

The euro zone: Is this really the end? - mixmax
http://www.economist.com/node/21540255

======
sandee
"The only institution that can provide immediate relief is the ECB. As the
lender of last resort, it must do more to save the banks by offering unlimited
liquidity for longer duration against a broader range of collateral."

This line of thinking is been pushed a lot. Its a one sided view. Why is it so
difficult to understand the German point of view, or at least put it across to
readers ? Germany insists that covering up the problems by printing money is
just treating the symptoms not the root cause. The root cause is the bad
monetary policies at some of member nations. They correctly understand than
politicians guarantee of fixing the bad monetary issues (once printing is
done) is wishful thinking. What they want is either go through painful process
of austerity in these nation or tighter political/financial integration where
member nations have say on finance budgeting in countries (in which case there
could be common bonds).

I am neither a US or EU resident. I am not a finance guy. But the approach
taken by Germany seems very sensible to me. What i see over and over again is
the US/UK media and economist pushing for the solution that they have taken in
their countries (monetary easing), to solve EU problems. Is there a agenda in
this or whether its just that they want to make their policies appear right is
open question.

I for one think that if Germany gets through this crisis (without blind
printing) it will open the new era of EU dominance in the world. EU would come
out as the most financially prudent currency and society (a more integrated
union, almost like a country). In such a case the high debt, bad finance
strategies of US/UK appear foolish.

Keep going Germany ! Long live EU

~~~
nhaehnle
At the very least, the position of Germany is deeply hypocritical.

After all, Germany was among the first batch of countries who violated the 3%
deficit-to-GDP rule in the Maastricht treaty.

The German approach is a holier-than-thou approach, believing in blindly
following rules that are elevated to moral principles ("Thou shalt not have a
deficit.") without regard for the _implications_ that this has for the well-
being of their people.

What the Eurozone really needs is functional finance: define your goals for
the real economy (e.g. full employment, high real living standards) and then
do whatever it takes to achieve that in the financial arena.

~~~
1010011010
"What the Eurozone really needs is functional finance: define your goals for
the real economy (e.g. full employment, high real living standards) and then
do whatever it takes to achieve that in the financial arena."

... just wish away reality by printing more Euros?

~~~
nhaehnle
_... just wish away reality by printing more Euros?_

The term "printing more Euros" is rather inaccurate. When people talk about
"printing money" it tends to be an indication that they either (a) don't know
what they're talking about or (b) are not interested in an honest discussion.

Printing money is irrelevant. Spending money isn't.

As for the reality: The reality is that there is vast under-utilization of
resources in the real economy. That's what a recession is all about, after
all. I'm not a growth-fanatic, but real people are hurt by that development
via the crazy amounts of unemployment, especially youth unemployment.

Furthermore, this under-utilization is an indication that if someone were to
massively increase spending _in the real economy_ , the economy would likely
react significantly by adjusting the size of its production, and the reaction
in terms of price level would be minimal.

So in that sense, if I indulge your misguided metaphor for the moment, it is
actually the _anti-printing_ folk who are wishing reality away: in their
fantasy world, the recession will just end without any spending involved. Out
here in the real world, this is not how it works.

(But note that the type of spending matters. Just throwing more money into the
hands of the financial sectors is not going to help. Direct job creation is
necessary, and in the case of Europe, there are some very obvious candidate
projects, such as installing large amounts of solar energy capacity around the
Mediterranean, along with the transmission capacity. That's just one pet idea
though, there are plenty of other useful things to do.)

~~~
1010011010
Recessions are about liquidating previous malinvestment. Thanks to
expansionist credit policies, in part.

------
avar
Whenever I read one of these articles I'm struck by how disconnected the vast
financial abstractions we've constructed are from reality.

Essentially they just discuss problems with the shared illusion (debt, bonds
etc.), but not problems with what those abstractions actually mean.

What's going to happen in a few weeks to cause everything to come crashing
down? We'll still have the same people working, the same infrastructure /
factories etc.

I'm not saying the issues aren't real. Just that they're always discussed
through so many layers of jargon to essentially be meaningless to someone who
doesn't work in finance.

~~~
mixmax
It's the exact same with programming. It's an abstraction on top of reality so
that we can wrap our brains around it.

It's a complicated system with many moving parts that sometimes don't have any
real world equivalents you can use to exemplify the issue.

Explaining a Collateralized debt obligation or a credit default swap is like
explaining a Lisp macro to a non-programmer: Possibly but very hard.

~~~
flourpower
I think this tendency to mythologize certain financial derivatives is weird.
The concept of a macro is way more complex than the concept of a credit
default swap. To demonstrate, here is (in my opinion) an explanation of credit
default swaps that a person with no financial background should be able to
understand.

A bond is a contract created and sold by an "issuer". The issuer can be a
government or a company. Ownership of the bond entitles you to payments from
the issuer. The specific number and size of payments varies from bond to bond.
Once the issuer sells the bond to someone, that person can sell the bond to
anyone else they want.

A credit default swap is a contract between two parties (neither of which is
necessarily the aforementioned issuer) that are usually called the protection
buyer and the protection seller. This contract is made in reference to someone
called the reference entity. The protection buyer agrees to make a series of
payments to the protection seller in exchange for the protection seller's
promise that, in the case of a "credit event", they will give the protection
buyer either some specified amount of money or some specified amount of bonds.
The nature of the payments and the meaning of "credit event" vary from
contract to contract, but generally a "credit event" is understood to have
occurred if the reference entity (which is always an issuer) fails to make
payments on some of the bonds it has sold. Either party in the contract is
free to find someone else to take up their side of the trade at whatever price
they can negotiate.

The only thing you needed to know to understand that was what a contract was,
but if you want to understand macros, you really need to know what an
interpreter is.

~~~
drumdance
It's also complicated by the legal framework. My (limited) understanding of
the problems with CDOs in 2008 was that multiple buyers could purchase
insurance on the same bond. It's like if I could buy fire insurance on your
house. If a lot of us did that and your house burned down, the insurer would
have been on the hook for many times the cost of the underlying asset. This is
why we had to bail out AIG.

When it's spelled out like that, the idea seems preposterous. But the legal
framework allowed it -- in certain contexts. AIG et al call them "CDOs"
instead of just "insurance" so they could avoid the more-restrictive legal
framework governing the insurance industry.

And given that a typical CDO is the size of a Manhattan phone book (remember
those?), there obviously is a lot of nuance that a lot of people did not
understand.

~~~
flourpower
You're thinking of CDS, not CDO. CDS stands for credit default swap(s) and CDO
stands for collateralized debt obligation. You're right that a CDO would be
really big if you printed out a formal specification, but that's because a CDO
is special trust where the trustee buys and sells different securitized
products and tranches out the payments to shareholders in the trust.

Also - AIG could have made the same mistake with conventional home insurance.
Say they only keep 100 dollars of cash around and they decide to insure a
million houses, each with a value of one dollar. If one ten thousandth of the
houses burn down, AIG goes bankrupt. So it's not true that selling a dollar
notional of home insurance is less risky than selling a dollar notional of
CDS, because it could easily be the case that the expected payout on the CDS
is higher. CDS are just harder to price. There are very robust statistics
about houses burning down - the statistics on whether homeowners would default
were a lot trickier to deal with.

------
itmag
I always feel like a retard when the discussion is about economics. Everyone
seems to know exactly why things are the way they are and what needs to be
done to fix the situation. Whereas I really have no idea myself why these
various crises happen, beyond "them thar Mericans sure borrow alotta moneys
hurr durr".

Am I the only one here? Is there something obvious I am missing? I am usually
able to learn anything I want, but economics seems quite opaque to me for some
reason.

Please help me level up this domain of my knowledge :)

~~~
nhaehnle
You are probably one of the wisest people here :)

Here's my humble opinion for what you should look for if you truly want to
understand this particular situation better. Forget about microeconomics
(supply and demand and so on) and fancy mathematical models at least
initially, and try to understand what money is.

What is money? What is the relation you have with money? What is the relation
the government has with money? What happens when you transfer money to pay
your bills?

These types of questions should be your guide initially. Look for bloggers who
write on Modern Monetary Theory - there are quite a number of academics and
hedge fund type people who do so, you can start e.g. here:
[http://neweconomicperspectives.blogspot.com/p/modern-
money-p...](http://neweconomicperspectives.blogspot.com/p/modern-money-
primer.html) \- or go straight to the book "Understanding Modern Money" by
Randall Wray (economist at UKMC).

That is roughly the path I took over the last one and a half years, though I
started via Bill Mitchell's (Australian economist) blog at
<http://bilbo.economicoutlook.net/blog/>.

As always, seek out different perspectives, but I've found that with some
minor nitpicks, MMT really does seem to provide the best framework for
understanding what's going on.

~~~
itmag
Thanks! I'll look into that!

My current analogy of money is kind of that society is a giant vending machine
capable of producing eg hamburgers, thai massage, anal lube, laptops, BMWs,
etc.

Money is kind of tickets that you put into this vending machine. And then
there are people loaning out these tickets (banks) and also there are
different kinds of tickets (currencies) and vending machines (countries) with
exchange rates.

Another analogy: money is to the bottom-level production of value (ie real
goods and services) as functional programming is to assembly language. Ie you
can do a lot of cool tricks and abstractions with it, but you can also shoot
yourself in the foot with endless recursive data structures and what not.

Am I on the right path here? I seem to grok most things in terms of analogies
and pictures btw, it's how my mind works. This isn't always a good thing,
though, sometimes it's more useful to see something as sui generis (unlike
anything else) rather than to say "it's like X".

When I have more time I'm going to read my copy of this book:
[http://en.wikipedia.org/wiki/Georg_Simmel#The_Philosophy_of_...](http://en.wikipedia.org/wiki/Georg_Simmel#The_Philosophy_of_Money)

~~~
nhaehnle
_My current analogy of money is kind of that society is a giant vending
machine capable of producing eg hamburgers, thai massage, anal lube, laptops,
BMWs, etc.

Money is kind of tickets that you put into this vending machine. And then
there are people loaning out these tickets (banks) and also there are
different kinds of tickets (currencies) and vending machines (countries) with
exchange rates._

You may want to think about what contractual obligations are represented by
those tickets.

A simple example would be literal tickets such as the fare tokens you can buy
for many subway systems. When you own such a ticket, you have a claim on the
subway system (in an accounting sense): the system is obligated to let you
enter in exchange for the ticket. When that happens, the ticket is destroyed
for all intents and purposes.

A deposit at a bank is also such a ticket. When you have a deposit, the bank
is obligated to let you exchange your deposit for paper money. It is also
obligated to let you make transfers, and that's where things become a bit more
complicated.

It gets weird with paper money. Paper money is a liability of the government,
but the government is not obligated to give you anything "real" in exchange
for the paper money. The only thing it is obligated to do is to accept your
paper money as a tax payment.

So at first sight, that might seem not ubiquitously useful.

However, it just so happens that because paper money is the way to pay your
taxes, lots of people want paper money. Hence you can use your paper money to
buy things from other people, even though the paper money does not represent
any kind of contractual obligation between you and the seller. (An exception
to that may be in legal tender laws; but for the most part, legal tender laws
are unnecessary.)

Then you go back and realize that most of our monetary system actually takes
place in computers and not using paper money, and you look into how deposits
at banks are proxies for "government money", in particular reserves. And down
the rabbit hole it goes ;)

~~~
itmag
Head is spinning.

------
mixmax
This crisis is becoming increasingly worrisome. and things are now
deteriorating rapidly in the Eurozone. It appears that the pace has quickened
considerably, with bad news almost every day.

Yesterday Belgium was downgraded by Standard and Poors, the day before Germany
was unable to sell all of the bonds it offered on sale, the day before that
Italy had to pay an unsustainable 7% on new bonds.

Unfortunately I have trouble seeing a short-term solution, though I hope there
is one as the alternative is really really scary.

~~~
holri
It was also very common in the past that Germany could not sell all bonds
offerd. The rate of return for German Bonds is very low now, no wonder that
the demand is also low. It is just how markets work. The fact that this makes
it to the headlines is alarming not the fact itself.

------
jbarham
I've just finished reading "Boomerang: Travels in the New Third World" by
Michael Lewis, a follow-up to "The Big Short". It's an enlightening and
sobering read as it shows how destructive the temptation of cheap money (i.e.,
debt) was to Iceland, Greece, Ireland, Germany and the U.S. from 2001 through
2008. More importantly, he shows how radically differently the three member
countries of the Euro zone he profiles (Ireland, Greece, Germany) mis-handled
that temptation, and it does not bode well for the survival of the Euro, or
even the EU. My own personal belief is that the Euro zone will disintegrate
within months, if not weeks, and the fallout will not be pretty. (BTW, Lewis
profiles Kyle Bass, a hedge fund manager from Texas throughout Boomerang.
Check out what he has to say on YouTube. It's very scary stuff.)

Financially there are really no safe havens. The U.S. is only able to run up
trillion dollar annual deficits because its currency is the default reserve
currency for the world and for now investors put up with sub 2% returns over
10 years (!) because they see no real alternatives.

Canada and Australia have ridden commodity booms to blow up their property
markets to massive bubbles that will crash hard.

And the financial end game will play out soon for Japan as it has
unsustainable debt levels. To date it has managed to fund those deficits
internally, but it has almost saturated its domestic debt markets, and as soon
as it has to start issuing debt on the international markets, it's game over.

Although the financial causes for this monetary crisis appear to be complex,
IMO at heart the reason is very simple: You cannot expect to live beyond your
means indefinitely and get away with it.

~~~
dnc
>> IMO at heart the reason is very simple: You cannot expect to live beyond
your means indefinitely and get away with it.

Yes, and there are basically two mutually exclusive, and opposite responses to
this:

1) printing money (euphemism for it being "quantitative easing") and
generating more debt which is just short term fix to buy yourself more time.
2) spending less and working hard to get yourself out of trouble which is only
sustainable long term solution.

The way I see it is that Germany is pushing the second agenda, but it faces a
great pressure to embrace the first solution. This pressuring is orchestrated
by US/UK media that are creating panic and atmosphere of inevitable financial
Armageddon. This, of course, threatens to become self-fulfilling prophecy if
only sufficiently large number of people start to believe in it.

------
rkischuk
I'm not sure how anyone reads these articles without reaching the obvious
conclusion that we've achieved abject fiscal insanity.

"...the ECB. As the lender of last resort, it must do more to save the banks
by offering unlimited liquidity for longer duration against a broader range of
collateral." "And since conditions are tightest in the peripheral [failing]
economies, the ECB will have to buy their bonds disproportionately."

Modern economics somehow deny every amount of basic common sense. The only way
to fix irresponsibility is apparently to reward it and encourage more. Nobody
ever thinks about how to compartmentalize risk and failure, how to reduce the
size and influence of financial institutions that threaten economic stability.
I'm sure someone from Europe can better fill in the gaps on who stands to
profit here and who's pulling the strings.

~~~
maaku
When you are in a crisis situation, you do what you need to do to fix the
problem, _then_ you go about making sure it doesn't happen again. There is a
solution that will prevent the eurozone from collapsing and triggering a
world-wide recession (depression?) that will make 2008 look like peanuts:
print money. The crisis could be averted tomorrow, if Germany would just go
along with ECB quantitative easing. _Then_ we can focus on austerity and
balanced budgets without brinkmanship. That's what this article is about.

~~~
dnc
That's exactly what Economist, Bloomberg and other mainstream media want you
to believe right now. In reality more money printing only will get you in a
greater trouble. The way out of that vicious circle is to spend only what you
have to and bootstrap yourself with a hard work.

------
knowsnothing613
if the EZ fails, there will be a liquidity crisis, and IPO runways will have
to be extended, so all seed to mid-stage startups will go bust over the next 8
months, as their cash dwindles, and they can't get financing. Expect massive
layoffs in the web 2.0 space, if it happens.

Cash is king. Conserve it.

~~~
kposehn
"if the EZ fails" - Ok, if it fails...

"there will be a liquidity crisis" - Ok, yes

"IPO runways will have to be extended" - Probably

"all seed to mid-stage startups will go bust over the next 8 months" - Wait,
what? How did you arrive at this conclusion? By what do you infer this? Yes,
liquidity may get crunched and runways may go long, but you've taken one set
of results and taken it way past the likely outcome.

I do understand the thinking that cash may dwindle, but you're assuming far
too much here.

~~~
knowsnothing613
seed funding usually provides an 18 month runway before more financing is
needed. Mid stage runways are for a 2-5 years. You had a seed/angel funding
bubble in 2010, so those companies are likely close to the end of their
runways now, so they will need a cash influx. If there is a liquidity crisis,
it'll be highly unlikely for them to get funding.

Also, they is still alot of inventory (mid stage web startups) from the 2007
funding bubble to work through.

Mid stage companies, funded in 2007, and had a 2-5 year runway, were waiting
on the recent IPOs (Groupon, LinkedIn, Pandora, Zynga, ..) to raise appetite
for their stock, but Groupon & LinkedIn, and Pandora IPOs are busts. So the
capital markets will likely be closed off to them, and their will have to turn
to the secondary markets. But once again, if there is a liquidity crisis, they
will not get funding, and they will face a cash squeeze over the next
9-12months, depending on their burn rate.

So you have two web bubbles that will collapse, if the EZ fails. The 2007
funding bubble (digg, etc), and the 2010 angel funding bubble.

~~~
drumdance
It's possible, but difficult to predict. Back in 2008 Sequoia famously
predicted startup capital would dry up, but it didn't come to pass.
([http://venturebeat.com/2008/10/10/the-sequoia-rip-good-
times...](http://venturebeat.com/2008/10/10/the-sequoia-rip-good-times-
presentation-get-your-copy-here))

Of course, the rise of super angels probably played a large role in that.

------
tete
Yes, there are Greece, Italy, Ireland, Portugal and Spain (where Greece still
is the only really serious problem), but on the other hand there are a lot of
strong/rich countries that are part of the EU and the Eurozone. There are
Germany, France, Austria, Belgium, Netherlands and Finland, Estonia and really
awesome ones like Luxemburg. The rest to my knowledge is doing fine.

In the mean there isn't a big difference to any other strong currency, like
the US who comparatively has a much bigger problem and already had it for a
long time.

The only thing that Europe lacks compared to the US is something like strict
rules and sharing debts. A finance minister (or something similar) and
Eurobonds would fix that.

Besides that it's really not like the Euro isn't worth a lot. Some years ago
when the EUR/USD exchange what way lower everyone complained about the Euro
being too strong and therefor causes export problems (low income). Now it is
still way higher than that and everyone says the Euro is at its end.

Besides that the US as well as China devalue their currencies by printing
-hardcore- and still have a lot more trust. Why?

------
diego_moita
To me this story looks a lot like Word War I and the Crimean War, to talk
about other European tragedies: everyone saw the disaster coming, but everyone
that could have made something to prevent it didn't do it because he/she
thought that it was just too bad to happen and in the end sanity would
magically prevail. I thing the tragedy will repeat itself.

It is possible that the common currency will crash and some countries will get
out of the European Community. But the European Community will survive.

Remember, before the European Community, all the biggest wars in history
either happened in Europe or were started by Europeans: Crusades, colonialism
in Africa and Asia, genocide of Native Americans, Napoleonic wars, WWI and
WWII, ...

After the European Community the only wars in Europe were outside of the
Community and the only really big tragedy with European initiative (Stalin's
big famine) was also outside of it.

~~~
mafribe
If by "Stalin's big famine" you mean the man-made famine in the Ukrainian SSR,
then that happened in 1932 and 1933, before the EU was started [1].

It is also wrong that to say that all big wars were started by Europeans, as a
quick look at e.g. Chinese history shows, e.g. the Taiping Rebellion [2].

[1] <http://en.wikipedia.org/wiki/Holodomor> [2]
<http://en.wikipedia.org/wiki/Taiping_Rebellion>

------
latch
I don't understand why people aren't doing bank runs. Is it really because, as
the article states, people believe leaders will solve the problem? For an
individual, that seems like an unreasonable/unecessary risk to take.

~~~
jerf
The result of a bank run would be a fistful of Euros. I don't see much point
in running a bank, as the way they're going to take the value away from you is
to inflate away what you've got, be it Euro or $LOCAL_CURRENCY. They can do
that with it in the bank or it in your hands. (Progress!)

~~~
flourpower
But then why not just change your euros into dollars?

~~~
philwelch
Because USD aren't legal tender in the Eurozone, so you couldn't actually buy
anything with them. You could change your euros into pounds and move to
Britain, except your job, family, friends, and so forth are still back home
(and once everyone gets that idea, it's not going to work for a million
reasons).

Now if you're talking about people with investments in EUR who could switch
that over to USD, well yeah, the exchange rate doesn't seem to have crashed.
Hm, can you short a currency somehow?

~~~
jmitcheson
"Hm, can you short a currency somehow?"

Check out Proshares UltraShort Euro <http://www.proshares.com/funds/euo.html>

~~~
fr0sty
Just a note: Short and leveraged ETFs are designed to match intraday movement
and are poorly suited for long-term holding. It says as much on the website.

To wit: YTD EUR/USD is down .2% and that ETF is down 5%.

------
linuxhansl
It's interesting to me that this is not caused by European countries being in
bad shape (most have a lower debt to GDP ratio than the US, although there are
of course other indicators).

The problem is the _perception_ of a problem and that leads to higher bond
yields and that is what leads to this real problem.

I'm not a conspiracy theorist, but it seems the timing of the downgrades of
Greece, Portual, and Spain by _US_ rating agency was quite perfect to cause
exactly this effect. It seems at least "dubious".

~~~
tsotha
>The problem is the perception of a problem and that leads to higher bond
yields and that is what leads to this real problem.

No, there is a real problem, which is the eurozone is a monetary union without
a fiscal union. It's fundamentally unstable, something that can only work in
good economic times. One of two things is going to have to happen to align
fiscal and monetary boundaries - either national currencies will be
reintroduced or fiscal policy will have to be aligned for the entire eurozone.

~~~
linuxhansl
How exactly is this causing the problem?

The problem is the cost of financing debt. That cost is high because the risk
of the investment is (perceived) high.

~~~
tsotha
>That cost is high because the risk of the investment is (perceived) high.

Eh, that's semantics. The risk _is_ high. None of these countries can afford
the slightest rise in interest rates, whether that rise is associated with a
loss of confidence or because there are better places to put money.

That's what the Maastricht treaty was supposed to prevent. But that was a pipe
dream because there's no way for the union to keep the spendthrifts in line.

------
rnadna
When German cars age, they tend get replaced by new German cars. Germany has
wealth because it sells expensive things in high quantity. Greece? Spain? Not
so much.

------
rewiter2011
Reset the thing finally, thank you Tyler!

------
suivix
I think the _actual_ end is when lots of cities in Europe are bombed, like in
WW2. But in this crisis all the infrastructure is still in place, and since
there is still demand for goods and services, there will be an economy.
Economists can make up whatever abstract ideas they want, but the fact is that
people will create and trade things of value for other things of value. Maybe
I'm just rambling but this is not "the end".

~~~
alex_c
"The Euro Zone" has a different meaning from "Europe".

------
tlear
Yes it is the end, the scam is over and it is time to pay. It was clear for
couple years now. PIIGS are about to go and with them the rest of this over
bloated, over regulated pyramid.

------
jscore
I want the Schengen zone to end so I'm not limited by 3 months in all of
Europe but instead on a country by country basis.

~~~
soult
The Schengen zone has nothing to do with the Euro. We had "open" borders
before the Euro and non-Euro states (UK, Sweden, ...) are part of the Schengen
zone. Even Switzerland is part of the Schengen zone.

EDIT: The UK is only partially a member of the Schengen zone.

~~~
learc83
I thought the UK wasn't part of the Schengen zone.

~~~
soult
Thanks for the tip. You are of course right, according to Wikipedia the UK is
only partially part of the Schengen zone. I must have confused it with Denmark
which is not part of the Euro zone, but part of the Schengen zone.

