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Smug US/UK commentators have now been shouting for 3+ years about how incredibly stupid the EU is, how the Euro will break up in two weeks... But why is the Eu

by Atropos 14y ago

Smug US/UK commentators have now been shouting for 3+ years about how incredibly stupid the EU is, how the Euro will break up in two weeks... But why is the Euro up 16% against the USD and 23.3% against the UK pound over the last 10 years? Why are German bond yields lower than the US bond yields, and why do some stable eurozone countries still possess a triple AAA rating by all credit agencies, in opposition to the US? Considering the population, Cyprus is more like a middle-size city than a country. It joined the EU in 2004 and the Eurozone in 2008 - their problems are much older than that. Other than for humanitary reasons, the EU shouldn't and doesn't really care if they go under. If panicked investos withdraw their money they shall - smarter investors will pick up their holdings and realize gains; the doomsayers will end up as losers, like the US hedge funds ala Paulson betting against the EU the last years.

jpdoctor 14y ago
> But why is the Euro up 16% against the USD and 23.3% against the UK pound over the last 10 years? You think it is something other than supply and demand? The Fed and BoE can print; The ECB cannot. The result (which is related to printing) you failed to quote: Greek deflation. It's not complicated.
- Atropos 14y ago
  What exactly is your point? If we see market prices as reasonably efficient, the current Euro price shows that the typical "Stupid Eurocrats idiotic mismanagement of the flawed Euro project will lead to European collapse in 2 weeks" simply doesn't have a base in reality. Individual (small) countries may fail, the system will be fine, and misinformed doomsayers will - as always - end up making fools of themselves.
  - jpdoctor 14y ago
    > What exactly is your point? The euro is up 16% because there are more dollars in circulation chasing the same number of euros. Same for the pound. A deflationary environment in Europe (what are prices doing in Greece? What is the Spanish unemployment rate?) is exactly what you would expect, and the Euro up 16% against the USD and 23.3% against the UK pound is evidence of that. Or to put it another way: You quote evidence that supports the point you are trying to refute. (Perhaps you are being confused by the term "up" in currency exchanges? It makes exports more expensive, which makes the deflation worse since fewer employees will be needed.)
    - Atropos 14y ago
      You do realize that I quoted numbers for the last 10 years? Since the Eurocrisis started, the Euro has losses of around 6-10% against the other major currencies, so your deflationary argument isn't really sound. All I wanted to say is that in the long run, foreign exchange rates express some form of judgment about the soundness of a currency. The markets still consider the Euro a very sound and safe currency - at least more so than the USD and the UK pound. A weaker exchange rate might be preferable, but that is not a way Europe wants to go. Instead of printing money, the idea is to restructure the economy. In the short run this will of course be super painful and allow commentators to shout "Look, austerity has failed". Let's talk again in 2025, bond yields for Greece,Italy,Spain are already down...
      - Turing_Machine 14y ago
        "You do realize that I quoted numbers for the last 10 years?" No, you didn't. You compared two isolated data points. If you look at the actual graph of the last ten years, the Euro has been both considerably higher and considerably lower against the dollar over that period.
- pavlov 14y ago
  The ECB does effectively print money by buying commercial banks' bonds with newly created money. Draghi said last year that the ECB is prepared to purchase "unlimited amounts", so if there is a bank run, the central bank will fill up the banks' balance sheets as necessary (in theory).
  - jpdoctor 14y ago
    > with newly created money. No. This is exactly the problem: The echoes of the German hyperinflation of the 1930s are still being heard, so Merkel and crowd have repeatedly stood against printing. As for the ECB purchases, those were "sterilized" as opposed to "quantitative easing", which is what the Fed does. http://blogs.wsj.com/eurocrisis/2012/09/06/the-ecb-sterilization-and-money-supply/ http://blogs.wsj.com/eurocrisis/2012/09/06/the-ecb-steriliza...
    - pavlov 14y ago
      The linked article is about ECB buying government bonds. But the ECB also buys bonds from Eurozone commercial banks, and this is where new money is being created. It does end up on the central bank's balance sheet, but there's no event that would force the bank to ever write it down. Those hundreds of billions in loans can stay unpaid for hundreds of years if necessary.
      - justincormack 14y ago
        All the lending to commercial banks is secured lending, they have to provide collateral to the ECB. The less good quality stuff is lent by individual central banks, so governments underwrite it. There is no unsecured buying of bank debt (banks can use covered bonds as collateral but again that is secured). And the LTRO is only three years. So it is not like you suggest at all.
        pavlov 14y ago
        Thanks and sorry, I was clearly misinformed. I must have taken some "stuff they say on the Internet" at face value.
pcrh 14y ago
Because the UK and the US are doing what the smaller states in the EU cannot, i.e. devaluing their currency. If the UK pound falls by X% against most other currencies, this is equivalent (in the long term) to all inhabitants of the UK losing X% of their income.
dageshi 14y ago
It's very simple, inside the eurozone you can transfer your euro's from dangerous Spanish/Greek/Portuguese bonds and put them into safe German bonds. Even if the euro were to collapse, the German bonds would be redenominated in the new German currency, chances are it would immediately begin to rise vs other currencies. So you don't have to exit the eurozone area, you just transfer your money from the debtor states to the creditor states. That doesn't make the situation any better particularly it just drives up bond yields in the debtor countries and makes their situation even worse. Essentially a decision has been made to save the currency and sacrifice the debtor countries which use it. This is just another example.
Symmetry 14y ago
>But why is the Euro up 16% against the USD and 23.3% against the UK pound over the last 10 years? Because the Euro is stupid. You don't want your money to be as valuable as possible! Deflation, when not accompanied by fast growth in real GDP, is bad! There's no excuse for the European Central Bank to be running such a tight policy when aggregate demand in the European periphery is so depressed. But of course nobody trusts the banking system in the periphery, so all the money from there is rushing into the center causing deflation in the periphery and inflation in Germany. And then the ECB sets policy to accommodate Germany, and threatens to screw the peripheral countries even harder if they don't make the supply side changes it wants.
chestnut-tree 14y ago
"...the EU shouldn't and doesn't really care if they go under." The EU should care. Do European officials and politicians think they are immune from the opinion of people in their own countries? I expect this measure will generate a lot more hostility towards the EU among the European populace.
danenania 14y ago
Unfortunately, our lovely world financial system is so precariously poised that a small pebble falling can quickly become an avalanche. Though as they relate to market psychology, first in the other troubled nations of Europe, but secondarily for the entire world, the actions taken in Cyprus don't exactly resemble the dropping of a pebble. They're more like exploding a few sticks of dynamite on the already teetering mountaintop. This will go down in history as a huge and pivotal economic policy blunder if it goes through.

by Atropos 14y ago

jpdoctor 14y ago

> But why is the Euro up 16% against the USD and 23.3% against the UK pound over the last 10 years? You think it is something other than supply and demand? The Fed and BoE can print; The ECB cannot. The result (which is related to printing) you failed to quote: Greek deflation. It's not complicated.

Atropos 14y ago
What exactly is your point? If we see market prices as reasonably efficient, the current Euro price shows that the typical "Stupid Eurocrats idiotic mismanagement of the flawed Euro project will lead to European collapse in 2 weeks" simply doesn't have a base in reality. Individual (small) countries may fail, the system will be fine, and misinformed doomsayers will - as always - end up making fools of themselves.
- jpdoctor 14y ago
  > What exactly is your point? The euro is up 16% because there are more dollars in circulation chasing the same number of euros. Same for the pound. A deflationary environment in Europe (what are prices doing in Greece? What is the Spanish unemployment rate?) is exactly what you would expect, and the Euro up 16% against the USD and 23.3% against the UK pound is evidence of that. Or to put it another way: You quote evidence that supports the point you are trying to refute. (Perhaps you are being confused by the term "up" in currency exchanges? It makes exports more expensive, which makes the deflation worse since fewer employees will be needed.)
  - Atropos 14y ago
    You do realize that I quoted numbers for the last 10 years? Since the Eurocrisis started, the Euro has losses of around 6-10% against the other major currencies, so your deflationary argument isn't really sound. All I wanted to say is that in the long run, foreign exchange rates express some form of judgment about the soundness of a currency. The markets still consider the Euro a very sound and safe currency - at least more so than the USD and the UK pound. A weaker exchange rate might be preferable, but that is not a way Europe wants to go. Instead of printing money, the idea is to restructure the economy. In the short run this will of course be super painful and allow commentators to shout "Look, austerity has failed". Let's talk again in 2025, bond yields for Greece,Italy,Spain are already down...
    - Turing_Machine 14y ago
      "You do realize that I quoted numbers for the last 10 years?" No, you didn't. You compared two isolated data points. If you look at the actual graph of the last ten years, the Euro has been both considerably higher and considerably lower against the dollar over that period.
pavlov 14y ago
The ECB does effectively print money by buying commercial banks' bonds with newly created money. Draghi said last year that the ECB is prepared to purchase "unlimited amounts", so if there is a bank run, the central bank will fill up the banks' balance sheets as necessary (in theory).
- jpdoctor 14y ago
  > with newly created money. No. This is exactly the problem: The echoes of the German hyperinflation of the 1930s are still being heard, so Merkel and crowd have repeatedly stood against printing. As for the ECB purchases, those were "sterilized" as opposed to "quantitative easing", which is what the Fed does. http://blogs.wsj.com/eurocrisis/2012/09/06/the-ecb-sterilization-and-money-supply/ http://blogs.wsj.com/eurocrisis/2012/09/06/the-ecb-steriliza...
  - pavlov 14y ago
    The linked article is about ECB buying government bonds. But the ECB also buys bonds from Eurozone commercial banks, and this is where new money is being created. It does end up on the central bank's balance sheet, but there's no event that would force the bank to ever write it down. Those hundreds of billions in loans can stay unpaid for hundreds of years if necessary.
    - justincormack 14y ago
      All the lending to commercial banks is secured lending, they have to provide collateral to the ECB. The less good quality stuff is lent by individual central banks, so governments underwrite it. There is no unsecured buying of bank debt (banks can use covered bonds as collateral but again that is secured). And the LTRO is only three years. So it is not like you suggest at all.
      - pavlov 14y ago
        Thanks and sorry, I was clearly misinformed. I must have taken some "stuff they say on the Internet" at face value.

pcrh 14y ago

Because the UK and the US are doing what the smaller states in the EU cannot, i.e. devaluing their currency. If the UK pound falls by X% against most other currencies, this is equivalent (in the long term) to all inhabitants of the UK losing X% of their income.

dageshi 14y ago

It's very simple, inside the eurozone you can transfer your euro's from dangerous Spanish/Greek/Portuguese bonds and put them into safe German bonds. Even if the euro were to collapse, the German bonds would be redenominated in the new German currency, chances are it would immediately begin to rise vs other currencies. So you don't have to exit the eurozone area, you just transfer your money from the debtor states to the creditor states. That doesn't make the situation any better particularly it just drives up bond yields in the debtor countries and makes their situation even worse. Essentially a decision has been made to save the currency and sacrifice the debtor countries which use it. This is just another example.

Symmetry 14y ago

>But why is the Euro up 16% against the USD and 23.3% against the UK pound over the last 10 years? Because the Euro is stupid. You don't want your money to be as valuable as possible! Deflation, when not accompanied by fast growth in real GDP, is bad! There's no excuse for the European Central Bank to be running such a tight policy when aggregate demand in the European periphery is so depressed. But of course nobody trusts the banking system in the periphery, so all the money from there is rushing into the center causing deflation in the periphery and inflation in Germany. And then the ECB sets policy to accommodate Germany, and threatens to screw the peripheral countries even harder if they don't make the supply side changes it wants.

chestnut-tree 14y ago

"...the EU shouldn't and doesn't really care if they go under." The EU should care. Do European officials and politicians think they are immune from the opinion of people in their own countries? I expect this measure will generate a lot more hostility towards the EU among the European populace.

danenania 14y ago

Unfortunately, our lovely world financial system is so precariously poised that a small pebble falling can quickly become an avalanche. Though as they relate to market psychology, first in the other troubled nations of Europe, but secondarily for the entire world, the actions taken in Cyprus don't exactly resemble the dropping of a pebble. They're more like exploding a few sticks of dynamite on the already teetering mountaintop. This will go down in history as a huge and pivotal economic policy blunder if it goes through.