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

[mheslep]

I'm not following you at all. The bursting of the housing bubble is what caused the economic meltdown. The economic meltdown led to their debt problem.

Sudden economic meltdowns do not create long term large sovereign debts, nor even untenable large deficits given restrained government spending. The major problem in Spain is the likelihood of the *government*, not the banks, finding itself unable to borrow more money and/or the *government* defaulting on its debts, all while Spanish policy puts it on the hook for rapidly rising entitlement spending. Look at Spanish government spending over the last ten years. The numbers tell the story. The bank troubles are merely the bump in the road that the top heavy government finally stumbled over.
http://www.oecd-ilibrary.org/econom...re-in-us-dollars-2012-3_govxp-table-2012-3-en

 

[Astronuc]

Spanish banks are indeed in trouble from a real estate bubble, but I think it is a myopic mistake to see the banks themselves as fundamental to Spain's troubles, which might lead to, for instance, a call for more banking regulation and all will be well next time. Instead the banks a symptom of long term policy mistakes: the Euro, restrictive labor laws, business laws and other laws that inhibit productivity and encourage dependency.

Interestingly, some European leaders are mentioning reform regarding labor and business laws.

A common currency such as the Euro is not inherently a mistake. It depends on how it is implemented, then how folks behave.

The plan will include measures to prevent bank runs and push for the repeal of regulations that hinder competition, keep young people out of the work force or make it difficult to start businesses.

European Leaders to Present Plan to Quell the Crisis Quickly
http://www.nytimes.com/2012/06/17/w...s-present-plan-to-quell-euro-zone-crisis.html

. . . . In addition, the plan will push for countries to remove the regulations and layers of bureaucracy that inhibit competition, keep young people out of the work force or make it difficult to start a new business.
. . . .

http://www.nytimes.com/interactive/...lobal/understanding-the-european-crisis.html?
http://www.nytimes.com/interactive/business/global/european-debt-crisis-tracker.html

Whatever Greek Voters Decide, the Euro Looks Likely to Suffer
http://www.nytimes.com/2012/06/17/business/euro-may-have-a-painful-path-whatever-greece-decides.html

. . . .
THE ultimate answer, Mr. Krygier says, is for European governments, led by his native Germany, to agree “on concrete and credible steps toward greater fiscal and political integration,” including the issuance of broader euro zone debt. That would eventually allow Spain and Italy to borrow what they need with Continentwide backing. In addition, he says, leaders should come up with a euro zonewide bank guarantee to avert full-scale bank runs in shaky countries.
. . . .

We'll find out tonight and tomorrow.

 

[chiro]

The other thing that I think some people are forgetting is that a loan or a credit arrangement is a two way thing, not one way.

If banks loan out way too much money, they also have to bear the risk that they take when the issue the loan and create credit. This means that they have to accept the possibility of a default in which they will ultimately take a loss.

The big thing IMO about a default between two countries is that when one country defaults against another, then there will be a huge impact with regards to trade between the country that defaulted and other countries. But if a country gets back on its feet and gets the wheels in motion (lots of examples of this like Iceland, as well as Argentina, Russia which had a ruble default which brought down LTCM), then things get better.

If I am stupid enough to lend you a million dollars, then I deserve what I get. You can't make credit/loans/bets/whatever like this and expect everything to always be paid back.

This is a very dangerous precedent to set in general banking where the lender has a gaurantee of getting most if not all of their money back, and if people don't see what dangerous precedent sets, then god help them.

 

[gravenewworld]

Greece should have never been allowed into the EU in the first place:

http://www.bbc.co.uk/news/world-europe-17108367

 

[Borg]

I found this article enlightening as to some of the systemic problems that have allowed countries to get to this point. I really don't see how it can last much longer. Even the best-case scenarios are just delaying the inevitable.

The 'Bang' Moment Is Here.

 

[mheslep]

A common currency such as the Euro is not inherently a mistake. It depends on how it is implemented, then how folks behave.

Well I suppose theoretically I agree, a common currency is not *necessarily* a mistake, but it requires some basic assumptions to work and the EU as assumed the opposite. Absent some kind of fiscal union, the assumption *must* be that yes of course their will come a Greece sooner or later. Of course their will be a country using the common currency to enable huge deficits while cooking its books. Then their *must* be an assumption that the response to the inevitable Greece will be that it will default on its debts, and that many banks in Greece will allowed to fail and many banks outside Greece that loaned it money will be allowed to fail.

But we've seen none of this, nor given human nature would we expect to. Instead we see central bank bailouts on top of bailouts. So I should have said: given human nature the Euro was a mistake.

 

[AlephZero]

So I should have said: given human nature the Euro was a mistake.

I would say, not so much a mistake as a (spectacularly) bad political judgement call.

The "elephant in the room" agenda by the EU's most enthusiastic supporters has always been full political union. That's what the Brussels bureaucrats still mean by "the project".

Everybody recognised that trying to impose political union from day one wouln't go down very well with the population at large, so the plan was to get there one step at a time, and a common currency was seen as a big step along that road. But unfortunately, the electorates of most of the 27 member countries still don't see full political union as the best idea since sliced bread - in fact, opinion might be heading in the opposite direction, but nobody is going to try the experiment of putting it to a referendum.

The EU didn't do itself any favors over this with the last round of treaty changes, when it was rather obvious that any country whose constitution that required a referendum to approve the treaty would have to keep answering the same question till it gave the "right" answer. (And the Greek elections might be heading the same way...)

 

[Astronuc]

I remember quite a few folks expressing misgivings about the Euro precisely for the reasons that the EU or Eurozone is now in trouble. Quite a few expressed concerns about the lack of fiscal discipline in some economies.


Pro-bailout conservatives win Greek election
http://news.yahoo.com/pro-bailout-conservatives-win-greek-election-205901474.html

So watch for a jump in the stock markets tomorrow.

 

[lisab]

I remember quite a few folks expressing misgivings about the Euro precisely for the reasons that the EU or Eurozone is now in trouble. Quite a few expressed concerns about the lack of fiscal discipline in some economies.


Pro-bailout conservatives win Greek election
http://news.yahoo.com/pro-bailout-conservatives-win-greek-election-205901474.html

So watch for a jump in the stock markets tomorrow.

Hard to say if there will be a big jump, if there's any at all. It seems to me the relative stability of the markets in the last few days makes me think the markets were expecting this election result.

 

[Borg]

Nikkei is up over 2% at the open. U.S. futures are still about even but that should change by morning.

 

[Astronuc]

Nikkei is up over 2% at the open. U.S. futures are still about even but that should change by morning.

The Nikkei could also be responding to the Japanese government allowing the restart to two nuclear reactors at Ohi.

Ohi mayor Shinobu Tokioka has announced his approval of the restart of Ohi 3 and 4, citing safety assessments carried out on behalf of Fukui Prefecture and also a public appeal by Japanese prime minister Yoshihiko Noda for the resumption of nuclear power.

However, "Prefectural governor Issei Nishikawa has said he will base his final decision on the restart on the will of the people of Ohi town and the prefectural assembly."

 

[Borg]

The Nikkei could also be responding to the Japanese government allowing the restart to two nuclear reactors at Ohi.

However, "Prefectural governor Issei Nishikawa has said he will base his final decision on the restart on the will of the people of Ohi town and the prefectural assembly."

That's good. I haven't been keeping current with Japanese market forces and I wasn't looking forward to an inflated 10% gain that some analysts were calling for today. Japan closed with a good gain, Europe has reasonable gains this morning and the U.S. futures are still flat. Yeah, sanity!

 

[Astronuc]

Euro, Global Shares Jump in Relief Rally After Greek Vote
http://www.nytimes.com/reuters/2012/06/17/business/17reuters-markets-global.html

SINGAPORE (Reuters) - The euro jumped to a one-month high and Asian shares rose nearly 2 percent on Monday after Greece's election delivered a slim parliamentary majority to pro-bailout parties, a result seen as crucial to European leaders' efforts to hold the euro together.

U.S. stock index futures and riskier commodities such as crude oil and copper also rose, while gold fell after a rally last week, when investors had looked to bullion as a safe haven amid fears the election could trigger financial turmoil.
. . . .

It remains to be seen how long-lived this mini rally becomes.

As the articles indicates, there are more hurdles or perhaps pitfalls ahead.

 

[mheslep]

I remember quite a few folks expressing misgivings about the Euro precisely for the reasons that the EU or Eurozone is now in trouble. Quite a few expressed concerns about the lack of fiscal discipline in some economies.
...

Perhaps most famously:

... I think within the next 10 to 15 years the eurozone will split apart. The British government, on balance, should stay out of it."

 

[Astronuc]

Europe's Tower of Babel hampers euro solution
http://news.yahoo.com/europes-tower-babel-hampers-euro-solution-055244786--business.html

Germany, France, Italy and Spain, the euro area's four biggest economies, are wrestling over proposals for a banking union, joint euro zone bonds and handing (surrendering?) more control over national budgets and economic policy to the European Union. However, the EU faces conflicts between and among its member states, and separate, often fierce, national debates within each state, each of which has the power to block any change to EU treaties, including 10 countries which are not members of the currency.

Can such a diverse group of nations/states pull it together - and avoid further deterioration of individual and aggregate economies?

 

[mheslep]

...

Can such a diverse group of nations/states pull it together - and avoid further deterioration of individual and aggregate economies?

I think no, at least not under the current structure of the EU government and constitution, which is far too involved in micromanagement. Only a sparse, highly restricted and limited federal government has a chance, one that leaves most of the power with the individual states such as the police power, would have constitutional check on spending, etc.