Why Europe Needs Two Euros, Not One

"As the Eurozone cautiously implements stabilising reforms, Germany is forced to go further with concessions than it would prefer. This column suggests that it would be beneficial for discontented members to consider the formation of a second monetary union. The second euro can be constructed better than the first, bringing the discontented members exchange-rate adjustments relative to Germany, and avoiding competitive devaluations."

"A repeated question about the Eurozone is whether the members form an optimal currency area. But another question – which is actually closer to Mundell’s original contribution (Mundell 1961) – is whether the right number of currencies in the Eurozone is as high as 18, the number of member countries in the system. If the right number is neither 1 nor 18, then 2 may be far, far better than either extreme.

Let me begin by recalling the reasons why 18 would be too many. First, some of the members are probably small enough to have no scope for using monetary or exchange rate policy as a tool of economic stabilisation over the business cycle (McKinnon 1963). Next, the 18 members do form an economically integrated group of geographical neighbours, and therefore their mutual efforts to use monetary and exchange rate policy to their advantage could easily lead them to enter into non-cooperative games with costly Nash consequences. Finally, national monetary policy can mean Treasury-dominated monetary policy, which can lead to very poor outcomes apart from strategic games with any foreigners, near and far."

http://www.nakedcapitalism.com/2014/07/europe-needs-two-euros-one.html

Why Negative Rates Won't Work In The Eurozone

"It seems unlikely that the ECB is unaware of the effect of negative rates on Danish lending volumes. So despite extensive comments in the media about negative rates encouraging banks to lend, I doubt if that is the real purpose. Indeed, as M3 lending figures for the Eurozone actually improved slightly in April, it is hard to see why the ECB would act now when it did not earlier this year.

So I don’t think this is about bank lending at all. I think it is about German disinflation and the exchange value of the Euro."

http://www.forbes.com/sites/francescoppola/2014/06/04/why-negative-rates-wont-work-in-the-eurozone/

How the Greek Banks Secured an Additional, Hidden €41 billion Bailout from European taxpayers

"In 2013 Greek taxpayers borrowed from the rest of Europe’s taxpayers €41 billion to pump into the Greek banks. This is well known. What is not known is that, also in 2013/4, the Greek banks received an additional, well hidden, €41 billion bailout loan from Greek and European citizens. This bailout was never authorised by any Parliament or even discussed in public anywhere in Europe.

This is how it worked: Bank X would lend money to… itself. It would do this by issuing a bond which it did not intend to sell. So, why issue such a phantom bond? Why write an IOU and give it to one’s self? The answer is: In order to hand this phantom bond over to the European Central Bank as collateral in exchange for a cash loan. Normally, of course, the ECB would never accept such a phantom bond as collateral. Accepting it would have been to accept a loan it gave to Bank X as collateral for the said loan. It would have been an assault on the meaning of collateral and a gross violation of the ECB’s rulebook. So, bank X, knowing this, took its phantom bond first to the Greek government and had it guarantee it. With the government’s guarantee stamped on it, the ECB then accepted Bank X’s phantom bond and handed over the cash. Why? Because the Greek taxpayer had, in the meantime, unknowingly provided the collateral for Bank X’s loan."

http://yanisvaroufakis.eu/2014/05/11/how-the-greek-banks-secured-an-additional-hidden-e41-billion-bailout-from-european-taxpayers/

Lessons from the Greek PSI

"Lesson 4 (Biggest Lesson of Them All): Prolonging an unavoidable debt re-structure makes the problem far, far worse, especially when a bailout is given in order to shift bad assets from the banks’ books to the taxpayers on condition of austerity that causes both the private and the public sectors to shrink. Introducing a PSI after this sinister error is implemented, while exempting the official sector that implemented it (including the ECB’s SMP bond purchases), is to add insult to injury. And to make a much larger OSI more pressing and more painful for future governments around Europe."

http://yanisvaroufakis.eu/2014/03/12/lessons-from-the-greek-psi/

Germany's investment problem

"We all know that Euro membership has been of doubtful benefit to periphery countries such as Greece and Portugal. But Germany has been a net beneficiary of the Euro, hasn't it?"

"And it is also a story of too-tight fiscal policy. Instead of increasing its own borrowing to compensate for the fall in NFC borrowing, the German government gradually reduced its fiscal deficit - indeed in 2007 and 2008, it was net saving (running a surplus). On the face of it, this looks sensible: after all, we are led to believe that governments should net save during booms. But not, emphatically not, when there is a growing current account surplus. A persistent current account surplus is contractionary over the medium-term, because it by definition means that productive investment is leaving the country."

http://coppolacomment.blogspot.co.uk/2013/12/germanys-investment-problem.html

PONZI AUSTERITY: A definition and an example

"Ponzi austerity is the inverse of Ponzi growth. Whereas in standard Ponzi (growth) schemes the lure is the promise of a growing fund, in the case of Ponzi austerity the attraction to bankrupted participants is the promise of reducing their debt, so as to liberate them from insolvency, through a combination of ‘belt tightening’, austerity measures and new loans that provide the bankrupt with necessary funds for repaying maturing debts (e.g. bonds). As it is impossible to escape insolvency in this manner, Ponzi austerity schemes, just like Ponzi growth schemes, necessitate a constant influx of new capital to support the illusion that bankruptcy has been averted. But to attract this capital, the Ponzi austerity’s operators must do their utmost to maintain the façade of genuine debt reduction."

http://yanisvaroufakis.eu/2013/11/08/ponzi-austerity-a-definition-and-an-example/

Looking back on the Global, European and Greek (post-2008) crises

"How did the EU profit from Greek indebtedness all these years?

The implicit contract between Greece and the European Common Market, as the European Union was called back in 1980, was simple: Greece would open up its borders to northern European imports and Northern Europe would transfer surpluses to Greece. The hope was that, in the process, investment funds would also flow into Greece to support local industries thus “balancing” out Greece’s trade and capital flows vis-à-vis Europe. However, the reality was that the funds that flowed in simply inflated asset prices while, catastrophically, they came hand-in-hand with the collapse of Greek industrial facilities which were quickly purchased by northern European companies, closed down, and turned into warehouses for their imports (e.g. the white goods industry that was purchased by Siemens which then used “badge engineering” tactics to sell imported refrigerators in Greece, under Greek labels). When in the 1990s the Eurozone was being concocted, and interest rates collapsed Euroland-wide, the process sped up massively and Greece’s hitherto risk averse and debt-hating households began to borrow more, purchasing German and other northern European goods as if there was no tomorrow; funded by the flow of northern European cash that was actively seeking higher returns in the European Periphery, often resorting to predatory lending of households and governments alike."

http://yanisvaroufakis.eu/2013/08/17/looking-back-on-the-global-european-and-greek-post-2008-crises-interview-with-d-polymenopoulos/

To End the Eurozone Crisis, Bury the Debt Forever

"What are the Options Today?

The debt problem cannot be avoided or hoped away. When debt is unsustainable it will not be sustained. The only question is how and when the crisis comes. Here are the five options that can address the debt quagmire."

"Option 1: Long-term debt reduction through budget surpluses"

"Option 2: Sales of public assets"

"Option 3: Classic debt restructuring"

"Option 4: Debt forgiveness"

"Option 5: Debt monetisation"

"At the end of the day, except for Option 1, which is the classic virtuous approach, and Option 2, the disposable of public assets, none of the other options is appealing.

But if Options 1 and 2 are impossible, one has to choose among bad options.

Option 3 is clearly the least desirable because it would shake the markets and possibly take down large segments of the banking system. Option 4 is not just politically explosive; it could trigger a debt crisis among the countries currently perceived as healthy. This leaves us with Option 5."

http://www.nakedcapitalism.com/2013/08/to-end-the-eurozone-crisis-bury-the-debt-forever.html

Europe unhinged

"To recap, before 2008 the United States operated like a huge vacuum cleaner sucking into its territory a disproportionate volume of the net exports as well as the profits of the Rest of the World. This surplus recycling mechanism was essential to the maintenance of the Eurozone’s faulty edifice. Once it vanished from the scene, the European common currency area would either be re-designed or it would enter a long, painful period of disintegration. An unwillingness by the surplus countries to accept that, in the post-2008 world, some other form of surplus recycling is necessary (and that some of their own surpluses must also be subject to such recycling) is the reason why Europe is looking like a case of alchemy-in-reverse: for whereas the alchemist strove to turn lead into gold, Europe’s reverse alchemists began with gold (an integration project that was the pride of its elites), but will soon end up with the institutional equivalent of lead. Unless, of course, a modicum of rationality sips into the collective mind of Europe’s hapless leaders before the tectonic plates shift irreversibly against a common currency that is now dividing proud European nations."

http://yanisvaroufakis.eu/2013/06/23/europe-unhinged-article-in-the-european-financial-review/

[Trystero] Irlandzki bailout oczami uczestników

"Irlandia ma około 4,5 mln mieszkańców i około 210 mld euro PKB. Zarządzający Anglo rozmawiali więc o pomocy, której kwota wynosiła około 1,5 tysiąca euro na każdego Irlandczyka. Bailout banku kosztował każdego Irlandczyka około 6,5 tysiąca euro.

W tym kontekście, nienajlepiej wygląda rozbawienie zarządzających Anglo gdy Bowe odpowiadając na pytanie o termin spłaty pożyczki mówi: To pożyczka pomostowa, do momentu, w którym możemy ją spłacić… to jest nigdy.

W rozmowie managerów Anglo znajdują się jednak dużo bardziej interesujące informacje. Bowe zdradza na przykład strategię negocjacyjną. W pewnym momencie Bowe mówi: Tak, ta liczba to 7 mld euro ale sytuacja jest taka, że tak naprawdę potrzebujemy więcej niż to. Ale strategia polega na tym by ich wciągnąć, by nakłonić ich do wypisania dużego czeku i wtedy będą musieli robić to dalej, bo muszą wspierać swoje pieniądze, rozumiesz?"

http://blogi.bossa.pl/2013/06/26/irlandzki-bailout-oczami-uczestnikow/

The Real Story of the Cyprus Debt Crisis

"Why do the debt crisis in Cyprus and the subsequent "bail-in" confiscation of bank depositors' money matter? They matter for two reasons:

1. The banking/debt crisis in Cyprus shares many characteristics with other banking/debt crises.
2. The official Eurozone resolution of the crisis--the "bail-in" confiscation of 60% of bank depositors' cash in an involuntary exchange for shares in the bank (which are unlikely to have any future value)--may provide a template for future official resolutions of other banking/debt crises.

In other words, since the banking/debt crisis in Cyprus is hardly unique, we can anticipate the resolution (confiscation of deposits) may be applied elsewhere."

http://charleshughsmith.blogspot.com/2013/06/the-real-story-of-cyprus-debt-crisis.html (part 1)

http://charleshughsmith.blogspot.com/2013/06/the-real-story-of-cyprus-debt-crisis_17.html (part 2)

[WSJ] IMF Admits Mistakes on Greece Bailout

"The International Monetary Fund has admitted to major missteps over the past three years in its handling of the bailout of Greece, the first spark in a debt crisis that spread across Europe.

In an internal document marked "strictly confidential," the IMF said it badly underestimated the damage that its prescriptions of austerity would do to Greece's economy, which has been mired in recession for the last six years.

But the fund also stressed that the response to the crisis, coordinated with the European Union, bought time to limit the fallout for the rest of the 17-nation euro area.

The IMF said that it bent its own rules to make Greece's burgeoning debt seem sustainable and that, in retrospect, the country failed on three of the four IMF criteria to qualify for assistance."

"The paper added that the targets and the underlying macroeconomic projections weren't revised to reflect what was actually happening in Greece for 18 months, until December 2011.
The IMF had originally projected Greece would lose 5.5% of its economic output between 2009 and 2012. The country has lost 17% in real gross domestic output instead. The plan predicted a 15% unemployment rate in 2012. It was 25%.

Slowing the pace of austerity would have helped Greece's economy, but wasn't politically possible, the fund said."

http://online.wsj.com/article/SB10001424127887324299104578527202781667088.html

Monetising the… ECB: The latest insult to be added to Greece’s multiplying injuries

"Last week another installment of the cruel theatre of the absurd, also known as the ‘Greek Rescue’ (and more recently re-released as ‘Greece’s success story’), was delivered silently: Not for the first time, the bankrupt Greek state borrowed from one arm of the Eurozone to give to another, with massive interest to boot. To be precise, the Greek government borrowed €4.2 billion from the European Stability Mechanism (ESM) in order to repay the… European Central Bank (ECB) €5.6 billion, leaving the ECB with a profit of €2 billion plus from this hideous transaction. Re-pay what exactly?"

http://yanisvaroufakis.eu/2013/05/20/monetising-the-ecb-the-latest-insult-to-be-added-on-greeces-multiplying-injuries/

The Great Disconnect: Markets Vs. Economy

"Last week I was swamped with interviews, both radio and television, to discuss the meaning of the markets hitting new all-time highs. The general consensus of the analysts and economists that I was pitted against was that the rise in capital markets, given weak current economic data and a resurgence of the Eurozone crisis, is clearly a sign of economic strength. This, combined with rising corporate profitability, makes stocks the only investment worth having. My arguments were much more pragmatic."

"So, while the markets have surged to "all-time highs" - for the majority of Americans who have little, or no, vested interest in the financial markets their view is markedly different. While the mainstream analysts and economists keep hoping with each passing year that this will be the year the economy comes roaring back - the reality is that all the stimulus and financial support available from the Fed, and the government, can't put a broken financial transmission system back together again. Eventually, the current disconnect between the economy and the markets will merge. My bet is that such a convergence is not likely to be a pleasant one.

http://www.streettalklive.com/daily-x-change/1627-the-great-disconnect-markets-vs-economy.html

Poland Is Not Yet Lost

Przesyłam ostatnią wypowiedź Paula Krugmana a propos wejścia Polski do strefy euro (The New York Times) i dodatkowo krótki artykuł "The euro has been a massive failure. So why does Poland want in?" z The Washington Post.

http://krugman.blogs.nytimes.com/2013/03/27/poland-is-not-yet-lost/
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/03/27/the-euro-has-been-a-massive-failure-so-why-does-poland-want-in/

Dareconomics: Cypriot Debt Will Not Be Sustainable in 2020

"This bailout raises two questions. Will Cyprus’ bank run spread to the periphery? It should, but I believe that it will not. Any depositor in the periphery must understand that if its country requires a bailout, not one euro in either country is safe. However, time has shown that the periphery has a great deal of faith in the current system. There may be some people withdrawing money Monday morning, but the run will quickly dissipate. It will be back to business as usual fairly quickly.

http://dareconomics.wordpress.com/2013/03/16/cypriot-debt-will-not-be-sustainable-in-2020/

Strefa Euro a Polska

http://www.nbp.pl/badania/seminaria_files/14iii2013.pdf

Ciekawe badanie NBP odnoszące się do tego jaka by była sytuacja Polski gdyby weszła do strefy euro w 2007 roku.

Can Germany do quite well while the rest of the euro zone is struggling?

"Various surveys seem to show that Germany's economic situation is likely to be decent in 2013 (even though the fourth quarter of 2012 was poor) while that of the rest of the euro zone is likely to be very poor. 

Can there really be such a gap between Germany and the rest of the euro zone? For this to be the case: 

- German exports outside the euro zone would have to be substantial enough and sufficiently fast-growing. However, these exports are not more favourable for Germany than for the rest of the euro zone; 

- German domestic demand would have to be markedly faster-growing than that of the other euro-zone countries, in particular in view of the stronger growth in real wages in Germany. Household demand growth is slightly positive in Germany, but is not vigorous since real wages are increasing by only 1% per year, and business investment is declining as much in Germany as in the rest of the euro zone."

http://cib.natixis.com/flushdoc.aspx?id=68886

How can unemployment be reduced in the euro zone?

"Unemployment is rising markedly in many euro-zone countries (we will look at the cases of France, Spain, Italy and Portugal). To combat unemployment, the causes of unemployment must first be identified. 

- Are we dealing with Keynesian unemployment, linked to sluggish demand and to underutilisation of production capacity? At present, the answer is yes, but the proportion of the unemployment that has a Keynesian origin is small (except in Spain). 

- It is a fact that euro-zone countries are characterised by low productivity gains, in certain cases (France, Italy) by a high tax burden, by significant  destruction of production capacity and by a decline in investment since the crisis. Structural unemployment is therefore high, and a reduction in  Keynesian unemployment would rapidly bring the unemployment rate to  the level of structural unemployment."

http://cib.natixis.com/flushdoc.aspx?id=68884

Europe needs a hegemonic Germany

Ciekawe rozważania o roli Niemiec w Europie w najbliższym okresie.

Should Germany then try to emulate America? Germany does not have the capacity to do what the United States accomplished from 1980 to 2008; that is, to operate as a gigantic vacuum cleaner sucking into its territory other nations’ net exports, at the cost of ever expanding deficits. Nor should German taxpayers be expected to reflate the bubbles that burst in 2008 (in their own banks, in and around the Greek state, in Irish and Spanish real estate markets etc.). Burst bubbles should be allowed to remain… burst. But meanwhile a hegemonic Germany would find ways to channel the huge pools of stagnant savings into productive investments in the Periphery where they shall produce the incomes that must pay down debts and maintain the level of intra-European demand German companies need to remain competitive both within and without Europe.

http://yanisvaroufakis.eu/2013/02/22/europe-needs-a-hegemonic-germany/