Brown said...

The long-deceased Nick Ridley was correct in his comment that the Euro-project was: "A German racket designed to take over the whole of Europe". Ultimately, he who pays the piper calls the tune.

Foxy Brown said...

May I add I don't dislike the Germans. On the contrary...

dearieme said...

"The Euro-militaries (with the possible exception of France's) are so emaciated..": but haven't the Germans only just stopped making everyone do two years of National Service? Still, the French have nukes and the others don't. (Or say they don't. A friend of mine who worked in Switzerland half-suspected that they might have some.)

dearieme said...

"If there is another European war can we opt out this time?" It would help if we got the troops home from Germany PDQ.

Mark said...

Barroso has today upped the ante with talk of ECB backed Euro denominated 'stability bonds' - a wheeze Merkel is sure to hate.

Meanwhile the yield on German bunds yesterday topped 2%- stratospheric by recent standards.

The 'Euro Crisis' in other words seems to have escalated a further notch- and I certainly wouldn't dare predict how it'll end.

James Higham said...

Currencies are going to be revamped into SDRs from CBs and funds like the IMF.

Furor Teutonicus said...

XX dearieme said...
but haven't the Germans only just stopped making everyone do two years of National Service? XX

12 to 18 months. And yes.

Something about not being able to afford it because we have to pay for lazy bastard Greeks to carry on being lazy and bastards.

Burberry bags on sale said...

Thanks for share.