Sun Nov 30th, 2014 at 03:50:15 PM EST
I wrote a quite long comment in Migerus Diary and I thought I should extend it even more and make a diary out of it.
In the comment section melo started a discussion about the Euro, in this case Germany leaving the Euro.
I posed the question to all participation in this thread
Would you recommend leaving the Euro? And: Would you vote for a party which recommends leaving the Euro?
The answers to this question I got could be divided into two groups:
Answer a) Cyrille, Migeru, afew, (maybe melo):
We need a credible threat to leave the Euro, to change the European institutional setup. The exact nature of the changes has not been spelled out, but from our discussion on this blog it is quite clear that what would be needed is, i) changes to the 'Stability and Growth Pact', ii) The possibility for the ECB to directly finance gouvernments. iii) maybe a higher inflation target.
Migeru later specified:
Unless and until Article 123 of the Treaty on the Functioning of the European Union (Article 104 of Maastricht Treaty) is repealed, all the rest is cosmetic.
Which is basically my point ii). I completely agree that this is the most crucial point.
front-paged by afew
Answer b) A swedish kind of death, cagatacos:
We should leave the Euro right now.
I want to lay out here why I think that position a) is wrong and b) is correct. With the caveat that b) makes most sense for Portugal, Spain and Greece. And that their are in fact other options as well, which I will lay out at the end.
Why is a) wrong?
The threat is not credible:
As expressed by afew, melo and Cyrille, I guess the idea here is that if countries where to leave the Euro, their new currency would devalue leading to less demand for German goods and in turn to a negative economic impact for Germany. I think there are several reasons why this will not be take seriously in Germany:
I)German economists are crazy and the economists advising our government are the worst of the bunch.
The understanding of the economy in Germany is deeply ideological: 'if you work hard things will be fine', 'a lower value for the currency is only needed for lazy southerners' and so on.
II) Even looking at it objectively it is not clear to me if German would be worse of if other countries would leave the Euro. All other countries have to import at lot of good, no matter what. So the amount of devaluation possible is limited. At the same time, the real income of Germans would rise. they could go cheaper on Holidays, they could by cheaper goods from the rest of Europe and so on. this would create a rebalancing which is urgently necessary.
III) In the special case of France I am not even sure that the new currency would devalue. The French economic weakness is a myth. I am not saying that everything is fine in France, but still the economy is quite strong. Furthermore, in contrast to Germany France has not destroyed its infrastructure in an obsession with its deficit and it has a growing population. These two factors lead to the conclusion that its growth potential is much better then the growth potential of e.g. Germany. If now on top of this France would have its own currency and could run a sane monetary policy this would probably create solid growth (I will also come back to this in b)) and therefore an appreciation of the currency.
IV) If you simply threaten to leave the Euro your financial system will be destabilized. As soon as you start to talk about leaving the Euro you basically have to shut down all banks, or you will have a bank run. Even if you agree with III), then it would still make sense to first take your Euros out of France, wait till the new currency drops a little and then go back in. For Spain and Portugal, anybody how lets his Euros be exchanged to the new currency will have substantial losses. So either you do it directly and quickly, or your banks will collapse and you will have to beg the IMF for Money.
V) I agree that with Migeru that repealing 'Article 123 of the Treaty on the Functioning of the European Union' is what we need to do. But no German government will ever do this! It is absolutely unthinkable. Which means that the threat of leaving the Euro is pointless.
Lets go to b):
We should not underestimate the challenges in leaving the Euro. I also have to say that legally any country leaving the Euro would enter unknown territory. If some investment fund would loose money because your country leaves the Euro, could it sue? Most probably. And, while in the long run leaving the Euro could be hugely beneficial, in the short run it could lead to real loss of purchasing power for imported goods, which are a lot of goods. A debt default is also pretty much unavoidable, which also comes with real costs down the line.
That said: 25% unemployment is unacceptable. I do not see how this can continue! This is an obvious reason why Spain, Portugal and Greece should leave the Euro. Similar to Argentina around 2000, the benefits of a different monetary policy would most probably outweigh all costs.
Now for France the Situation might be different. It could probably leave the Euro, and some of its creditors might even agree to denominate the debt in the new currency. Or maybe not, but even then France will not need to default on its debt. I am quite confident that growth would be sufficient. Again, it is not clear to me that leaving the Euro is really a good idea for France at the moment, but it still beats the 'whining about leaving the Euro' option.
Are there other options?
Again, I am not so sure about the situation of Spain, Portugal and Greece. Maybe there is no other option. But for France and Italy there are plenty of other ways of how to improve the situation.
I) Break the 'Stability and Growth Pact'. Others (e.g. Bernard) have already pointed that out. And in fact France is already doing it. and as expected the the Commission is doing nothing!
II) Grandstanding! But on the right issue: Why the fuck is the ECB failing in fulfilling its 2% Inflation Mandate! Just a few Months ago Jens 'Worst Central Banker of the World' Weidmann gave a speech were he demanded this or that type of structural reform from Italy (make it easier to fire people). And I could not help but wonder: why did nobody tell him to shut the fuck up, and do his job! How can it be that inflation is still running below target. Every speech of every southern European politician should be about blaming the ECB to hit its target.
III) Don't leave, push Germany to leave the Euro (again others pointed that out, too.). 5 Stars, Podemos, Syzra and others need to attack 'Article 123 of the Treaty on the Functioning of the European Union'! This is the best way to shove Germany out of the Euro. It is a much better solution then for any of the economically weaker countries to try to leave the Euro on its own.
IV) and now for the radical stuff Solving the economic depression in the eurozone by issuing "quasi"
The idea here is to issue your own currency in parallel to the Euro. You do it basically by paying in somthing similar to IOUs.