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Just to provide the counterpoint (perhaps from a less biased position than Soros): the EU was doomed from the start due to member countries (excluding GB) losin

by spangry 11y ago

Just to provide the counterpoint (perhaps from a less biased position than Soros): the EU was doomed from the start due to member countries (excluding GB) losing sovereignty over monetary policy (i.e. common currency) but retaining sovereignty over fiscal policy. This is a problem because there is no strong mechanism for 'horizontal fiscal equalisation' (HFE) across EU member countries. Take Greece and Germany in the lead up to the GFC for instance. Germany's economy is going great-guns and national income is rising thanks to their strong exports. Greece is not doing so well, with low productivity and low or negative economic growth. If Greece was not in the EU, they'd have had two options to stimulate their economy: government spends more (fiscal policy) or its central bank lowers interest rates (monetary policy). The latter option also has the nice side benefit of depreciating their currency, meaning their exports become more price competitive. However, because they're a member of the EU monetary union, they're stuck with the Euro as their currency. Which has a single centrally set interest rate. So with Germany (and other EU countries) doing well, while Greece (and others) doing poorly, the European Central Bank sets the interest rate 'too low' for Germany, and 'too high' for Greece. Therefore, Greece's only option is to deficit spend. And they have to spend more than normal because EU monetary policy is working against them and they have little to no control over it. And because there's no HFE, they have to go in to extreme budget deficit despite being monetarily yoked to countries like Germany. I think that the monetary union will eventually dissolve and EU nations will move back to sovereign monetary policy. It's hard to imagine the alternative: an effective and formal HFE mechanism being agreed. It's a hard sell in domestic politics, especially if you happen to be one of the 'successful' countries, who must now cross-subsidise 'unproductive' neighbours. It's just my speculation, but I suspect they'll hold on to free trade and 'open boarders' within the EU.

DominikR 11y ago
I agree with your description of the situation but on the other hand it can't be the solution for an economy to engage in currency wars. Greek labour SHOULD be priced lower than labour in the Netherlands, Germany, Austria or the UK because it is less productive. Once its labour is priced correctly it should cause foreign investors to invest there, which would in turn increase productivity. I think austerity is not the issue, the problem is that the EU forces Greece to take on larger credits and even larger credits after that instead of letting dysfunctional parts of the Greek economy go bankrupt.
- spangry 11y ago
  I agree; currency wars are certainly not the answer as they most likely make everyone poorer in the long-run. I'm more talking about a 'nation level' currency/floating exchange rate (to act as an automatic stabiliser) and interest rates that can be set domestically (as a stimulatory/destimulatory policy tool). Those 'loans' to Greece are a 'kinda, sort of' weak form of HFE. Most bureaucratic government organisations have a strong instinct for self-preservation. I imagine they would have been pressuring Germany and other nations pretty hard to effectively extend these loans to Greece via capital reserve deposits and corresponding drawing rights for Greece. I haven't looked at it in any detail, but I find myself wondering if there might be a half-way house resembling the Bretton-Woods system (though perhaps with something other than gold backing). Assuming the ECB is preceived to be credibly independent (as opposed to the IMF, who were suddenly less hawkish when the GFC hit rich western nations)... EDIT: Oh and agreed on allowing capital and labour to reallocate. I guess the point of contention is at what rate, and whether there are other non-distortionary ways of softening the social dislocation (possibly necessitating fiscal support).
  - Overtonwindow 11y ago
    I've learned more from this comment thread about EU monetary policy and the euro than I did in college. Thank you.
jcfrei 11y ago
> It's hard to imagine the alternative: an effective and formal HFE mechanism being agreed. I believe a fiscal union is the only viable resolution to this crisis - any dissolution of the euro would look like a huge defeat for European politics from which Brussels wouldn't recover for decades. You are right that a fiscal union is very hard to imagine - because it would undermine national sovereignty even more. That's why I believe we will see the usual European approach to this problem: Misusing existing institutions like the ECB to create a "quasi fiscal union" (for example by guaranteeing rates for government bonds of poorer countries). It would work almost like a real fiscal union but its true nature would be somewhat hidden behind misleading nomenclature, complex and indecipherable legal agreements and new institutions with fancy names. It's a very schizophrenic situation, because every EU official knows that creating a fiscal union (of sorts) is inevitable for the survival of the Union, while at the same time promoting such an idea would be political suicide for any government in the wake of recent nationalistic movements.
- spangry 11y ago
  I realise I'm replying to a fairly old thread now, but just wanted to say thanks for the insightful comments. After giving it some though, I agree that the scenario you've outlined is the most likely one. I hope the 'eurocrats' keep an eye out for unintended consequences/incentives that 'hidden' (but more complex) arrangements can spawn. Hidden subsidies, like underwriting government bonds, give me the willies...
iofj 11y ago
You seem to advocate lowering the interest rate. The interest rate is currently -0.3% and we've just heard Draghi promise (over 10 times in a single meeting) that he'll lower it further. What makes you think Greece could lower it's interest rate from that point ?

by spangry 11y ago

DominikR 11y ago

I agree with your description of the situation but on the other hand it can't be the solution for an economy to engage in currency wars. Greek labour SHOULD be priced lower than labour in the Netherlands, Germany, Austria or the UK because it is less productive. Once its labour is priced correctly it should cause foreign investors to invest there, which would in turn increase productivity. I think austerity is not the issue, the problem is that the EU forces Greece to take on larger credits and even larger credits after that instead of letting dysfunctional parts of the Greek economy go bankrupt.

spangry 11y ago
I agree; currency wars are certainly not the answer as they most likely make everyone poorer in the long-run. I'm more talking about a 'nation level' currency/floating exchange rate (to act as an automatic stabiliser) and interest rates that can be set domestically (as a stimulatory/destimulatory policy tool). Those 'loans' to Greece are a 'kinda, sort of' weak form of HFE. Most bureaucratic government organisations have a strong instinct for self-preservation. I imagine they would have been pressuring Germany and other nations pretty hard to effectively extend these loans to Greece via capital reserve deposits and corresponding drawing rights for Greece. I haven't looked at it in any detail, but I find myself wondering if there might be a half-way house resembling the Bretton-Woods system (though perhaps with something other than gold backing). Assuming the ECB is preceived to be credibly independent (as opposed to the IMF, who were suddenly less hawkish when the GFC hit rich western nations)... EDIT: Oh and agreed on allowing capital and labour to reallocate. I guess the point of contention is at what rate, and whether there are other non-distortionary ways of softening the social dislocation (possibly necessitating fiscal support).
- Overtonwindow 11y ago
  I've learned more from this comment thread about EU monetary policy and the euro than I did in college. Thank you.

jcfrei 11y ago

> It's hard to imagine the alternative: an effective and formal HFE mechanism being agreed. I believe a fiscal union is the only viable resolution to this crisis - any dissolution of the euro would look like a huge defeat for European politics from which Brussels wouldn't recover for decades. You are right that a fiscal union is very hard to imagine - because it would undermine national sovereignty even more. That's why I believe we will see the usual European approach to this problem: Misusing existing institutions like the ECB to create a "quasi fiscal union" (for example by guaranteeing rates for government bonds of poorer countries). It would work almost like a real fiscal union but its true nature would be somewhat hidden behind misleading nomenclature, complex and indecipherable legal agreements and new institutions with fancy names. It's a very schizophrenic situation, because every EU official knows that creating a fiscal union (of sorts) is inevitable for the survival of the Union, while at the same time promoting such an idea would be political suicide for any government in the wake of recent nationalistic movements.

spangry 11y ago
I realise I'm replying to a fairly old thread now, but just wanted to say thanks for the insightful comments. After giving it some though, I agree that the scenario you've outlined is the most likely one. I hope the 'eurocrats' keep an eye out for unintended consequences/incentives that 'hidden' (but more complex) arrangements can spawn. Hidden subsidies, like underwriting government bonds, give me the willies...

iofj 11y ago

You seem to advocate lowering the interest rate. The interest rate is currently -0.3% and we've just heard Draghi promise (over 10 times in a single meeting) that he'll lower it further. What makes you think Greece could lower it's interest rate from that point ?