
Italy and the euro: On the edge - llambda
http://www.economist.com/node/18958397
======
retube
>They cannot agree on who should bear the cost of today’s crisis: should it be
creditors (through a write-down), debtors (through austerity) or the Germans
(through transfers to the south)?

In theory it should, of course, be the creditors. You buy an asset (govt
bonds), you're implicitly and knowingly shouldering a risk of default. The
institutions that bought these assets should have known what they were buying.
Caveat Emptor.

Of course in practice you need to ask what the wider implications of default
are. Greece _should_ be allowed to default. Absurd austerity budgets are
penalising the average Greek whilst minimising the bottom line impact to
(arguably wealthy and powerful) European banks. It's no wonder they're pissed.
The short-sharp shock of a Greek default will be over in no time. Rolling debt
and refinancing terms etc etc is likely to make things worse in the long term.

But of course Italy is different, given the size of the economy. The impact of
a default is likely to be far, far wider than a write-down to the creditors.
But to be honest I think this worry over contagion is being over-blown.
Markets often over-react. It only takes a single hedge-fund these days to move
a market - even a big one like Italy debt. It's probably just Bluecrest or
Moore selling the market :)

~~~
gaius
It's not as simple as that. Greece is in a hole largely because tax evasion is
the national sport. The "average Greek" _should_ bear the brunt of it. He or
she owes decades of back taxes anyway... The premium Greece will have to pay
on it's debts won't go away with dropping out of the Euro.

~~~
Qz
Except that the loans in question were made to the Greek government, _not_ the
average Greek. The creditors should have taken into account the Greek
government's inability to collect proper taxes.

Let's be honest, tax evasion is pretty much a national pastime in the US too
-- the difference is that here the IRS will come after you if you cross the
line.

~~~
gaius
Yes, whereas it's systemic in Greece - the government will call off tax
inspectors in an election year!

The only way forwards I see is for the Germans to take over the collection of
Greek taxes, and to control Greece's spending too, at least for a generation.

~~~
Qz
I highly doubt that will happen unless Germany wants to try turning Greece
into a police state because the people will not stand for that.

~~~
gaius
Yes well that was the problem - Greeks are happy to vote for high government
spending, they even vote for high taxes - they just don't pay them.

I think we'll also see them sell their half of Cyprus to Turkey too, for a few
billion Euros, once the austerity starts to bite. And the Germans have their
eye on a few of the Greek islands too.

~~~
zeemonkee
Sorry, WTF ?

The Republic of Cyprus is a sovereign state, it's not part of Greece.

~~~
gaius
Then they won't mind relinquishing their claim on it, then! And British
peacekeepers can withdraw at last.

~~~
handelaar
What, essentially, you just said:

"US Treasury Bonds downgraded because of the Deficit Cap row? OK, so the
Americans can just sell their half of Canada to France."

This Cyprus diversion of yours was just wrong to the point of surrealism. Let
it go.

~~~
nate_meurer
It was only recently that Greece stopped openly calling for enosis, enjoining
Cypriots to overthrow their own government if necessary. They've been quieter
about that crap over the last couple of decades, but Greece still clings to
the territorial dispute to justify its overgrown military. It is quite
accurate to say that Greece hasn't yet let go of Cyprus, and that doing so
would save it considerable money.

To my knowledge, the U.S. has never encouraged Canadians to overthrow their
government, nor do they use Canada as an excuse to justify an expensive cold
war against, say, France.

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btcoal
The problem as I see it, and the article briefly hinted at this is
illiquidity. Western Europe is extremely rich (in terms of capital stock) but
has a relatively low income (in terms of capital flow) and extremely low
income growth. Without structural reforms (improving infrastructure,
decreasing frictions in the labor market, reducing entitlements to incentive
work, etc) you cannot increase income or income growth levels.

But, by increasing public claims on private wealth and opening the country up
to foreign direct investment (read: selling the Sistine Chapel to China to
rent) you can tap the capital stock. This should be increasingly seen as a way
out for wealthy yet cash-poor Euro countries.

Without structural improvements in the US it will also be the only way forward
30 or 40 years for now. Be prepared for a "Sponsored by India" sticker on the
Washington Monument.

~~~
nate_meurer
That's interesting. It immediately made me think of the way Chicago sold off
its parking meter system in 2009(?) to a private company for a fraction of
what it's worth. The deal is so bad for the city, I almost have to believe it
was corrupt.

I suspect sales of national assets are unlikely to tap their full value,
subject as they are to corruption and to the likelihood that the sellers are
over a barrel.

~~~
btcoal
That was unfortunate. But another side of the issue in Chicago was that the
city blew through the cash in record time. Even if the meters had been sold
off at an above market price, the disfunction in the local government would
have resulted in the squandering of the proceeds.

From your well made point I infer that we should make a dispassionate
evaluation of the value of public assets during good times so that they won't
be sold for a song during bad times.

Things usually go, "No we will not sell off pieces of our nation" (during good
economic times) so nobody actually evaluates the options for doing so --> "We
need cash now!" And we become subject to market forces when leveraging public
assets.

~~~
nate_meurer
Some large Amercian cities -- San Fran comes to mind, Chicago maybe just as
much -- are microcosms of countries like Greece. Enormous government payrolls
locked up in union contracts, massive social regimes from which a large part
of the population either draws upon or derives job security, and a corrupt and
labyrinthine tax system.

~~~
nradov
Not really. San Francisco and Chicago are governed just as badly as some
third-world kleptocracies, but those cities fortunately have relatively little
general obligation debt (proportionally much less than Greece). Eventually
they will probably declare bankruptcy and repudiate their ridiculous union
contracts.

------
ChuckMcM
I enjoy the Economist because they cover topics well and will tell you their
sources as well. (which both validates that they _have_ sources and you can
evaluate the base information they are using for their article). That being
said, this particular event, or series of events, will change the European
Union profoundly.

As with most political enterprises, the EU is a compromise. Much like the
original Articles of Confederation [1] it took a very touchy situation (pretty
much independent political nation-state entities) and attempted to craft a
framework around how they might co-operate politically, financially, and
militarily.

Early criticism of what was produced was once called 'a bus where every
passenger has their own steering wheel' by a Swiss delegate. We can see the
literal effects of that as participating countries, have their wheels
apparently turned 45 degrees to the direction of travel. If enough countries
do that the bus can, and will drive off the road. (ok that's enough torturing
of that analogy!)

Europe remembers what it was like to be dominated by Germany involuntarily.
One of the sub-themes of the original EU discussions had very real tension
about effectively handing over the soverignty to the 'big' economic powers
(France, Britain, and Germany). So there were a number of checks and balances
in the final treaties that provide very real limits on what the EU can do
(mostly they left in the ways to 'help' and took out most of the ways to
'discipline'). That compromise may ulitmately be untenable and the events of
the next few years will test those compromises to the breaking point.

I predict several things will be true _after_ this crisis that are not true
now. One, I think there will either be a way for the EU to expell a member or
to put it under 'federal' control. Second there will be a trans-EU judiciary
system which allows for injecting change (either through impeachment,
imprisonment, or both) into member states leadership. If such a system existed
it would have allowed the joint-EU leadership to demand (and get) corrective
action on destructive behavior.

Those changes will effectively mean handing national soverignty over to a
central authority. And either the Europeans will be able to swallow that
change, or the EU will disintegrate back into independent nations.

It may be that they reach a compromise somehow, but my expectations that the
EU will survive unchanged are low.

[1]
[https://secure.wikimedia.org/wikipedia/en/wiki/Articles_of_C...](https://secure.wikimedia.org/wikipedia/en/wiki/Articles_of_Confederation)

~~~
tomjen3
The 13 colonies fought a war against a common enemy (Britain) for a relatively
short time and did not suffer greatly (compare with Ireland).

Europe countries have been at war with each other on and of (mostly on) at
least for a thousand years and while Poland and Russia suffered far more, very
few have forgotten what happened to Rotterdam, London and the occupied cities
in France.

The horror of the first world war broke one of the most militarized countries
in the world (laugh at France all you want, but it was Napoleon who fought
Russia). France has never been the same since. It was only a few months ago
that they allowed a (tiny) German military base in France.

My maternal grandparents where children during the occupation and was thrown
out of their house by the Nazies. To this day they still hate them.

Don't forget the historial rivalries between the UK and France either, though
they don't hate each other nearly as much as the French hates the Germans.

Europe is a cross section of old scars and grievances and relative recent
wounds that haven't healed all that much; Even the old scars can easily be
ripped open.

Europe will never go for what you suggest.

~~~
ChuckMcM
I completely agree with your assessment.

The worst case outcome I can imagine is that the EU will dissolve, the Euro
will be abandoned, and Europe will return to its previous state of decline in
terms of competitiveness in the world economic stages. China and India will
fill the gap and except for the self supporting economies the rest of Europe
will slide into a long and deep depression.

That will be followed by a lot of externalized accusations of conspiracies and
general hatred ultimately leading to an insurrection which results in the loss
of soverignty for between 1/3 and 1/2 of the current nations.

One 'law' that I've never seen fail is 'Nature abhors a vacuum.' and when the
EU collapses, it will create a very, very large vacuum.

~~~
jvandenbroeck
It will be far more likely to have some kind of laws as tomjen3 suggests. We
can't allow individual countries to jeopardize the Euro. With the worst case
that one country will abandon the Euro (although I don't see that happening
any time soon)

The EU will not dissolve, that's just crazy talk. The EU is something
_totally_ different than the Euro, not all members of the EU even have
Euro's.. Saying that the EU will dissolve is almost as unlikely as saying that
the US will dissolve.. although countries in the EU are of course much more
individual than states, we work together on so many levels that it would just
be nuts.

------
Derbasti
At some point, we will have to realize that debts are _a bad thing_. No one
can spend money he does not own without paying the consequences. The Euro
seems to be exacerbating this race towards a tipping point.

It seems that some kind of serious crash is inevitable. But it is yet to be
seen whether Europe (and the world) will come out of this united or in flames.

~~~
lkrubner
People who make arguments against debt are ignoring a great deal of historical
information. A person, or a nation, can clearly spend money on stupid things,
but that doesn't mean that debt is bad. Many businesses take on debt to grow,
or at least they seek a credit line to cushion themselves against variations
in income.

The argument for debt goes like this: in the future "we" will be wealthier, so
why don't we borrow against our future income to make the investments that
will ensure that, in fact, in the future we will be wealthier.

"We" can refer to a person, business, or nation.

The careful and strategic use of debt has been used to build great empires. A
quote:

<http://www.ukpublicspending.co.uk/debt_brief.php>

"Chart 2 tells, in stark detail, the story of the British Empire. It was built
on the National Debt. Throughout the 18th century the National Debt grew and
grew, from nothing at the end of the 17th century to about 60 percent of GDP
by the end of the War of Spanish Succession in 1715."

To win World War II, the USA drove up debt to 100% of GDP, a level much higher
than what it faces today.

To finance business, an interesting difference has developed between the
English speaking nations (I mean those who inherit their legal codes from
English Common Law) and those nations of continental Europe. In the English
speaking nations, it became common, by the 1800s, to finance growth by
offering equity for sale at public auction. The continental nations developed
along different lines -- banks played a larger role. In Germany, most firms
operate with higher levels of debt that what would seem normal in English
speaking nations.

To get an understanding of the importance of debt, and its history, I'd
suggest you read Fernand Braudel:

[http://www.amazon.com/Wheels-Commerce-Civilization-
Capitalis...](http://www.amazon.com/Wheels-Commerce-Civilization-
Capitalism-15Th-18th/dp/0520081153/ref=sr_1_5?ie=UTF8&qid=1310738832&sr=8-5)

As he points out, debt and civilization tend to go hand in hand. Debt was
illegal in many European nations during the Dark Ages. Nations in the Mideast
and India all had flourishing markets in debt, and flourishing trade, while
Europe was sunk in poverty. When Europe revived and began to expand again, it
helped itself along with the revival of credit, and credit markets. By the
time the 1600s came around, Amsterdam was able to offer the world the full
range of modern financial instruments: put and short and forward contracts,
options of every kind (save for the exotic derivatives of recent vintage).

There is no civilization without debt, no advanced commerce without debt, no
growth without debt. The wheels of commerce are greased with credit.

~~~
spydum
Yes, debt makes sense when talking of investment. However, borrowing is a bad
choice when you are just trying to pay operating expenses. This is the dilema:
nations have shifted from borrowing for investment purposes, to borrowing to
keep the lights on.

~~~
seanalltogether
Precisely! Taking out a loan to pay for college should be seen as a good
thing. Taking out payday loans to cover living expenses should be seen as a
bad thing.

------
ez77
On related news, _US and the dollar: On the edge_

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Gravityloss
It is also very possible that the average Greek or whatever country person is
not responsible for the country's problems.

What we have here is a communications breakdown. So anyone from those
countries themselves want to explain what went wrong, when and where?

------
Jayasimhan
The image on the article is very creative!

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shin_lao
The economist likes to predict the end of the euro every six months or so.

Newsflash: countries have armies, banks do not. Guess who will ultimately
prevail?

~~~
uvdiv
_"Newsflash: countries have armies..."_

All the Red horses and all the Red men could not put Soviet economy together
again.

~~~
gvb
It did provide a really intense story plot, though.
<http://en.wikipedia.org/wiki/Red_Storm_Rising>

------
Uchikoma
Italy is nowhere like Greece.

