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The Euro falling into a recession?
- davidw 15y agoThe phrase that struck me is "The risk that the currency disintegrates within weeks is alarmingly high" Weeks ?! Wow... that's a very short time frame.
- nickpp 15y agoWhat exactly does a currency disintegration mean, anyway? Even of the economy goes into recession, the euro would still be on the market, used by all these countries.
- mootothemax 15y agothe euro would still be on the market, used by all these countries. A country doesn't have to continue using the Euro. It would be... painful were they to switch, but it's by no means impossible.
- nickpp 15y agoSurely the switch can't happen within weeks?! Besides, what would those countries have to gain from such a switch?
- mootothemax 15y agoSurely the switch can't happen within weeks?! Besides, what would those countries have to gain from such a switch? Why can't it happen overnight? A government wouldn't want to announce it in advance, as that would lead to everyone withdrawing their money from the country and keeping it in (relatively safe) Euro, rather than the chosen local currentcy.
- justincormack 15y agoIt is quite hard to do. The bank clearing systems for each country have been replaced by centralized euro ones for example. And no one will want to convert their money. There are stories that the Greeks have been withdrawing cash and putting it in safe deposits for months.
- junto 15y agoHopefully they aren't storing it Euro!
- nickpp 15y agoAdditionally, if the weak countries would leave th Euro, wouldn't that strengthen it instead of disintegrating it? I don't see the strong euro economies having any reason to leave, right?
- arethuza 15y agoThat's what I wondered - surely the value of the Euro would shoot up if the PIIGS left. However, this might cause problems for huge exporters like Germany.
- wtvanhest 15y agoDisintegration refers to the process of removing the construct that is the euro and allowing all (or some weak) European countries to print their own money. The problem with the Euro comes from the fact that all countries are locked in to the euro and that some countries (those with lots of debt) would benefit from the inflation that would be caused by printing Euros and some countries who saved money (Germany) would loose if inflation was prevalent. The quickest way to understand the Euro crisis is to understand the concept of inflation and what it will do to each country. *Alternative solutions that were proposed weeks ago include germany lending to greece or all of europe lending to weaker countries, but those loans required the countries borrowing to adopt tighter monetary policy. That tighter monetary policy caused riots in greece because they didn't want to loose their entitlements. The problem is escalating and will likely result in the fall of the European union.
- vladd 15y agoThe most important gain is the country's ability to print its own currency (pay the country's debt via inflation).
- arethuza 15y agoTheir debts will still be in Euros even if they change from the Euro to new local currencies.
- vladd 15y agoIf you can print your own currency you'll be able to pay EUR-debt if you tolerate the spiked exchange rates and the hyperinflation that comes with them (see also http://en.wikipedia.org/wiki/Hyperinflation http://en.wikipedia.org/wiki/Hyperinflation ). Or you can just default ( http://en.wikipedia.org/wiki/Argentine_economic_crisis_%281999%E2%80%932002%29#End_of_convertibility http://en.wikipedia.org/wiki/Argentine_economic_crisis_%2819... ).
- geargrinder 15y agoI am constantly amazed that printing more money, thereby devaluing the currency and causing hyperinflation, is even considered as a viable option. Does anybody read history? Is there any good example in the past of this actually working out well? I can only think of disasters when this was tried (usually by desperate politicians) in the past.
- _delirium 15y agoControlled devaluation has worked fairly well for Greece in the past, when it had its own currency. Several times in its history it's used one-time 15-20% devaluations, which didn't spark hyperinflation. The main purpose of them was to: 1) reduce outstanding debt in real terms by in effect soft-defaulting; and 2) increase competitiveness by cutting domestic wages in real terms, without having to cut nominal wages, which are extremely sticky. Greece is currently at least suffering from the inability to do #2: it would be ideal for Greece for the Eurozone to be running higher inflation rates, which, if nominal pay was held constant (as it currently has to be under their agreements), would in effect cut the pay of Greek employees (and their pensions) without having to cut it in nominal terms, as well as bring down the real prices of all sorts of other things like housing. The only alternative way of accomplishing that is significant, sustained domestic deflation in the form of actual nominal price/wage cuts, which is more difficult to pull off in a way that doesn't completely wreck the economy.
- SkyMarshal 15y agoIt means Greece, followed by Portugal, Spain, Italy, possibly Ireland, all leave the Euro and re-issue their own currencies. Suddenly the Euro is not the currency of a 400 million person economy anymore, but something smaller.
- vladd 15y agoEuro disintegration implies an abolishment of its treaty ( http://en.wikipedia.org/wiki/Maastricht_Treaty http://en.wikipedia.org/wiki/Maastricht_Treaty ) or a ratification which would severely limit its scope (and significantly affect the list of participating countries).
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- VladRussian 15y agoGreek pulling out isn't disintegration. Germany, to avoid being stuck for the next decade (or two) as the one paying out the PIIGS debt, - that would be a disintegration. "I'll pay all your past bills/debts just to stay roommates" Unfortunately, the roommates need to grow up, and paying their debt has never been the way to help it. [ Note: i don't mean social programs/austerity measures as it wasn't the social programs that run these countries into the ground. Wasteful, inept governments and Big Speculation taking advantage of such governments. Unfortunately, it is old people having their pensions cut off and the likes who will pay for it.]
- michaelty 15y agoIntrade has it at 8% that a country drops out of the euro by the end of the year. http://intrade.com/v4/markets/contract/?contractId=713738 http://intrade.com/v4/markets/contract/?contractId=713738
- seltzered_ 15y agoeric janszen at itulip.com has been speculating on a euro fracture, due to the lack of a cohesive I find it surprising how just 3 years ago the euro was becoming a safe-haven, with Jay-Z flaunting them in his videos.
- sebbi 15y agoAren't there states in the US who would like to file bankcrutpcy? Isn't that the same situation? Some do ok, the others don't and somehow to richer states pay for the poorer states ... leading to a transfer-union. Problem solved.
- DanielBMarkham 15y agoI read a lot of financial commentary. In the last year the discussion about the Euro breakup has gone from "if it breaks up..." to "when it breaks up..." There is a lesson here about taking systems of people and trying to mash them together without acknowledging the necessary pain. I'm concerned that now we're in the end game, and more and more complex strategies are just going to make things worse. I would never advocate any kind of violence, but there's a good reason why Napoleon was the one person who did the most to modernize Europe. The general consensus seems to be that a recession is already under way, and the contraction will continue until this all gets straightened out.
- VladRussian 15y ago>but there's a good reason why Napoleon was the one person who did the most to modernize Europe. if you mean centralized government of the Empire - i'd not agree, there were other big Empires in the Europe which preserved, instead of solved/improved, the problems. If you mean Napoleonic wars, when i'd agree and add WWI and WWII.
- Tichy 15y agoThe most convincing argument seemed to me that the way the Euro was set up is simply not workable/secure - for example they can not just print more Euros because of lots of rules. But that kind of thing hardly seems to be the problem of mixing too many people together, it is simply a flaw in the system. Of course the initial problem might have been that the system could only be some lowest common denominator of all the systems it tries to combine, making it almost impossible to create something good. I find it interesting that there are therefore two interesting problems: how to set up a stable currency, and more importantly, how to set up a decision process that produces good results and doesn't alienate everybody.
- k-mcgrady 15y agoThe problem is that monetary policy is not set on a country by country basis. The economic cycles of countries differ and trying to control monetary policy on a global level leads to policies that do not help any country.
- brador 15y agoCan someone explain why the UK is not shown in any of those graphs? I thought it was part of the Euro?
- sateesh 15y agoNo U.K is not part of the Euro, the currency in U.K is Pounds (GBP)
- seanos 15y agoUK = £ Sterling
- rmc 15y agoThe UK is part of the EU, but it is not in the Eurozone and does not use Euro currency. Sweden and Denmark are also both in the EU and, along with the UK, did not switch over to the Euro.
- brador 15y agoSo will the UK be well protected from this fallout?
- tomjen3 15y agoYep. So long as it doesn't trade with any of the other (eurozone) countries. Which looking at Britains trade deficit it does. Bugger that.
- junto 15y agoI think this explains quite well the debt default threat to the UK (and various other countries including the US): http://www.bbc.co.uk/news/business-15748696 http://www.bbc.co.uk/news/business-15748696
- _delirium 15y agoDenmark, Latvia, and Lithuania are sort of partway in the Euro: they joined ERM II, which guarantees a fixed exchange rate to the Euro. So while they retain separate currencies, those currencies are just alternate units for the Euro, at a fixed conversion, unless they break the peg, and how they rise/fall against other currencies like the dollar or yen is 100% determined by how the Euro moves. Though admittedly it'd be easier to break the peg than to unwind full Euro membership, so the exit strategy is clearer. I believe Sweden and the UK are the only two non-recent EU members with fully independent, floating currencies.
- danmaz74 15y agoThere is so much shortsightedness in this whole crisis. What had to be done was clear from the start: * recognize the dangers of this crisis and act boldly * have much stricter controls on Eurozone countries, and have mechanisms to automatically cut expenses/raise taxes when some don't respect the rules (as Greece so blatantly did) * compensate that making the ECB the lender of last resort of the Eurozone Countries It's getting late, but there is still time to do this. But our leaders need to stop being timid and worrying so much about their reelection.
- rmc 15y agohave much stricter controls on Eurozone countries That would require some new treaties, and in some countries, require a referendum, i.e. a popular vote. If there's a big financial problem, you don't want that to hang on the popular vote or some small member states. have mechanisms to automatically cut expenses/raise taxes EU doesn't have the ability to levy taxes, only member states. The cynic in me says that with the ECB bailing out & funding several states, that the ECB already has the power to dictate taxation matters to some of those states already. Let's see if that saves the euro.
- danmaz74 15y agoYes, changing the treaties now would really be a big problem; but it looks like they're thinking about bilateral agreements to start with. That would be a much faster approach. As for taxes to levy, I didn't mean that they would be levied by the EU, but that the member state would have to do that automatically to keep the imbalance in check. Not easy to enforce, but I'm pretty sure a way can be found if there is the political will.
- rmc 15y agoThere is rarely political will to increase taxes.
- barrkel 15y agoThat wouldn't have fixed the problem. Did you know Germany broke Maastricht spending limits well before most other countries did? That Ireland had a debt to GDP ratio of ~30% before the crisis - and it never burned any failed bank bondholders because of pressure from the US Fed's Tim Geithner, as well as the ECB? In Ireland's case, the US and the ECB coerced it into forcing its citizens to take on private debt owed to foreign bondholders. And Germany would still not acquiesce to letting ECB become a lender of last resort. FWIW, Germany didn't want Italy joining the Euro, much less Greece.
- dman 15y agoI have always been interested in how the Euro does in the long run given that it is not directly backed by taxation and given that the central body does not appear to have the broad mandate to enforce a fiscal policy for the entire Eurozone. The next year should be really educational in this regard.
- tlammens 15y agoSometimes I think headlines like this are the cause of a recession rather than the facts behind it. Economy is more about psychology than it is about numbers. (Of course there were governments and financial institutes which have behaved badly in the past, no denying there.)
- veyron 15y agoThe very same agencies that are generating the headlines are leaking the headlines to hedge funds hours before. There is a current SEC probe of S&P over concerns that employees disclosed info about the downgrade to hedge funds hours before the announcement.
- wildjim 15y agoI have regularly wondered how all these Hedge Funds (let alone the Banks) are doing so well without some kind-of inside information and/or some means to "generate interest or concerns" in the direction they would find the most beneficial.
- veyron 15y agoThe banks and large hedge funds manage so much money that their opinions and positions actually impact the market prices. For example, akin to the "Colbert Bump", there is a "Buffett Bump" where position prices rise as Buffett releases his positions. Over the past few weeks a bunch of firms were required to disclose some positions as part of a 13F filing. But it's not all puffery. Check out the story of David Einhorn and Green Mountain Coffee (GMCR).
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- dreamdu5t 15y agoThe Euro is a tragedy of the commons. Each individual country can benefit from using the central bank but all share the costs. Why are there still people trying to convince us that the mere existence of more lenders is a solution to debt?
- nhaehnle 15y agoYou've got it the wrong way around. At least according to the official rules, none of the member countries can benefit from the ECB system. The ECB has broken that rule because they realized that if they stick too tightly to it, they risk a breakup of the Eurozone, and that would eliminate their power base. By giving the least possible amount of support to troubled countries, they hope to stay in power - at the cost of the real living standards of the peoples of those countries, of course, as you can see with a quick look at the double-digit unemployment rates there. The Euro could become a tragedy of the commons, but it isn't one at this point in time. It is more an example of Wile E. Coyote running into the air since 2000 until, around 2008-2009, he realized that there is no longer any ground beneath his feet. Since then, he's falling.
- antr 15y agoCurrently, the disintegration of the Euro is highly unlikely: - If each country leaves the Euro, debt (including that with the U.S.) will remain as it is (no change in face value), - If each country has its own currency, the inevitable devaluation will increase the value of the debt, and cost of interest (on local currency terms), making it impossible for many countries to repay that debt (including that with the U.S., which is well over $350bn) - This will result in the immediate default for a long list of countries. Food for thought
- yxhuvud 15y agoSovereigns do not play by the same rules as the rest of us. They can unilaterally declare their debt to be in their new currencies, if they separate. If each country leaves the Euro, then this will definitely happen. If only some does, then it will be up to the courts to decide what the treaties says.
- Tichy 15y agoOf course they could, but there might be consequences. For example nobody might be willing to lend them money again in the future. Or there might be wars ("if you don't want to pay me what you owe me, I am going to take it by force"). Overall, who is going to guarantee a contract between states (like money lending)? There is no superpower that watches over them and punishes them if they do wrong, they have to fight it out among themselves somehow.
- yxhuvud 15y agoConsidering Greece has been in default for about half of its modern existence (since the early-mid 19th century) and still has been able to lend - I think the danger of not being able to lend is nil. Also note that most of the contracts is not between states but between citizens, banks and other companies. As for wars - forcing sovereign nations to pay debts in currencies they cannot pay is also a way to get wars. The post WWI war reparations and how they paved the way for Hitler[] is a good example of this. [] Godwin, but I do think the example is relevant.
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- Freestyler_3 15y agoIt's already a recension, the Institute of International Finance (IIF) had said that last week. The last months the situation in Europe has gotten drastically worse. The expected growth of the economy in 2012 is -1%.
- MaysonL 15y agoHeadline wrong, twice: 1) Question mark. Recession already starting. 2) Not falling, pushed.
- adabsurdo 15y agodepression would be more accurate. the problem, i think, is that there is a core contradiction at the heart of the euro system: 1) you can't have a currency union, without a fiscal union; 2) you can't have a fiscal union, without a true political union; 3) the euro area is a currency union with neither a fiscal or a political union. in other words, for a currency union to work well, you need to shuffle money around. but you can't do that without political legitimacy, or if people feel like the money is going to "them", as opposed to "us". The leaders who created the euro were trying to go about it the other way around: currency union would lead to fiscal union, which would lead to political union. but now, in a recession, with things going bad, they are finding that, in fact, they would need all three for any part to work correctly. why are the Germans refusing to let the ECB be the lender of last resort? the core reason is that they see, correctly, that this would put them on the hook for the past and likely future mismanagement of the Greeks and Italians. of course, they can't say this publicly, so instead you hear all sorts of nonsense, hyperinflation this and weimar that. or, to put it another way, would the Germans let this kind of thing happen to other Germans? I don't think so! Greeks and Italians are "them", and in bad times people feel less generous and fall back to the "us". but at the same time, of course, their refusing to let the ECB, as it were, bail out the Greeks and Italians will inevitably lead to their default, exit from the Euro, and who knows what after that. at the very least, expect nationalist parties everywhere to rise in the polls. let's just hope that we're not rebooting to the early 20th century.
- umarmung 15y agoExcellent post. 1) you can't have a currency union, without a fiscal union; - correct. 2) you can't have a fiscal union, without a true political union; - unknown, but history is on your side. 3) the euro area is a currency union with neither a fiscal or a political union. - correct. There may be a way to incentivise independent states to act in their collective interest and thus create a fiscal union without a true political union. However, if there is such a way, it has certainly never been applied to date for the Eurozone. This is the grand experiment ongoing in the EMU. In a sense, the experiment not only already failed, but failed from the outset due to states choosing to ignore leverage rules in the 1997 Stability and Growth Pact, including even Germany. The probability of this ending well, or without Germans paying in some shape or form and potentially severely against their long-term interests, is low. If Germany had any sense, they will be making preparations to leave at any time, possibly taking the few remaining Germanic (+Switzerland) and Scandinavian creditor nations with them too.
- lutorm 15y agoWhen Sweden voted whether to join the Euro zone back in 2003, one of the arguments against was this exact scenario. They said something like "there has never been a successful case of a permanent currency union without a fiscal union in history. Even if remaining outside of the Euro will have a small negative effect on the Swedish economy, it's akin to paying insurance against the (in their opinion at the time) substantial risk of a Euro collapse."
- zerostar07 15y agoSo if there are sufficient amendments to the EU treaties, Sweden is bound to join?
- nickik 15y ago> you can't have a currency union, without a fiscal union This is just not true. Didn't we have Gold and Silver for a common currency for a very very long time? Didn't countries just default back then? The problem is not the currency the problem is implicit (now explicit) agreemand that countries cant default in the eurozone. Greek could of have defaulted just as Island did. The only loosers would have been the people holding the debt. There would no Euro-Crisis just a crisis of the countries that do really have a fical crisis.
- umarmung 15y ago1. A peg is not a common currency/currency union. Critically, you readily come on and off a peg. 2. Various types of gold standards have failed many times in history, including pegs to gold. The reason is almost always the same: countries will overspend no matter what currency they use - wars/militarism are often the excuse. Notable failures include: - helping worsen, if not cause, the US Great Depression (US Fed decided to defend the peg to gold); - helping cause the Weimar German hyperinflation (due to the victors taking almost all the German gold reserves for WWI reparations). 3. Free floating, market-traded fiat currencies solved the core problem of a physical fixed currency like gold. But like gold, they do not, nor can they, prevent governments continuing to overspend. However, they do allow a mechanism to punish them for doing so, i.e. the capital markets! Unfortunately, the capital markets are unable to enforce their own brand of spanking and consolation in this case because there are no individual currencies per government in the Eurozone. So, it has to whip them using the main stick it has left which are the separate sovereign debts, but cannot console them with lower currencies. After leaving these individual sovereign debt markets in droves and therefore causing government borrowing costs for EZ countries to soar to unsustainable levels, everyone in the markets is finally starting to realise there is no upside in being involved in a common currency which is killing its members. Locked in a sub-optimal currency area, unable to raise affordable funds, unable to devalue currency, forced to reduce debt levels by austerity, no ability to import inflation (which would reduce real level of debts) because the world economy is entering a downturn, no fiscal union therefore no fiscal transfers, uncompetitive industries and low productivity due to decades of binge spending, therefore low or negative growth outlook... This is a painful way for any sovereign to live and at some point something has to give!
- antirez 15y agoI think that many people like me, that don't even know economy 101, are now wondering: what happens if euro disintegrates, practically speaking?
- 80hours 15y agoNothing special. Euro would be exchanged with national currencies. No money will be lost or anything. Just a giant currency conversion, but with some turbulence around it. Having said that, the Euro is a great project. It will trigger a common European economic policy and that will push Europe to the next level.
- elemeno 15y agoIt's nowhere near as simple as that. What national currencies will Euros be exchanged for? What rates will they be exchanged at? Will other markets recognise those new currencies (and they will be =new= currencies, since all the Eurozone currencies ceased to exist when they changed to the Euro), and what rates will they be traded at on the markets as opposed to the fixed exchange rate they'll swapped for Euros at. It took 10 years to get from the establishment of the Euro (then ECU) as a currency to the point where all the Eurozone nations switched to it as the only official currency - there will not be 10 years to switch the other way, and it's going to be very very messy. The Euro is the 2nd most traded currency after the US dollar, is the 2nd largest reserve currency after the dollar, it's used as part of currency baskets for setting FX rates of numerous other currencies. Were the Euro to dissolve, the second order effects in markets around the world would be extremely turbulent, and likely highly damaging to the world economy. Claiming that it would be 'Nothing special' is naivety at it's most dangerous.
- InclinedPlane 15y agoYour statement is false on its face. The Euro has not triggered a common European economic policy but instead has made the impact of dissimilar economic policies worse. What is the route from point A to point B here? An economic crisis that forces tighter Eurozone policies? Military enforcement of economic policies?
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