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The European Default Line

MacroAndCheese's picture





 

macroandcheese.org

 

What the heck is going on in Europe, and why are the peripheral countries putting up with it?

 

Let’s review what has happened over the past dozen years.  When the Euro was created, Eurozone countries signed on and began using the common currency.  They all agreed to follow certain rules, such as maintaining annual deficits of less than 3%, etc.  Sensing that Greece and Portugal were now fungible with Germany, investors poured money into the peripheral countries.  Hundreds of billions of euro rushed into these countries, mostly from European banks, leading to bubbles all over the place.

 

The European banks knew what they were doing, it was caveat emptor.  They invested in real estate projects, made construction loans, funded small businesses, and stuffed themselves with zero percent BIS sovereign bonds.  They thought they couldn’t lose.

 

But the banks lost.  Fine, welcome to investing.  But rather than take the hit, those banks were bailed out by their own governments, who told Ireland, Greece, and Portugal, no no no, you can’t default, you can’t leave, we’ll lend you more money so you can make your payments.  You just have to follow a few rules, like ratchet up your taxes and slash your spending, so you can pay us back.

 

So rather than the banks losing money that was foolishly invested, the citizens of the PIIGS countries are on the hook, effectively forever.  Sure, Greece will get a break on the bonds it issued, but there was no choice about that, the game had gotten so far out of hand that Greece had no hope of ever paying the money back.  But Ireland and Portugal are slated to pay back every dime.

 

Not only are the PIIGS citizens in debt for probably the rest of their lives, but also they're stuck with a horribly strong currency that makes it all but impossible to compete with their neighbors.  Devaluing their currency is the only thing the weak countries can do short of slashing jobs and lowering salaries, and they’re already teetering on the edge of a depression.

 

Yesterday I attended a presentation by a prominent European economist from one of the strong European countries.  He claimed Greece would have no reason to leave the Eurozone, since their imports were two times larger than their exports.  If they were to revert to their old currency, the cost of imports would soar, he said, and they don’t have an export sector large enough to benefit from a weaker currency.

 

But that is exactly wrong!  Of course they have no export sector, the Euro is too expensive for them, that’s the whole problem.  With a weaker currency they could rev up exports and manufacturing, add jobs, and finally compete.  The devaluation would increase exports, while at the same time reducing imports and bringing their current account back in line.

 

C’mon, PIIGS, default already.  Jettison the Euro—it was a bad idea anyway, it’s time to move on.  And by all means, don’t agree to make the rich countries’ banks whole when they get burned on a sure thing.

 

 

 


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Fri, 02/03/2012 - 17:25 | Link to Comment Get the Borrow
Get the Borrow's picture

UMM Bullshit.  By leaving the euro and immediately de-value-ing the new drachma, anyone who owns anything denominated in the new currency gets smoked.  Has anybody been paying any attention to the "managed" devaluation of the dollar?

 

Fri, 02/03/2012 - 17:18 | Link to Comment Silberadler
Silberadler's picture

Greece,

manufacturing ?

What manufacturing ?

Oilve oil and falaki ?

Problem is:

Greece has no real manufacturing of goods worth exporting to anywhere.

Oh by the way:

In 1908 they got kicked out of the Latin Mint union (standardized gold coin sizes).
(Belgium, France, Italy, Spain, Switzerland and some associated countries)

Before that , until 1865 Otto from Bavaria was king of Greece before they made him resign.

Before Otto came it was just one mess after the other.

History check, please !

Now - where would Greece go from here anyway?
The sad thing : the answer is - nowhere.

There must be a reset, both in people's minds and their attitude and also in Greece's political system.

Both - highly unrealistic if they remain in the EU.

 

Fri, 02/03/2012 - 16:42 | Link to Comment falak pema
falak pema's picture

greece should default in the name of greek people.

Fri, 02/03/2012 - 17:00 | Link to Comment zaphod
zaphod's picture

"With a weaker currency they could rev up exports and manufacturing, add jobs, and finally compete."

But that is the whole point, the people in Greece do not want to work. That is hard, they'd rather have all their political parties promise free government jobs for all with unlimited pensions.

Fri, 02/03/2012 - 17:36 | Link to Comment gina distrusts gov
gina distrusts gov's picture

sirrah do you collect a cheque from the gov  to post that drivel

Fri, 02/03/2012 - 16:41 | Link to Comment randomdrift
randomdrift's picture

I agree completely with this article: Defaulting would be the best possible outcome.

Fri, 02/03/2012 - 16:11 | Link to Comment web bot
web bot's picture

The author says that EU citizens are in debt for the rest of their lives due to the PIIGS. Not so. It's going to blow up and reset with massive social unrest. They will eventually be free of this genetic cancer.

Fri, 02/03/2012 - 23:26 | Link to Comment bonin006
bonin006's picture

read it again bot:

Not only are the PIIGS citizens in debt for probably the rest of their lives...

Fri, 02/03/2012 - 17:29 | Link to Comment Are you kidding
Are you kidding's picture

Can we do that here too? Get rid of genetic cancer?

Fri, 02/03/2012 - 16:01 | Link to Comment BlackholeDivestment
BlackholeDivestment's picture

U.N.Sustainable Development. LMAO!

You see, when you put ''U.N.'' in front of ''Constitution''

       ...it looks like this; U.N.constitution(al)

Do NOT follow this link or you will be banned from the site!