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"At root was a failure to grasp the elemental point that currency unions with no treasury or political union to back them up are inherently vulnerable to debt c

by abduhl 8y ago

"At root was a failure to grasp the elemental point that currency unions with no treasury or political union to back them up are inherently vulnerable to debt crises. States facing a shock no longer have sovereign tools to defend themselves. Devaluation risk is switched into bankruptcy risk. “In a monetary union, the basics of debt dynamics change as countries forgo monetary policy and exchange rate adjustment tools,” said the report. This would be amplified by a “vicious feedback between banks and sovereigns”, each taking the other down. That the IMF failed to anticipate any of this was a serious scientific and professional failure." This is so obvious it boggles the mind how it could be ignored or not seen. Anti Eurozone people have been saying it since the formation of the Eurozone.

muro 8y ago
People making the decision had no cost to themselves if they were wrong.
- RobertoG 8y ago
  It's deeper than that. The adoption of the Euro without a fiscal capacity at the Euro-area level means that the Euro countries are basically working with a foreign currency. That means that monetary issues are beyond political control. That means beyond democratic control. Some people consider that is a good thing. Another issue is that the Euro is not a bad thing for all the countries in it. Germany, for instance, as a big exporter, get a currency devaluation for free an unencumbered access to a huge market. Interestingly, this success of the German economy have not reflected, for the best, in the quality of life of most of the Germans, but maybe, this is a discussion for other day (even if in my opinion is really the same issue, see first paragraph).
  - TheOtherHobbes 8y ago
    Germany made €2.8bn from the Greek debt crisis - so not a bad deal for Germany.
    - cinquemb 8y ago
      They'll make even more in Frankfurt when holding defaulted PIIGS sovereign debt when the ECB exhausts its capability to be largest marginal counterparty bidder while also trying to target asset price stability…
    - matt4077 8y ago
      That's like €25 per person. It's basically meaningless. Meanwhile, Germany's annual net contribution to the EU is €220 per person. I'm not pointing this out to complain–the EU is worth far more than that, and seeing the giant improvements these transfers have supported in Eastern Europe, or Ireland, or Portugal makes their usefulness obvious. But suggesting that Germany (and the other countries involved) took on billions and billions in risk hoping to earn what are obviously below-market returns is laughable. Not everything is motivated by money.
      - RobertoG 8y ago
        You are forgetting that at the start of the Greek crisis, the debt was owned by private banks (mostly German and French), now it's owned by the Europeans. So, basically we saved those banks, make the life of the Greeks worse in the process, and now they owe even more money than before.
      - petre 8y ago
        It's actually €34 per German and €237 per Greek. Different countries, different people. The German contribiution to the EU is not guaranteed to make it's way back into the Greek economy. And Germans could perhaps use an unpaved country road to travel and move goods to and from Greece instead of a highway that passes through 5 different states, of which two are not even in the EU but have received money from the EU exactly for this kind of infrastructure. https://europa.rs/eu-assistance-to-serbia/?lang=en https://europa.rs/eu-assistance-to-serbia/?lang=en http://ec.europa.eu/regional_policy/en/funding/ipa/fyrom/ http://ec.europa.eu/regional_policy/en/funding/ipa/fyrom/
  - matt4077 8y ago
    The European Central Bank is controlled by its board of directors, who are appointed by the European Council. The European Council is just the assembly of the EU's heads of governments. It's basically the same system as it is for the US' FED, or most other central banks for that matter. The only difference is that it's not a single head of state but the group of 18. But then again the US Senate also needs to consent for FED appointments, and it's a rather similar body of regional delegates. It's also doubtful that the ECB had any meaningful choices since 2008. The low-interest, quantitative-easing policy is common among all the relevant central banks, including not just the US but also Britain or Japan.
    - RobertoG 8y ago
      So, you are telling me, that the FED would allow something like what have happened to Greece, happen to a USA state? A crisis deeper and longer than the Great Depression? Or that they will thread to stop the payment systems if some state don't bend to their will like the ECB did [1]? Anyway, the problem is not the ECB, but the lack of a federal capacity. [1] https://www.yanisvaroufakis.eu/2017/03/14/the-campaign-goes-on-did-the-ecb-break-the-law-in-closing-greeces-banks-sign-the-petition-today/ https://www.yanisvaroufakis.eu/2017/03/14/the-campaign-goes-...
      - matt4077 8y ago
        They wouldn't allow it to happen to a state. But to Puerto Rico? Yes, very much so. To Detroit? Sure!
deandm 8y ago
This even feels like it could be a quote from The Shock Doctrine by Naomi Klein. After reading that book it's hard not to start thinking that it was completely intentional.
beojan 8y ago
> Devaluation risk is switched into bankruptcy risk And for the inhabitants, this is a good thing. Look at Venezuela to see what happens when a country devalues its currency to pay its debts. The situation would have been even better (for the Greek people) if the European Union hadn't permitted Greece to introduce capital controls (which negated some of the advantages of a currency not tied to the Greek economy).
- conmarap 8y ago
  Venezuela has had a long history of high inflation, much like Turkey. The problem is not that, it's that people lost faith in the currency and all the non-circulated (ie savings or foreign reserves) came into circulation again very fast, flooding the market and ultimately causing hyperinflation.
  - beojan 8y ago
    > it's that people lost faith in the currency What do you think happens when you devalue your currency to pay your debts?
    - conmarap 8y ago
      High inflation due to government-initiated devaluation has happened even in the US, but it didn't result in a hyperinflation. The Weimar Republic is a good example of a government that got screwed because of this. What makes hyperinflation unique is that the price is ultimately sunk by the actions of panicked citizens who rush to spend their fiat currency because they think that it won't have value in the coming days/weeks/months. This is like a domino effect and eventually everyone jumps on the bandwagon, thus flooding the market with currency that wasn't circulating or contributing to the GDP. Hyperinflation usually comes right after a short-lived deflationary period which, in turn, comes after a very long period of high inflation (10-30% typically). You can clearly see the pattern in Venezuela's inflation chart: https://www.businessinsider.com/venezuela-hyperinflation-chart-2017-4 https://www.businessinsider.com/venezuela-hyperinflation-cha... Because of this $1 equals 206941.00 Venezuelan Bolivar, up from $1=119k Bolivar from a month ago, which in turn was up from $1=10 Bolivar from February (according to Google - not sure how accurate it is).
brightball 8y ago
There are a lot of things that people warn about that seem like basic economics, yet people ignore them or dismiss them as party politics. Misinformation is easy when people don’t think through what they are hearing.
timrichard 8y ago
> That the IMF failed to anticipate any of this was a serious scientific and professional failure. And maybe there's a consensus that everything is lower priority than ever-closer integration. Great for Commissioners, not so great for Greek pensioners.

by abduhl 8y ago

muro 8y ago

People making the decision had no cost to themselves if they were wrong.

RobertoG 8y ago
It's deeper than that. The adoption of the Euro without a fiscal capacity at the Euro-area level means that the Euro countries are basically working with a foreign currency. That means that monetary issues are beyond political control. That means beyond democratic control. Some people consider that is a good thing. Another issue is that the Euro is not a bad thing for all the countries in it. Germany, for instance, as a big exporter, get a currency devaluation for free an unencumbered access to a huge market. Interestingly, this success of the German economy have not reflected, for the best, in the quality of life of most of the Germans, but maybe, this is a discussion for other day (even if in my opinion is really the same issue, see first paragraph).
- TheOtherHobbes 8y ago
  Germany made €2.8bn from the Greek debt crisis - so not a bad deal for Germany.
  - cinquemb 8y ago
    They'll make even more in Frankfurt when holding defaulted PIIGS sovereign debt when the ECB exhausts its capability to be largest marginal counterparty bidder while also trying to target asset price stability…
  - matt4077 8y ago
    That's like €25 per person. It's basically meaningless. Meanwhile, Germany's annual net contribution to the EU is €220 per person. I'm not pointing this out to complain–the EU is worth far more than that, and seeing the giant improvements these transfers have supported in Eastern Europe, or Ireland, or Portugal makes their usefulness obvious. But suggesting that Germany (and the other countries involved) took on billions and billions in risk hoping to earn what are obviously below-market returns is laughable. Not everything is motivated by money.
    - RobertoG 8y ago
      You are forgetting that at the start of the Greek crisis, the debt was owned by private banks (mostly German and French), now it's owned by the Europeans. So, basically we saved those banks, make the life of the Greeks worse in the process, and now they owe even more money than before.
    - petre 8y ago
      It's actually €34 per German and €237 per Greek. Different countries, different people. The German contribiution to the EU is not guaranteed to make it's way back into the Greek economy. And Germans could perhaps use an unpaved country road to travel and move goods to and from Greece instead of a highway that passes through 5 different states, of which two are not even in the EU but have received money from the EU exactly for this kind of infrastructure. https://europa.rs/eu-assistance-to-serbia/?lang=en https://europa.rs/eu-assistance-to-serbia/?lang=en http://ec.europa.eu/regional_policy/en/funding/ipa/fyrom/ http://ec.europa.eu/regional_policy/en/funding/ipa/fyrom/
- matt4077 8y ago
  The European Central Bank is controlled by its board of directors, who are appointed by the European Council. The European Council is just the assembly of the EU's heads of governments. It's basically the same system as it is for the US' FED, or most other central banks for that matter. The only difference is that it's not a single head of state but the group of 18. But then again the US Senate also needs to consent for FED appointments, and it's a rather similar body of regional delegates. It's also doubtful that the ECB had any meaningful choices since 2008. The low-interest, quantitative-easing policy is common among all the relevant central banks, including not just the US but also Britain or Japan.
  - RobertoG 8y ago
    So, you are telling me, that the FED would allow something like what have happened to Greece, happen to a USA state? A crisis deeper and longer than the Great Depression? Or that they will thread to stop the payment systems if some state don't bend to their will like the ECB did [1]? Anyway, the problem is not the ECB, but the lack of a federal capacity. [1] https://www.yanisvaroufakis.eu/2017/03/14/the-campaign-goes-on-did-the-ecb-break-the-law-in-closing-greeces-banks-sign-the-petition-today/ https://www.yanisvaroufakis.eu/2017/03/14/the-campaign-goes-...
    - matt4077 8y ago
      They wouldn't allow it to happen to a state. But to Puerto Rico? Yes, very much so. To Detroit? Sure!

deandm 8y ago

This even feels like it could be a quote from The Shock Doctrine by Naomi Klein. After reading that book it's hard not to start thinking that it was completely intentional.

beojan 8y ago

> Devaluation risk is switched into bankruptcy risk And for the inhabitants, this is a good thing. Look at Venezuela to see what happens when a country devalues its currency to pay its debts. The situation would have been even better (for the Greek people) if the European Union hadn't permitted Greece to introduce capital controls (which negated some of the advantages of a currency not tied to the Greek economy).

conmarap 8y ago
Venezuela has had a long history of high inflation, much like Turkey. The problem is not that, it's that people lost faith in the currency and all the non-circulated (ie savings or foreign reserves) came into circulation again very fast, flooding the market and ultimately causing hyperinflation.
- beojan 8y ago
  > it's that people lost faith in the currency What do you think happens when you devalue your currency to pay your debts?
  - conmarap 8y ago
    High inflation due to government-initiated devaluation has happened even in the US, but it didn't result in a hyperinflation. The Weimar Republic is a good example of a government that got screwed because of this. What makes hyperinflation unique is that the price is ultimately sunk by the actions of panicked citizens who rush to spend their fiat currency because they think that it won't have value in the coming days/weeks/months. This is like a domino effect and eventually everyone jumps on the bandwagon, thus flooding the market with currency that wasn't circulating or contributing to the GDP. Hyperinflation usually comes right after a short-lived deflationary period which, in turn, comes after a very long period of high inflation (10-30% typically). You can clearly see the pattern in Venezuela's inflation chart: https://www.businessinsider.com/venezuela-hyperinflation-chart-2017-4 https://www.businessinsider.com/venezuela-hyperinflation-cha... Because of this $1 equals 206941.00 Venezuelan Bolivar, up from $1=119k Bolivar from a month ago, which in turn was up from $1=10 Bolivar from February (according to Google - not sure how accurate it is).

brightball 8y ago

There are a lot of things that people warn about that seem like basic economics, yet people ignore them or dismiss them as party politics. Misinformation is easy when people don’t think through what they are hearing.

timrichard 8y ago

> That the IMF failed to anticipate any of this was a serious scientific and professional failure. And maybe there's a consensus that everything is lower priority than ever-closer integration. Great for Commissioners, not so great for Greek pensioners.