Can the Eurozone Survive the Economic Challenges of Greece and Italy?

[mheslep]

Well the Greek referendum effectively dumps the EU backed debt deal.

Next up, Italy. Italy's debt is ~$2.2 trillion which it will now have to roll over at 6+%.

10 year Italian bond
[PLAIN]http://www.bloomberg.com/apps/chart?h=200&w=280&range=1y&type=gp_line&cfg=BQuoteComp_10.xml&ticks=GBTPGR10%3AIND&img=png
European banks hold ten times more Italian debt than they do Greek.

Going, going, ...

The chart link updates in real time.
Now 7.25 (November 9)
Going, going, going, ...By contrast Ireland implemented an austerity program, some real spending cuts. The Irish 10 Year bond:
[PLAIN]http://www.bloomberg.com/apps/chart?h=200&w=280&range=1y&type=gp_line&cfg=BQuoteComp_10.xml&ticks=GIGB10YR%3AIND&img=png

 

[MarcoD]

Yes.

Well, seems you were right on the weather bell. Italy's government bonds now passed the 7% interest magic limit. Most financial experts believe that the 7% interest limit signals the point where a government is bankrupt; i.e., there's no manner in which a government can pay back the debt.

Probably, the next couple of weeks -if interest stays at 7% or above- we'll see Italy apply for EU/IMF support (i.e., cheaper financing).

 

[Nikitin]

What about the Italian government debt credit default swaps? These would be the true indicator of the marked betting against Italy.

Anyway I'm no economist but I think you are worrying too much. I mean when was the last time a collapse was predicted by most media outlets in the world at the same time? And the Italian economy isn't that indebted, http://en.wikipedia.org/wiki/Net_international_investment_position . One might guess that the Spanish economy with its heavy trade deficit, huge unemployment and debt would buckle before Italy.

 

[Borg]

You might want to read this:

http://news.yahoo.com/italys-crisis-why-worry-161155642.html"

Today's selloff was mainly due to Italian Bond Yields going over the 7% mark combined with the massive amount of debt that they have. If Italy doesn't get its house in order, today's drop could look like a picnic. And, don't forget the US supercommittee has a huge deadline later this month. This summer's budget fights don't bode well for that either. There isn't a lot of good news out there.

 

[Nikitin]

Budget fights, fear mongering, fighting over power.. I don't see this is a big problem, politicians aren't dumb (most of them) and they will resolve this.

I am of course nervous about investors running away from Italian bonds (no rational reason to run away from Italy but to stay with Spain or Portugal, though) and thus increasing the yield, but what about US manufacturing companies posting generally good numbers from Q3+ increasing employment in the US economy? Inflation in China is decreasing as well, so maybe the Chinese government will start pumping money into the economy again?

Correct me, but all in all I think there's disproportionally much doom and gloom in the markets.

 

[MarcoD]

What about the Italian credit default swaps?

I don't know, really, I am not a financial expert. But it seems to me that CDSs, which are 'bets' in the hands of others than the government, are indifferent to Italy's government debt position. The market is weird, the CDSs predicted a 100% certain Greek collapse which didn't happen yet. I am pretty certain the CDS rates, whatever they are at the moment, are not a good predictor since I imagine most people will expect Europe to take over the debt; i.e., the debt is mostly guaranteed, but the Italian government will not be able to borrow from the financial markets itself but will need to go through the IMF/EFSF. At worst, they are a market predictor of the whole of Europe going bankrupt.

Tbh you are worrying too much, when was the last time a collapse was predicted by most media outlets in the world at the same time? And the Italian economy isn't that indebted, http://en.wikipedia.org/wiki/Net_international_investment_position . One might guess that the Spanish economy with its heavy trade deficit, huge unemployment and debt would buckle before Italy.

Again, I don't know. I don't think in this case the international debt figures -which I don't understand,- are that relevant. The 7% interest limit is seen as a hard limit on government debt, I doubt it matters whether the liabilities are international or national.

My best guess is that if the financial experts believe that the 7% is unsustainable, then either Italy implements a number of austerity measures fast -which is what they are doing now, while also kicking Berlusconi out- and hopefully get the interest number below that before a substantial part of the debt needs to be rolled over, or the rest of Europe will need to bail out Italy. The latter, of course, is an informal but not a technical bankruptcy.

At the moment, in Italy, the government is asking wealthy Italians to buy the debt?

Again, these are all the best guesses of a financial nitwit. Best I can do is repeat what the real experts think, which I didn't do in the above speculations.

(Italy is different than Greece. The Italians are rich, the economy is strong, though their government may be broke. I don't think there is a need for a hair-cut like in Greece, they just need to reform government, and probably raise taxes to get out of the current debt hole... and maybe apply to the EFSF/IMF meanwhile.)

 

[SW VandeCarr]

Correct me, but all in all I think there's disproportionally much doom and gloom in the markets.

OK. In 1929 there were no wars, shortages, plagues, or even a lot pessimism before October. Why did stock markets and eventually the world economy collapse? Today the interest rate demanded by the market for Italian government 10 year bonds hit 7%. For Italy, that rate is unsustainable. What would make that rate go down? What would make that rate go even higher? It's a gamble that has little to do with business activity and that's the mistake that you and many financial advisers are prone to. Markets are affected by many things, and it's quite obvious that a major default in the Euro zone will have severe ramifications. You can be cautious or you can be daring. But to say there is too much gloom and doom and that we can rely on politicians to do the right thing is bologna!

 

[klimatos]

So the Greece bailout so far seems to be $145 billion (so far), or about $13k per Greek. I fail to see why the United States has to be paying a large portion of that, especially under current conditions

Because if Greece defaults a very large number of very influential Americans will loose very large sums of money. This bailout is part of the ongoing process to make investment profits private and investment losses public.

 

[rootX]

Because if Greece defaults a very large number of very influential Americans will loose very large sums of money. This bailout is part of the ongoing process to make investment profits private and investment losses public.

Can't they take over all Greece assets (government land properties/historical sites)?

I was thinking the most ideal way out of this is let Greece default and get ownership of all its assets to pay back the investors.

It angers me when I see how others are punished for irresponsible Greeks behavior.

 

[AlephZero]

Again, I don't know. I don't think in this case the international debt figures -which I don't understand,- are that relevant. The 7% interest limit is seen as a hard limit on government debt, I doubt it matters whether the liabilities are international or national.

It's not a "hard" limit, it's just a measure of the risk investors are prepared to take in the current low-interest-rate low-inflation environment.

There's another factor. The clearing house for settling bond trades (LCH Clearnet) has raised its margin deposits on Italian bond trades by about 75%in the last few days. That instantly makes trading them much less attractive compared with the alternatives.

At the moment, in Italy, the government is asking wealthy Italians to buy the debt?

We are talking big numbers here - more than 350 bn Euros in 2012 just to "recycle" the short term debt that will come due for repayment. I don't know if the Vatican and the Mafia can afford that sort of money

Nobody knows what the worst case scenario would be, but 2000 bn Euros is one credible estimate.

The Italians are rich, the economy is strong, though their government may be broke.

Not only broke, but completely broken. An analogous scenario in the US would be something like this: imagine Rupert Murdoch had bought up several more media channels (including public service broadcasting) and had more or less 100% control over the national news media; he then became President while keeping full personal control of his media empire; he then stayed in office for 16 years; oh, and he also changed the law so that he was untouchable by the legal system on any grounds whatever...

 

[MarcoD]

Can't they take over all Greece assets (government land properties/historical sites)?

I was thinking the most ideal way out of this is let Greece default and get ownership of all its assets to pay back the investors.

I think the British did that once when Greece defaulted. They seized lots of Greece's cultural heritage. In the end, they gave it all back.

What are you going to seize? You can ask for an island, then what? You own an island with twenty thousand grumpy Greeks on it? What are you going to do? Tax them?

Again, Greece is not a problem. It is 2% of the EU. If Germany wanted, it could probably buy Greece's debt by itself. Nobody cares. It ain't nice for Greece's public what's happening, I sympathise, but they are nothing in comparison to Italy. Italy is the third economy of the EU with a debt larger than most of the other PIIGS combined.

It may be that interests rise since investors are worried the EU will inflate their way out of (Italian) debt. No idea.

 

[AlephZero]

Can't they take over all Greece assets (government land properties/historical sites)?

You have the "being in debt" problem the wrong way round. It's the old joke: if you owe your bank $10,000 and you can't pay, you have a problem. If you owe the bank $10bn and you can't pay, the bank has a problem.

But I guess once the US has lost interest in screwing up Iraq and Afghanistan, it could try invading Greece as its next adventure. Just so long as you don't try to claim the British Museum in London is also US territory because the Elgin Marbles are there.

 

[MarcoD]

... because the Elgin Marbles are there.

I looked that up. Seems I got my history screwed up. I thought I remembered British seizing Greek assets, but looks like I was mistaken.

 

[klimatos]

Can't they take over all Greece assets (government land properties/historical sites)?

I was thinking the most ideal way out of this is let Greece default and get ownership of all its assets to pay back the investors.

It angers me when I see how others are punished for irresponsible Greeks behavior.

Unfortunately, this is not possible. These assets were not pledged as collateral for the loans. They cannot be legally seized upon default. Greek bonds, like US bonds, are back by the "good faith and credit" of the nation. The credit disappeared a long time ago, and the good faith followed soon after.

My complaint is with the whining of the investors. For years they received high yields to compensate them for high risks. Well, . . . they lost. They should either take their lumps like men or give all those yields back with interest.

 

[mheslep]

Because if Greece defaults a very large number of very influential Americans will loose very large sums of money. ...

Perhaps, but how do you know this? For all I know Greek bonds are held by the Wisconsin teachers union pension fund, and they, or those like them, are exerting political influence on the IMF level pullers.

 

[Nikitin]

The Italian 10 year loan rents hit 7% yield due to irrational fear, and I'm certainly no financial expert.

The only thing I fear at this moment is the yield due to this evil circle: the higher the yield the more fear and the more fear the higher the yield. Will the rents go down? I think if people get greedy enough and start buying, it will.As for the great depression, as far as I know it happened due to loaning and speculation on the stock market. It's an interesting pattern that pretty much every stock market crash happens after a rosy bull-market period.

 

[Borg]

The rates are going up because people who live and breathe market analysis see the Italian debt as unsustainable. There is a real probability that they will borrow more money than they can pay back. That increased risk is what is driving the rates.

Cautious investors don't want the risk and the investors that are willing to take the risk want a return that is commensurate with the risk that they are taking. Even the Chinese, who have huge amounts of cash, don't want anything to do with them right now. That could change but China would probably want additional guarantees.

Italy can possibly fix this but not if they continue with the status quo of their spending habits. The longer that continues, the more likely it is that they could have a default of some sort and someone will get stuck holding a bag of worthless Italian bonds.

 

[mheslep]

As for the great depression, as far as I know it happened due to loaning and speculation on the stock market. It's an interesting pattern that pretty much every stock market crash happens after a rosy bull-market period.

Clearly margin buying and rampant speculation were causes of the 1929 stock crash; the follow-on great depression was caused by the Federal Reserve acting to cut off the money supply, and, I think, was in part due to the actions of the federal government, especially raising tariffs on imports and other dramatic interference in the private economy, along with a deliberate PR campaign to vilify business.

 

[Nikitin]

I don't know much about the federal government's involvement, though I seriously doubt its involvement was destructive, but I'm pretty sure the stock market crash was not merely a symptom. Loads of people were loaning money from the banks and putting the money into the stock market. When the stock market crashed, lots of people were without money to repay the banks.

The rates are going up because people who live and breathe market analysis see the Italian debt as unsustainable. There is a real probability that they will borrow more money than they can pay back. That increased risk is what is driving the rates.

Cautious investors don't want the risk and the investors that are willing to take the risk want a return that is commensurate with the risk that they are taking. Even the Chinese, who have huge amounts of cash, don't want anything to do with them right now. That could change but China would probably want additional guarantees.

Italy can possibly fix this but not if they continue with the status quo of their spending habits. The longer that continues, the more likely it is that they could have a default of some sort and someone will get stuck holding a bag of worthless Italian bonds.

Yup. Though if you're buying 10-year bonds It'd be silly to worry about Berlusconi being booted and some financial problems. Chances are Italy will get into much bigger trouble than this during a 10 year period, thus the yield increase isn't really rational.

 

[Nikitin]

I don't know, really, I am not a financial expert. But it seems to me that CDSs, which are 'bets' in the hands of others than the government, are indifferent to Italy's government debt position. The market is weird, the CDSs predicted a 100% certain Greek collapse which didn't happen yet. I am pretty certain the CDS rates, whatever they are at the moment, are not a good predictor since I imagine most people will expect Europe to take over the debt; i.e., the debt is mostly guaranteed, but the Italian government will not be able to borrow from the financial markets itself but will need to go through the IMF/EFSF. At worst, they are a market predictor of the whole of Europe going bankrupt.

No, the CDS predicted that Greece would default on its loans {again}. The prediction was right, as Greek debt was haircut (not a technical default as that would be catastrophic, but a default none the less).

 

[Borg]

I don't know much about the federal government's involvement, though I seriously doubt its involvement was destructive, but I'm pretty sure the stock market crash was not merely a symptom. Loads of people were loaning money from the banks and putting the money into the stock market. When the stock market crashed, lots of people were without money to repay the banks.
Yup. Though if you're buying 10-year bonds It'd be silly to worry about Berlusconi being booted and some financial problems. Chances are Italy will get into much bigger trouble than this during a 10 year period, thus the yield increase isn't really rational.

I didn't say anything about Berlusconi or that this has anything to do with him. You're not making sense w.r.t. the bonds. If Italy defaults, the 10 year bonds will be worth zero. That is clearly something for the markets to worry about.

 

[Nikitin]

This has everything to do with Berlusconi. The yield jumped from a sustainable rate to 7,4% directly due to the political squabbling and Berlusconi's removal.

Italy will not default due to some political instability. Italy will default if its debt gets out of control and economy start to break down.

My point was, that it is highly improbable that Italy won't get into worse trouble than it is in today. The yield of 10 year bonds shouldn't really be affected much by current events, but by the structural health of the Italian economy (which isn't nearly as bad as Greece's or Protgual's).

 

[MarcoD]

No, the CDS predicted that Greece would default on its loans {again}. The prediction was right, as Greek debt was haircut (not a technical default as that would be catastrophic, but a default none the less).

I agree, I stand corrected. The market predicted a haircut and it happened in the Greek case. I saw that the Italian CDSs became somewhat more expensive but I can't translate it to a probability on an Italian default. I think I heard it being translated to around 50% on the radio, but I might have gotten it wrong.

I am a bit baffled by people proposing that the ECB should buy the Italian debt though. I mean, that's equivalent to just printing money to buy debt, right? Looks to me that they can do that a little bit, but at the risk of (hyper-)inflation, pushing up the interest rates of all European economies, and subsequently blowing up the whole of Europe. I mean, Dutch interest rates are 2.2% now, what happens if all European governments need to borrow at 7%?

 

[mheslep]

Greece, Italy and the Euro Thread:

I don't know much about the federal government's involvement, though I seriously doubt its involvement was destructive, ...

There had been several similar panics prior to 1929; in those instances the market and economy always recovered within a year or so. The 1907 panic caused a 50% stock drop which returned to previous highs within eight months. In the months after the 1929 panic the stock market recovered half its value before the government via the actions of the Federal Reserve turned the panic into a national banking collapse which began the Great Depression. There is debate about the impact of policy actions by the US government itself (i.e. not the central bank) with regards to extending or shortening the Depression, but there is no question that at least some of those actions were destructive; http://en.wikipedia.org/wiki/National_Industrial_Recovery_Act" in particular was found unconstitutional and was cancelled.

"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.

http://en.wikipedia.org/wiki/Causes_of_the_Great_Depression

 

[John Creighto]

I agree, I stand corrected. The market predicted a haircut and it happened in the Greek case. I saw that the Italian CDSs became somewhat more expensive but I can't translate it to a probability on an Italian default. I think I heard it being translated to around 50% on the radio, but I might have gotten it wrong.

I am a bit baffled by people proposing that the ECB should buy the Italian debt though. I mean, that's equivalent to just printing money to buy debt, right? Looks to me that they can do that a little bit, but at the risk of (hyper-)inflation, pushing up the interest rates of all European economies, and subsequently blowing up the whole of Europe. I mean, Dutch interest rates are 2.2% now, what happens if all European governments need to borrow at 7%?

If all of the European governments needed to borrow at 7% then certainly the Dutch interest rate wouldn’t be 2.2%. If the European central banks were trying to not change the money supply they could sell their Dutch debt and buy Italian debt. All central banks influences the money supply by their actions. The only question is how should they do it and how much should they do it.

 

[klimatos]

Perhaps, but how do you know this? For all I know Greek bonds are held by the Wisconsin teachers union pension fund, and they, or those like them, are exerting political influence on the IMF level pullers.

I have a daughter who is very high in international banking circles. She predicted every step of the Lehman Brothers fiasco months in advance and warned the Bank of England that they were about to be ripped off. The Bank's response was, "No, No, No. The US wouldn't do that to us!" Now, they know better.

By the way, she predicts that Bank of America will be in Chapter 11 within six months.

 

[MarcoD]

If all of the European governments needed to borrow at 7% then certainly the Dutch interest rate wouldn’t be 2.2%. If the European central banks were trying to not change the money supply they could sell their Dutch debt and buy Italian debt. All central banks influences the money supply by their actions. The only question is how should they do it and how much should they do it.

Yah, that was my point, that with too much inflation all the European governments would need to pay too much interest and in the end the European economy would blow up.

Somehow, given the lack of interest of the ECB and other affiliated central banks, I have the feeling that they are laughing their heads off.

(I checked the assets of the Dutch Central Bank, which is a member on the council of the ECB. I doubt the assets of all the European central banks combined are enough to fill the Italian debt hole, so the ECB can only buy debt with freshly 'printed' money, or European banks chip in. That's the silly thing: I doubt there even would be a debt problem if all the European banks agree to buy the debt. But that's similar like giving a blank cheque to government... seems like a lousy idea to me.)

 

[DoggerDan]

The 1907 panic caused a 50% stock drop which returned to previous highs within eight months.

Precisely. No matter how bad things get, life moves on. Sometimes sooner, sometimes later.

Still, we persist.

 

[John Creighto]

I think the facts are something like this (I need to confirm this with sources). I think the interest rates quoted are for loans with two year terms. For Italy 7% is considered dangerous. 5% is considered stable. Markets valued Greek debt at 50% before the haircut. The actually haircut I think was effectively 20%. That's about a 10% loss per year. If both the risk free rate of return was 2% (which is the target inflation rate) and a 20% haircut was considered likely then one might expect a fair market value for the interest rate on Italian debt to be around 12%.


The fact that interest rates are only 7% could mean the markets think one of the following:
1)the risk of an Itialian debt haircut isn't significant
2)the governments will cover the risk of Italian debt
3)their will be about 5% deflation per year.

For point 1, the Italian economy is considered in much better shape then Greece. For point 2. There has been some precedent of Europe helping to guarantee sovereign debt. Additional the ECB has been buying some sovereign debt to help reduce pressure on the interest rates.

With regards to point three while a 5% deflation rate is not likely to be seen in the CPI, asset prices have fallen significantly since the downturn. Stock market valuations (adjusted for inflation) have not fallen to the lows of the 80s and as the baby-boomers start to draw down their retirement assets there will be further downward pressure on asset valuations.

http://modeledbehavior.com/2011/02/22/the-401k-pyramid/

 

[MarcoD]

I think the facts are something like this.

I think all the facts can be derived from the following table:

The 'red' countries are in problems, Germany and France pretend that they are trying to fix things, which can't be true since their debt cannot run higher. Moreover, Europe can be damned glad with the former eastern bloc countries, who have low debt and a lot of room for growth.

Greece was never a problem (in the sense that I imagine the rest of the EU is more worried about their own debt), Spain cannot possibly be a problem, it is Italy and worst case France and Germany themselves which are the problem.

 

[MarcoD]

The fact that interest rates are only 7% could mean the markets think one of the following:
1)the risk of an Itialian debt haircut isn't significant
2)the governments will cover the risk of Italian debt
3)their will be about 5% deflation per year.

1) It may happen, but it is unlikely, Italy can even sustain 7% several years. 2) Can't really happen, they can take over some of the debt, but not all. 3) I think you mean inflation? My guess is that inflation is probably the worst which can happen; it will deflate the debt burden a bit, but at the cost of increasing the interest rates when rolling over the debt and evaporating Northern European investments.

If you look at the European figures of the previous post, the problem just isn't that big at the moment to start the money printing presses - and some of the Northern European countries will be very upset if the ECB starts doing that; I doubt it will happen. It is mostly sentiment which says that Europe is in a bad shape which, unfortunately, is also a hard economic fact.

The problem is the Italian government. They have been unable, under Berlusconi, to implement market reforms and austerity measures to get the Italian debt lower. In fact, they have seemed to have done the opposite the last decade. Now they have to, but it may be too little, too late, for market sentiment.

 

[AlephZero]

1) It may happen, but it is unlikely, Italy can even sustain 7% several years.

That is very unlikely under any set of assumptions. The only way to sustain debt in the long term is for the economy to grow faster than the debt interest rate, (and allowing for inflation). The Eurozone strategy on inflation is to keep it low (say less than 3%). The long term growth rate of the Italian economy has been less than 1%. So the debt is sustainable if 3+1 > 7. Financial engineers spend their working lives redefining the rules of arithmetic, but that's a tough one even for them to justify.

 

[MarcoD]

That is very unlikely under any set of assumptions. The only way to sustain debt in the long term is for the economy to grow faster than the debt interest rate, (and allowing for inflation). The Eurozone strategy on inflation is to keep it low (say less than 3%). The long term growth rate of the Italian economy has been less than 1%. So the debt is sustainable if 3+1 > 7. Financial engineers spend their working lives redefining the rules of arithmetic, but that's a tough one even for them to justify.

I agree with that, the debt would grow under these circumstances. But it can grow to, say, a 140% GDP before the government would go bankrupt. It ain't nice, but they could do that for a few years, if they would find a way out meantime.

[ The thing with Italy is that they have the money, they just don't tax enough. ]

[ Of course, I am Dutch. My best guess is that a combination of austerity in Italy and not starting the money presses is the best for the Netherlands, and probably most of the Scandinavian countries. The French, Germans, and Brits may disagree, though, not sure. ]

 

[John Creighto]

I think all the facts can be derived from the following table:

The 'red' countries are in problems,

Maybe but who decided that above 90% debt to GDP was a dangerous situation. I read somewhere else that 120% debt to GDP was sustainable. Japan was even able to sustain a higher debt to GDP then Greece but Japan has control over it's currency. What debt levels are sustainable is partly driven by Germany's fear of inflation
http://www.americanfuture.net/2011/11/10/germany-the-weimar-hyperinflation/

That is very unlikely under any set of assumptions. The only way to sustain debt in the long term is for the economy to grow faster than the debt interest rate, (and allowing for inflation). The Eurozone strategy on inflation is to keep it low (say less than 3%). The long term growth rate of the Italian economy has been less than 1%. So the debt is sustainable if 3+1 > 7. Financial engineers spend their working lives redefining the rules of arithmetic, but that's a tough one even for them to justify.

Interesting math but while 3+1 doesn't equal 7 part of the interest on the debt is paid of course from tax revenue. As to weather the debt is sustainable I have no opinion on this yet but here is what the German presendent of the Bundesbank Juegan Stark has to say:
"JW: You are rushing to conclusions in saying that the interest rate levels are unsustainable. Of course this level may not be sustainable in the long run if there is a lack of fiscal discipline and economic growth remains low. But in the short run I do not think it is such a big an issue. What we are facing in Italy is an acute confidence crisis, and only the Italian government can resolve that crisis by implementing what has been announced. Italy is very different from Greece in a lot of respects. I’m confident that Italy will be able to deliver."

http://www.americanfuture.net/2011/11/13/germany-bundesbank-president-opposes-ecb-as-lender-of-last-resort/

 

[MarcoD]

Japan was even able to sustain a higher debt to GDP then Greece but Japan has control over it's currency.

I always find the currency argument a bit silly. When it comes to government debt, there is no difference between a haircut, and devaluation of sovereign issued money. There is also no difference between lowering (government) wages and deflation of a currency. All in all, it doesn't matter. Most of the news about breaking up the Euro therefor is completely nonsensical. It'll only blow up a southern economy since they then need to invest in new IT, don't have access to the European market, and don't have access to European development funds.

The difference between northern and southern Europe is production and wealth; some of the southern European countries gambled on that they could grow their economies to compete with the north. Government debt isn't everything, I think if you look at private ownership of investments and banks, the truth -I expect- is that some of these economies (Portugal/Greece) just found out that they can't compete [at least not in the timeframe they thought they could], and now the north simply owns them. That's the real problem since there is no way out of that except for reforming the economies to make them competitive.

Maybe the only way out for Europe is to just implement a federal European army which mostly hires from the poor parts of the south. That manner the rich parts can send loads of money without anybody feeling bad about it.

(Then again, after the army we would need to start a war with, say, Iran, to defend the federal defense budget. And who would want that? )

(Anyway, I estimate that Japan, like Germany, still has a trade surplus, so they are hoarding cash and buying up the rest of the world. Likewise, the US can run a large deficit since, as the world's reserve currency, more money doesn't drive government bond interest up, but down. What do the Greeks have?)