Europe’s problems as a symptom

RobertBrusca's picture

Calling Europe’s problem a balance of payments problem as Martin Wolff and some others are doing is a mistake. It confuses cause with effect. BOP imbalances are the SYMPTOM. The causal variable is ‘competitiveness.’ It is the competitiveness differences across the Zone. The Zone has gone wrong by making itself a slave to the currency instead of to true integration. Economies in the Zone sacrifice everything to hold the euro 'peg'. It makes no sense, especially since the euro peg is now the cause of their pain as it truly is.

We can engage in revisionism but we cannot run time backwards. We are where we are and the Zone cannot undo its terrible mistake. It is all but impossible to heal the rift from within. I do not see Germany relating nor do I see Mediterranean countries undergoing a generation of austerity just to keep the euro peg. I see chaos.

Learning from the Euro-undoing
The e-Zone problem is a microcosm (well maybe a Macro-cosm....) of the world economy where, similarly there are no burdens placed on surplus countries to adjust. In the Zone this manifests itself as competitiveness issues as the ECB held macro inflation in check but country by country results undermined the system probably though fiscal excess but also because of poor integration. Germans took the opportunity to cement their position as the most competitive Zone nation and now seem to be in the cat bird's seat of supreme competitiveness. But it’s still a seat on the good ship Titanic and as things worsen Germany will increasingly be called upon to do the bailing. In the end Germany's maneuvering to be the most competitive did not serve it well. It was poking holes in the sides of the same ship that it occupied. By undermining its neighbors competitive position too badly it undermined itself.

Away from the Zone where exchange rates are flexible competitiveness problems are not such an issue, or at least, they take on a different dimension. In this environment policy options are greater. But the global system has not prospered and has built up its own set of rigidities and imbalances because surplus countries are not forced to adjust and the US, the reserve currency takes the other side of the currency value that other nations select. Some countries select a policy of export led growth and ignore their too-low exchange rate. They ride the trade surplus to prosperity. A country that is piling up forex reserves, and does not take that as a sign of an undervalued currency simply undermines the system. Its surplus takes the form of a deficit elsewhere.

Fixed as in set; flexible but broken
So in EMU the adjustment mechanism is fixed in the sense of being ‘set’ or ‘rigid’ while outside the Zone the adjustment mechanism is flexible but nonetheless is broken.

We have created systems without rules, or at least without rules that any one will obey or will be forced to obey (who would force them?) WTO does not even require market-determined exchange rates for its rules to apply. It’s as mad as the e-Zone having had no real fiscal rules (Mass-trick- right).

While I see lots of fingers being pointed what is clear and consistent is that we have invented systems with flaws. EMU has painted itself into a corner (or coroner?). I don’t’ see how it survives unless it can break apart and reform.

ECB bond buying or more LTRO is just more of the junkies fix; it is not a solution but will deepen and worsen the problem.

Why Free is so expensive
Apart from the Zone there are similar issues that go unresolved and that undermine and destabilize the global trading system. NOT agreeing to anything may be worse than agreeing to something that countries don’t want. But trade, even ‘free trade,’ requires rules. Trade may be free, as in ‘free of restrictions’ but it must also be free it the sense than it is supported by other free markets. And when exchange markets are not free and are meddled with they are not efficient and free trade conducted on such a base is a disaster.

How it actually works
We should ponder how we are getting to equilibrium or what passes for that in this system. Since surplus countries won’t appreciate their currencies to trim their surpluses, deficit countries get larger deficits. And goods stay so cheap that deficit countries simply over-consume. They consume so much that they become debt-saturated while financing their ‘cheap’ purchases. Some figure it out before it is destructive; others don’t. Economists generally defend this excess consumption by looking at the ‘consumer surplus’ accruing to the purchaser of the cheap goods but only because they think in terms of the commodity markets and forget about financing. But it’s in the financing of the excessive consumption where the real evil is being done. In our financial crisis the developed world took it on the chin. China has turned to a domestic demand model, away from a model based on export-led growth, not out of the goodness of its heart, but because it saw that the US has become nearly debt saturated and China does not want to absorb a. lot more US debt. It knows the price of its chronic surplus policy is chromic deficits for the US and more debt issuance. This is how equilibrium is being foisted on the system: It is happening because of debt saturation and because the current account signal is being ignored.

‘No rules’ does not mean no consequences
So in the end having a system without rules is not the same as having a system without consequences. It may be hard to figure out the consequences in such a poorly articulated system, but in time the system will tell you. EMU is finding out. The rest of us are finding out and still we have no solutions.

We need to go back to a rules-based system. We need cops and penalties. We don’t need gold we don’t need fixed exchange rates just need rules and to have them followed.

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Zero Govt's picture

"Calling Europe’s problem a balance of payments problem as Martin Wolff and some others are doing is a mistake."

the FT's chief economist, Martin Wolff, is a mistake ...he's a socialist not an economist

He's been huffing and puffing the EU Project is just brilliant, must be kept together for our "greater good" and now as the debts/bill mounts for this horrible idealistic dream (socialist nightmare) he guffs how he/we should have seen it coming

of course like 98% of economists (idealists?) he doesn't see anything coming and has blown like the grass in the wind bending his ever-changing opinion to the politics of the day ...crony FT journalism supporting the politics of the day

and when the EU Project splits and falls apart Wolff will be right there pontificating how "inevitable the split" was all along through his tears and uch sweeping the shithole under the rug with excuses and how this obnoxious socialist hell of a project will be sadly missed

windbag Wolff is the idealistic lamb to the slaughter of realism.. he should have done his maths like an economist, not a leftie politicos favourite crone as i told him for over a year (before the FT banned my comments) ...who was EU correct/accurate FT ? 

AnAnonymous's picture

Ah, something new maybe.

Idealism, ideals.

Idealistic people do not share the same ideals de facto but maybe, here, a gem of knowledge as one US citizen may try to manipulate that basic fact to impose his dominatrix ideal that US citizens have been somehow naive.

Tydown4fun's picture

He says "Letting people out of their obligations because they got in too deep generally is not a good idea."  Did he miss the bailout of the TBTF, the AIGS, etc?  Letting companies out of their obligations because they got in too deeply is ok?

RobertBrusca's picture

Didn't miss it. Point stands.

Ever heard of TBTF?

Where you been?

GeneMarchbanks's picture

We need to go back to a rules-based system. We need cops and penalties. We don’t need gold we don’t need fixed exchange rates just need rules and to have them followed.

Brusca... Brusca... All of that only to disparage Au in the last sentence. It's like... it's like a ten minute build-up only to have a punchline that doesn't even engender a chuckle.

So anyhow, keep spit-balling ideas on the European problems. After all, being a Fed head, your expertise is unlimited, your wisdom unfathomable.

RobertBrusca's picture

Yes, thank you,

glad you see it that way.

By the way, lay down some paper towels to catch that dripping sarcasm you are drooling.

I realize the prescriptive part was all too pithy but I wanted to throw down something as as an idea of where I think we need to go.

You might read some of my subsequent comments.

Eric L. Prentis's picture

It is IMPOSSIBLE to rekindle “animal spirits,” living on George Orwell’s Animal Farm—where “all animals are equal, but some animals (pig banksters) are more equal than others.” Ten thousand banksters deserve to be in maximum security prison.


But Wall Street banksters pay protection money to politicians, so we have a loss-of-trust and a shitty economy. I call this a lousy tradeoff.

RobertBrusca's picture

Oh yes.

The financial lobby is exceptionally strong.

Might makes right.

He owns the gold makes the rules and all that.

plus the modern version:

He who stuffs the politicians PACs full of Federal Reserve Notes makes the rules or keeps them from being amended.


trilliontroll's picture
27 Statistics About The European Economic Crisis

" ...

#4 The unemployment rate in the port town is Perama is about 60 percent.

#8 Despite all of the austerity measures, it is being projected that Greece will still have a budget deficit equivalent to 7 percent of GDP in 2012.

#12 The youth unemployment rate in Spain is now over 50 percent.

#20 The youth unemployment rate in Portugal is now over 35 percent.

#24 Youth unemployment in Italy is up to 31.9 percent - the highest level ever.



To remind you: There is no national anthem that europeans learn in school,

we also do not have a pledge of allegiance; in other words: F*** europe if

it is not for my /our benefit.)


RobertBrusca's picture

In other words austerity is not for the sake of posterity.

Arnold Ziffel's picture

Taxpayers foot £1billion bill to pay for pensions of council staff retiring early

David Cameron, already under pressure for the tax decisions, will face more anger from taxpayers on council worker's early retirement pay

The scale of the spending came to light after the TaxPayers’ Alliance claimed there was a £54billion black hole in council pension funds which could have to be met by a rise in council tax, as reported by the Mail yesterday.

Read more:

Stuck on Zero's picture

Germany is mercantilist. All mercantilists eventually destroy the system.  No-one should trade with or deal with mercantilists. 

RobertBrusca's picture

A 'good parasite' does not kill the host.

Hannibal's picture

The perfect distraction:

Keep focusing on Europe (or Iran) instead of the USofA sothat ignorance and stupidity at home can continue.

Lednbrass's picture

Oh I dunno, I suspect most who are actually aware of the ignorance and stupidty in Europe are equally aware of the ignorance and stupidity in the US.

williambanzai7's picture

I don't know what rules you are talking about. But I know the definition of financier: one who circumvents for financial gain.

falak pema's picture

circumvents the rules and circumcises the gullible fools!

daily bread's picture

rules == (if 1%, framework for cheating)  (if 99%, framework for fleecing)

AnAnonymous's picture

Sometimes, US citizens snap and spill it.

One poster on this site admitted it: Ben Bernanke works for the US of A middle class and this includes squeezing China as much as possible.

China is going nowhere. As many other countries.

The US People,just like the various other European People, wont accept a decrease in consumption to enable an increase of consumption by Chinese.

The China domestic consumption model cannot exist.

US citizens are in line with Chinese government on that:posturing.

Demand in China does not come from Chinese, it comes from US citizens.

US citizen world is where the consumption is done. The rest of the world is organized to allow that state, to enable consumption in US citizen world.

This is the way it works under US citizenism.

The problems are being solved the US citizenism way:that is by triggering a new wave of colonization.

US citizen middle class who simply can no longer make it in US citizen world are going to move to another country to have it easier.

Already happening for US citizen youth and pensioners.
Will follow long term unemployed etc...

Indeed, a different topic as well, it wont go without consequences and well, the consequences are also known.

Nukular Freedum's picture

But if the Chinese govt. allowed the Yuan to truly float then US consumptionism (Citizenism?) would be curtailed in an instant. Really in this case the control does seem to be emanating from the Chinese rather than the US side, no? 

AnAnonymous's picture

Truly? So as usually, when the result does not come, that will because they have not allowed their currency to truly float.

Not because the idea is wrong.

US of A has locked the world commodity market through institutions like World Bank of Development, (Keynes'legacy), countries saddled with debt they must repay in actual terms (nothing like US citizen nations that can repay in funny money, or even better, repay someone else with someone else's own wealth)

China like any other BRIC members need the world commodity market to boost the growth and the development of middle class(smithian economics)

No USD? No access to that market.

Control is on the side of US of A side through monopoly of USD emission.

US citizen Bernanke is one US citizen middle class champion.

Nukular Freedum's picture

I cant argue with you there AA. Its just that I have this naieve and idealistic vision of the world as a whole approaching truly free markets asymptotically as it were. But theres a long way to go no doubt and mercantilism/hypocrisy on all sides. Thanks for the reply. :)

honestann's picture

Socialism cannot ever compete... not in honesty, efficiency or productivity.  The only solution for Europe and elsewhere is liberty and zero government.

AnAnonymous's picture

Competiting with what?

Besides, competition selects the best competitor,which is not forcefully the best solution.

honestann's picture

Eh, "compete" as in producing better goods at lower price (factoring in all non-obvious consequences).

AnAnonymous's picture

Better goods and lower prices, that seems really relative these days...

TheFourthStooge-ing's picture

AnAnonymous said:

Better goods and lower prices, that seems really relative these days...


The words "better" and "lower" are inherently relative because they are words used to describe comparisons.

You need to lighten up on the weekend opium consumption. It's making you sound retarded.


AnAnonymous's picture

Why so? Real is US citizenism realm.

Really has to be really really relative for US citizens to miss a reference to one of their stronger points...

TheFourthStooge-ing's picture

Your lack of an intelligible response is somehow very something. Really.


JeffB's picture

So is the peg to the dollar the cause of the problems in California and Detroit etc., Mr. Brusca? Are they really slaves to that dollar peg, and could be freed from their slavery if they but threw off the shackles and devalued their California I.O.U.s to make them more competitive?

Is holding to a set monetary value really the root cause of uncompetitiveness?

Why does that hurt the Greeks, but not the Germans do you think?


RobertBrusca's picture

The German are hurting because they are a part of e-Zone and are going to obligated by that membership to effect change- to finance it.

Having become the most competitive country in the Zone will actually cost them because they did at the cost to their neighbors with whom they share responsibilities in the Zone.

A cine teacher of mine once noted that it is was a bad parasite that kills its host.

JeffB's picture


RobertBrusca: "The German are hurting because they are a part of e-Zone and are going to obligated by that membership to effect change- to finance it."

Thanks for the reply, Mr. Brusca. But would not the same thing apply to an economic shift in the United States from the "Rust Belt" to the southeastern U.S., and from a nascent shift from California elsewhere?

I think the actual issue, is why ae the Germans more competitive? Are they really "parasites", or are they harder working, &/or saving more by living below their means etc., relative to their Greek partners? Calling the Germans "parasites" because people want to purchase their goods and services more than their neighbors seems to me to be turning logic upon its head.

It is the Greeks, after all, who have a bloated and inefficient bureacracy, who apparently have overly generous retirement plans, and who cheat on their taxes to an extreme, all the while borrowing far more than they produce. Now they come with their hands out to the Germans and the others who have been less profligate than themselves demanding bailouts and funding to help them out of the jam they find themselves in. It seems to me that if anyone is going to be throwing the "parasite" word around, it would be more fittingly applied to those demanding to live off of the savings and labors of others.

Of course, I place the majority of the blame on the central governments which have been artificially holding interest rates below their free market equilibrium, which has in turn suppressed savings and expanded borrowing and spending, but the Greeks have been the ones who chose to grab far more of that sugary food than they could digest.

"Having become the most competitive country in the Zone will actually cost them because they did at the cost to their neighbors with whom they share responsibilities in the Zone."

So being competitive in this New World Order is now redefined as irresponsibility that will necessarily "cost" the dastardly "culprit" who was so audaciously and viciously competitive?

I think the true fix would be to set up an economy where there's less external governmental manipulation of the market, not more... including, of course, manipulation of the money supply and interest rates by the central bankers. If the free market was allowed to operate like it should, very early on jobs would have been shifting towards the hardest working and most efficient areas. Anyone who wanted to compete would have been obliged to perhaps work a bit longer hours, or perhaps for slightly less money, or become more efficient and productive, or some combination of the above.

It would have been far easier to adjust early on, rather than have the governments and their central bankers cover things up with their manipulations, causing and exacerbating misallocations of resources until the whole thing became untenable even for them.


"A cine teacher of mine once noted that it is was a bad parasite that kills its host."

As noted earlier, wouldn't that be more appropriately applied to the country sucking the resources from their hosts? Would we say that the parents helping out and supporting an adult child are parasites when they finally claim they've reached their financial limit, and fear they will be dragged down into poverty as well should they raise their handouts and loans even more? Or would we say that the child that was living too high on the hog for his/her income for too long was the parasite?


EcoFlow's picture

Depends of what you call competitivity...

Also you tend to make the same mistake than the overall anti-euro mass. The fixed exchange rate implied by the common currency does not mean that current account imbalances cannot be resolved. Did you have a look at the trajectory of those of Greece, Ireland, and even Spain recently ?

If a nation's economy is allowed to borrow through markets at a rate that is lower than its nominal growth for too long, the current account balance can only do one thing : deteriorate, and this is true for Greece, as it is for Germany. Competitivity here is just for talk and politics.

In the case of the Eurozone economies, the risk posed by negative current accounts has not been properly priced by markets, which lead to relative cheap borrowing for fast growing economies and relative expensive borrowings for depresed-demography-and-demand Germany.

The removal of currency risk meant that Spain and Germany would borrown both at 4-5%, but Spain growing at 6% and Germany and 3.5% max ( in nominal terms ).

 The current situation is simply that markets realized that risk posed by negative current account balance should be priced on soverign yield spreads. The higher level supported by periphery coupled with austerity is generating increase of their CA while these of Germany may well starts to deteriorate from its current level.


Also, do not underestimate the improvement of the overall EZ balance, which also translates into improvement for all members.

And to finish, Germany has a workforce of 42 millions versus 28 for France. That's 50 % more. Though, GDP is only 28% higher. And umemployment rate is supposed to be better in Germany. How competitive they are these german workers...And what will it be in the current 2 decades to come as they are expected to lose about 5 to-8 millions workers to France.

It is like those in mid-2000s taking the UK as the example to follow...




falak pema's picture

all for one and one for all : someone has to teach the protestant, liberal north to abide by the musketeer code with the catholic, statist south; and vice versa!

Can the last fifty years of euro construct, that produced this problem child called euro, learn from problem and not fall back to five hundred years of internecine euro wars? 

Methinks, that first Eurozone has to grow up and sever its links with pax americana; this crisis could father that. Then, it has to develop its own continental model, which is energy, food, and innovation technology sustainable. Tall order? we'll find out. 

All this, in a world environment where climate change and RM/energy crunch means a 7-8 billion population is now a mega problem. Herd  depletion of homo sapiens seems inevitable...not a rosy global picture at all!

New American Revolution's picture

Then you need gold, because gold is simply a regulator in a classical gold standard, and this in turn regulates credit naturally, leaving regulation of banking a simple matter of enforcing solvency.   It makes regulation of the markets easier then, because the criminal element in bankstering is denied his vehicle and so can no longer steal, or it makes it a great deal harder.   Does it remove and replace the current financial house of cards then?   Of course, but by doing so it restores structure.    How do we get there?   Link to

RobertBrusca's picture

Gold does modify behavior. It is a straight-jacket.

committing to gold with all the development in the low-wage world around us would probably set the US on multi-generational trip though deflation-land.

Other than that it's a good idea.

Umh's picture

It's a straight jacket that keeps the crazy politicians and bankers hands in their pockets. Everytime they take their hands out they steal.

LawsofPhysics's picture

Deflation is only bad for corrupt bankers and irresponsible or corrupt behavior.  This sounds fucking great, it is about time the savers were rewarded and good behavior was rewarded.

You really gave yourself away with the deflation is bad bullshit.

RobertBrusca's picture

If you own a house, as most Americans do, you do not want deflation.

I don't think you have any idea what deflation is or what it does. It's not about Bankers but about real people.

And it is real painful.

Do you really want to own assets that are worth less and less over time?

AurorusBorealus's picture

Umm, I might be missing something, but hasn't there been deflation in the value of housing in America for something like 4 years now?  All the while asset prices of other kinds (such as wheat and gasoline) are rising at rates that only fools would believe is anything but alarming?

Deflation lowers prices and allows properly financed consumption to resume.  Deflation rewards savings, which allows prudence to prevail in the acquisition of assets. Prudent people then finance new ventures, as opposed to our brand of inflation, which only rewards those who are closest to the money spigots (and most of these folk are anything but prudent).

Apply Force's picture

If you OWN a house deflation is painful...?  Not if it's where you enjoy living.  And a home is a liability last I checked. 

Lednbrass's picture

Perhaps I missed something, but doesnt the EU already have rules regarding deficit spending (supposedly a 3% cap) that were utterly ignored? This being the case, why would new rules be any more successful then the last?

That anyone thinks it can be fixed with more rules is a bit mind boggling, what is going to change- everyone double pinky swears that they really really mean it this time? Mr. Brusca's continued faith in politicians, cops, and rules is incomprehensible to me.

odatruf's picture

Led- see, they mean it this time. That's why it will be different. We can even see their fingers aren't crossed. That's all I need...

And oh yeah, this time will be different in the US too. If only we agree to higher taxes, spending will actually be cut and everything will be fine. We just need the taxes raised first.

Nukular Freedum's picture

I find little if anything to fault in this article. Everytime I thought you were missing a vital point you corrected for it downstream. Good writing style too.

The concept of a free market with different currencies is sufficient (also to solve the Eurozone imbalances) in the absence of illegal Mercantilist practices. WTO was constructed to police such a system but it does not (hello, China). This, as you point out, is the problem, not the free-market. But solving such a problem, well!

One tendentious point at the end regarding the adequacy of the currency system. Again I tend to agree with you that absent of Mercantilist practices it works okay and tends to be self policing (the market quickly highlights countries and currencies that seem to be failing). However the failure of the WTO to police the system has exacerbated the tendancy of some countries, even Western countries, to severely debase their currencies. This in turn harms savers (and hence capital formation) in those countries. Do you think this is intrinsic to the free floating currency system (as gold loving ZHers do) or do you dismiss it merely as another symptom of the failure of the WTO and similar bodies?

RobertBrusca's picture

It is hard to do the counter-factual.

China is not alone in playing the export-led growth game.

Had the currency system worked the way it does when you study it as an academic (exchange rates move to keep current account imbalances from being stuck ad form becoming excessive) a lot would be different.

Much of Asia would not have grown as fast. US debt would not be as large. China would either be a lot less developed or would have raised the standard of living for more Chinese as it would have needed to stoke domestic consumption (and to have provided income to do that). China would NOT be sitting on trillions in fallow foreign exchange reserves.

Yes, the dollar would be lower. as a result the US would be more competitive and we would have more manufacturing in the US.

American's would have 'less stuff' (read George Carlin on this...) and the storage unit business would not have grown as it has. We may have avoided the housing bubble as foreign capital would not have surged aimlessly into the US by those needing to be in dollars to fulfill exchange rate targets for foreigners who needed to buy dollars to peg a forex rate but had no clear investment aim for those dollars.

and so on.

Obeying the 'rules of the game' would have made a huge difference.

Many simply do not recognize or accept that WTO runs without the support of a proper functioning exchange rate system making it a sham and a a joke. China has manipulated it.

People learn Ricardian Comparative Advantage but without a capital account to settle trade imbalances that lesson is meaningless. It's a nice academic concept but it's true meaning gets lost when you graft it into a system that needs financing.

Comparative advantage does not work when I buy cheaply from you and no one buys from me but they all lend to me so I Can buy more from them-at prices that are oh so sweetly cheap.

Where is the comparative advantage there? Now if my exchange rate fell so their stuff became more expensive and my stuff became cheaper, we could trade and then we would activate comparative advantage.

It is not the microeconomics that has gone astray but the macro- the systemic elements and their linkages.

Nukular Freedum's picture

I must say I think this has been a great thread and debate, thanks Robert.

Your point about the breakdown of comparative advantage theory is well taken - it seems to me a logical by-product of a world awash with dollars and hence with easy financing terms. The fix for such a broken monetary system seems to be quite beyond me as it does for many posters here.

Ive really racked my brains trying to think of a monetary system that works and have come to the conclusion that none of them do, that some sort of Godelian incompleteness applies to economics as it does to all open systems and that this feature expresses itself via the monetary system.
I wrote a post on it for those interested (sorry to blow my own trumpet but it does seem pertinent here):

geekgrrl's picture

"Good writing style too."

LOL. You obviously didn't read the OP.