EU economy 2010

Spiegel online: Euro Crisis — Related articles, background features and opinions.

Bloomberg: German Government Bonds Climb in 2010 as Fiscal Crisis Roils Euro Economy
29 December
Paul Krugman: Euroskeptics
Nice piece by Landon Thomas on the sort-of vindication of Euroskeptics. But to really have a sense of how it has played out, you have to know a bit more about the arguments.
…  So the academic euroskeptics have been proved right in their analysis. Now, that need not mean that the euro was a mistake: there were, after all, political economy considerations. And it certainly doesn’t have to mean that the thing should break up: doing that would be highly disruptive.
But there is, I think, a lesson here, namely that straightforward economic analysis has its virtues. Euro enthusiasts tended to be kind of cosmic about the whole thing, and dismissed the pedestrian cost-benefit approach taken by many US-based economists. Yet those costs and benefits did and do matter. And the crisis Europe is now having is very much the kind of thing those pedestrian analyses suggested was going to happen. [See Comments from Kimon Valaskakis and Tony Deutsch below]
28 December
Sovereign-debt struggles in Europe
TEN years ago when the Economist Intelligence Unit, a sister company of The Economist, calculated scores for countries’ sovereign-debt risk, the riskiest countries by some distance were Russia, Brazil and China, three of the four emerging-market BRICs (along with India). The scores measure the risk of a build-up in government debt, and take political, economic-policy, economic-structure and liquidity-risk factors into account. Now, though, some European economies look flakier. High public debt, weak growth and high unemployment explain why credit-rating agencies recently put Greece and Spain on credit watch, and downgraded Portugal’s and Ireland’s ratings.
Landon Thomas Jr.:Europe’s Economic Pain Awakens Old Arguments
When the treaty establishing Europe’s common currency was approved in the early 1990s, Europe’s political and business elite had high hopes that it would bind the Continent’s disparate economies and often bickering nations as never before.
And as the euro made its debut in the early 2000s, there was an outpouring of support from many citizens pleased that they would no longer have to change Spanish pesetas to French francs or Dutch guilders to German marks as they crossed borders from one country to another.
But not everybody was caught up in the celebration. A noisy band of dissenters, many of them economists from outside the Continent, issued a warning: the euro was doomed to struggle, they proclaimed, maybe not immediately but certainly before long. Different countries would pursue such different economic policies, they argued, that it would ultimately place an unbearable strain on the currency and some of its members.
20 December
Ill winds blow British economy no good
(The Independent) Given the impact of public spending cuts and a weaker outlook for the European economy, where the weather has also been extreme, much of the hoped-for expansion in the last few months of 2010 will be lost, some of it forever, and growth may be pushed uncomfortably close to zero.
Europe Turns against Germany
(Spiegel) Germany’s controversial approach to fighting the euro crisis has split the European Union. Some countries are complaining about Berlin’s rigid course, while others accuse Chancellor Merkel of betraying the European project. The only thing they can agree on is that the EU needs Germany as a motor if it is to survive.
16 December
Hungry for power: The government takes over Hungary’s independent institutions, one by one
(The Economist) In January the country takes over the rotating presidency of the European Union. But there is growing alarm about the increasing centralisation of power under the right-wing Fidesz government led by Viktor Orban, Hungary’s pugnacious prime minister. Tony Deutsch writes: This article … summarizes my recent concerns about Hungary. The numerous, but often confused comments are also worth sampling.
2 December
HANDS OFF OUR PENSIONS: A tempting target for impoverished governments
(The Economist) IN THE war on savers a new front has been opened. Savers are already penalised by record low interest rates, as central banks try to bail out debtors. Now governments are feasting their greedy eyes on private-sector pension pots.
Hungary provides the latest example. A reform in 1998 created a mandatory supplementary pension system, with contributions deducted from wages and invested in a private fund. These funds have since accumulated nearly $14 billion of assets. Those assets (and the employee contributions) are now in effect being taken back by the government, since those who opt to remain in the private sector will face stiff penalties. Tony Deutsch writes: I spent at least two years of my life trying to get this set of institutions going.
29 November
Paul Krugman: The Spanish Prisoner
Why is Spain in so much trouble? In a word, it’s the euro. Spain was among the most enthusiastic adopters of the euro back in 1999, when the currency was introduced. And for a while things seemed to go swimmingly: European funds poured into Spain, powering private-sector spending, and the Spanish economy experienced rapid growth. Through the good years … the Spanish government appeared to be a model of both fiscal and financial responsibility….
But problems were developing under the surface. During the boom, prices and wages rose more rapidly in Spain than in the rest of Europe, helping to feed a large trade deficit. And when the bubble burst, Spanish industry was left with costs that made it uncompetitive with other nations.
Now what? If Spain still had its own currency, like the United States — or like Britain, which shares some of the same characteristics — it could have let that currency fall, making its industry competitive again.
No risk of euro zone breakup in Irish crisis: EU
(Reuters) – Senior euro zone officials dismissed any risk of the single currency area breaking up after financial markets, alarmed by Ireland’s debt crisis, forced the borrowing costs of Portugal and Spain to record highs. Ireland bailout to reduce burden for central bank
23 November
Spain and Portugal reject talk of bail-outs
(FT) Spanish and Portuguese leaders, with reinforcements from Brussels, are fighting a rearguard action to convince investors that there is no need for further eurozone bail-outs
22 November
Can the Euro Still Be Saved?

(Spiegel) The countries of the euro zone are hopelessly divided over the question of how to save the currency in the long term. Bailouts for individual countries like Ireland and Greece can only be a temporary solution. Meanwhile, an internal paper drawn up by the German government has revealed Berlin’s plans for forcing private-sector investors to take their share of losses in future crises.
In Europe Debt Crisis, Some Call Default a Better Option
(NYT) … The risk, of course, is an investor panic that would seize financial markets at a time when the global economy remains on tenterhooks. But an organized restructuring of debt that would reduce the amount of money troubled countries owed, especially in conjunction with a financial aid package, might provide a quicker path to recovery and avoid the trauma of a forced default down the road, some economists argue.
EU Agrees on Multi- Billion Rescue Package for Ireland

Ireland has formally asked the European Union for financial assistance, and EU finance ministers have approved the aid. The size of the rescue package is not yet clear, but it could be up to 100 billion euros. The junior partner in Ireland’s ruling coalition, the Green Party, has called for an early election in January.
Ireland’s Paradise Lost
It’s as if there were only two eras in Irish history: the Middle Ages and the housing bubble.
This actually isn’t a bad way of thinking about Ireland’s 20th century. The island spent decade after decade isolated, pre-modern and rural — and then in just a few short years, boom, modernity! The Irish sometimes say that their 1960s didn’t happen until the 1990s, when secularization and the sexual revolution finally began in earnest in what had been one of the most conservative and Catholic countries in the world. But Ireland caught up fast: the kind of social and economic change that took 50 years or more in many places was compressed into a single revolutionary burst.
14 November
(Market Oracle) The Euro Back Under the Microscope, PIIGS Debt Crisis Round3
(Bloomberg)
3 November
Fed Easing May Spur Deflation in Europe, Mundell Says
Federal Reserve debt purchases to stimulate the U.S. economy may send the euro rising against the dollar, sparking deflation in Europe, said Nobel Prize-winning economist Robert Mundell.
The European Central Bank would be unlikely to stem the euro’s gains, Mundell said in an interview in Beijing today. In an earlier speech, he said U.S. quantitative easing would hurt nations around the world.
Deflation would worsen European sovereign credit woes by making debts harder to pay off, said Mundell, who won a Nobel Prize in economics in 1999 and is credited as the intellectual father of the euro.
31 October
Angela Merkel consigns Ireland, Portugal and Spain to their fate

Germany has had enough. Any eurozone state that spends its way into a debt crisis or cannot adapt to a monetary union set for Northern rhythms will face “orderly” bankruptcy.
Bondholders will discover burden-sharing. Debt relief will be enforced, either by interest holidays or haircuts on the value of the bonds. Investors will pay the price for failing to grasp the mechanical and obvious point that currency unions do not eliminate risk: they switch it from exchange risk to default risk. Tony Deutsch notes that One story missing from this analysis, limiting itself to governments and private lenders, is that of pension funds. The number of European countries recently forcing pension funds to buy bonds to finance current deficits is at four and counting. Maybe the EU ought to stop that practice too, if it is concerned about the fate of taxpayers. People saving for their old age are no less worthy
18 May
The PIIGS that won’t fly — A guide to the euro-zone’s troubled economies
(The Economist) ON MAY 10th European finance ministers meeting in Brussels produced a three-year €750 billion rescue package for the euro zone, designed to convince financial markets that the weaker members of the single currency would not be abandoned. The scale of the response reflected growing fears among European leaders that financing for the most troubled euro-zone countries might suddenly stop. Although the package has bought the troubled currency area time, it does not resolve the underlying structural difficulties facing many of its members, particularly the five so-called PIIGS: Portugal, Ireland, Italy, Greece and Spain. These countries face many of the same economic challenges as well as the ability to cause headaches in Brussels (and Berlin).
5 May
Joseph Stiglitz: Can the Euro be Saved?
(Project Syndicate) The Greek financial crisis has put the very survival of the euro at stake. At the euro’s creation, many worried about its long-run viability. When everything went well, these worries were forgotten. But the question of how adjustments would be made if part of the eurozone were hit by a strong adverse shock lingered. Fixing the exchange rate and delegating monetary policy to the European Central Bank eliminated two primary means by which national governments stimulate their economies to avoid recession. What could replace them?
The Nobel Laureate Robert Mundell laid out the conditions under which a single currency could work. Europe didn’t meet those conditions at the time; it still doesn’t. The removal of legal barriers to the movement of workers created a single labor market, but linguistic and cultural differences make American-style labor mobility unachievable.
15 February
Nouriel Roubini: Teaching PIIGS to Fly
(Project Syndicate) Greece’s fiscal problems are, as I have argued many times, but the tip of a global iceberg. For the next installment of the recent global financial crisis will be rising sovereign risk, especially in advanced economies that run massive budget deficits and accumulate large stocks of public debt as they socialize private financial losses in order to revive economic growth.
Indeed, history suggests that severe recession and socialization of private losses often lead to an unsustainable build-up of public debt. Moreover, financial crises triggered by excessive debt and leverage in the private sector are followed after a few years by sovereign defaults and/or high inflation to wipe out the real value of public debts.

2 Comments on "EU economy 2010"

  1. Antal (Tony) Deutsch December 29, 2010 at 10:01 am · Reply

    It is difficult to disagree with Krugman on this one [Euroskeptics]. Would it be so difficult for him to give credit to the late Milton Friedman, the most prominent public US-based Eurosceptic? The Mundell referred to in the article is the only Canadian ever to receive the Nobel in Economics. Tony

  2. Kimon Valaskakis December 29, 2010 at 10:04 am · Reply

    I am, in general, a fan of Paul Krugman and tend to agree with his positions most of the time. In this instance, I am more of an euro-optimist than he is.
    His arguments about optimum monetary areas are sound and, indeed based on well known theories. Europe may not yet be an optimum monetary but could eventually become one. The two key factors are, increased labor mobility (which is happening between northern and southern Europe – witness the Portuguese and Spaniards in France) and a harmonized fiscal policy. This has not happened as yet, but may do so, given the need for it, if the euro zone is going to survive.
    This being said, the United States, is not a perfect fiscal union since there are wide discrepancies between state and federal fiscal policies, but things tend to work out because of high intra-national labor mobility. This has not, however, left the South less underdeveloped especially places like Louisiana and Alabama.
    Canada is also not a perfect monetary union or fiscal union. The mobility between Québec and the rest of Canada is low. At one point it has been suggested, only half in jest, that there should be two monetary zones in Canada with the demarcation line being the St.Lawrence Boulevard in Montreal. All points east should devalue vis-à-vis the currency of all points West of the St.Lawrence Boulevard!! An interesting idea but obviously never happened.
    There are three reasons why I am an Euro-optimist.
    First, because the construction of an integrated Europe was always a political project to be achieved via economic means and not vice versa. The emphasis on a European flag, European standards, a European Parliament etc. expresses, rather well, the primacy, in the mind of the Euro builders, of the political project. The economics will follow and be adjusted.
    This is fact has happened when, at every threshold point, the Treaty of Maastricht, the Treaty of Nice and the Treaty of Lisbon, the Europeans came through, in spite of persistent Euro-skepticism, especially by the Brits and the plethora of doubting thomases.
    Second, as I have claimed in more than one Wednesday Night, Europe has been, historically speaking, more united than disunited, under empires to be sure, but united nevertheless. The burst of nationalism in the nineteenth and the first half of the twentieth century, unleashed centrifugal forces, led to two world wars, and may possibly have been aberration when seen in the long run.
    The third reason is that I am not sure that a Europe without the euro is itself viable. If Europeans, in a fit of pique, return to francs, pesetas, liras and deutschmarks, how long will that last in an increasingly globalized world ? Competitive devaluations would lead to an obvious reductio ad absurdum. The return to a pre-Euro Europe is not sustainable, at all, therefore, given no other choice, the Europeans will improve the Euro Zone and adapt.
    In sum then, although Krugman’s points are well taken, we must also note his conclusion that, when all is said and done the euro was not a mistake, although quite obviously it has to be improved and monetary policy has to be harmonized with fiscal policy. This has become a truism.
    I strongly believe that necessity is the mother of invention – and we certainly have necessity here !! So let’s see the invention !!
    Best, Kimon

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