Tag Archives: Eurozone crisis

Either there’s parity between M0 and M1 or there isn’t

For a given currency such as the Euro, either there is 1:1 parity between M0 (central bank money) and M1 (commercial bank money) or there isn’t. Actualy many problems would be mitigated if there was no guaranteed parity, i.e. if bank deposits could fall in value when monetary-financial bubbles burst. If in 2008 there had been a haircut on all bank deposits to write off bad debts, that would have been much preferable to austerity as a means of rebalancing. At least it would be so in substance – selling it to the public would have been a challenge.

However, parity or not parity has to be uniform across a currency. If Euro-denominated bank deposits in some Cypriot banks are overvalued and must be cut then all Euro-denominated deposits in the zone must be cut equally, by a smaller amount. That is necessary for a single currency and banking system to work. Otherwise, Cypriot bank money, or Greek, or whoever’s is next is not actually trading 1:1 with German bank money due to risk perception and we don’t really have a single currency. Or more accurately we have single M0 (central bank money and printed notes) but M1 (bank deposits and nearly all inter-bank payments) is already fragmented and exposed to de-facto exchange rate risk. That risk premium is opaque and thus much higher than if it were a properly floating national currency. Greek businesses, and presumably soon Cypriot ones, are unable to pay for imports with Greek-bank M1 (bank money) at parity. Businesses in countries with stricken bank systems are de-facto thrown out of the single currency already.

The Bundesbank hawks can’t have it both ways. Either the Euro is a single currency, which means a Euro in a bank in Cyprus is a Euro in a bank in Italy is a Euro in a bank in Germany so you can use it for payments, or it isn’t. That absolutely means that whetever happens to one Eurozone commercial bank in terms of crisis response has to be collectivized across the zone. Otherwise we don’t have the benefts of a single currency. We just have the penalties and there is no reason that electorates should accept such a flawed construction.

Europe’s two problems

Europe has two big problems. Doubtless one of them is political, or to put it more precisely, it’s in the space of national politics.

The post-national European project has  stalled. It has certainly taken us a long way, from warring nation-states to an open community where we feel free and entitled as citizens throughout the continent. We’ve largely lost our national identities, and it may come as a surprise to Americans that we don’t care about our flags. National cultures are cherished as heritage, but not something to be defensive or overly proud of – certainly not something to kill or die for. The nation state was born in Europe in the 1700s and it died in Europe in 1945. Generations of visionary leaders have taken the people of Europe from the aftermath of an existential war to a point where the state is little more than an old-fashioned cultural and administrative unit. It took a lot of paternalism and manipulation to get us here, but on the whole we are grateful. Even the insular British do not prefer to go back to a time of animosity where crossing the border to Germany or France had the significance that entering Israel or Iran has today.

The problem is that after the Maastricht treaty and the introduction of the Euro the post-nationalist transformation has stopped. The Euro obviously came too soon for Europe, but also obviously it was the first of a sequence of bold steps that the then heads of state could not take all at once. Having the Euro is like putting one foot on a moving streetcar, but not climbing on board, instead limping desperately after it with the other foot on the street. The onward steps were very much expected and obvious, but they didn’t come: an elected European presidency; real powers for the European Parliament or some reformed elected chamber; continent-wide taxation, social security, and pension systems; business reform to allow companies to operate across the zone without country subsidiaries; stronger education, development, and technology agencies. None of this happened. The Euro and the ECB were the last post-national institutions that Europe saw.

We haven’t stopped to ask why. Continue reading →

Greeks should vote against Merkel tomorrow

I’ll vote against Angela Merkel in the upcoming Greek elections, and I think it’s very important that all with the right to vote in Greece do so. The choice is as follows:

If Antonis Samaras, the conservative New Democracy party gets elected his government will implement the austerity, deflation, and asset-stripping recipe/punishment prescribed by big European Capital through the German government. The economy will continue to deteriorate, a lot, until whatever is left of Greek capital (mostly small and medium business) is destroyed and Greece becomes a cheap labour and no social safety net state. There will be riots, fascism, and widespread hardship in Greece especially amongst old people and the self/family employed. The successful enforcement of austerity and de-capitalisation will be roundly seen as a triumph by EU and international capital, and Spain and Italy will be next in line for the same treatment. That is why the Greek press and even the German edition of the FT are practically intimidating Greeks to accept it. Vote this way or unspecified bad things will happen.

If Alexis Tsipras of the left SYRIZA (means “from the root”) party wins, his government will reject the terms of the austerity and impoverishment package and force a re-negotiation. He is not especially anti-Euro and neither is Greek public opinion. A hard rejection of the austerity terms by Greece will force the Eurozone, meaning the ECB and Ms. Merkel, to shelve the “austerity for the losers” doctrine and come up with something else. There will be a period of frantic deliberation, whose possible outcomes include: very optimistically reforming the Euro to a model that works and is under political control like the US Fed; realistically some form of flawed compromise with the Euro and ECB in the hands of private capital but with a human face; and pessimistically and unlikely a breakup of the Euro. In the latter case, Greek savers will lose another chunk of their savings (unless they move them to other EU banks, in which case they may lose them outright due to unpaid Target 2 balances). Germany will be stuck with a strong currency and exposed banks, which will require inflation. More to the point, the Merkel government will be seen to have presided over a colossal failure and will likely lose power, perhaps prematurely.

Ten easy ways to fix the Eurozone

I’m bored of hearing prejudiced nonsense about the Eurozone. A lot of what is said in the Anglo-Saxon press, with few exceptions such as Krugman or Ezra Klein, I interpret as either misinformed or pushing an anti EU, either pro-US or in the case of the UK exceptionalist agenda.

The Euro and the EU post-national project has many challenges, but not the ones that dogmatic US/UK commentators churn out. It’s not unsound and doomed to failure as a pegged currency system would indeed be. It’s not demanding of human perfection and discipline to work – that is just the flawed conception of the Merkel government. The Euro won’t collapse if some countries leave, though it would get stronger if a more homogeneous set of countries remain. The Euro is, indeed, a corporatist and pro capitalist construction. That is the idea, to compete with the dollar and to a lesser extent the Yen and RMB. Having the Euro doesn’t mean that European society as a whole has to change to be like America.

The real challenges of the Eurozone are: Different competitiveness amongst regions chiefly due to an imbalance of capital, unwillingness to fix that through redistribution, a single monetary policy that favors the center, and most damagingly a ban on the ECB making use of its powers as monetary sovereign. But rather than bore you by analysing the problems, I’ll offer instead solutions. There are relatively simple solutions to the Eurozone mess, and each of them involves fixing one or more of these problems. These are easy solutions, in the sense that governments can decide and do them. They do not require people or the economy to deliver an orchestrated outcome. All of these solutions are currently blocked, politically, by Germany. Continue reading →

Three options for Europe, three options for Greece

The countries in Europe have different productivity. Germany is large and near the top, Greece has a lot of debt and is near the bottom in productivity. With an open market and easy credit, the mismatch in productivity produces a trade imbalance within the EU, and that accumulates as debt. Poor Europe buys goods from rich Europe partly on credit.

Assuming things remain constant, this credit is nominal only – it’s to keep trade flowing and will never be repaid. This is usually OK. Sovereign debt is usually permanent, and it’s really a monetary instrument (bonds are a kind of slow money) rather than a cashflow debt that’s expected to be repaid. The market will sustain the debt if it matches the pace of growth, so that the debt to GDP ratio is roughly constant. If debt grows much faster than GDP the market gets jumpy and starts perceiving sovereign debt as ordinary cashflow debt, and we get the current mess.

What, then, is to be done? Europe as a whole has three options:

Continue reading →