making sense of the eurozone

Will Greece default? Or will the debt be restructured? What will then happen to Portugal, Ireland, Spain, Italy etc.? Does the structure of the eurozone create its own special problems on top of the declining world economy?

In searching for answers I have found the analysis of blogger Protesilaos Stavrou (Critical views on current affairs) helpful. Although the following does not directly address the wider problem of the ailing world economy he does make a strong case that there is a problem with the euro itself which makes things worse:

European leaders created a monetary union, a single currency, without a coordinated fiscal policy (a fiscal union), thus leaving the euro open to serious shocks that would hit directly at this systemic flaw. This is the reason why the once two-speed eurozone has become two-tier, since national economies grew unequally, as the economies of the more efficient countries of European center were concentrating the surpluses of the eurozone, while the periphery was left with debt and the illusion of prosperity that came from the once cheap loans. That is the reason why we say that the surpluses of the North (Center) are the deficits of the South (Periphery).

Failing to address the structural flaws of the euro, means failing to see the real problem, which is basically what happens today, since all European officials speak of the “Greek”, “Irish”, “Portuguese” crises, as if those are not related anyhow to the way that the single currency functions. That kind of approach, is made manifest in the bailout packages that are given to these countries, which do not aim at preventing defaults and bringing national economies back on track, but at buying precious time for German and French banks, who hold around 30% of their respective countries GDP in government bonds of the European South, so as to avoid a more generalized crisis. The bailouts are thus a means of indirectly financing German and French banks and minimizing loses.

These practices will not solve the problem. All they will do is accumulate more problems that go beyond the scope of economics into social and political spheres that will at some point erupt with unpleasant consequences for the EU architecture. For as long as the systemic flaws of the single currency are not touched upon, there will be no viable solution to the eurozone’s debt crisis
Systemic flaws of the Euro are the root of the debt crisis

Here are direct links to some of his key blogs:

update: July 6: An overview of the four dimensions of the Greek Crisis

July 4: Systemic flaws of the Euro are the root of the debt crisis

July 3: Eurogroup chairman speaks of limited Greek sovereignty

July 1: Market relief will be short lived over Greek debt

June 29: Evaluation of the new austerity measures in Greece

June 28: Ad hoc measures can not save the EU

June 19: The effects of a Greek debt restructuring

June 1: The scenario of Greece switching to the Drachma – Goodbye Euro

update: May 30: About the “change” the Indignant want

May 23: Better for Greece to default rather than take new austerity measures

May 16: What if Greece goes bankrupt?

May 10: Two-speed Europe becomes TWO-TIER

May 4: The European safety mechanism dooms Greece

update: April 7: The Greek Odious Debt and its Essential Lies

37 Responses to “making sense of the eurozone”

  1. 1 Arthur

    Thanks for the links.

    Another one is About the “change” the Indignant want.

    That struck me as fairly insightful.

    Unfortunately the conclusion he advocates is:

    The only way for Greece to survive is to denounce the safety mechanism and the memorandum with the troika that leads to its doom. Declare the public debt Odious, thus deny paying it, since to be covered it requires measures that are detrimental for the essential needs of the Greek people. Hence declare default on all its creditors. Abandon the euro and re-adopt its national currency (drachma) so as to regain monetary policy powers which is in desperate need of. Nationalize banks in order to control the supply of money. Adopt protectionist measures to save local production and invest in increasing that production. In other words the only way out for Greece is to apply Economic Nationalism coupled with Communal Markets that have already started to appear in various parts of the country and need to be spread everywhere. This is the only real safety mechanism that Greece can choose to avoid agony, misery, slavery and death.

    The question now is will the current political establishment that is responsible for the whole situation, abandon its policies and adopt these radical measures? The answer is NO and the Greeks must realize that the soonest. In the peoples’ and the intelligentsia’s everyday parlance there is one word that has to be included: Revolution!


    Seems obvious that simply won’t work. There are no magical “monetary policy powers” that result in a bankrupt without a bailout facing less “austerity” than with a bailout.

    The results of protectionism and economic nationalism are well known.

    A more useful directly opposite perspective has been raised by Joschka Fischer in Does Europe Have a Death Wish?

    The breakdown of monetary union proves the necessity of fiscal union, ie a European treasury with at least veto powers over national budgets.

    But why stop at Europe? And why stop at fiscal union?

    The last phase of the global crisis was successfully postponed by coordinated national fiscal and monetary policies. Such policies are limited by the government share in GDP. When more is needed it will be necessary for the state to take over investment policy.

    Essentially that means the state becoming the national capitalist as described by Engels in Socialism, Utopian and Scientific.

    But the most important enterprises are no longer national. A state that could take control of global investment policy would have to be an international state. More than the embryo of world government already exists (expressed in a multitude of different institutions it is already more powerful than the Polish state in which individual nobles each had a “free veto”).

    The required world government will require more financial integration than the EU yet would have to extend far beyond the EU.

    This raises sharply the continuity between revolutionary democracy and proletarian dictatorship. There is already a recognized “democratic deficit” in the EU. Not to mention the general emptiness of parliamentary politics worldwide. A revolutionary struggle for democratic control of the world government would be the order of the day.

  2. 2 steve owens

    Bill, Will Greece default? Or will the debt be restructured?
    Most economic journalists that Ive read don’t differentiate. To restructure is to default. Rating agencies and people who insure against loans going bad also consider restructuring to be a default event. My point is that Greece may default but not in a commonsense understanding of the term.

  3. 3 jim sharp

    bill; you might like to suss out this doco

    The Weekly Guardian had an article recently reviewing a greek documentary which is spreading like wildfire amongst the Greek people. The writer terms it “the best film of Marxist economic analysis yet produced”.
    See an English subtitled version at
    For the first time in Greece a documentary produced by the audience. “Debtocracy” seeks the causes of the debt crisis and proposes solutions, hidden by the government and the dominant media.

  4. 4 Arthur

    Interesting video. Very explicit rejection of Marxist analysis. Instead of capitalist crisis pointing to necessity for ending capitalism it is supposed to be due to corruption and can be resolved by repudiating debts!

    Its well produced and will probably be quite popular. But it is very obviously oriented towards letting off steam rather than changing social conditions.

    Problem is that the consequences of simple debt repudiation would obviously be even greater austerity as it does not provide any means to maintain living standards etc. Sets up public opinion to blame leftists for that instead of blaming capitalism.

    The nationalist anti-EU stuff adapts very well to the overtly far right demands to kick Greece and other periphery countries out of EU – those demands are quite popular in Germany and Finland. As usual the pseudo-left takes the same position as the far right.

  5. 5 Bill Kerr

    I have added 3 more links from Protesilaos Stavrou to the original post and marked them update.

    July 6: An overview of the four dimensions of the Greek Crisis
    (provides a more balanced overview of PS’s position)
    May 30: About the “change” the Indignant want
    (suggested reading by arthur about the need for the indignant to have a revolutionary programme)
    April 7: The Greek Odious Debt and its Essential Lies
    (relates to the video Jim has suggested we watch)

    The video recommended by Jim is mainly about the concept of Odious Debt and relies heavily on Iric Toussaint (Committee for the Abolition of Third Word Debt) and Rafael Correa, president of Ecuador, who acquired hero status in 2007 for defying the IMF and the World Bank.

    The video looks at the history of Odious Debt including the fact that it was used by George Bush to establish that Iraq would not have to repay debts acquired under Saddam Hussein. There is further discussion about debt being illegitimate or illegal under certain circumstances.

    But the line becomes blurred. For example, it is argued that the Olympic Games held in Greece in 2004 resulted in illegitimate debt. Note that the current Greek debt is described by Protesilaos Stavrou as Odious because to repay it would cause too much hardship for the people and then that is retrospectively rationalised because of corrupt dealings by administrators with Goldman Sachs, etc. But it is pretty much the normal workings of capitalism for countries to hold big sporting events, to do deals with the likes of Goldman Sachs, etc. So, where should the line be drawn between legitimate cases of Odious Debt and cases where Debt arises through the normal workings of capitalism? Why don’t we just describe all debt as odious and there we have it – the revolution has happened! That sounds even better than Kevin Rudd giving away money for free in 2008.

    Marx describes the various cycles of capitalism (money capital, productive capital and commodity capital) in Volume 2. The credit system, debt and fictitious capital arise from the ongoing contradictions in the system which can never be resolved. Whenever the system slows or stalls then debt will arise as a natural consequence of capitalism. As arthur points out debt is natural to the system not just a product of corruption.

    This doesn’t necessarily contradict the logic of the socialists in the video. They may be thinking we live in a class society and debt is a problem created by capitalism and that is their problem, working people shouldn’t pay for the capitalists problem created by their system. But the video does not present the Odious Debt problem in this way. It suggests that debt arises from corruption and hence obscures the real nature of the capitalist system. So instead of a real challenge to the system we end up with populist politicians who stand up to the IMF and the World Bank on the promise of not repaying the debt. But ultimately politicians like Rafael Correa operate within the system and from reading his bio do not end up delivering democratic rights even to the people.

  6. 6 Bill Kerr

    So, are these the options for the future and which is more likely?

    1) Greece defaults,rejects the IMF as suggested by Protesilaos Stavrou and David Harvey. Well, that did not happen.

    2) the debt is restructured in Greece, Ireland, Portugal, Spain as suggested by economist Ken Rogoff, Rogoff Says Debt Restructuring in Greece, Ireland, Spain Is `Inescapable’, bondholders take losses of as much as 40 percent.

    3) Germany and France overcome the formidable obstacles and work out a way to politically unify Europe, as suggest by Joschka Fischer (Does Europe Have a Death Wish?)

    4) the contagion spreads throughout Europe and then to the whole globe, the great financial crisis becomes a the greater financial crisis

    What do you wish for? Which one is more likely to happen?

  7. 7 Steve Owens

    Bill option 4) is a disaster that only the right will benifit from. The Right is already on the rise in European elections i.e. Findland
    Option 3) makes alot of sense and would see Greece as being the equivalent of Nevada in a monetary union run along the lines of the USA
    Option 2) has some sense to it, a combination of 2) and 3) seems likely
    Option 1) won’t happen unless Greece has a revolution.
    There is always option 5) and thats the Argentinian model but for that Greece would probably have to get out of the Euro zone and reinvent the drachma

  8. 8 steve owens

    Argentina declared itself to be in default in 2002. As you can see from the graph the people that run Greece would take this result.

  9. 9 patrickm

    Reading Rogoff from March 3 indicates that he’s drawing lines based on wishful thinking and doing so precisely because ‘Spain is too big’. He notes that if Spain goes, it won’t stop there and Belgium gets a mention but not Italy?

    He would like Portugal and Greece to leave the Euro region for 10-15 years (fails to mention Ireland , presumably have to be same) but what does this actually mean? How can a European country leave the Euro zone other than by producing its own currency, presumably a NEW Drachma or Punt, but the value of that currency would immediately be valued in Euros would it not?

    Well soon it will be another half a year along and governments etc.,have clearly kicked these problems further down the track (see bond yield chart Portugal) that he said would see matters get worse with delay and I think it is safe to say that things are worse now.

    I see no reason to assume that the next six months will not be at least more of the same and conclude that when people are talking about a ‘haircut’ of 40% the defaults have actually already happened. The rush to the exits has already produced the jammed up death trap that they were all worried about. The losses are as real and broad as they are not finalised! The music has stopped and the question is who is really sitting on a chair and who is pretending to be sitting comfortably.

    If the bond charts indicate risk then Italy is riskier than Belgium. ( Spain chart , Irish , Belgium , Italy , GREECE ,)
    At the start of 2010 there was not much difference with all of them compare and contrast to the AUS US and UK chart!

    If we go back to the period where the investment firms that must daily place a stream of money were accepting the same from Greece as everyone else, and governments were assuring everyone that they really didn’t require any bailout – we are not going back very far. Clearly if this keeps up the banks will stop lending to each other as they did in stage one of the GFC when the governments ‘fixed it’ with taking on huge debt and stimulus spending.

    The next time the banks freeze up nobody is going to believe the Greek and Portuguese, or the Irish, and the same goes for Spain and Italy, and therefore the French and Germans will do all they can to stop the banks freezing up. So the problem will grow according to Rogoff’s thinking as far as I can see.

    These guys seem to have thrown their hands up and are just blaming the politicians for making it worse not for making it in the first place however.

    Arthur; I read this

    What is required, therefore, is an open bilateral French-German dialogue about a comprehensive realignment of the monetary union. Treaty changes are impossible; therefore, different methods will need to be found, which makes the Franco-German partnership all the more important.

    and naturally I don’t get it.

    He seems to be saying that a German-French led political solution must lead the further economic integration – after solving the current financial crisis – using different methods (that will need to be found) because agreements between the various EU governments can’t be formally agreed at the level of the whole community with some Treaty changes. He simply says that this proposed G-F solution must be found because it would be very bad if it were not.

    As long as the EU’s life-threatening political crisis continues, its financial crisis will continue to destabilize it. At the heart of resolving the crisis lies the certainty that the euro – and with it the EU as a whole – will not survive without greater European political unification.

    If Europeans want to keep the euro, we must forge ahead with political union now; otherwise, like it or not, the euro and European integration will be undone. Europe would then lose nearly everything it has gained over a half-century from transcending nationalism. In the light of the emerging new world order, this would be a tragedy for Europeans.
    Unfortunately, when the outgoing president of the European Central Bank, Jean-Claude Trichet, proposed a step in this direction by suggesting that a “European Secretary of the Treasury” be created, heads of state and government dismissed the idea out of hand. Hardly anyone on the European Council seems willing even to acknowledge the depth of the EU crisis.
    Resolving this crisis requires more Europe and more integration, not less. And yes: the rich economies – first and foremost Germany – will have to pay for the way out.
    Germany and France, the two crucial players in this crisis will have to devise a joint strategy, because only they working together can push through a solution. The problem is that the French referendum on the EU constitution in 2005 vetoed further political integration, while further economic integration may now fail because of Germany.

    a) It’s an EU life threatening political crisis and it will get worse the longer the financial crisis goes unresolved and there is nothing in sight on that front as they all kick the problem down the road ensuring that it will get worse.

    b) If the Euro is to be saved then Europe must forge ahead with political union now by reducing the problem to the big two, G-F, because this can’t be done via reform of the EU Treaty so that means a new G-F body must supersede the EU and adopt the Euro as it’s own currency so that 2005 French veto must be disregarded!

    c) The PIGS as far as I can see have already brought down the G-F banks (and also the non Euro British banks) and insurance companies but this has not been finalised.

    d) Yesterday the talk was about Greece today it is about Portugal being downgraded to junk bond levels and everyone knows that the Irish and then the Spanish will follow the same well worn path ‘tomorrow’. I think by the time these state bankrupts fess up, Italy and Britain will have unraveled …

    Steve; I don’t think the Argentina example, that happened in isolation, points us to any simple way forward at all in the Euro point.

  10. 10 patrickm

    Sorry appear to have lost links I will fix it tomorrow.

  11. 11 steve owens

    Just a couple of points
    “How can a European country leave the Euro zone other than by producing its own currency, presumably a NEW Drachma or Punt, but the value of that currency would immediately be valued in Euros would it not?” the answer is no, the new drachma would not be pegged to the Euro but devalue against the Euro. Greek debts are denominated in Euros so the debt would sky rocket. Thats why this strategy would include repudiation of debts.
    (Argentina had a currency called the Austral which was pegged to the US$. It was scrapped and replaced by the Peso which went into freefall against the US$)
    I don’t believe that the above will happen because of politics. As I have pointed out before the EU needs a central bank just like that other large monetary union the USA has. When Nevada like Greece got into trouble it could borrow from the Fed at 3%. Nevada doesn’t have to ask international financiers for loans. If they did then they would be offered the Greek rate of 16% and Nevada like Greece would go broke. The Germans and the French will do their best to hold the other EU nations together. If they hold their nerve the worst that will happen is that the Euro will devalue against the greenback and whatever you want to call the Chinese currency. If that happens European capitalism will gain a competative advantage, no wonder China is stepping forward to support the Euro.
    Capitalism saw off the Latin American debt crisis, the Asian economic melt down and now it faces the North Atlantic debt crisis. My money is on them doing whatever is necessary to keep the party going even if it means selling part of the farm to China.

  12. 12 steve owens

    Chinese Communist party saves Europe. Leader says what else could we do Europe gave us Marx

  13. 13 Steve Owens

    The Chinese just don’t realise how much trouble they are really in.

  14. 14 Steve Owens
  15. 15 Bill Kerr

    So, the contagion has spread to Italy (which represents 17% of the eurozone GDP, compared with a mere 6% of Greece, Ireland and Portugal combined) and the best official assurance from Angela Merkel is that she is confident that Italy will approve an austerity budget.

    Italy within an inch of economic crisis

    According to Johan Van Overtveldt, throwing money at a problem, whether it is Greece, Portugal, Ireland or Italy is not enough …. “It will not solve the problem. Economic growth is needed so that these countries can raise the revenues. We’re talking here about structural reforms, microeconomic reforms, and tax reforms to get the growth machine of these countries going again. But unfortunately Italy predicts it will have no economic growth this year”.

    Italian bond yields approaching disaster zone

    There is no simple explanation as to why Italy finds itself the centre of attention. It is not news that the country’s debt-to-GDP ratio, at 119%, is the second worst in the eurozone. Rather, the driver seems to be the dithering displayed by eurozone leaders over Greece, specifically over the design of a bailout package. The market can see that, if the authorities can’t agree on how to treat holders of Greek bonds, the risk of an uncontrolled default, which would reverberate through the European banking system, is rising.

    Italy and the eurozone: Welcome to the inferno

    Even more worrying, the eurozone’s third-largest economy, Italy, is also coming under increased suspicion – interest on its 10-year bonds is almost 6%. In theory, as members of the same single currency, with the same central bank setting a single benchmark interest rate, each country should be able to borrow at near enough the same rates. Instead, what’s happened over the past couple of years is that markets have divided the eurozone between the wheat (Germany, Austria, the Netherlands and a few others) and the chaff – which is an ever-expanding category. Spain and Italy now risk being marked chaff, and being charged consistently punitive rates for loans from the money markets.

  16. 16 Bill Kerr

    I thought your link to this article (China increases export edge) about the Chinese economy contained some interesting facts about how cutthroat competitive the world economy is. For example:

    In some products, such as apparel and footwear, Bangladesh, Honduras and Indonesia and other countries are starting to erode China’s dominant market position.

    Just as with toys, China has had a stranglehold on the worldwide shoe market. Nearly half of all shoes exported on the planet — and three out of four shoes exported to the US — come from China. But it’s a nimble industry, accustomed to shifting production in the search for the cheapest labor. Insiders’ term for it is “footloose”.

    In the 12 months through April, while China’s shoe exports to the US rose a pedestrian 12 per cent from the previous 12-month period, Indonesia’s jumped 33 per cent, Vietnam’s rose 29 per cent and Mexico’s were up 15 per cent.

    If the trend continues, China’s share of footwear sent to the US could shrink slightly this calendar year for the first time in more than a decade. There’s similar slippage in products such as knit apparel, woven clothing and bedding.

  17. 17 Bill Kerr

    A couple of interesting links:
    The only way to save the Euro and contain the crisis

    Instead of bailing out individual member-states the EU needs to create a mechanism (or revise the European Financial Stability Facility – EFSF) that will decisively guarantee the whole system’s debt, thus putting an abrupt end to the speculative attacks of the markets. The system-wide mechanism will guarantee the face value (nominal value) of the sovereign debt of each member-state, otherwise market fears will continue to influence negatively the effectiveness of the efforts to solve the debt crisis. In order to ensure the face value of debts, the rationale of narrow bailout packages must be completely rejected and instead the ECB and the mechanism must be allowed as much money as possible to fully cover the debt (certainly much more than the €750 billion that are available today). Furthermore the mechanism must be given the power to buy back government debt/bonds from the secondary market so as to be able to reduce the debt and ease the pressures on interest rates.

    Towards that end Europeans must first agree to the creation of a Eurobond: That is a mechanism that would benefit from the good faith (low cost of borrowing) of its fiscally healthy members to issue bonds that will be used to finance the member-states who are in trouble. This of course means that the healthy economies must accept to take debt to save their counterparts who are on the verge of default, which is understandably a very difficult political decision, as it is highly unpopular. This is a trade-off that has always existed but European leaders always wanted to avoid it, since it puts the credibility of robust economies, mainly Germany’s in support of the less effective members of the Union and furthermore brings the powerful members of the euro up to their responsibility to pay as much as necessary to support a single currency that has greatly benefited them throughout all these years.

    An unwillingness to adopt such an audacious programme will be a clear sign that egoism has prevailed over the European dream and that the powerful states do not wish to accept their responsibility as leaders of the single currency. Being a leader applies not only to the good times but mostly to the bad ones. If European leaders continue to deny addressing the issue as a systemic problem and if they allow in one way or another a partial default (restructuring) of the Greek debt, thinking that they will contain the crisis elsewhere, then they are completely mistaken. If a single country is allowed (or forced) to exit the euro the ramifications will be devastating, as the re-adoption of national currencies will immediately create from the outset a need to impose protectionist policies that will make every other member in the union worse-off, thus putting even more pressure to those who remain with the euro to also follow a similar path back to national monetary power.

    from the IMF:
    Expansionary Austerity: New International Evidence (pdf 37pp)
    I have only skimmed this one so far but the “expansionary austerity” concept sounds like the end game of capitalism to me – expansion for the capitalists, austerity for the masses.

  18. 18 Steve Owens

    Bill, You say that the article I linked to had some interesting facts about the Chinese economy and how cutthroat competitive the world economy is, like thats a bad thing.
    Footloose industries set up in Eastern China but now as wages rise there, they move to low wage Western China, Indonesia and Mexico.
    Thats a good thing. Capitalism develops an economy raises living standards and then moves on. Thats why we oppose tarriffs and support globilisation because it is developing the world rather than the previous protectionist world where everything just stagnates and the poor are excluded from the productive world. You have to make a cake before you can argue over shares in the cake or decide to place all of the cake into the hands of the cake makers.
    Bill you either support globalization or you don’t there is no middle path.

  19. 19 Bill Kerr

    I was mainly encouraging others to read the article, initially posted by you, here is the link again (China increases export edge). I think it provides a valuable thumbnail of the dynamics of the developing world economy with information that indicates that China’s economy is both dynamic and fragile.

    Your original one line comment on the article said:

    The Chinese just don’t realise how much trouble they are really in.

    I took that to be a sardonic endorsement of the first few paragraphs which outlined how well China is doing. Yet if you read the article carefully it is clear that the Chinese economy is also beset with serious contradictions and problems and that for now it is succeeding despite those contradictions. Maybe I interpreted your comment incorrectly and you weren’t being sardonic. However, even if I take your comment literally it would still be wrong. Both the Chinese and the author of the article understand that the Chinese economy is unstable as well as growing fast for now.

  20. 20 Steve Owens

    Bill I agree with you that the article argues that the Chinese economy is dynamic but not fragile.
    It’s main argument is that despite allowing the Yuan to appreciate against the US$ China is increasing market share and that China is adjusting to rising input costs by moving industry West and through automisation. The article argues that the wage disparity between China and Vietnam of about 10% is not great enough to move industry there. Partly because of China’s strong supply chain.
    The article argues that China is coping with problems through being dynamic and through its devaluation in relation to a competator currency like the Euro by 5% hence the bad news for Italy and Spain.
    Bill, the Chinese economy is unstable because Capitalism is unstable. No one knows how much it will grow or when it might stop growing. I think that it still has a long way to go because the world doesnt seem to want to stop buying their stuff and they will soon develop a strong internal market.
    People at this site have argued that Capitalism has been in decline since the 1970’s and that growth has been illusory, a phenomenon built on debt.
    If Capitalism was in a spiral of poor growth and diminishing returns then there could be no China. If opportunities for Capital were really being restricted by a falling rate of profit and markets were really chocked with overproduction of goods and or over production of Capital then China could not have risen from an impoverised nation with little per capita growth to become the worlds second biggest producer and one of the worlds biggest lenders.
    You can describe China as fragile, you can scoff at the idea that China would stop Australia going into recession in 2008, you can reproduce stories about China’s empty cities and their real estate bubble and their poor February PMI figures but the fact remains that the China phenomenon doesn’t fit into your analysis and therefor you are reduced to acting like it’s not real, it’s just growing fast for now.

  21. 21 Bill Kerr

    Some more links about the crisis in Europe:

    Can even more bailouts really be the answer? Andrew Lilico
    Bailing out the Banks is a Failed Strategy. He doesn’t have a solution. Despairing.

    Sovereign Debt Crisis Is Now Global Sheldon Filger
    The financial collapse of 2008 is entering a more dangerous phase worldwide

    Time is running out for Europe Steen Jakobsen, Chief Economist at Saxo Bank
    The problem is that Europe’s leaders are not facing reality. There will be more pain but a solution is suggested:

    In fact, a crisis 2.0 could be what is needed to create both the economic and political platform that will solve Europe’s problems: namely, a fiscal union. Do not misunderstand me – I am agnostic on the EU’s existential question, but the EU was created as a political institution, not an economic one. Europe is a house without a financial foundation: no ministry of finance.

    The time has come for some major decisions if the great European experiment is to survive. The Euro Zone needs a Ministry of Finance, one that should probably issue Euro Bonds from EFSF/ESM.

  22. 22 jim sharp

    bill & steve china: maybe this link to h.mcqueen’s essay may help your ponderings

    Chinese Crackers – Humphrey McQueen (Feb, 2011) – a detailed analysis of the political economy of the so-called “Chinese miracle” – do the numbers stack up?

  23. 23 Steve Owens
  24. 24 Bill Kerr

    Summary of some more links about the eurozone crisis:

    Full analysis of the outcomes of the EU Summit by Protesilaos Stavrou
    Quotes directly from the EU summit document and challenges most of its claims
    – soothing rhetoric
    – lies
    – fails to deliver the required haircut
    – ad hoc measures, not real long term strategy
    – fails to deliver fiscal union or co-ordinated fiscal policy
    – blames the rating agencies

    The magnificent strength of the euro by Ambrose Evans-Pritchard

    The euro is strong only against other deadbeats such as sterling and the dollar (China’s yuan is linked to the dollar in a dirty float, so that rate is rigged), currencies of central banks that are pursuing a policy of deliberate debasement to prevent Fisherite debt deflation

    Europe, Free Speech, and the sinister repression of the Rating Agencies by by Ambrose Evans-Pritchard

    My gripe against the agencies is not that they are downgrading all these semi-bankrupt states today, but that they totally failed to signal the inherent dangers of EMU a long time ago when the crucial investment decisions were being made. They too were swept up by euro euphoria. They too failed to understand the inherent structure of monetary union, or to spot obvious warning signs as the drama unfolded and the North-South divide became ever-more apparent. They handed out AAAs like confetti.

  25. 25 Lupin3

    I hate to be late to the party, but I have a special interest here.

    One of the concerns I have with LS:ST is continued insistence on the inability of capitalism to moderate itself, despite good evidence for it. In my view, this tends to manifest itself as an implication of the “Krugman Fairies” line, in that since Keynes had it wrong, there’s no use in anything but revolution. Since there’s no use in anything but revolution, anything that prolongs it by making the present more bearable (Krugman Fairies) is counter-revolutionary.

    Arthur seems to make this rather more than implicit in his comment that “[i]nstead of capitalist crisis pointing to necessity for ending capitalism it is supposed to be due to corruption and can be resolved by repudiating debts!” But what would Arthur offer in place of austerity or default?

    We are not speaking in historical terms; the crisis is unfolding now. In general, the left has been as conservative as the right in responding to it, with austerity in Spain and Greece, and Obama more economically conservative than Richard Nixon or Ronald Reagan. From a class point of view, this merely serves the interests of the rentiers at the expense of the working class. Why should Marx’s view of long term failure of capitalism to transform society trump the need he expressed to act on the interests of the working classes, who cannot see their own interests?

    The left should respond to this crisis with rather more than jeering from the sidelines, with something more concrete than revolutionary fantasy. When Arthur says “[t]here are no magical “monetary policy powers” that result in…less “austerity” than with a bailout” it makes me wonder how serious he is.

    The point of austerity is that the working classes are forced into accepting pay cuts or unemployment for long periods in exchange for financing debt interest. Generally, the working classes have had no access to international credit, and have not benefited from it directly. Why should they bear the costs of it?

    The point of default is to share the burden of bad debt more equally among debtors and creditors. So too is the point of a monetary breakup: since EU monetary policy is decided in France and Germany, the valuation of the Euro reflects their priorities. But more importantly, the value of the Euro reflects the overall economic conditions of its most important members.

    Consider it this way. If we could create a hypothetical drachma and assign a more or less rational value to it in Euro terms – let’s say, 1000 d to 1 eu – and then substitute the drachma for the Euro in Germany, what would be the result?

    The result would be that Germany’s products instantly become more competitive in their export markets, and are unchanged domestically. Thus, Germany’s economy would become more productive than it already is, and in time the German drachma’s value would rise to match the economic productivity it represents. But in the meantime, the revaluation of the German Euro to the German drachma results in windfall productivity.

    This is precisely the “magical monetary power” the existence of which Arthur denies.

    And of course, the result of this windfall productivity would be greater employment and wage reliability for Greece, were it employed there. Naturally inflation would be a problem, but here again, inflation (as opposed to deflation) redistributes the cost of the crisis from the working class to the capitalists, and in any case the scope for managing growth and inflation would now lie at least partially with the Greek people, rather than with French and German bond-holders.

    It’s true that the costs of the breakup cannot be known with any precision, but that’s hardly a concern when the alternative is simply abandoning capitalism, right?

  26. 26 Arthur

    Sorry, I’m still stuck and will just jot some notes:

    1. patrickm, you didn’t follow up with links as you mentioned. My impression is that what Joschka Fischer means is that there is no way to get appropriate EU treaty provisions changed but they will just have to go ahead and organize a de facto fiscal union anyway. If you compare the federalism of the Australian Constitution with the fiscally centralized reality it isn’t that difficult to imagine in Europe.

    2. lupin3, thanks for the stimulus to discussion!

    3. I googled for “Krugman Fairies” but did not find a clear explanation. I take it as a reference to anti-Keynesian mocking of what they claim is the Keynesian idea that Government spending would cause magical fairies to revive the economy by digging holes and filling them up. Please clarify.

    4. I stand by my assertion:

    There are no magical “monetary policy powers” that result in a bankrupt without a bailout facing less “austerity” than with a bailout.

    That was in reference to Greece. The choice they have is between austerity with billions in bailout assistance from EU or much GREATER austerity as a result of not being able to borrow at all as well as losing the billions in bailout assistance.

    You say:

    The point of austerity is that the working classes are forced into accepting pay cuts or unemployment for long periods in exchange for financing debt interest. Generally, the working classes have had no access to international credit, and have not benefited from it directly. Why should they bear the costs of it?

    That is a plea for sympathy and justice, not an argument that there IS some magical (or non-magical) monetary alternative. I agree that it is completely unjust. That does not imply that Greek workers would be better off if Greece left the EU, repudiated its debts and followed a protectionist policy as advocated by the blogger and the video. I think it is blindingly obvious that they would be worse off. If you think they would be better off, present an explanation rather than a cry against injustice.

    The point of default is to share the burden of bad debt more equally among debtors and creditors.

    The point of credits and debts is to finance exchanges, not to share burdens. Creditors don’t lend money to debtors who won’t repay it and Greece still needs to borrow.

    Consider it this way … in the meantime, the revaluation of the German Euro to the German drachma results in windfall productivity.

    This is precisely the “magical monetary power” the existence of which Arthur denies.

    Its worse than me denying it, I’ve read the whole passage several times (including the long ellipsis) and just don’t understand it at all.

    Where does this “windfall productivity” come from if not from magical fairies? Why is it only available when the situation is grim? Why couldn’t the SAME windfall be obtained during good times?

    It is well known that people turn to prayer and magic to relieve pain when things are grim. But this only explains why they do it. It is not evidence that prayers or magic are efficacious.

    Why should Marx’s view of long term failure of capitalism to transform society trump the need he expressed to act on the interests of the working classes, who cannot see their own interests?

    The left should respond to this crisis with rather more than jeering from the sidelines, with something more concrete than revolutionary fantasy.

    I think “long term failure of capitalism to transform society” is not the right expression, but I agree with the substance of the complaint.

    We certainly should be advocating some serious concrete demands and mobilizing around them. Our inability to do so reflects badly on us and presumably reflects a serious gap in our analysis.

    But again, that is simply a reality to be acknowledged, just as is the FACT that workers WILL be faced with “austerity” in the near future whatever they do (including revolution which would take some time to recover from the ADDITIONAL economic dislocation).

    However that does not make it tempting to support the pseudo-left (and far right) in advocating a retreat to protectionism, which is well known to only make things MUCH worse.

    BTW one can simply oppose cuts to social security, health and wages etc WITHOUT claiming that this natural opposition will help “solve” the crisis.

    As for opposing tax cuts I am inclined to agree with the argument that increased taxes on the incomes of the rich would only make them jam up investments even more. My conclusion is that income taxes are not capable of delivering. A (100%) wealth tax is the best way to remove decision making over investment from the rich.

    I know that’s more like revolutionary fantasy than a serious concrete demand. But I would seriously like to find ways to express it in serious concrete demands.

    I’ll try to add something re Keynesianism in response to marx and the domains of ignorance

    That discussion does not belong here, because from recent news –
    Toto, I’ve a feeling we’re not in the Eurozone any more!

  27. 27 Lupin3

    In response to my admittedly simple explanation of monetary policy’s role in shaping the Greek crisis and its solution, Arthur says:

    “Its worse than me denying it, I’ve read the whole passage several times (including the long ellipsis) and just don’t understand it at all.

    Where does this “windfall productivity” come from if not from magical fairies? Why is it only available when the situation is grim? Why couldn’t the SAME windfall be obtained during good times?”

    To put it in simpler terms, devaluing Germany’s currency means that nice BMW you’ve always wanted is now much less expensive, compared to a similar Honda or Jaguar. This of course means that BMW will sell comparatively more BMWs, and thus employ comparatively more Germans in manufacturing them.

    China and other countries accomplish something similar by tying their currencies to the dollar, artificially keeping their valuations lower than they should be, and making their economies more productive than they otherwise would be, given the same trade policies.

    Absent market irregularities such as dollar pegs, the currencies of a devalued German “drachma” or remnibi or whatever would rise to reflect the underlying economic productivity the currency represents. The fact that Greece cannot devalue its currency is precisely the same kind of irregularity China pursues with its remnibi. In this case, however, the beneficiaries are not the Greek people, but French and German bond-holders. And it is not a dollar peg, but essentially a Euro peg.

    So nothing magical at all, just the good old market and monetary policy. The reason it isn’t available in good times is because 1) it is, by definition, unnecessary and 2) highly inflationary.

    Ultimately, austerity and devaluation are two different strategies to accomplish the same thing. Both aim to increase GDP by reducing the costs of production relative to competing economies, and thereby ensure solvency.

    Austerity forces Greece to be more competitive by reducing the real wages of its working class, therefore maintaining the real value of its currency denominated debt. This is obviously in the interest of Greek and European capitalists, since their capital is not attrited through inflation.

    Devaluation causes Greece to be more competitive by making its products more cost competitive, which increases production and productivity, thus maintaining nominal wages while decreasing real debt through inflation. This is clearly in the interests of the working class, since they maintain their relative standard of living and employment levels.

    To be clear, there is no inherent connection between leaving the Euro and default – except that the ECB has in the past promised to ensure Greece is kicked out of the Euro if it defaults. In fact, it may well be that leaving the Euro is now Greece’s best option for avoiding default – or at least the kind of repudiation advocated by some. But this in fact highlights the larger problem for Greece – that whatever the strategy, whether austerity or devaluation, the problem is with the underlying economy. If we get people working again by devaluation, they still need something productive to do.

    And since Greece doesn’t make BMWs, or much of anything, without more effective trade policies the pain of getting through the crisis will have accomplished little.

    Nevertheless, the current austerity program pushed on Greece by the ECB (and on others as well) is really an attack on the social welfare state. One can argue that the costs will be payable in either scenario, but this is merely to avoid noticing who pays them.

  28. 28 Bill Kerr

    Moody’s cut the Italian credit rating by three levels, from A2 to Aa2. That is a lower rating than Moody’s rates the credit worthiness of the Baltic republic of Estonia.

  29. 29 Steve Owens

    I wasn’t going to reply but I hate people being disrespectful to the economic miricle that is Estonia
    Italy is in trouble because it has Capitalism? No. Because it is badly managed? No. Because it is in a monetary union that doesnt have enough centralised treasury powers? Yes
    And since when does Moodys ratings make sense. Currently the Isle of Man has a better credit rating than the USA, yes some rock in the Irish sea is a more secure credit risk than the worlds number one economy backed by the international reserve currency.

  30. 30 Steve Owens

    I suspect that people don’t generally think a great deal about Estonia but for those of us interested in the argument as to whether Capitalism can be managed, Estonia is a must look at country. Estonia was as badly hit as anyone by the GFC and it made people like Krugman angry by becoming the poster child for those urging austerity. Yet here we are in 2011 and Estonia’s growth rate is 6%+

  31. 31 Bill Kerr

    IMF Advisor Says We Face a Worldwide Banking Meltdown

    Dr. Robert Shapiro who advised Presidents Clinton and Obama and who currently advises the IMF predicts a cascading meltdown of the World’s banking system starting with Sovereign debt in the Eurozone, affecting the UK then finally bringing down the global banking system.


    (having trouble with the httpv wordpress video embedding feature at the moment)

  32. 32 Bill Kerr

    Euro Science

    What’s roiling the markets is the fact that the governments of the richer European nations, especially that of Chancellor Angela Merkel, in Germany, have been putting the domestic unpopularity of bailouts ahead of their evident economic necessity. This might be only a piece of theatre, taking the crisis right to the brink before the need for action becomes so apparent that its political cost is lowered. (Merkel is facing reëlection in 2013.) German politicians seem to have a block about making clear to their electorate just how much the country has benefitted, and continues to benefit, from the euro, mainly through its enormously helpful effect on Germany’s strong export economy. That could turn out to be a historic failure of leadership. The parliaments of all seventeen euro-zone countries are constitutionally compelled to vote on whether to reform and extend the euro’s too puny bailout mechanism; the measure passed in Germany, but elsewhere the projected margins for the vote are razor-thin. The difference between a safe euro and a euro on the verge of failure is the difference between that metaphorical elephant in the room, which you can ignore, and an actual elephant in the room with you, right now, filling the air with its hot, dank breath. That situation would be unignorable, and the source of a rising panic. The euro zone is already in the room with that elephant; unless some decisive steps are quickly taken, the rest of the world will soon be joining it

  33. 33 steve owens

    This is one of the best explanations of the Euro crisis that Ive come across

  34. 34 steve owens
  35. 35 Steve Owens
  36. 36 steve owens

    Even Sweeds can be stupid
    PS if anyone hasnt caught up yet the Euro crisis is over. Oh well it was fun while it lasted.

  37. 37 steve owens

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