
The Euro falling into a recession? - aespinoza
http://www.economist.com/node/21540259?fsrc=scn/tw/te/ar/bewareoffallingmasonry
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tlammens
Sometimes 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
The 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
I 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
The 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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antr
Currently, 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
Sovereigns 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.

~~~
antr
You are misreading the comment while making untrue economic and policy
comments.

"They can unilaterally declare their debt to be in their new currencies, if
they separate." is juts a wrong statement. How is sovereign debt different
from corporate debt? Do you have an example?

Example: If Italy goes back to the Lira, the face value of Italian debt that
the U.S. Government holds, in dollar terms, _will not change_ , even if that
debt is changed to Lira, IT IS NOT re-valued to a price the Italian Govt. sees
fit. Should a devaluation of the debt occur, the U.S. would have to write-off
billions from its balance sheet (assuming a devaluation of the Lira occurs,
which is most certain).

If each country does this, billions will have to be written off, there isn't
such thing as "Sovereigns do not play by the same rules as the rest of us.". I
suggest you read any debt offering memorandum from any European Government or
even the U.S. Government, all terms, clauses, reps/warranties are clearly
explained and detailed.

~~~
barrkel
Sovereigns are exactly that: sovereign. They create the law. What court do you
think you're going to take a country to when they default on a bond? Which
court is going to force them to pay? And under which set of laws? Sovereigns
can rewrite the law to change the terms of these contracts. What they can't
control is how (allegedly independent) third-party ratings agencies rate their
bonds, and declare whether a credit event has occurred or not (triggering
insurance etc).

~~~
antr
you missed the whole first point. Anyways, i'm happy you are happy with your
answer.

~~~
barrkel
What first point? How sovereign debt is different from corporate debt? Because
it is different, and I explained why. It's commonly mentioned in articles on
sovereign debt. Single example:

[http://blogs.reuters.com/felix-salmon/2011/11/20/cds-
conspir...](http://blogs.reuters.com/felix-salmon/2011/11/20/cds-conspiracy-
theory-du-jour-gretchen-morgenson-edition/)

"Everybody knows that Greece can and should take some kind of tactical
advantage of the fact that most of its debt has been issued under Greek
domestic law."

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danmaz74
There 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
_have 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
Yes, 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
There is rarely political will to increase taxes.

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antirez
I think that many people like me, that don't even know economy 101, are now
wondering: what happens if euro disintegrates, practically speaking?

~~~
80hours
Nothing 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
It'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.

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davidw
The 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
What 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.

~~~
SkyMarshal
It 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.

~~~
nickpp
And if so what, I wonder? Before the Euro there was the EQU used by no one, I
think, it was an equivalence currency. Still, it did not disintegrate.

~~~
jeroen
ECU - European Currency Unit

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DanielBMarkham
I 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.

~~~
Tichy
The 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
The 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.

~~~
Tichy
Still, it worked before. For example Germany used to be a lot of little states
with different rulers and different currencies. The money union worked out
well. And even within a country there are strong and weak economic regions.
That alone does not seem to stand against a common currency.

I suppose even the US has different parts with different economic cycles and
different economic strength.

~~~
k-mcgrady
That very interesting I didn't know that Germany previously worked like that.

Your point about the US is valid. However as their national debt is $15
trillion they aren't exactly a model economy.

~~~
veyron
Even if the debt is 15 Trillion and one ratings agency felt we didn't deserve
the highest rating, investors are champing at the bit to purchase bonds.

~~~
k-mcgrady
The reason the US is not suffering more from its huge debt is because the US
dollar is the primary reserve currency.

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lutorm
When 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
So if there are sufficient amendments to the EU treaties, Sweden is bound to
join?

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nickik
> 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
1\. 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_!

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dman
I 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.

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dreamdu5t
The 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
You'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.

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Freestyler_3
It'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%.

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brador
Can someone explain why the UK is not shown in any of those graphs? I thought
it was part of the Euro?

~~~
rmc
The 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
So will the UK be well protected from this fallout?

~~~
tomjen3
Yep. So long as it doesn't trade with any of the other (eurozone) countries.

Which looking at Britains trade deficit it does. Bugger that.

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seltzered_
eric 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.

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adabsurdo
depression 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.

~~~
danmaz74
The point is that Germany IS going to pay for the crisis anyway, because if
Greece, Spain and Italy defaulted, the German banks would lose hundreds of
billions of euros of German money. The European economy would enter a crisis
that would last years (decades?), and most of German exports are to other
European countries - thinking that they could have a great economy amid a
European depression is just stupid. And I'm not even thinking about the
possibility of wars should become "everyone for himself" in Europe again.

So, it isn't a matter of self interest vs. generosity: it is a matter of
understanding that it would be MUCH less costly to make the ECB lender of last
resort now than to wait and just hope that things will fix themselves.
Moreover, in Italy the only real risk is that of interest rates on its massive
debt going too high: Italy already has a primary budget surplus, with "normal"
rates the debt would already be shrinking.

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MaysonL
Headline wrong, twice:

1) Question mark. Recession already starting.

2) Not falling, pushed.

