Is the Euro well and truly buggered?

@cicerone imposter,

Ask the poor French people who are taxed to the maximum, cicerone!

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@CalamityJane,

Very interesting observations Calamity. I was surprised at the strength of Chancellor Merkel's majority in the recent Bundestag vote on the increased bailout fund, and agree that this was an important political victory for her.

My concerns stretch the limits of my own understanding of finances. Most of the Greek debt is held by French and to a lesser extent German banks. Greece is already effectively unable to issue more bonds without external guarantees, and it still hasn't reduced the costs of its government enough to pay for it with current tax revenues. It does look to me as though the ECB is simply issuing new debt to replace old unsound "assets" on its balance sheet and in the balance sheets of the major banks of member countries. Ultimately it is an illusion. This is particularly true if Greece fails to take and deal with the losses it has already incurred - and effective action on their part appears very unlikely to me.

I assume your references to the lack of understanding of the EU on the part of many Europeans are related to the sometimes odd (but often practically successful) circumventions of democratic process in expanding the role of EU governance and regulation. I have long thought that these actions (repeated plebicites, rewriting treaties to be passed by parliamentary action, etc.) involved merely delaying the resolution of a growing pile of political problems, the accumulation of which could one day become catastrophic. Still there is no denying the remarkable economic and political success the EU has achieved so far with this very pragmatic approach.

Election defeats of Merkel and Sarkozy could change the political face of Europe. Who would replace them? The French Socialists don't appear (to me) to have any credible candidates.

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@georgeob1,

It surprised me too, George, but Angela is one tough cookie. She reminds me of old Margaret Thatcher at times. Unfortunately, the Germans don't like her style of governing and after the big scandal and resignation of Guttenberg (who falsified his Phd) who was seen as her protegee and successor, Merkel and her party fell into further disapproval.

It looks like that the Social party will win the next election, Peer Steinbrueck is a good candidate, but with the current turmoil and shifting in parties and its leaders, it's hard to tell.

As for Sarkozy, he's an egocentric, ineffective politician and the the recent
victory over Libya won't sway the French either - they could care less. Sarkozy had his chance and he blew it. I think Martine Aubry will be a better win. Right now she's neck on neck with Francois Hollande, so it's hard to tell as well.

I agree with you, George, Greece is unable to issue more bonds and it seems that the EU is throwing good money after bad, yet there is just no alternative. The EU cannot simply leave them stranded and fend for themselves after such a fiscal fiasco. It's not the right thing to do. Morally and financially, the EU needs to extend their support. There is no way
they'll ever exclude Greece from the EU - unless the Greek initiate it and they're not that stupid.

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@CalamityJane,

Quote:

yet there is just no alternative. The EU cannot simply leave them stranded and fend for themselves after such a fiscal fiasco.

There was, the EU could have taken the position that they were defrauded by the Greeks, and that as a result the EU owes Greece nothing. They could have cut Greece loose with the promise to give them another shot at entry when and if they get their act together. All of the other countries would then claim that they did not perpetrate the fraud that Greece did where upon the EU would promise that all of the other countries would be support by the EU IE not dropped like Greece was.

It is too late now, but the EU is in this mess with Greece still only by choice.

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@CalamityJane,

I generally agree. However, it is not clear to me that Greece can be saved without risking worse calamities to other parts of the EU that are trying hard to claw their way out of the current financial difficulties. Ireland and Latvia are taking the harsh medicine and producing current surpluses with which to deal with their (largely non structural) debts. Spain is addressing the undercapitalization of its banks and cajas; etc. Only Greece hasn't as yet done anything serious to limit government expenditures, and now almost two years into the crisis still presents its EU benefactors with current deficits and a still overwhelming and built in dependence on borrowed money.

I also suspect that the (perhaps illusory) desire to protect their own banks is at least as important as the moral issues to which you refer, in France and Germany particularly.

Wasn't it Martine Aubry who intrroduced the 35 hour week in France? I'll confess I don't understand French economics very well. They have a largely state-controlled economy with government representation of the boards of most major firms, and an elite cadre of Enarchs who run most institutions. Despite these impediments (as they seem to me) they appear to do rather well.

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@georgeob1,

The French economy putters along because of a national consensus. Corporations provide generous pay and benefits packages, which allows the government to tax more moderately than they would otherwise be obliged to do. Paying benefits through government is grossly inefficient, it is much better if the benefits are disbursed by employers who already have the cost of managing payroll. In the 1968 riots in Paris, students joined labor in the streets and it was then that the national consensus was born. Much like the Japanese, the French are paranoid about the ability to feed themselves, so agriculture occupies a special place in the equation, as well. Because France can feed itself, because they have some tried and true and reliable value added exports such as wine, their only large foreign exchange drain is for petrolem. Since the late 1970s, France has invested heavily in nuclear energy--when i worked at the University of Illinois, there were heaps of French students there with a full ride from the government studying nuclear engineering--i'm sure it was the same at many other American universities. What distinguishes France from most other countries, not just in Europe, but anywhere, is that they take a long view and for as divisive as their politics may ever get, they have a "we're all in this together" attitude, so they seek consensus and they hammer our compromise.

Of course, none of this is palatable news to your less thoughtful conservative bretheren who blindly hate France because they won't play lap dog to the United States.

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@CalamityJane,

Don't you guys ever talk to anybody in the German Finance Ministry? They've written off Greece and Portugal, are carefully checking out Ireland, and they're gleefully quoting to all visitors the devastating Michael Lewis article in November's Vanity Fair: California And Bust. We're next.
http://www.vanityfair.com/business/features/2011/11/michael-lewis-201111

Quote:

.......What happens when a society loses its ability to self-regulate, and insists on sacrificing its long-term interest for short-term rewards? How does the story end? “We could regulate ourselves if we chose to think about it,” Whybrow says. “But it does not appear that is what we are going to do.” Apart from that remote possibility, Whybrow imagines two outcomes. The first he illustrates with a true story, which might be called the parable of the pheasant. Last spring, on sabbatical from the University of Oxford, he was surprised to discover that he was able to rent an apartment inside Blenheim Palace, the Churchill family home.

The previous winter at Blenheim had been harsh, and the pheasant hunters had been efficient; as a result, just a single pheasant had survived in the palace gardens. This bird had gained total control of a newly seeded field. Its intake of food, normally regulated by its environment, was now entirely unregulated: it could eat all it wanted, and it did. The pheasant grew so large that, when other birds challenged it for seed, it would simply frighten them away. The fat pheasant became a tourist attraction and even acquired a name: Henry. “Henry was the biggest pheasant anyone had ever seen,” says Whybrow. “Even after he got fat, he just ate and ate.” It didn’t take long before Henry was obese. He could still eat as much as he wanted, but he could no longer fly. Then one day he was gone: a fox ate him.

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@High Seas,

Quote:

Don't you guys ever talk to anybody in the German Finance Ministry? They've written off Greece and Portugal,

Almost everyone has written off Greece, which is why the politicians talking about how Greece must be saved, can not default or leave the euro is so disconcerting. They have taken off the table the only solutions that are known. So now what? Without a credible new option they look like people who refuse to deal with reality.

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@Setanta,

It's the British I really hate. In many ways the French are more like us. They think they are the center of the world and believe that everyone should speak as they do.... all very American.

In the Indian ocean during the 1980s we worked very closely and routinely with French naval forces operating out of their base in Djibouti. We refuelled the carrier routinely from a very modern French oiler and operated almost daily with their carriers (Foch and Clemenceau in those days). Lunch on Foch was a particular treat. Their only constraint was no publicity, which was OK by us. Periodically the Brits would send out an Admiral (but no ship) to host a press conference aboard one of ours.

Actually I don't hate anyone.

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@georgeob1,

You'll note that i referred to your less thoughtful conservative bretheren.

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@georgeob1,

Yes, Aubry successfully introduced the 35 hour week and that's why she probably has a slight advantage over Hollande. The French economy actually looks quite rosy in the years to come, especially when they start selling electricity (at a prime rate) to the paranoid Germans who virtually shut down most of their nuclear power plants.

Yes, aside from Ireland and Latvia, there is also Portugal which has turned around its debt and is working towards a better economy. Greece is a different story and to understand them you have to know the people and their stubbornness to comply. It's in their mentality to spend tomorrows expenditures today and not worry too much about tomorrow and unfortunately, the Greek government isn't too conservative in monetary issues either, but I do think that with added pressure from the EU and harsher sanctions towards expenditures, they can turn their economy around. Greece has tremendous income from tourism and even China is trying to help and vouched to buy Greek olives en mass to stimulate the economy. Greece has no other options as to tighten the belt, and they will.

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@High Seas,

Well, I don't think you can look at California alone, the United States has its own fiscal crisis and despite what Obama said that it is due to the EU financial crisis, the U.S. created this mess all by itself. Greed, greed and greed comes
to mind when trying to analyse the U.S. crisis.

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@CalamityJane,

Well greed is fairly ubiquitous in this world. For example, I don't think I would exempt the Greek government employees who rioted when the government finally cut off their extra pay for the "13th & 14th months" of the year. Indeed greed is what makes economies run. The socialist attempts to do without it in centrally planned economies ended up resorting to far worse measures to extract productivity from their people, and they didn't get very much of that for all their cruelty and murders.

In addition, I don't really see much that is different in the behaviors that led up to the parallel crises in Europe and this country.

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@georgeob1,

Yes, you are right, greed is not exclusive to the United States and the Greek crisis is a prime example of greed, from the government level down to the last Greek citizen who received social security payments on their deceased relatives for years and years. However, the fiscal crisis in the United States is not a result of the parallel crisis in Europe, as Obama stated, it is simply not.

I am not so sure I am buying into the greed factor resulting in a thriving economy. Sure, a fair amount of greed is healthy, it motivates us to go the extra mile, but when I see the enormous amount of greed of U.S. financial institutions and their leaders exhibited and still do, then I have to say, the U.S. is unsurpassed in that.

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@CalamityJane,

CalamityJane wrote:

Yes, aside from Ireland and Latvia, there is also Portugal which has turned around its debt and is working towards a better economy. ..

Your information clearly does not originate with Eurostat, which hit the roof when a previously "overlooked" hole of a billion euros in the deficit of the island of Majorca, a Portuguese territory, had to be reluctantly disclosed as part of the bailout audited statement.. a billion here, a billion there, pretty soon you're talking real money, as a senator observed some years back. But the real opposition to Barroso in that joke of a EU Parliament where he presides actually came from a British Conservative, Nigel Farage, who didn't mince words in addressing that Portuguese "EU President":

Quote:

"Now, as a former communist yourself, you probably remember the old soviet leaders getting up to give their speeches and telling everybody that there was a record harvest, or that tractor production figures were terribly good. And they, of course, believed that history was on their side. President Khrushchev got up and said to the West: 'We will bury you'. You know, so much that he believed in his own union. Well, now of course we look back at them and we laugh. And I think, in our tomorrows, people will look back at you and they will say: 'How on earth did this unelected man get all of this power? And how did Europe's political class, sitting in this room, decide that the community method should replace national democracy?".

I can't help but like this Mr Farage - and in fairness to Brits I see that they, unlike Mr Barroso's countymen (to say nothing of the Greeks) don't send their bills to Berlin!

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@CalamityJane,

CalamityJane wrote:

Well, I don't think you can look at California alone, the United States has its own fiscal crisis and despite what Obama said that it is due to the EU financial crisis, the U.S. created this mess all by itself.

You may want to read the article I linked in the post you're answering; of course you're right about the federal level deficit problem, and many of the remaining states also having problems, but in the scope and extent of its fiscal imprudence California stands alone. Obama will say and do anything to save his own job - nothing from him matters to markets at this point - but Geithner, the Chinese, and others are right that a euro collapse means massive systemic risk to the world.

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@High Seas,

Quote:

Your information clearly does not originate with Eurostat, which hit the roof when a previously "overlooked" hole of a billion euros in the deficit of the island of Majorca, a Portuguese territory, had to be reluctantly disclosed as part of the bailout audited statement..

You do realize that Majorca is part of Spain and not Portugal.

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@High Seas,

High Seas wrote:

Don't you guys ever talk to anybody in the German Finance Ministry? They've written off Greece and Portugal, are carefully checking out Ireland, and they're gleefully quoting to all visitors the devastating Michael Lewis article in November's Vanity Fair: California And Bust. We're next.
http://www.vanityfair.com/business/features/2011/11/michael-lewis-201111

Well I read the article. Good impressionistic writing, well tuned to a slick magzine like Vanity Fair, and providing an excellent subjective summary of Schwartzeneger's experience as Governor. However, far from a serious or complete analysis of California's finances. I will agree that, in many respects, California governments have behaved similarly to that of Greece, with a bloated, underperforming state bureaucracy, and undue political influence in the hands of state employee unions. However, there are important differences as well. Unlike Greece, California is very efficient at tax collection.

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@georgeob1,

georgeob1 wrote:

Unlike Greece, California is very efficient at tax collection.

As a fellow Californian I can confirm this.

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@CalamityJane,

CalamityJane wrote:

georgeob1 wrote:
Unlike Greece, California is very efficient at tax collection.

As a fellow Californian I can confirm this.

Are you ignorant of the fact that a huge slice of the California economy is off the grid and thus pays $0 in taxes (black market)??

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Is the Euro well and truly buggered?

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