Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

Is the euro really worth it?

by tyronen Tue Nov 16th, 2010 at 06:39:34 AM EST

Why should Greece, Ireland, Portugal, and maybe later Spain and Italy be tortured like this?

It might take a year or two to exit the euro, but I now believe it would be better for these five to exit rather than lay waste their economies and social programs in futile attempts to be able to borrow money they can't print.

Arguably the Baltic states, too, should have exited the ERM rather than suffer double-digit unemployment as they are doing now.  Nor does the expansion of the euro in 2014-15 seem to be a good idea.

Monetary union is not feasible without fiscal union, which in turns requires political union, which has been stalled for most of the past decade (since the introduction of the euro, probably not coincidentally).

A core rump of France, Germany, Benelux, Austria, and Finland may be all that is practical to stay in the euro in the long term.


Display:
... that can't be fixed with a round of sovereign defaults, revoking the Growth and Stability Pact German Suicide Pact and raising the inflation target to 8 % plus your country's intra-€-zone balance of payments surplus relative to GDP.

Specifically, one should not lump together Ireland with the other four. Ireland has no business leaving the €. All it has to do to get out of its current mess is to default on its sovereign debt: It has no economic problem that a sovereign default would not solve. The higher inflation target is for the benefit of the other four on your list.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Nov 16th, 2010 at 08:18:14 PM EST
There is nothing wrong with the € that can't be fixed with a round of sovereign defaults

I was going to write the same. Then I remembered that wages have been going up far faster than productivity in the peripheral countries. Wages have to go down for them to become competitive again. If you can't manage this through weakening your currency, you've got very big problems.

Hindsight is 20/20, but I feel it would have been much better to look at what were actually the optimal currency areas of Europe, and then create maybe 3-5 currencies based on that. Then, after a couple of recessions the currencies could have been merged into one, if there had been no major issues.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Nov 17th, 2010 at 12:43:30 PM EST
[ Parent ]
Starvid:
Wages have to go down for them to become competitive again.
Or they can go up in Germany, which has famously been depressing its wages for over a decade.

So, say, 7% inflation in the Eurozone with frozen nominal wages in the periphery and stable real wages in Germany might fix some of the problem in 3 to 5 years.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Wed Nov 17th, 2010 at 12:50:56 PM EST
[ Parent ]
Increasing wages in Germany is important as well (and here the blame falls on the German labour unions), but companies in the peripheral countries don't only compete with Germany, but with the rest of the world too. They have to be competitive compared to them as well.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Nov 17th, 2010 at 01:16:27 PM EST
[ Parent ]
but companies in the peripheral countries don't only compete with Germany, but with the rest of the world too. They have to be competitive compared to them as well.

There is no problem with peripheral EU members' competitiveness vs. ROW that cannot be solved by devaluing the €.

The structural problem is with the intra-€-zone inflation differential.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 17th, 2010 at 01:19:34 PM EST
[ Parent ]
Even if the euro is devalued (which lies in the hands of the markets as the euro is a floating currency), the too high unit-labour costs of the PIIGS compared to the EU core will remain.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Nov 17th, 2010 at 01:24:47 PM EST
[ Parent ]
There are two ways to solve that. The smart way is to raise inflation in Germany. The painful way is to cause deflation in the periphery.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 17th, 2010 at 01:29:15 PM EST
[ Parent ]
The smart way is to raise inflation in Germany.

As I said, good luck with that. What we're seeing here is the folly of putting countries with very different economies in the same currency union. I say this with regret, because I used to be a strong supporter of the euro, and I was blind-sided by this problem. I can't recall  anyone discussing it back in 2003 when we had our referendum. On the other hand I didn't know much about economy back then, as I was only 17-18.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Nov 17th, 2010 at 01:42:23 PM EST
[ Parent ]
  • Low inflation

  • Pegged exchange rates

  • No obligation to other EU members' debts.

Pick any two.

he smart way is to raise inflation in Germany.

As I said, good luck with that.

Then Germany is unfit to be a member of the €. Demanding all three of the above statements be true at the same time is a case of demanding a free lunch. And there is nothing magical about the European Union that suddenly makes TINSTAAFL not apply.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 17th, 2010 at 01:47:52 PM EST
[ Parent ]
Then we're back at the conclusion that only the PIIGS should use the euro while Germany et al should leave it. Is that a happy outcome? I don't think so.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Nov 17th, 2010 at 01:51:37 PM EST
[ Parent ]
The €-zone is larger than just Germany and the PIGS (only one "I" in that - Ireland has no business leaving the € under any scenario).

Is Germany reverting to the D-Mark a happy scenario? No. The happy scenario is Germany accepting the mathematical impossibility of fixed exchange rates, low inflation and no bailouts at the same time, and raising its inflation target.

But absent the happy scenario, I'll go with the unhappy scenario over the painful scenario.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 17th, 2010 at 01:58:42 PM EST
[ Parent ]
It's actually TANSTAAFL (if you read your Heinlein).
by njh on Fri Nov 19th, 2010 at 05:49:37 PM EST
[ Parent ]
Optimal currency-zone was discussed in 2003 and so was the lack of fiscal union. Not in the precise terms of today, but it is easier to see the details when it actually happens.

Though these discussions were marginal compared to:
a) general EU/Sweden vision (were left against EMU and right for EMU had the same ideas about what it would lead to, the same was true for left for EMU and right against EMU)
b) practicalities surrounding coins and notes

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Nov 17th, 2010 at 04:34:27 PM EST
[ Parent ]
As I commented when Krugman made the same argument about Spain last year: I'm on board with the argument until I realise that Spain's median wage is lower than some core countries' minimum wages. So, this begs the question of how 'unit labour costs' are defined and estimated.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 17th, 2010 at 01:33:38 PM EST
[ Parent ]
Then I suppose Spanish median productivity is lower than some core country's "minimum productivity" as well, otherwise Spanish companies will be roaringly profitable...

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Nov 17th, 2010 at 01:39:01 PM EST
[ Parent ]
So you find the idea sensible that the median Spanish worker is less productive than the average Swedish unqualified labourer?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 17th, 2010 at 01:44:26 PM EST
[ Parent ]
I don't think there are many unqualified labourers in Sweden. We've pushed up minimum wages so high that they're either unemployed or working in the black sector of the economy.

No matter if this speculation is correct or not, the idea that Spanish workers are very productive while their wages are far lower than in the core, should rsult in very high corporate profits for Spanish companies. Are we seeing that?

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Nov 17th, 2010 at 01:49:51 PM EST
[ Parent ]
Well, I just find it hard to believe that a janitor or street sweeper of toilet cleaner in Germany or Sweden is more productive than the average wage earner in Spain. So either the measure of "productivity" or "unit labour costs" is bogus or the Spanish business class is skimming an ungodly fraction of the value added. Or the underground economy really screws with Spain's productivity figures.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 17th, 2010 at 04:54:33 PM EST
[ Parent ]
I don't know about Germany, but in Sweden the low-productive service sector is subsidised by industry. This is done through collective wage bargaining where the industrial worker wage increases are seen as the baseline to which also the service sector adapts, even if the productivity increases of say janitors are very low. This is not a very big problem for Swedish service businesses, as many of them either are in the public sector or have public sector as a big customer.

So I suppose you could explain low Spanish janitor wages either because Spanish industry doesn't subsidise the Spanish service sector, or because Spanish industry isn't productive enough to afford a large subsidy.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Nov 18th, 2010 at 09:31:30 AM EST
[ Parent ]
It's not just low janitor wages, it's low median wages.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Nov 18th, 2010 at 09:39:05 AM EST
[ Parent ]
The argument is still valid in that situation, if it is valid at all that is.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Nov 18th, 2010 at 09:43:38 AM EST
[ Parent ]
Maybe I should take a career cue from Good Will Hunting and move to Sweden to become a janitor at the University of Uppsala...

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Nov 18th, 2010 at 09:45:39 AM EST
[ Parent ]
I'd rather see you as a econo lecturer here, with the added benefit of being able to fail my essays... ;)

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Nov 18th, 2010 at 09:50:18 AM EST
[ Parent ]
I don' have the qualifications to be an econ lecturer. A janitor, on the other hand...

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Nov 18th, 2010 at 10:42:57 AM EST
[ Parent ]
I don' have the qualifications to be an econ lecturer.

That's precisely why he wants you...

by gk (gk (gk quattro due due sette @gmail.com)) on Thu Nov 18th, 2010 at 11:32:05 AM EST
[ Parent ]
Now you are having trouble with that honesty thing that apparently is a plague on the working classes. Take a cue from the former minister of labour market and buy yourself a fitting exam. You might want to avoid Fairfax University that he used as it is a bit known now. A Spanish speaking diploma-mill will probably work better, but avoid Chile, there is a fair amount of Chilean ex-pats in Swedish academia.

When it was discovered he said his apologies, changed his resume and kept going as minister of labour market. So if you enter Swedish labour market with a bought exam, you are simply following his example.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu Nov 18th, 2010 at 05:35:27 PM EST
[ Parent ]
Of course, all this analysis really does is raise the question of whether productivity can be meaningfully measured at the level of individual job functions, or it is more meaningfully measured at the firm level. Janitors may not be more productive today than they were twenty years ago in terms of how many square meter they can clean. But the fact that they have a clean working environment makes everybody else much more productive than they would otherwise have been.

If we take the fraction of production that would have been impossible without a clean working environment to be approximately constant (in fact it is likely to be increasing, so this is a conservative estimate), then constant janitorial square meter productivity translates into the same actual relative productivity increase (including externalities) for the janitors as for the firm overall (this doesn't mean that the relative productivity increase is lower for other workers in the firm - it just means that their absolute productivity is lower; but that doesn't enter into the question of wage growth, only of absolute wage levels).

So I'm less than completely convinced that what you're describing is a subsidy in real terms, even if it is in nominal terms.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 18th, 2010 at 09:42:52 AM EST
[ Parent ]
JakeS:
all this analysis really does is raise the question of whether productivity can be meaningfully measured at the level of individual job functions, or it is more meaningfully measured at the firm level
It also serves to call into question the unsubstantiated axiom that wages are related to marginal productivity.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Nov 18th, 2010 at 09:46:48 AM EST
[ Parent ]
To be fair, Starvid's claim hasn't so far been that wages are related to marginal productivity, only that they are related to productivity. Which is true, to an extent: It is not possible for a private going concern that wishes to remain a private going concern to collectively pay its employees more than the value added in its production (resp. the value confiscated in the course of its operations, for a bank or other firm that is in the business of government rather than production).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 18th, 2010 at 09:52:08 AM EST
[ Parent ]
Unit labour costs are the wages paid per € of output. So unit labour costs can be high either because labour is well remunerated, or because production is low.

Since labour is not excessively remunerated in Spain, the explanation must be that Spain is less industrialised than the core €-zone economies. Which would indicate the desirability of applying European industrial policy to improve Spain's industrial plant.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 17th, 2010 at 01:42:56 PM EST
[ Parent ]
Any Spanish industrial policy must originate from Madrid. Do you want Brussels to decide hot Danish industry should be structured, after seeing these EU idiots in action? I don't think the Spaniards want that either. The principle of subsidarity should certainly be applied in this case.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Nov 17th, 2010 at 02:07:58 PM EST
[ Parent ]
But the EU must be prepared to fund it. And, far more importantly, the EU must be prepared to not obstruct it with market fundamentalist demands that it be carried out without explicit state aid to Spanish companies.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 17th, 2010 at 02:10:29 PM EST
[ Parent ]
That the EU should not obstruct it I agree with, obviously. I love the market fundamentalists just as little as you do. But why should the EU fund it? Why can't the Spanish fund their own industrial policy, just like Denmark could fund its policy? It hardly makes sense that everyone sends money to the EU just to have it redistributed again. Let each country pay for itself. Indeed, some countries might not even want industrial policies and will be hurt by that fact. Surely they shouldn't be doubly punished by having to pay for it anyways?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Nov 17th, 2010 at 02:17:36 PM EST
[ Parent ]
Then why are you in the EU?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 17th, 2010 at 02:21:13 PM EST
[ Parent ]
The EU exists, basically to avoid a new Franco-German war, and to provide free movement within the union, and to avoid cross-border tragedies of the commons, like environmental problems covering several nations.

It doesn't exist because every decision should be made by some central federal government in Brussels.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Nov 17th, 2010 at 02:23:57 PM EST
[ Parent ]
Why should the EU fund it? There are several reasons.

In the first place, it is in the interest of every EU member state that the EU is, collectively, as strong as possible. Thus, you will want collective funding of EU industrial policy to incentivise industrial policy, for much the same reason that you'll want public financing of education.

In the second place, it is in the interest of the European Union that its members are of reasonably uniform level of industrialisation. There are three ways to go about this: a) The EU can expel all members who are not sufficiently highly industrialised, and only take in new members when they are. b) The EU can de-industrialise to the level of Spain and Greece. c) The EU can subsidise the industrialisation of the not quite sufficiently highly industrialised members. I know which one I prefer.

In the third place, the gains from a concerted industrial policy are much greater in underindustrialised countries than they are in fully industrialised countries. Collectively speaking, European resources are therefore better spent on industrialising Greece and Spain than on further improvements to an already excellent German industrial plant.

In the fourth place, the members who currently lack industrial policy for want of funds (and/or because effective industrial policy is prohibited) are almost uniformly poorer than those who have been able to conduct their industrial policy around (or in blatant violation of) the EU rules, and with their own funding.

In the fifth place, federal industrial policy can be a driver of economic and political integration.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 17th, 2010 at 02:29:11 PM EST
[ Parent ]
The EU disallows most forms me industrial policy that don't reduce to letting the free market provide.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 17th, 2010 at 02:16:28 PM EST
[ Parent ]
Indeed. Then why are you in the EU? </snark>

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Nov 17th, 2010 at 02:25:50 PM EST
[ Parent ]
Oh, peripheral Europe suffered from a strong inadequacy complex.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 17th, 2010 at 04:48:47 PM EST
[ Parent ]
Well, the point is that this is wrong on its face, in the European context.

Any Spanish industrial policy must originate from Madrid. Do you want Brussels to decide hothow Danish industry should be structured, after seeing these EU idiots in action? I don't think the Spaniards want that either. The principle of subsidarity should certainly be applied in this case.

Brussels does decide how Danish or Spanish industry should or should not be structured. Look at the (de)regulation of telecommunications, energy, transportation... the opening of postal, energy and other markets to competition, the illegal state aid rules, agricultural quotas, and industrial reform/privatization/dismantling requirements on new entrants. The principle of subsidiarity does not apply to the single market.

Undoubtedly Spain has benefitted from the first 22 years of its 24 years of membership in the EU but "core Europe" seems intent on rolling back any gains accrued to "peripheral Europe" so before not too long it may be that Spain is back where it was in 1986.

In fact, in terms of unemployment, we're back where we were in 1982. Quite a success for the 2000 "Lisbon Agenda for Growth and Jobs", if you ask me.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Wed Nov 17th, 2010 at 05:02:06 PM EST
[ Parent ]
Brussels does decide how Danish or Spanish industry should or should not be structured. Look at the (de)regulation of telecommunications, energy, transportation...

And you want more of the EU meddling?! No thanks. We'll do fine by ourselves, thank you, without remote control from crazy Brussels eurocrats.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Nov 18th, 2010 at 09:42:23 AM EST
[ Parent ]
We first and foremost want different EU meddling.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 18th, 2010 at 09:43:55 AM EST
[ Parent ]
Yes. I know. That's the problem. You wan't the EU to intervene, as long as they do good stuff. But you can't count on them doing good stuff instead of bad, and instead of putting all the eggs in the same basket you should accept that this kind of industrial policy can be done excellently well on the national level, or by using bilateral cooperation.

This is the same folly embraced by Swedish liberals and socialists who wanted to bring abortion rights to the Poles. So they moved the issue to the EU level, where they were soundly trounced by the Poles, Irish, Italians etc. The end result was that instead of abortion right ebing increased in Poland, they were reduced in Sweden.

Thanks for nothing. Look, we have the principle of subsidarity for a reason: when you start intervening in other countries domestic affairs in this way, you give them the opportunity to meddle in yours. And I really dislike that, especially when we are talking about what are clearly national issues.

Decisions should be made on the correct level. This is not always Brussels.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Nov 18th, 2010 at 09:56:43 AM EST
[ Parent ]
That's the problem. You wan't the EU to intervene, as long as they do good stuff. But you can't count on them doing good stuff instead of bad, and instead of putting all the eggs in the same basket you should accept that this kind of industrial policy can be done excellently well on the national level, or by using bilateral cooperation.

Where did I argue for prohibiting state-level industrial policy? Having a public pension system does not prevent you from buying common stock, does it? Then why should a federal industrial policy prevent you from pursuing additional industrial policy on your own?

Obviously, the neoliberals will try to push for EU-mandated industrial non-policy, just like the Poles pushed for EU-mandated restrictions on reproductive rights. But they are already doing that. The neolibs won't accept the principle of subsidiarity when it conflicts with their religious convictions, and the treaties as currently constructed give them excellent air cover for that position. So you can't refer the question of industrial policy to the state level under the principle of subsidiarity. That boat has sailed.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 18th, 2010 at 10:05:33 AM EST
[ Parent ]
When you argue that industrial policy should be something decided on by the EU level, you open up for the EU banning industrial policy. Which is, by the way, what the current situation looks like.

And the boat hasn't sailed, not if you push back. So the Comission wants you to implement some stupid directive? Just ignore it. While it goes through the EC courts for years and years you negotioate an opt-out from that stupid directive, or just keep ignoring it and refuse to pay any fines. Italy does stuff like that all the time.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Nov 18th, 2010 at 10:14:16 AM EST
[ Parent ]
It may come to that with the current crisis.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Nov 18th, 2010 at 10:22:55 AM EST
[ Parent ]
Starvid:
hot Danish industry

in england they eat them cold usually, but maybe on a madrid winter night...

;)

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Tue Dec 21st, 2010 at 11:30:00 AM EST
[ Parent ]
Unit labour costs are the wages paid per € of output. So unit labour costs can be high either because labour is well remunerated, or because production is low.

I guess we should look at the wage bill as a fraction of GDP...

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Wed Nov 17th, 2010 at 05:05:27 PM EST
[ Parent ]
Oh for fuck's sake.

Wages have risen from a very low level to somewhere below EU averages, generally.

Or does competiveness require keeping the periphery at third world levels?

by Colman (colman at eurotrib.com) on Wed Nov 17th, 2010 at 12:56:33 PM EST
[ Parent ]
When Croatia joins the EU you'll have somebody to really depress your wages by competition...

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 17th, 2010 at 01:00:51 PM EST
[ Parent ]
Wages can't rise faster than productivity. That's not sustainable. Hence, it won't be sustained. Companies will be outcompeted, close their factories and lay off their workers.

It's quite ironic that the PIIGS-crisis was caused by wages rising faster than productivity, while the US crisis was caused by wages being stagnant while productivity rose.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Nov 17th, 2010 at 01:22:39 PM EST
[ Parent ]
Wages can't rise faster than productivity.

Neither can "asset" prices. Why there is such a worry about rising wages? When it comes to rising housing market, stock market or banking profits, everybody is celebrating.

by kjr63 on Mon Dec 6th, 2010 at 05:35:40 AM EST
[ Parent ]
You're also truncating my recommendation. I really don't like it when people do that. There's normally a reason my policy recommendations aren't snappy one-liners.

The full recommendation was:

There is nothing wrong with the € that can't be fixed with a round of sovereign defaults, revoking the Growth and Stability Pact German Suicide Pact and raising the inflation target to 8 % plus your country's intra-€-zone balance of payments surplus relative to GDP.

If you only do one of the three, you don't fix the problem. If you only do two of the three, you don't fix the problem. You have to do all three to fix the problem.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 17th, 2010 at 12:58:49 PM EST
[ Parent ]
I truncated your text because you wrote the same thing about defaults that I was thinking about, which I specifically mentioned in the post. I didn't say anything about the likelihood of success if your other suggestions were to be implemented.

But if I should comment on them... The growth and stability pact makes no sense, I agree with that. 8 % inflation? Good luck with that. All more or less sound euro nations would rather leave the euro than suffer that, making the euro the currency of the PIIGS nations.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Nov 17th, 2010 at 01:20:46 PM EST
[ Parent ]
Suffer?

There is no suffering at 8 % inflation. There might be suffering at 12 % inflation, but if you're running a 4 % of GDP CA surplus against fellow €-zone members, you should be able to take that on the chin.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 17th, 2010 at 01:30:34 PM EST
[ Parent ]
Where for 'sound' one should read 'net exporters'?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 17th, 2010 at 01:41:13 PM EST
[ Parent ]
The sound ones are the ones who can service the debts they have taken on, and who refrain from running deficits they can't afford.

   

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Nov 17th, 2010 at 01:46:14 PM EST
[ Parent ]
You're still labouring under the false frame that sovereign outlays are constrained by revenues, rather than macroeconomic stability.

There is such a thing as "excessive inflation" and there is such a thing as unemployment. But there is no such thing as "unsustainable sovereign debt."

And, incidentally, if your definition of "excessive inflation" is such that it precludes simultaneous achievement of acceptable inflation levels and full employment, then it is your definition of acceptable inflation that has to change, not the definition of full employment.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 17th, 2010 at 01:52:16 PM EST
[ Parent ]
I suppose I do, because I can't understand what you're saying. Unsustainable debt is unsustainable when it can't be sustained, when you can't service the debt without a massive and unacceptable reduction in net income, and when you can't roll it over because people think you're going to default.

And then I wonder what you consider full employment? Less than NAIRU?

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Nov 17th, 2010 at 02:07:17 PM EST
[ Parent ]
Furthermore, full employment is not necesarily the most important goal: a reasonable standard of living for all, however, is.

If the price of having a sound and highly productive is say 5 % unemployment, that's fine by me. With such an economy, we can afford to pay these 5 % generous unemployment benefits, especially if they aren't long-term unemployed.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Nov 17th, 2010 at 02:10:02 PM EST
[ Parent ]
I'm not a productivist, so I won't argue with that, except to note that there is no actual evidence that economies that pursue less than full employment are actually more productive than economies that pursue full employment. But in the society we actually have, as opposed to the one we might want, unemployment is associated with deprivation. Hence the need to prevent unemployment. It is possible that different social organisation might obviate the need for full employment, along the lines you suggest, but that is somewhat beyond the scope of resolving the present crisis.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 17th, 2010 at 02:19:13 PM EST
[ Parent ]
Starvid:
Furthermore, full employment is not necesarily the most important goal: a reasonable standard of living for all, however, is.

If the price of having a sound and highly productive is say 5 % unemployment, that's fine by me. With such an economy, we can afford to pay these 5 % generous unemployment benefits, especially if they aren't long-term unemployed.

Problem is that these rarely match, instead there tend to be Moral Underclass Discourse going on explaining why those on benefits are lazy.

And is not the point of unemployment to keep wage growth down? Then comfortable unemployed will do you no good, as people will not be that afraid to loose their jobs.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Nov 17th, 2010 at 04:44:03 PM EST
[ Parent ]
I suppose I do, because I can't understand what you're saying. Unsustainable debt is unsustainable when it can't be sustained, when you can't service the debt without a massive and unacceptable reduction in net income, and when you can't roll it over because people think you're going to default.

Sovereign states can always service their debts. And they can always roll them over. In extremis, they could retire them all, and conduct interest rate policy entirely through the discount window of their central bank.

Sovereign bonds are not debt instruments, they are interest rate policy instruments.

And then I wonder what you consider full employment? Less than NAIRU?

Frictional unemployment only. Which is in the neighbourhood of 2 %.

NAIRU is a fantasy that doesn't actually exist in the real world - which gets ridiculously obvious when you look at how people model it. It is modelled either by taking actually realised unemployment and passing it through a five-year running average, or by picking some wholly arbitrary value without reference to the makeup of the real economy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 17th, 2010 at 02:15:27 PM EST
[ Parent ]
Sovereign states, yes. But now the EMU states have given up a considerable part of their sovereignty to some gentlemen in Frankfurt. Ireland can't just print euros at will.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Nov 17th, 2010 at 02:19:48 PM EST
[ Parent ]
Speaking of NAIRU, it seems I did indeed mix it up with the frictional unemployment. NAIRU is some Friedmanesque clap-trap.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Nov 17th, 2010 at 02:21:35 PM EST
[ Parent ]
That is a problem with the EMU, not a problem with unsustainable sovereign debt.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 17th, 2010 at 02:30:33 PM EST
[ Parent ]
Well, I don't disagree with that. I'm after all in the pro-default crowd. ;) But the fact is that these countries unfortunately are in the EMU and have the euro. If they hadn't joined, everyone would be a lot better off.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Nov 17th, 2010 at 02:34:34 PM EST
[ Parent ]
Being in the € does not, as Jerome does not tire of pointing out, prevent them from defaulting.

Being in the € does not actually prevent them from adjusting their competitiveness. The 2 % pr. year inflation target prevents them from adjusting their competitiveness.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 17th, 2010 at 05:04:20 PM EST
[ Parent ]
The problem is that Ireland essentially has a fixed currency with the rest of the world. They can't devalue out of this mess, and that problem is entirely due to the euro.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Nov 18th, 2010 at 09:45:46 AM EST
[ Parent ]
No, that is entirely due to the excessive inflation targeting.

If the inflation target were a more reasonable 6-8 % plus your internal current accounts surplus.

Additionally, as I keep harping on, Ireland has no economic problem that can't be solved by a sovereign default. The balance of payments problem is with the PIGS, not Ireland.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 18th, 2010 at 09:48:03 AM EST
[ Parent ]
Conversely, Germany is doing to the rest of the EU what China is doing to the US, exchange-rate wise.

It's just that Germany has been smart enough to convince its victims to do the corrency management for it, and to feel guilty for the consequences, too.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Thu Nov 18th, 2010 at 09:48:10 AM EST
[ Parent ]
JakeS:
You're still labouring under the false frame that sovereign outlays are constrained by revenues, rather than macroeconomic stability.
Well, in the Eurozone government spending is not a sovereign outlay since governments are not monetarily sovereign and, in fact, there is no EU fiscal authority so the ECB is the sovereign.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Nov 18th, 2010 at 04:25:53 AM EST
[ Parent ]
That is a problem with the design of the €, not an intrinsic problem with having a common currency.

Yes, I keep harping on this point, because it's important - dismantling the € in the current political climate would set European integration back by a generation. Improving it might not.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 18th, 2010 at 07:10:40 AM EST
[ Parent ]
If I may ...

Then I remembered that wages have been going up far faster than productivity in the peripheral countries.

A better comparison would be real wage rates versus Cost of Living arranged by demographics.  Not only will tell you the levels of consumer discretionary income it will indicate if wage levels are (net/net) falling, rising, or staying the same.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Nov 17th, 2010 at 03:24:06 PM EST
[ Parent ]
You may, but I disagree. :)

You have to pay wages from corporate incomes, and those depend on productivity, not the cost of living.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Nov 17th, 2010 at 03:30:08 PM EST
[ Parent ]
It's not about setting wages, it's about monitoring them.

If corporate profits are falling, that's not necessarily a bad thing as long as they're being distributed into the wider economy.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 17th, 2010 at 04:02:09 PM EST
[ Parent ]
If profits are low, you'll get a deficit of new investment.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Nov 17th, 2010 at 04:54:06 PM EST
[ Parent ]
No you won't. You'll get more effective investment, because you'll have a workforce with ready cash to act as a market for innovation.

If you don't redistribute profits you get cancerous financialisation of the kind we're seeing at the moment.

Sometimes this get mistaken for investment, but in reality it's nothing of the sort.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 17th, 2010 at 05:04:49 PM EST
[ Parent ]
That's all fun and games when you have a massive domestic market like the US, but otherwise, it's awful. No matter how much cash the Swedes might have at hand, they'll never buy the entire Swedish output of trucks, paper, steel, machinery and mobile phones.

And why would anyone want to invest their money in a place with a low risk-adjusted return, when they instead can invest the money where they get a high risk-adjusted return?

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Nov 18th, 2010 at 09:48:51 AM EST
[ Parent ]
You just have to change your frame and think about "the EU" as your "domestic" market rather than "Sweden".

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Nov 18th, 2010 at 09:50:17 AM EST
[ Parent ]
The risk-adjusted return argument still stands.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Nov 18th, 2010 at 09:51:21 AM EST
[ Parent ]
by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 18th, 2010 at 09:54:30 AM EST
[ Parent ]
How illiberal of you.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Nov 18th, 2010 at 09:56:39 AM EST
[ Parent ]
Do industrial policy in a bad way, and you get capital flight.

Using state money to push industrial policy is fine by me. But if you try to use private money in that way, and it'll just move away.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Nov 18th, 2010 at 09:58:22 AM EST
[ Parent ]
Fully mobile capital turns comparative advantage into absolute advantage and, to quote Samuelson, "makes all the debunked mercantilist arguments true".

So, the "risk-adjusted rate of return" argument belongs to a world (that of fully mobile capital) which is unstable against (fully rational) mercantilist reactions.

Therefore, I'd rather not base my policy on risk-adjusted rates of return for fully mobile capital.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Thu Nov 18th, 2010 at 09:55:30 AM EST
[ Parent ]
Now that I think was the best thread ever at the ET, the absolute advantage one. I think it started as a comment on the Icelandic election. :)

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Nov 18th, 2010 at 09:59:26 AM EST
[ Parent ]
Yup, a comment by Jerome a Paris:
Uneconomic growth? (none / 1) Or a serious competitive advantage, i.e. cheap renewable energy?
in the Icelandic Alþing Elections diary by by NordicStorm on May 13th, 2007.

Now, was Iceland in 2007 an example of uneconomic growth, or of absolute advantage? Or is absolute advantage in the age of financialization a recipe for uneconomic growth?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Thu Nov 18th, 2010 at 10:12:07 AM EST
[ Parent ]
Iceland was a great example of absolute disadvantage, or possibly absolute insanity.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Nov 18th, 2010 at 10:15:36 AM EST
[ Parent ]
From that thread:

Migeru:

Direct foreign investment is the flip side of domestic divestment. It's one thing to outsource goods and services to a different country and another to move your production to a different country. In the second case, the domestic economy gets divested. The mechanism is the same that, thought capital movements within one country, leads to economic crisis and unemployment in certain regions while others thrive. Free movement of capital leads to divestment and unemployment and forces nemployed people to move in chase of capital. Within a country there is freedom to move and so the "problem" is people's resistance to uproot themselves. The US has a culture of transience in which people will move large distances without much apparent trouble, but look at the massive migrations from the "dust bowl" to California during the Great Depression.

...

So, I am not opposed to free trade, and I am not opposed to free movement of capital but 1) if there is free movement of capital, goods and services there has to be free movement of people; 2) if you have free movement of capital you need a redistributive policy encompassing the whole scope of the free movement of capital.

Therefore, the European Union needs to strengthen its economic government. We already have a Central Bank for the Eurozone, and we need a supranational redistributive policy. The neoliberal nationalism that is now in charge of it is going to cause a lot of damage.



Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Thu Nov 18th, 2010 at 10:19:29 AM EST
[ Parent ]
Unless you set the required rate of return lower, on equity, debt or both. This is always within the power of the sovereign to do. It's called industrial policy. Or used to be called that, anyway. These days, it's called "illegal state aid."

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 17th, 2010 at 05:08:16 PM EST
[ Parent ]
Real wages have been growing faster than productivity perhaps between 2007-2009 in Greece. Before they were not:

Based on increases to real wage increases during 2007 (3.9%), pay increases in Greece were the highest of the countries of the EU15. Prior to the 2007 increase, there had been four years during which the average annual increase in Greece was around 3%. These big increases, by international standards, in the average real wage in Greece were fully offset by increases in labour productivity, leaving unit labour costs stable in real terms at 2000 levels.

In the private sector during the 2000-2007 period, there was a cumulative decrease of 1.2% in real unit labour costs. Average real wages increased more slowly than average labour productivity, which left companies with leeway to benefit from higher labour productivity. The effect of this development was that at the end of 2007 real wages in the private sector had increased by 27% over the 2000-2007 period, while productivity increased by 36.5%. Thus, there was a benefit to companies of around 7% in unit labour costs in real terms.

For the year 2007, Greece was in second to last place as regards the level of gross wages in € (net wages plus employee contributions). In Greece, average monthly earnings in 2006 amounted to €1,668 for full-time employees, compared to an average of €2,366 in the other countries of the EU15...

... Whereas monthly labour costs in Greece were 83% of the comparable mean costs in the EU15 (in purchasing power parities), labour productivity in Greece stood at 91% of the European average.

In recent years unit labour cost in Greece has become the lowest in the EU15. This development relates to the fact that in Greece labour productivity increased substantially in 1996-2004 and increased in the range of 1.7%-2.7% a year during the four years from 2005 to 2008.

AFAICS The problem with this analysis is that it does not take into account the very high (comparatively speaking) inflation during this period, which means that "real" wages in PP were not what counted. However high inflation in Greece was due to vast monopolies in many sectors of the economy, that went practically unchecked.

Note also that even during the period 2000-2009 (that is, including the crash in productivity of 2007-2009) unit labor costs in Greece had indeed grown compared to Germany, but in fact fell compared to the EU average, and in manufacturing they were below German ULC as well. I've linked to Erik Jones's article before, but I'll quote him again:

...What matters in terms of a head-to-head competition is how Greece and Germany compare in the cost of labor per unit of output and not the real compensation of employees.  Moreover, we should look at their performance across the European marketplace as a whole.  By that measure, if we set the year 2000 equal to 100, then by 2009 Greece was at 98 while Germany was at 95.  Germany is still doing better than Greece, but only by a little and both have improved against the rest of Europe.
...Using national accounts data for relative real unit labor costs in manufacturing, Greece goes from 100 in the year 2000 to 87 in 2008.  Over the same period, Germany goes from 100 to 90.  It is hard to see how Germany comes off better in the comparison.
...Even if Greece is not suffering in terms of manufacturing, the high real incomes that Greek employers are doling out must surely be hitting the bottom line in the service sector, shouldn't they?  Again, that's hard to see in the data. Total compensation per employee was 53.8 percent in Greece and 57 per cent in Germany...

However the result of this imposed austerity is to drop wages to average purchasing power that Greeks had in 1980 or something. And to push that through the ECB is demanding circumvention of collective bargaining and lowering the minimum wage from 700 to 590 Euros (possibly below that in "exceptional cases").

I do think that Greece leaving the Euro would be a disaster, however if this madness is kept up (we're heading for a -4,5% recession at least this year and - -3% next year - and these are a slight negative correction on the IMF's numbers, so they're probably idiotically optimistic - with inflation running at close to 6% this year) this disaster might turn out to be the lesser evil compared with the ECB / IMF intensive thirdworldization programme.

Sorry about this impossibly long reply. I just want to kill the meme that somehow in Greece workers were benefiting from unreasonable pay-hikes this past decade. This is not the case: note that these alleged pay increases came with increasing hours worked and do not apply to the black or gray economy...

The road of excess leads to the palace of wisdom - William Blake

by talos (mihalis at gmail dot com) on Thu Nov 18th, 2010 at 07:57:04 PM EST
[ Parent ]
It is evident that the Euro as currently configured can only work if all its member states are net exporters.

The Euro convergence criteriawere so much monetarist bullshit

1. Inflation rates: No more than 1.5 percentage points higher than the average of the three best performing (lowest inflation, which may be negative) member states of the EU.

2. Government finance:

Annual government deficit:
The ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding fiscal year. If not, it is at least required to reach a level close to 3%. Only exceptional and temporary excesses would be granted for exceptional cases.
Government debt:
The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year. Even if the target cannot be achieved due to the specific conditions, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory pace.

3. Exchange rate: Applicant countries should have joined the exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for two consecutive years and should not have devalued its currency during the period.

4. Long-term interest rates: The nominal long-term interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states.

The purpose of setting the criteria is to maintain the price stability within the Eurozone even with the inclusion of new member states.

Without structural reforms in candidate countries which were net importers (especially the ones with a negative balance of payments with the rest of the EU) it was (with hindsight) inevitable that limiting the public deficit to 3% and keeping inflation down would cause the private sector to get progressively indebted. Either that, or you'd get a protracted recession. The Stability and Growth Pact only ensured that the pressure to pile on private debt continued after the Euro was formed
The pact was adopted in 1997,[4] so that fiscal discipline would be maintained and enforced in the EMU. Member states adopting the euro have to meet the Maastricht convergence criteria, and the SGP ensures that they continue to observe them.
The actual criteria that member states must respect:
  • an annual budget deficit no higher than 3% of GDP (this includes the sum of all public budgets, including municipalities, regions, etc)
  • a national debt lower than 60% of GDP or approaching that value.

The SGP was initially proposed by German finance minister Theo Waigel in the mid 1990s. Germany had long maintained a low-inflation policy, which had been an important part of the German strong economy's performance since the 1950s; the German government hoped to ensure the continuation of that policy through the SGP which would limit the ability of governments to exert inflationary pressures on the European economy.

Note that the avowed purpose of the Convergence Criteria was price stability. Not employment, not growth, not transition to export-based economies.

In addition, I cannot come up with ways to turn an economy from a net importer to a net exporter without running afoul of the European Commission's interpretation of the EU's no illegal state aid rules.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Wed Nov 17th, 2010 at 04:40:26 AM EST
Thinking about how the euro could end. I did some googling and found this from 2000:

The end of EMU: How Germany might leave

A country in the eurozone can, without being in breach of the Maastricht Treaty, create a new central bank controlling the monetary policy of a new currency. This loophole in the Maastricht Treaty is not widely known.

The end of EMU: How Germany might leave

there is a problem with the 1948 and 1990 strategies. The problem is that they would be in manifest breach of Article 106 (ex Article 105a) of the Treaty establishing the European Community (the Maastricht Treaty)*2.

1. The ECB shall have the exclusive right to authorize the issue of bank notes within the Community. The ECB and the national central banks may issue such notes. The bank notes issued by the ECB and the national central banks shall be the only such notes to have the status of legal tender within the Community. *3 *4

But you can create a private bank, here called Deutsche Zentralbank and issue scrip.

The end of EMU: How Germany might leave

Whatever it is called, it is really a new central bank issuing its own currency and in control of its own monetary policy. But because this currency isn't legal tender, people would not be compelled to use it. Would they use it voluntarily?

  • People could be nudged into using this currency. The DZB could open branches in each major German city, and give 100 such securities to every German citizen.

  • The government might make taxes payable in the new currency, providing a further nudge. The tax laws would probably be challenged in a European Court of Justice, on the grounds that they are in breach of the single European market. No problem, the case would take at least two years, by which time the acceptance of the new German currency would be fait accompli.

I think it covers the same bases that has been discussed here on ET, but more with an eye towards legality.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Nov 17th, 2010 at 05:43:14 AM EST
But the point is that Germany doesn't need to leave - its treasury is actually pretty confident that its checkes will not be bounced by the ECB since Germany has a balance of payments surplus.

Plus, issuing scrip is a recipe against deflation. Germany loves deflation - they are the primary pushers behind the ECB's deflationary bias.

So, issuing scrip is something that would be useful for EU member states with negative balances os payments and in deep recession. Namely, peripheral Europe.

In addition, breaching article 106 temporarily would not necessarily entail exiting the Euro. There is no mechanism for kicking an Euro member out. And defining a new scrip as "legal tender within one member state" might not run afoul of the "legal tender within the community" rule given that no attempt is made to force entities outside the member state to accept the scrip.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Wed Nov 17th, 2010 at 05:52:50 AM EST
[ Parent ]
Well, Germany is presumably the example because this was written in 2000, and the general fear appears to have been that the euro would have to high inflation. prompting Germany to de facto exit. The article also has a paragraph on how such a threat by Germany probably would mean that Germany gets its way, that is low inflation euro.

But I figured it is applicable to any member that wants to keep their options open.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Nov 17th, 2010 at 07:40:20 AM EST
[ Parent ]
A swedish kind of death:
Germany is presumably the example because this was written in 2000, and the general fear appears to have been that the euro would have to high inflation. prompting Germany to de facto exit
Except that you cannot issue scrip as a reaction to a weak currency.

Scrip works because of Gresham's law: bad money drives out good. You issue lower-quality scrip than the artificially-scarce high-quality currency, and the scrip circulates much faster than the high-quality currency while the high-quality currency is hoarded.

The certificates circulated so rapidly that only 12,000 were ever actually put into circulation. According to reports by the mayor and economists of the day who studied the experiment, the scrip was readily accepted by local merchants and the local population. It utilized the scrip to carry out 100,000 AS in public works projects involving construction and repair of roads, bridges, tanks, drainage systems, factories, and buildings. The scrip was also accepted as legal tender for payment of local taxes. In the one year that the currency was in circulation, it circulated 13 times faster than the official shilling[citation needed] and served as a catalyst to the local economy.
This means scrip is a possible way out of deflation.

But scrip can never be a way out of inflation.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Wed Nov 17th, 2010 at 08:37:32 AM EST
[ Parent ]
You know that and I know that, and presumably the Bundesbank knows it as well (though given the level of insight into the operations of the monetary system revealed by their recent performance, I would not place any expensive bets on that proposition). But as long as enough people policymakers don't know it, you can still use it to bluff.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 17th, 2010 at 12:00:46 PM EST
[ Parent ]
So wait - are schemes like Chris Cook's - or even simpler bartering and scrip schemes - a way for the grassroots populace to combat deflation? Can it work in restricted geographies (i.e. in a city?)
by Metatone (metatone [a|t] gmail (dot) com) on Wed Nov 17th, 2010 at 12:29:12 PM EST
[ Parent ]
The link in my previous comment is to Migeru:
Wikipedia: Historical Local Currencies
The Wörgl experiment that was conducted from July 1932 to November 1933 is a classic example of the potential efficacy of local currencies. Wörgl, a small town in Austria with 4000 inhabitants, introduced a local scrip during the Great Depression. By 1932 unemployment in Wörgl had risen to 30%. The local government had amassed debts of 1.3 million Austrian schillings (AS) against cash reserves of 40,000 AS. Local construction and civic maintenance had come to a standstill. On the initiative of the town's mayor, Michael Unterguggenberger, the local government printed 32,000 in labor certificates which carried a negative 1% monthly interest rate and could be converted into schillings at 98% of face value. An equivalent amount in schillings was deposited in the local bank as cover for the certificates in case of mass redemption and earned interest for the government. The certificates circulated so rapidly that only 12,000 were ever actually put into circulation. According to reports by the mayor and economists of the day who studied the experiment, the scrip was readily accepted by local merchants and the local population. It utilized the scrip to carry out 100,000 AS in public works projects involving construction and repair of roads, bridges, tanks, drainage systems, factories, and buildings. The scrip was also accepted as legal tender for payment of local taxes. In the one year that the currency was in circulation, it circulated 13 times faster than the official shilling[citation needed] and served as a catalyst to the local economy. The heavy arrears in local tax collection declined dramatically. Local government revenue rose from 2,400 AS in 1931 to 20,400 in 1932. Unemployment was eliminated, while it remained very high throughout the rest of the country. No increase in prices was observed. Based on the dramatic success of the Wörgl experiment, several other communities introduced similar scrips.

In spite of the tangible benefits of the program, it met with stiff opposition from the regional socialist party and from the Austrian central bank, which opposed the local currency as an infringement on its powers over the currency. As a result the program was suspended, unemployment rose, and the local economy soon degenerated to the level of other communities in the country.

Take that, inflation hawks!
Wörgl is the most famous historical example and, indeed, it extended only to one municipality.

WikipediaLocal currency: See also...

[1] Wörgl Experiment with Depreciating Money


Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 17th, 2010 at 12:33:53 PM EST
[ Parent ]
You can see some pictures of Wörgl from my visit there last year, as well as a link to the Unterguggenberger Institut that tries to revive his ideas (mostly in German, and with links to other German sites).
by gk (gk (gk quattro due due sette @gmail.com)) on Wed Nov 17th, 2010 at 01:02:03 PM EST
[ Parent ]
Yes, I was googling around and I came across your diary, which I had seen last year but the import of which I didn't understand at the time...

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 17th, 2010 at 01:06:58 PM EST
[ Parent ]
So wait - are schemes like Chris Cook's - or even simpler bartering and scrip schemes - a way for the grassroots populace to combat deflation? Can it work in restricted geographies (i.e. in a city?)

For a suitable definition of "grassroots."

You need at least one institution whose solvency is credible to be in on the scheme. That could be the city council (assuming that it has sufficient institutional freedom to go against national policy), or it could be a local bank, or a local landlords' or wholesalers' association. Or even a (group of) labour union(s).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 17th, 2010 at 01:05:28 PM EST
[ Parent ]
Note that the way Wörgl did it was to deposit an equal amount of Schilling in a local Raiffeisen Bank branch as the number of certificates that were issued. The rule was that the certificates could be cashed in on demand at a 2% discount. The initial plan was to issue 30,000 Schilling in certificates but due to the large velocity of circulation no more than 12,000 Schilling needed to be pledged as a guarantee.

Given the multiplicative effect of velocity of circulation, a lot less value is needed to back circulating scrip as would be naïvely expected from GDP estimates.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Wed Nov 17th, 2010 at 01:11:35 PM EST
[ Parent ]
Solvency is not so much the issue as legal tender. Wörgl did it by making the certificates redeemable in payment of local taxes.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 17th, 2010 at 01:50:16 PM EST
[ Parent ]
Legal tender laws essentially boil down to stating that the sovereign has infinite creditworthiness (or, equivalently, is solvent by definition rather than by accounting).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 17th, 2010 at 01:56:31 PM EST
[ Parent ]
Legal tender - Wikipedia, the free encyclopedia
Legal tender is a medium of payment allowed by law or recognized by a legal system to be valid for meeting a financial obligation

There's a difference between fungibility - ie general acceptance - and legal tender, which is acceptance in payment for obligations generally and not just tax obligations, which are an important sub-set.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Nov 17th, 2010 at 06:42:37 PM EST
[ Parent ]
Legal tender has two functions: One is the one you quoted above, namely to provide "hard money" against financial obligations. The other is to ensure that the sovereign has infinite purchasing power (because tradesmen are required by law to quote a price denominated in legal tender - and no matter what that price is the sovereign can always meet it).

For the purpose of issuing scrip, it's the fact that the scrip is backed by an entity with a trusted solvency that matters, not whether or not a court of law will recognise it as hard money for clearing financial obligations.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 17th, 2010 at 07:09:11 PM EST
[ Parent ]
Ah, yes good point.

So, if a country wants to leave to get low(er) inflaiton they have to leave EMU for real, in effect using legal tender laws to establish the new currency.

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by A swedish kind of death on Wed Nov 17th, 2010 at 04:53:26 PM EST
[ Parent ]
A swedish kind of death:
A country in the eurozone can, without being in breach of the Maastricht Treaty, create a new central bank controlling the monetary policy of a new currency. This loophole in the Maastricht Treaty is not widely known.

This is interesting.

Not only could they do that - by creating a form of scrip (ie paper currency) or an accounting system, or both - but there is no reason at all why the Unit of currency should not circulate by reference to the € as a purely abstract 'Value Standard' or Unit of Account.

This is precisely how the Swiss WIR (and a proprietary barter system like Bartercard) works, through the issue of a Swiss Franc 'look-alike' Unit of currency redeemable in 'money's worth' by WIR members. ie no 'fiat' Swiss Francs circulate, but billions of Swiss Francs' worth circulate electronically (there is no scrip) by reference to the SFr as a Unit of Account.

The WIR Bank formerly the Swiss Economic Circle (GER: Wirtschaftsring-Genossenschaft), or WIR, is an independent complementary currency system in Switzerland that serves small and medium-sized businesses. It exists only as a bookkeeping system, with no scrip, to facilitate transactions.

The question then is - bearing in mind the fact that it cannot be legal tender - what would be the basis of the scrip/currency in order that it would be generally acceptable/ 'fungible'?

In my view the obvious candidate is an amount of energy, say 10 Kwh, and the necessary pool of funds backing the curency would come from a levy on carbon fuel consumption.

This carbon levy would be 'voluntary' in the sense that it would be applied through consensual membership of an Energy Clearing Union agreement, and those who were members would be able to access the related pool of credit/investment.


"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Nov 17th, 2010 at 07:14:31 PM EST
[ Parent ]
A country like Portugal leaving the euro would translate immediately into hyperinflation, meaning that the government would loose the reins of the Economy.

Right now what is missing is an European Treasury, but so far the christian democrats haven't shown the will to do it. Breaking up the euro is not a solution to anyone, and I refuse to let the dream go just because present leaders don't have the balls...

You might find me At The Edge Of Time.

by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Thu Nov 18th, 2010 at 08:01:52 AM EST
A European treasury is one possible solution. And, being a federalist myself, I would obviously advocate for it.

But it is important to keep in mind that there are other, far less interventionist, measures that can be taken, if a genuine unified European fiscal policy proves politically unpalatable. A Eurobancor would work just as well to prevent the sort of crises we're seeing right now, and so would simply accepting an inflation target that depended on your internal current accounts surplus. Both of these are simple ways to stabilise the collective monetary system of the €-zone, and they are sufficiently hands-off that they can (hopefully) be sold as "apolitical technical adjustments" to many euroskeptics.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 18th, 2010 at 08:08:27 AM EST
[ Parent ]


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