In every economic crisis there comes a moment of clarity. In Europe soon, millions of people will wake up to realize that the euro-as-we-know-it is gone. Economic chaos awaits them.
To understand why, first strip away your illusions. Europe's crisis to date is a series of supposedly "decisive" turning points that each turned out to be just another step down a steep hill. Greece's upcoming election on June 17 is another such moment. While the so-called "pro-bailout" forces may prevail in terms of parliamentary seats, some form of new currency will soon flood the streets of Athens. It is already nearly impossible to save Greek membership in the euro area: depositors flee banks, taxpayers delay tax payments, and companies postpone paying their suppliers -- either because they can't pay or because they expect soon to be able to pay in cheap drachma.
The troika of the European Commission (EC), European Central Bank (ECB), and International Monetary Fund (IMF) has proved unable to restore the prospect of recovery in Greece, and any new lending program would run into the same difficulties. In apparent frustration, the head of the IMF, Christine Lagarde, remarked last week, "As far as Athens is concerned, I also think about all those people who are trying to escape tax all the time."
Ms. Lagarde's empathy is wearing thin and this is unfortunate -- particularly as the Greek failure mostly demonstrates how wrong a single currency is for Europe. The Greek backlash reflects the enormous pain and difficulty that comes with trying to arrange "internal devaluations" (a euphemism for big wage and spending cuts) in order to restore competitiveness and repay an excessive debt level.
Faced with five years of recession, more than 20 percent unemployment, further cuts to come, and a stream of failed promises from politicians inside and outside the country, a political backlash seems only natural. With IMF leaders, EC officials, and financial journalists floating the idea of a "Greek exit" from the euro, who can now invest in or sign long-term contracts in Greece? Greece's economy can only get worse.
Some European politicians are now telling us that an orderly exit for Greece is feasible under current conditions, and Greece will be the only nation that leaves. They are wrong. Greece's exit is simply another step in a chain of events that leads towards a chaotic dissolution of the euro zone.
During the next stage of the crisis, Europe's electorate will be rudely awakened to the large financial risks which have been foisted upon them in failed attempts to keep the single currency alive. When Greece quits the euro, its government will default on approximately 121 billion euros of debt to official creditors, and about 27 billion euros owed to the IMF.
More importantly and less known to German taxpayers, Greece will also default on 155 billion euros directly owed to the euro system (comprised of the ECB and the 17 national central banks in the euro zone). This includes 110 billion euros provided automatically to Greece through the Target2 payments system -- which handles settlements between central banks for countries using the euro. As depositors and lenders flee Greek banks, someone needs to finance that capital flight, otherwise Greek banks would fail. This role is taken on by other euro area central banks, which have quietly lent large funds, with the balances reported in the Target2 account. The vast bulk of this lending is, in practice, done by the Bundesbank since capital flight mostly goes to Germany, although all members of the euro system share the losses if there are defaults.
The ECB has always vehemently denied that it has taken an excessive amount of risk despite its increasingly relaxed lending policies. But between Target2 and direct bond purchases alone, the euro system claims on troubled periphery countries are now approximately 1.1 trillion euros (this is our estimate based on available official data). This amounts to over 200 percent of the (broadly defined) capital of the euro system. No responsible bank would claim these sums are minor risks to its capital or to taxpayers. These claims also amount to 43 percent of German Gross Domestic Product, which is now around 2.57 trillion euros. With Greece proving that all this financing is deeply risky, the euro system will appear far more fragile and dangerous to taxpayers and investors.
Jacek Rostowski, the Polish Finance Minister, recently warned that the calamity of a Greek default is likely to result in a flight from banks and sovereign debt across the periphery, and that -- to avoid a greater calamity -- all remaining member nations need to be provided with unlimited funding for at least 18 months. Mr. Rostowski expresses concern, however, that the ECB is not prepared to provide such a firewall, and no other entity has the capacity, legitimacy, or will to do so.
We agree: Once it dawns on people that the ECB already has a large amount of credit risk on its books, it seems very unlikely that the ECB would start providing limitless funds to all other governments that face pressure from the bond market. The Greek trajectory of austerity-backlash-default is likely to be repeated elsewhere -- so why would the Germans want the ECB to double- or quadruple-down by suddenly ratcheting up loans to everyone else?
The most likely scenario is that the ECB will reluctantly and haltingly provide funds to other nations -- an on-again, off-again pattern of support -- and that simply won't be enough to stabilize the situation. Having seen the destruction of a Greek exit, and knowing that both the ECB and German taxpayers will not tolerate unlimited additional losses, investors and depositors will respond by fleeing banks in other peripheral countries and holding off on investment and spending.
Capital flight could last for months, leaving banks in the periphery short of liquidity and forcing them to contract credit -- pushing their economies into deeper recessions and their voters towards anger. Even as the ECB refuses to provide large amounts of visible funding, the automatic mechanics of Europe's payment system will mean the capital flight from Spain and Italy to German banks is transformed into larger and larger de facto loans by the Bundesbank to Banca d'Italia and Banco de Espana -- essentially to the Italian and Spanish states. German taxpayers will begin to see through this scheme and become afraid of further losses.
The end of the euro system looks like this. The periphery suffers ever deeper recessions -- failing to meet targets set by the troika -- and their public debt burdens will become more obviously unaffordable. The euro falls significantly against other currencies, but not in a manner that makes Europe more attractive as a place for investment.
Instead, there will be recognition that the ECB has lost control of monetary policy, is being forced to create credits to finance capital flight and prop up troubled sovereigns -- and that those credits may not get repaid in full. The world will no longer think of the euro as a safe currency; rather investors will shun bonds from the whole region, and even Germany may have trouble issuing debt at reasonable interest rates. Finally, German taxpayers will be suffering unacceptable inflation and an apparently uncontrollable looming bill to bail out their euro partners.
The simplest solution will be for Germany itself to leave the euro, forcing other nations to scramble and follow suit. Germany's guilt over past conflicts and a fear of losing the benefits from 60 years of European integration will no doubt postpone the inevitable. But here's the problem with postponing the inevitable -- when the dam finally breaks, the consequences will be that much more devastating since the debts will be larger and the antagonism will be more intense.
A disorderly break-up of the euro area will be far more damaging to global financial markets than the crisis of 2008. In fall 2008 the decision was whether or how governments should provide a back-stop to big banks and the creditors to those banks. Now some European governments face insolvency themselves. The European economy accounts for almost 1/3 of world GDP. Total euro sovereign debt outstanding comprises about $11 trillion, of which at least $4 trillion must be regarded as a near term risk for restructuring.
Europe's rich capital markets and banking system, including the market for 185 trillion dollars in outstanding euro-denominated derivative contracts, will be in turmoil and there will be large scale capital flight out of Europe into the United States and Asia. Who can be confident that our global megabanks are truly ready to withstand the likely losses? It is almost certain that large numbers of pensioners and households will find their savings are wiped out directly or inflation erodes what they saved all their lives. The potential for political turmoil and human hardship is staggering.
For the last three years Europe's politicians have promised to "do whatever it takes" to save the euro. It is now clear that this promise is beyond their capacity to keep -- because it requires steps that are unacceptable to their electorates. No one knows for sure how long they can delay the complete collapse of the euro, perhaps months or even several more years, but we are moving steadily to an ugly end.
Whenever nations fail in a crisis, the blame game starts. Some in Europe and the IMF's leadership are already covering their tracks, implying that corruption and those "Greeks not paying taxes" caused it all to fail. This is wrong: the euro system is generating miserable unemployment and deep recessions in Ireland, Italy, Greece, Portugal and Spain also. Despite Troika-sponsored adjustment programs, conditions continue to worsen in the periphery. We cannot blame corrupt Greek politicians for all that.
It is time for European and IMF officials, with support from the U.S. and others, to work on how to dismantle the euro area. While no dissolution will be truly orderly, there are means to reduce the chaos. Many technical, legal, and financial market issues could be worked out in advance. We need plans to deal with: the introduction of new currencies, multiple sovereign defaults, recapitalization of banks and insurance groups, and divvying up the assets and liabilities of the euro system. Some nations will soon need foreign reserves to backstop their new currencies. Most importantly, Europe needs to salvage its great achievements, including free trade and labor mobility across the continent, while extricating itself from this colossal error of a single currency.
Unfortunately for all of us, our politicians refuse to go there -- they hate to admit their mistakes and past incompetence, and in any case, the job of coordinating those seventeen discordant nations in the wind down of this currency regime is, perhaps, beyond reach.
Forget about a rescue in the form of the G20, the G8, the G7, a new European Union Treasury, the issue of Eurobonds, a large scale debt mutualization scheme, or any other bedtime story. We are each on our own.
Simon Johnson is the co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters To You, available from April 3rd. This post is cross-posted from The Baseline Scenario. Read more from the Fiscal Affairs series here. Peter Boone is chair of Effective Intervention, a UK-based charity, an associate at the Centre for Economic Performance, London School of Economics, and a principal in Salute Capital Management Limited.
Follow Simon Johnson on Twitter: www.twitter.com/baselinescene
Andrew Cooper: G20 Must Discuss What G8 Was Scared To
Europe must offer Greece a post-election prospect
By Zsolt Darvas on 8th June 2012
The euro might survive. But a cooperative Greek government, a real European programme to support Greek economic growth and a resolution of the Greek public debt overhang are minimal conditions for the short term. The euro's deeper flaws should also be addressed soon if a disorderly and destructive dissolution of the euro area is to be avoided.
http://www.bruegel.org/nc/blog/detail/article/807-europe-must-offer-greece-a-post-election-prospect/
Next to North Korea’s 5 year plans, fixed exchange rates must be the worst economic policy ever devised by man:
1. The fixed exchange rate regime of the interwar period was a complete disaster, arguably causing WWII.
2. The Chilean peg of the early 198os led to a massive recession, before they switched to inflation targeting.
3. The 1994 Mexican crisis.
4. The 1997-98 East Asian crisis.
Then people said the regimes had to be more impregnable, so that even a speculative attack wouldn’t undermine the peg. This led to:
5. The Argentine depression of 1998-2001
Then people said even the currency board wasn’t enough, As long as you still had a currency, there was always the possibility of devaluation. This led to the idea of the single currency, the ultimate doomsday device:
6. The eurozone crisis of 2008–2018
When you talk to proponents of a single currency, they talk of the huge efficiency gains, as if the Swiss and Swedes and Norwegians and Danes are disadvantaged by holding on to their old currencies. (Actually they are slightly disadvantaged, as the euro is such a monumental failure that desperate Europeans are buying Swiss and Danish bonds with negative nominal yields, even more negative than Germany.)
It should be noted that the SWISS WIR have had a multilateral trade network oprerating as a complimentary currency for approximately 80 years. With more than 80,000 participants performing approximately 1.8 billion swiss francs per annum in transactions between them (Approximately 1% of Swiss GDP).
Other global multilateral barter exchange networks such as the Ormita Commerce Network Barter Exchange (http://www.ormita.com and http://www.ormitausa.com) offer the ability for businesses to exchange excess capacity for essential goods and services. monetises capacity in areas which are asset rich but cash poor.
"Unfortunately for all of us, our politicians refuse to go there -- they hate to admit their mistakes and past incompetence,..."
A universal truth,... European, American, or wherever,...
"Democracy, national sovereignty and global economic integration are mutually incompatible. It's possible to have any 2 but not all 3. It's the inescapable trilemma of a world economy" -
Dani Rodrik He is the among the 100 most influential economists in the world according to IDEAS/RePEc
Doesn't seem as if the brain is evolving at all.
We could finance additional payments to Europe by taxing our poor through cigarettes, junk food, and gasoline taxes.
Know what's going to happen? Nothing.
Money is just a medium of exchange,that's all it is. If the euro collapses, investors (gamblers) in it will take a bath, that's all. But you know what? I don't own any euros. I only have dollars. Europe will become a cheap place to visit again. Couldn't happen to a nicer continent.
And if America defaults on its debt to stop Planned Parenthood -- no big deal either -- just money
games .
If even Greece falls -- it will make the Lehman Bros panic seem like small potatos . The world is primed for a true global bank run . The end of the bank run is a true world depression - the rise
of authoritarian regimes , destablization , terroists with nuclear weapons .
However dark you can think -- it will likely be darker .
The world has been moving in concentric circles towards the drain -- that is how depressions
form --
And you sit on the sidelines oblivious that it could effect you and those you care about .
Lovely .
1. Provide for the common military defense.
2. Pay for the construction of the common infrastructure elements that we all enjoy.
3. Pay for police, fire fighters, and a judicial system.
4. Take care of those citizens that cannot take care of themselves.
5. Provide various other non-essential government expenses such as libraries, museums, zoos, parks, hospitals, NASA and other unnecessary similar services that serve the total population.
Bureaucratic government employees at every level of government therefore are NET CONSUMERS of the nation’s financial resources, and DO NOT CONTRIBUTE to the creating any new financial resources or NATIONAL WEALTH that might be available to be taxed to collect money to spend on various government activities.
For any nation to sustain a Republic, Democracy, Capitalism, Socialism, Communism, Fascism, Dictatorship, Kingdom, Principality or any other form of government that they select and/or is imposed on them, that nation has to have sufficient privately owned NATIONAL WEALTH continuously generated in their nation so that there is enough for the taxing authority to CONFISCATE a portion of that NATIONAL WEALTH that was created by their private sector businesses, plus an additional amount taken through sales taxes, property taxes, tariffs, etc., to collect money to pay for their government activities, without borrowing wealth from other nations to pay for their various government activities
We must all realize that PRIVATELY HELD NATIONAL WEALTH NON-GOVERNMENT JOBS are only made, created, and/or acquired mainly (maybe only) when the members of a family or the citizen businessmen of a nation, city-state, island, tribe, etc., perform one or more of the following tasks:
1. plant, grow and/or harvest something of commercial value from the earth;
2. extract something of commercial value from the earth;
3. manufacture something of commercial value that is consumable
4. construct a building that is permanently useful for rental income;
5. provide professional services (medical, legal, dental, engineering, architecture, land surveying, technology, accounting, etc.);
6. collect payment for patent and copyright uses;
and if they then trade, sell, lease or rent these items and/or services to parties outside of their family, in return for a net transfer of gold, currency or commodities from other parties outside of their family into their own family, then that family is enriched.