excellent summary Euro Crisis in layman's language

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Valuethinker
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excellent summary Euro Crisis in layman's language

Post by Valuethinker »

http://www.newyorker.com/talk/comment/2 ... lanchester

(from October 11th issue).

Lanchester is consistently one of the best writers about the financial crisis, see

http://www.amazon.com/I-U-Why-Everyone- ... 401&sr=8-1

(called 'Whoops' in the UK edition)
Once in a great while, though, something happens that reverses the loop, and has the moneymen more scared than the rest of us. That happened in late 2007, when the credit crunch began, and it’s happening again now. The cause is the crisis affecting the euro,
If “contagion,” the term favored by policy analysts, spreads widely, governments are going to have trouble borrowing money and repaying their debts; if governments have trouble repaying their debts, the institutions that own those debts—the already stretched European banks—are in serious difficulty.

The condition of these banks, since 2008, has been the elephant in the room, the big issue that everyone is assiduously ignoring


Read more http://www.newyorker.com/talk/comment/2 ... z1gRHNgCPQ
chaz
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Re: excellent summary Euro Crisis in layman's language

Post by chaz »

Valuethinker, thanks for the nice post.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
Soren Aabye
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Re: excellent summary Euro Crisis in layman's language

Post by Soren Aabye »

The article you link to in the New Yorker strikes me as seriously misleading on a couple of important points.

It’s claim that “[w]hat’s roiling the markets is the fact that the governments of the richer European nations, especially that of Chancellor Angela Merkel, in Germany, have been putting the domestic unpopularity of bailouts ahead of their evident economic necessity” is a view that is based on a false understanding of the way that treaties limit the actions of the European Central Bank. For a good (and brief) analysis of this see

http://doug-huggins.blogspot.com/2011/1 ... reign.html

The idea that Germany has only benefitted from the Euro and thus should feel obligated to bail out the peripheral countries (presumably, on an ongoing basis) misreads the history of the Euro I think. There was an excellent article on this in the Frankfurter Allgemeine.

http://www.faz.net/aktuell/wirtschaft/1 ... 52994.html

It is unfortunately written in German. Google Translate makes it unreadable. But here is an excerpt which I cleaned up:

Germany was not the winner of the Euro, as some politicians maintain, but rather benefits from free trade. The huge outflow of capital from Germany to the deficit countries, which came along with the euro is an essential cause for the fact that Germany for a long time had the lowest net investment rate of all OECD countries, carried the red lantern when it came to growth [that is, was in the last place--the caboose of a train carried the red lantern], and experienced mass unemployment, which forced the Schröder government to make painful social reforms. From the beginning of the interest rate convergence, which was initiated already in 1995 through the announcement of the euro, up until the year 2007, the last year before the crisis, Germany had fallen back from third to eleventh place in gross domestic product per capita of the EU countries. The thesis that Germany benefited from the euro in a special way is, in view of these facts, not tenable.

Only after the outbreak of the euro crisis in the years 2010 and 2011, was Germany able to realize above-average growth. But that was partly because it had overcome its own euro-crisis by years of restraint in wages and prices and the efforts of [working to manage its] economy. And it was in part due to a reassessment of foreign risks, which caused German investors to stay in the relatively safe home port. In fact, the economic upturn of the last two years was driven above all by investments. Our country worked itself up from eleventh to ninth place in the ranking of EU countries. The success thus came about not because of the euro but in spite of it and because of the crisis of the euro.


I just wanted to throw the above into the mix. The Euro crisis is complicated to say the least. The New Yorker article puts a bit too much one-sided spin on things for my taste.
Topic Author
Valuethinker
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Re: excellent summary Euro Crisis in layman's language

Post by Valuethinker »

Soren Aabye wrote:The article you link to in the New Yorker strikes me as seriously misleading on a couple of important points.

It’s claim that “[w]hat’s roiling the markets is the fact that the governments of the richer European nations, especially that of Chancellor Angela Merkel, in Germany, have been putting the domestic unpopularity of bailouts ahead of their evident economic necessity” is a view that is based on a false understanding of the way that treaties limit the actions of the European Central Bank. For a good (and brief) analysis of this see

http://doug-huggins.blogspot.com/2011/1 ... reign.html

The idea that Germany has only benefitted from the Euro and thus should feel obligated to bail out the peripheral countries (presumably, on an ongoing basis) misreads the history of the Euro I think. There was an excellent article on this in the Frankfurter Allgemeine.

http://www.faz.net/aktuell/wirtschaft/1 ... 52994.html

It is unfortunately written in German. Google Translate makes it unreadable. But here is an excerpt which I cleaned up:

Germany was not the winner of the Euro, as some politicians maintain, but rather benefits from free trade. The huge outflow of capital from Germany to the deficit countries, which came along with the euro is an essential cause for the fact that Germany for a long time had the lowest net investment rate of all OECD countries, carried the red lantern when it came to growth [that is, was in the last place--the caboose of a train carried the red lantern], and experienced mass unemployment, which forced the Schröder government to make painful social reforms. From the beginning of the interest rate convergence, which was initiated already in 1995 through the announcement of the euro, up until the year 2007, the last year before the crisis, Germany had fallen back from third to eleventh place in gross domestic product per capita of the EU countries. The thesis that Germany benefited from the euro in a special way is, in view of these facts, not tenable.

Only after the outbreak of the euro crisis in the years 2010 and 2011, was Germany able to realize above-average growth. But that was partly because it had overcome its own euro-crisis by years of restraint in wages and prices and the efforts of [working to manage its] economy. And it was in part due to a reassessment of foreign risks, which caused German investors to stay in the relatively safe home port. In fact, the economic upturn of the last two years was driven above all by investments. Our country worked itself up from eleventh to ninth place in the ranking of EU countries. The success thus came about not because of the euro but in spite of it and because of the crisis of the euro.


I just wanted to throw the above into the mix. The Euro crisis is complicated to say the least. The New Yorker article puts a bit too much one-sided spin on things for my taste.
Soren

There is of course a debate and a 'german view'.

But Germany runs a current account surplus with the Euro Zone almost exactly equal to the deficit of the countries which are in trouble.

That is straight evidence that the German currency is pegged too low against the other European currencies via the Euro. Otherwise the Dmark would appreciate, and the CA deficit would close.

In addition Germany did not have the major bank failures of the Anglo Saxon countries in the crisis, but neither did any Euro country but Ireland. And, now, the German ifnancial system is coming into question-- some quite serious bailouts going on.
plnelson
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Re: excellent summary Euro Crisis in layman's language

Post by plnelson »

Valuethinker wrote:
But Germany runs a current account surplus with the Euro Zone almost exactly equal to the deficit of the countries which are in trouble.

That is straight evidence that the German currency is pegged too low against the other European currencies via the Euro. Otherwise the Dmark would appreciate, and the CA deficit would close.
Or it means that Germany is more productive. Since they all have the same currency it's hard to argue that Germany's net exports to the rest of the EZ are due to some exchange-rate advantage.

The real problem is that putting so many countries with such huge differences in industrial policy, culture, productivity, etc, under the same currency was bound to end in tears. Merkozy's plan for tighter integration will only make it worse.
Soren Aabye
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Joined: Fri Aug 19, 2011 5:02 pm

Re: excellent summary Euro Crisis in layman's language

Post by Soren Aabye »

Valuethinker wrote: There is of course a debate and a 'german view'.

[I agree.]

But Germany runs a current account surplus with the Euro Zone almost exactly equal to the deficit of the countries which are in trouble.

[I agree with everything except the "But". (Meaning, I dont' think this fact about current account balances runs counter to anything in either the article you quoted or my post.)]

That is straight evidence that the German currency is pegged too low against the other European currencies via the Euro. Otherwise the Dmark would appreciate, and the CA deficit would close.

[Absolutely right.]

In addition Germany did not have the major bank failures of the Anglo Saxon countries in the crisis, but neither did any Euro country but Ireland. And, now, the German ifnancial system is coming into question-- some quite serious bailouts going on.
Yes. Indeed.
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