1996 UBS Redux: Who Should Have Been In The Euro?

Tyler Durden's picture

No, it's not Friday and no, it's not a total joke, but UBS' Stephane Deo takes a retrospective look at what his firm's economists were saying back in 1996 about who should be in and who should not be a part of the Euro 'project'. Given the growth and performance of the 'ins', it seems perhaps we should, as Deo says, always pay attention to economists for a happy and prosperous existence but it is somewhat insightful that as far back as the beginning of this experiment, it was relatively clear (in 1996) that proximity to Maastricht rules, political flexibility, and real economic prospects separated the 17 nations, leaving an at-the-time optimal five (or maybe six) nations. There are many yeah-but comments with this look-back, but for sure, it provides a quick-and-dirty view on what these countries looked like before whatever integration they have now, and maybe what they should revert to once again - it is certainly cathartic to see the peripherals already standing so far from the core.


UBS - Stephane Deo - What if – economists had been listened to?

This is, perhaps, the easiest question to answer. The secret to a happy and prosperous existence is to listen to economists all the time.


Back in 1996 UBS published research saying that the Euro should consist of five or six countries (Germany, Austria, the Netherlands, France, Luxembourg and, with a certain degree of charity as to the debt burden, Belgium – summarised in the Venn diagram above). What would have happened if the Euro had consisted of those countries, and no more?

The chart shows the difference in growth between the strongest and weakest Euro member (given the Euro’s current composition), alongside the difference in growth for the strongest and weakest Euro member in a perfect world (where economists decide everything). The growth differential for the Euro 17 is huge, unmanageable, and symptomatic of an entirely dysfunctional monetary union.

The growth difference for the Euro 6 (actually 5, as Luxembourg has been excluded from this analysis) is steady, modest, and entirely manageable with a single interest rate and a single exchange rate.

In other words, a Euro consisting of the six countries would have worked in economic terms. Monetary policy would have been appropriate for all parts of the union. That would not have prevented fiscal strains as the global financial crisis developed, but the fiscal strains might have been somewhat lessened (because fiscal policy would not attempt to compensate for an inappropriate monetary policy).

How the eleven excluded from the Euro would have fared is a more difficult question. Would Greece have had so profligate a fiscal policy if it had been able to run a more appropriate monetary policy? Would the property bubbles, and ensuing crashes, in Spain and Ireland have taken place if monetary policy had been sensitive to their needs? While there are disadvantages in using a less liquid currency, it seems likely that the advantages of a more appropriate domestic monetary policy would have offset the potential disadvantages of a more volatile exchange rate. After all, in all of these economies, the domestic economy far outweighs the external in terms of its importance.

Unsurprisingly, therefore, it seems that the world and in particular the Euro would have been a better place had economists’ advice been heeded.

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achmachat's picture

best thing I've seen all day.
It's nice to see what everybody knows to be true in diagrams and charts.

defn8Dog's picture

Speechless. This certainly provides a different perspective. Please preserve a copy to be reviewed in 2026.

Grimbert's picture

I went to your link and tried clicking on the videos but it wouldn't let me. Is it becasue I is Inglish? 


BTW my local fish 'n' chip shop in no way recognises the fact that Belgium contributed this important part of British culture. Thank you, Belgium. 

Also your beer is OK. Just OK, not great.


mrgneiss's picture

Or try this one of MF Globals Asian clients on reaction to the trustees latest moves:


scratch_en_sniff's picture

And that is why hindsight will never go out of fashion.

clymer's picture

this might be considered foresight

Rainman's picture

also means 11 near-deads must exit the lifeboat

RopeADope's picture

Packaging junk and labeling it AAA will never go out of fashion as long as you can bet against it.

lolmao500's picture
Who Should Have Been In The Euro?

Nobody. The euro is a globalist invention. Whatever the globalists want is bad for the 99% bitchez!

Neidhammel's picture

The Euro consisting of the six countries would have worked in economic terms? Certainly, as long as Germany was willing (i.e. forced) to finance the deficits resulting from mismanagement of French economy and to fund French statism.

France’s struggle to escape Bundesbank’s  ‘brutality’.


disabledvet's picture

And this is the problem and what will lead to the EU's collapse sooner rather than later. France should never have been part of the euro. Their monetary history is simply put both vastly superior and unique to the rest of the Continent's. Moreover as the only true unitary State on the Continent they simply are incapable of living by its strictures...which of course is why we love France. Soon France will turn honestly Socialist which will put the dagger through the heart of this truly odd financial coupling of France...and anybody. Ironically New York will have played a critical role in accelerating the demise of Mutt and Jeff political economy: by setting DSK up and amazingly then throwing him into Rikers Prison they all but destroyed what hope New York had of "keeping the euro ponzi alive" by keeping the French Government as solidly Jewish as it is/was right wing. This is in the immortal words of Jim Morrison "The End."

Grimbert's picture

Of course the French invented hyperinflation http://en.wikipedia.org/wiki/Assignat


disabledvet's picture

but the Germans perfected it. the fact is there is no gold bug like a French gold bug. when the confiscation of gold occurs in the US it will blow this country away. Because the French state has historically had awesome amounts of power the French people fully understand the importance of not just having gold but of the danger of being "MF Globaled" where--ever though that's your bar of gold "you now have less of a bar."

merizobeach's picture

I like history, too, but let's not forget that most people alive today are dumb as shit, regardless of where they come from.  In my limited experience, I can't say I've ever been memorably impressed by the intellectual capacity of the French people I've met.

As an aside, I thought DSK sounded pretty smart til I saw what happened to him.  Maybe he was a little too smart for his own good...  DSK via the IMF: 'No, China, you can't join the SDR; yes, world, we are prepared to supplant the USD as reserve currency; hey, Sarkozy, how about a little contest?'  So in the span of a few months, he made enemies of China's gov, the US gov, and France's president.  Seemed prudent at the time..

falak pema's picture

the franco german ping pong is good for france, who have forgotten to count since 1792! Relearn what a market economy is!

Non Passaran's picture

What does that even mean?

We'll see how sporty France'll get after they receive that email from S&P...

honestann's picture

The euro would have worked fine if their "money" was 100% real, physical gold coins denominated in grams with absolute prohibition of every possible variation of fractional reserve practices.  In fact, a single one-world-currency also works fine, but ONLY under the identical circumstances.

kito's picture

question is: should there have been a euro?

Sudden Debt's picture

I know what you mean. I would have called them Kradjoebiekala's, it sounds more catchy and sounds more powerfull.

Now... Eeeuuuuu ro
Sounds Like a bunch of cows that need to be milked....

Ancona's picture

More doom........I'm doom deficient!

Actually, this makes perfect sense, except a bunch of globalists were in charge, and wanted what they wanted; open borders and an end to sovereign tariffs.

Well, they got what they wanted, only it wasn't.

THE DORK OF CORK's picture

Nah - I think yee have got it all wrong.

Germany is fucked in more ways then people imagine - the implosion and flow of credit deposits helped them to a great extent but that is drying up.

Germany  always puts up a good show for the first 3 years of a war - then it begins to flag.

Its position means it must fight & win a lightning war

Mercantile states - especially mercantile states that export high value goods always suffer most in a Depression.

And as for the others they always needed colonies to prosper - without colonies they are nothing.

If the ECB does not produce money soon its body will drift down the Rhine.

Gunther's picture

Remains to be seen if Germany is more fucked by the current setting of selling expensive stuff abroad, vendor-financing it and on top subsidizing the rest of the EU with low interst rates or writing the whole EU plus the debts off and cooperating with Russia.

THE DORK OF CORK's picture

Its your Banks - they have not deleveraged , everything was put on Ice.

The Euro trade imbalance can be fixed with a higher Gold price - if Germany really has the Gold.

no life's picture

Is this just a long way of saying the Eurozone is about to blow the fuck up??

Antifaschistische's picture

The world is confused.

There never should have been a "Eurozone"

But the entire world would benefit from a single currency.   If the US made a gold eagle and Europe used the Philharmonic Gold then the world would be using a single world currency....gold.

The problem with the "Euro" (the currency) isn't a single currency.  It's the artificial market for sovereign debt where banks continue to invent debt and buy and buy and buy.   The "free" market would never ever ever lend this much money to stupid governments.  The "free" markets would have jacked up interest rates a decade ago and FORCED governments to considerably curb borrowing.  

It's the banking system that needs flushing not the "Euro Currency" 



Jim in MN's picture

Hmmm, guess I'll just leave this right here...


Finland 'finds Patriot missiles' on China-bound ship

The Finnish authorities have impounded an Isle of Man-flagged ship bound for China with undeclared missiles and explosives, officials say.

Police are questioning the crew of the MS Thor Liberty after what were described as 69 Patriot anti-missile missiles were found aboard.

Interior Minister Paivi Rasanen said the missiles were marked "fireworks".

The MS Thor Liberty had docked in the Finnish port of Kotka after leaving Germany last week.

Dock workers became suspicious after finding explosives poorly stored on open pallets, and the missiles were then found in containers marked "fireworks".

The managing director of the ship's owner, Thorco Shipping, expressed surprise. Thomas Mikkelsen told AFP news agency from Denmark that he was unaware of the matter.

Another company official, speaking on condition of anonymity, confirmed the ship had been detained in Finland and said the missiles could have been loaded on to the vessel by mistake, AFP adds.

Police did not confirm Finnish media reports that the ship had also been scheduled to stop in South Korea, Reuters news agency reports.

slewie the pi-rat's picture

...you had me at Venn Diagram...

Atomizer's picture

The never ending tale of a progressive EU Bong Song

Creating one membership Widowermaker at a time.


oogs66's picture

Time capsule bitchez

merizobeach's picture

Ok, I'm sorry if I've got this wrong, and someone please explain it to me, even with as much vulgarity as you may require...  But, aren't the two shades of green on the second chart labeled incorrectly? ? ? (!) ?  The dark green is more stable, but it's labeled as "Euro 17".  Please somebody correct me if I'm wrong because I want to rail against incompetence with furious profanity if this is the mistake it looks like to me.

Peter K's picture

Couple of points:

The whole rationale behind the EU, or rather why a country other than Germany should join the EU was that in the currency union, the market will price the countries risk premium at or close to the level of Germany. Therefore, it was a quid pro quo that those who joined the club would be allowed to load up with cheaper gov debt because it would be priced at lower risk levels. I.e. they all became Germans:)

All the proof one needs to see is how the BTP's looked like during the convergence trade. In the span of 3 weeks, the BTP rates fell by 300 to 400 bp.  This was shear lunacy. And the European banks and insurance companies were forced to play by the pols. Ever wonder why 85% of all European debt is in the hands of European banks/insurance companies?  

Second, UBS's Paul Donovan has been consistantly saying throughout this entire time that the Euro was a political decision and not an economic one. He was a voice in the wilderness, and this needs to be stated here. He stated numerous times that when the economists were consulted, the answer was: Don't do it. But the pols decided differentsly. 

A Man without Qualities's picture

Exactly - it was taken as a given that the stronger nations would support the weaker, the implicit German guarantee.  They just prefered to bury their heads in the sand as the debt levels grew beyond what could be sustained.  The fact is, nobody ever asked the citizens of the richer nations whether they were willing to support the periphery.  

Silo's picture

Good luck to Germany in NEuro competiting with the QE'd pound and the super QE'd lira with no proxy QE from informal bail outs. The Euro works better as it currenty is, the north European countries just have to come to terms with the fact that it isn't a free lunch.

A Man without Qualities's picture

I remember being at a dinner party in Brussels back in 1995, surrounded by a bunch of EU apparatchiks.  It was very clear that the political class did not want to, or more correctly were not able to consider the economic dangers of an enlarged Eurozone and the differences in economies.  The wanted the Euro to be the currency for Europe, so wanted to colour in the map to make it look nice and pretty.  They really believed that labour mobility would ease most of the imbalances, but didn't seem to understand there was a big difference in a Greek farm worker moving to Germany versus a middle class university educated twenty-something taking up a job in Brussels...

It's also clear they wanted to sell the project as a way for everyone to enjoy the same standard of living, so easy credit flowed at far lower rates of interest than had been known.  It all looked so good for a while, even to the extent that they thought the wave of prosperity would make it possible for Greece to join the party - yes, there were some issues with Greece, but it sure made the map look good.