"Euro May Already Be Lost" - Vice-Chairman Of EuroThinkTank Warns "No Way To Avert Break-Up"

Tyler Durden's picture

Submitted by Mike Shedlock via MishTalk.com,

In response to Blinded by Hate, I received an email from Tuomas Malinen, Vice-Chairman of EuroThinkTank regarding the fate of the euro.

Hi Mish,

Thank you for an excellent blog. I’ve been an enthusiastic reader for years.

 

I am the vice Chairman of EuroThinkTank, a group of economists and financial market experts (and a statistician) studying the future of Eurozone. We have recently published a working paper, How to abandon the common currency in exchange for a new national currency, and we are in the process of preparing a report on how Finland could leave the eurozone.

Concerning you recent piece, Blinded by hate, I was wondering have you noticed our piece in HuffPost entitled, The Euro may already be lost?

 

We go through the scenarios of euro -survival and find them to be extremely unlikely.

 

With Best Wishes,
Tuomas Malinen

The Euro May Already Be Lost – Tuomas Malinen

The 1st of January 2017 marked the 18th anniversary of the European common currency, the euro. Despite its success from 1999 to 2007, after 2008 the euro has become a burden for many of its members. For example, living standards in Italy and Greece are below the levels when they joined the euro. Finland is the only Nordic country using the euro and it is also the only Nordic country which has not yet recovered from the financial crash of 2008.

There have been many proposals on how to fix the euro and the EMU, but they are politically unpopular and unrealistic. In this blog-entry, we will argue that the euro will almost surely fail; we just do not know the exact timing of its demise.

Problems of the euro are structural and persistent

The problem of the euro can be visualized in the development of the GDP per capita.

eurozone-gdp-per-capita

Germany has been successful in the Eurozone, while Greece and Italy have not. France is not doing well either. The jury is still out for Finland.

The different growth paths are a symptom of a general problem that has haunted currency unions for centuries. Competitiveness and productivity develop at a different pace in different countries. Over time, this leads to large competitiveness differences among the members of a currency union. These differences do not usually pose a problem during economic booms because strengthening aggregate demand supports ailing fields of production. However, when a currency union faces an economic downturn or a crisis, falling aggregate demand hits less competitive industries and countries hard and the financing costs of less competitive countries jump. This is an asymmetric shock.

The detrimental effects of asymmetric shocks can be mitigated by transferring funds from prosperous to declining member states. When the dollar union of the US threatened to fall apart during the Great Depression, the federal government enacted federal income transfers from prosperous states to aid ailing ones. The federal budget also increased rapidly and, in practice, income transfers became permanent. The no bailout policy of crisis-hit states had already been enacted earlier.

According to the ECB, competitiveness of the German economy has improved by around 19.3 percent, Greece’s competitiveness has improved by around 6.5 percent, France’s around 3.9 percent, Finland’s around 1.7 percent and Italy’s around 0.9 percent since 1999. Thus, for survival in its present form and size, the Eurozone needs a similar income transfer system, that is, a full political union as in the US.

There is no European-wide polling data on a political union, but it appears that the support for the EU is diminishing in its core. In a recent survey, 40 percent of Finns wanted to leave the EU. Also, only 53 percent of Dutch are against a new referendum on the EU, which means that 47 percent are either for it or do not know their stand. For permanent income transfers, you would need to change the Maastricht Treaty and ratify it in each member country or to negotiate several bilateral agreements. There is only a very small likelihood that these would go through, for example, in Finland and in the Netherlands.

Funds, unions and reality

Because there is no public support for a federal European Union, many have envisaged alternative ways to fix the euro. The CEO of the European Stability Mechanism (ESM) Klaus Regling has proposed that euro could be saved by a combination of the banking and capital market union and a rainy day fund. This fund would allegedly be used when asymmetric shocks occur. The fund would be financed jointly by all euro countries. However, because of the persistent differences in competitiveness, its transfers would become permanent. Only the most competitive members of the Eurozone would have sufficient income to finance the fund. Any financing through the European Central Bank (ECB), would need to be covered by European tax-payers later when it would become evident that weaker countries are unable to pay back their loans and when seigniorage revenues would be unable to cover the losses of the ECB.

Thus, in practice, there are only two ways to fix the euro: A far-reaching political union proposed in the Five President’s report in 2015 or returning to the system described in the Maastricht Treaty, where member states would be responsible for their own economies only (no bail-out).

In a full political union, there would be a concentration of economic policy decision-making and it would require major structural changes in the Eurozone and its member countries. Tax and social policies would be unified, labor unions would be dismantled or unified as a European-wide system, a European debt relief system and banking union would be set up. These would ensure the flexibility of wages, prices, and labor agreements and guarantee convergence of competitiveness and living standards. This could work, in theory. But, the likelihood of getting all the member states to agree that their wages, debt and living conditions would be negotiated at the European level is extremely small.

Returning to the Maastricht Treaty and to the no bail-out rule would mean that persistent differences in living standards and market-based debt restructurings would be enacted. ESM and the European Financial Stability Facility would be wound down after their current programs would end. ECB support (QE and OMT) programs would stop. This would lead to the default of Greece and its likely exit from the euro. In the long-run, asymmetric shocks and persistent income differences would be likely to force several additional countries to leave the euro.

The Eurozone is in a stalemate. A federal union would be needed to fix its problems, but there is no public support for it. Returning to national fiscal responsibility would lead to defaults and exits. Half-way solutions will prove insufficient but expensive and obfuscate the issues. Therefore, there may be no way to avert the partial or complete break-up of the Eurozone in the years to come. The fate of the euro may already have been sealed.

Tuomas Malinen, CEO of GnS Economics, postdoctoral researcher at the University of Helsinki, co-written with Dr. Heikki Koskenkylä and Dr. Peter Nyberg.

End Malinen

Thanks, Tuomas.

We look forward to your report on report on how Finland could best leave the eurozone.

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Tallest Skil's picture

One of my favorite things about this is being able to stick it to those commie fucks on alternatehistory.com who fellate everything that any liberal has ever said. No more supranational unions for you!

Thoresen's picture

Ireland can look forward to the Punt or Pound.

Paper Boy's picture

Serial inflationists stuck in a super-national straight jacket. Who could have seen it coming?

Jim in MN's picture

And to think they were trading silk stockings for eggs or milk, not so very long ago.....

YouJustMadeTheList's picture

They need more Greek finance ministers in there instead of Goldman guys... Oh Wait!

Manthong's picture

I ran across some confidential video of EU Commissioners meeting and working on solutions.

https://www.youtube.com/watch?v=3_3VrHLuqG4

D Nyle's picture

Its all fun and games until they hang the un-elected officials, then the fun really starts

rsi1's picture

Love it, time to buy EUROs is finally here.

 

TeamDepends's picture

If we had to choose the main reason the EU is imploding, we would have to go with the Merkel Twerkle.https://m.youtube.com/watch?v=rUZfsryMqvc

brianshell's picture

Sovereign money for all states.

https://www.rt.com/shows/keiser-report/377277-episode-max-keiser-1032/

The guest from Norway suggested the bancor, but just for the EU.

Mareka's picture

"Despite the Euro's success from 1999 to 2007"

The Euro was a failure from the beginning.
The inevitable outcome just took 8 years to become obvious.

greenskeeper carl's picture

Haha nice. Ya that's about right.

Soul Glow's picture

Especially if it is a Guiness!

peddling-fiction's picture

I have said it before, reinstate the Finnish Mark, get out of the EU and then foster peaceful relations and business (at least +10% GDP growth) with the Russian Federation. Also, support high quality Finnish agriculture, dairy and livestock. Especially small and medium sized farmers.

Just getting out of the Euro, would help Finland snap out of its doldrum. Getting out of the EU, and its choking regulations, would then help Finland thrive.

The EU army is just about a reality. Finland does not have a land border with Europe. Now is the time to get the heck out, or pay dearly.

At least I warned Finland about this danger, and that our leaders are taking us to the cliff.

I paid dearly for being vocal about this in Finland.

This gets me misty-eyed.

Terve (Hi) Tuomas

Billybullshit's picture

What's wrong with what you say? Nothing , except the corrupt , money crazed cunts in charge only care about themselves

August's picture

The Irish will be begging for seats at Westminster.

NoWayJose's picture

And some expect the US Dollar to 'weaken' against the Euro!

YouJustMadeTheList's picture

Frankly ~ I was more expecting for jewish monkeys to fly out of Mario Draghi's ass & unleash hell, like, you know, the worst parts of the Bible.

Thoresen's picture

Thought the headline meant Theresa May!

Soul Glow's picture

"Euro May already be lost!" - Ali G, when asked about Brexit

Jim in MN's picture

Marine Le Pen, not the female president the leftist dolts were rooting for...

http://finance.yahoo.com/news/le-pen-calls-rioters-scum-144221043.html

Le Pen Calls Rioters Scum as Violence Roils Paris Suburbs
williambanzai7's picture

Marine Le Pen is quite formidable. The only French politician with cohones.

AC_Doctor's picture

The Euro experiment will end badly.  It was a horrible idea from the start, like running Crooked Hillary, instead of the Bernster.  Satan has an opening for one of them...

I woke up's picture

Same thing happened in 1944 with Henry Wallace and Truman, except Truman eventually became President, still screwed Wallace over

TheABaum's picture

Sanders was a fraud.

Professional politician, no record of legislative success, and bitches about wealth while living in a 600K house and driving a 170K car.

His supporters are idiots. 

 

MASTER OF UNIVERSE's picture

I personally eviscerated the European Union March 10th 2008 around 11:00am Bear Stearns time New York shitty, fuckwads.

 

Everyone has known since 08 that the Euro & EU are defunct, and that they were flawed really lousy pieces-of-SHIT that were manufactured by retards that worked for Goldman Sachs-of-SHIT & JPMorgan. All the retarded fuckwad academics in Oxford University can get in line to lick my balls in deference to my intellect & intelligence over their own.

 

NOTE: The EU & Euro is a long dead poorly constructed & amateurish bit of lame engineering that does not even pass Engineering 101 principles of engineering. European & American academics really are objectively uneducated as evidenced by their knowledge of the basics of mathematics principles in contemporary High Finance & Commerce.

MASTER OF UNIVERSE's picture

It took me 8 years of daily computing to reverse engineer the engineering & architecture of Wall Street, the City, Vatican Bank, the FED, World Bank, BIS, IMF, & EU. I, for one, can guarantee you that the laws of mathematics, statistics, and physics, as well as thermodynamics, and Engineering, are universal. And I applied those laws in my designed implosion of the Western Empire & Global banking architecture.

 

We have a tool in Mechanical Engineering that is called the 'BFH', and good engineers like myself know when to use it for full advantage to solve problems in Engineering.

Withdrawn Sanction's picture

BFH works well in auto repair too, and for the same reason:  some nuts just wont let go. 

MASTER OF UNIVERSE's picture

Agreed, but in body work the BFH is for hammering dents, and Oxy-Acet cutting torches, Plasma cutter, or grinding disc, is best for nuts' n' bolts that won't let go. I have done my fair share of frame off restorations, eh. I just sold my Miller MIG Welder a few months ago. My body work days are over unless Rothschild forks over my bullion.

hendrik1730's picture

Nice description. But hey, it were politicians, bankers and lawyers who founded this monster construction. You know, those guys with an IQ matching their shoesize ( EU units ) but with the biggest pockets and ego of the known history. When their pockets are well-filled and they got a fortress somewhere in New Zealand, they will abandon ship and leave the bill for the hardworking citizens. The process is ongoing.

youngman's picture

should be good for Gold and Silver.....right...lol....nothing moves it anymore...

nah's picture

France, Germany, and Italy probably haven't given up on everything yet.

.

The Euro is probably still in its infancy as representing the bloc of nations allowing it to trade.

.

Big government needs big ideas and big banks with lots of customers to compete and stay relevant in a big government world.

.

Its about talent in the long run

Squidbilly's picture

EU/EURO TITS UP IN NO TIME

OverTheHedge's picture

Nothing to worry about: Ghordius has matter in hand, and all will be well. If it isn't, the US is probably to blame.

Ghordius's picture

+1, made me laugh

seriously? I am soooo not worried about the EUR itself. everything else, yes. but not that fancy "the EUR is doomed, doomed"

look at this nugget in the article:

"When the dollar union of the US threatened to fall apart during the Great Depression, the federal government enacted federal income transfers from prosperous states to aid ailing ones. The federal budget also increased rapidly and, in practice, income transfers became permanent. The no bailout policy of crisis-hit states had already been enacted earlier. "

no, I do not blame the US. I do "blame" Tricky Dick for taking the dollar out of gold. isn't that a fact? just a straight fact?

the real question after the closing of the gold window was simple: Dollarization, Yes or No

what would your advice be in this decision? the third option, waiting for (as other commenters pointed out) for an SDR or the new global Yuan?

meh. we built the EUR. and sometimes, it looks it is a kind of problem... for lots of people that think it's too hard, too much like... gold

hilarious, eh?

Yen Cross's picture

 I'd be focusing on the $petro.

Jim in MN's picture

LOL I thought you said $pectro.

I was like, ooh $pectro, that sounds cool what is it.....

Jim in MN's picture

Which of course reminded me of the great band Scratch Acid who recorded a song called 'El Espectro'

https://www.youtube.com/watch?v=drvhfJIrM88

 

GlassHouse101's picture

If the Euro burns the USD will be the only game in town, and we will see MASSIVE deflation (& a US default).

The West will fall, and the East will be the recipient of the massive wealth transfer.

Yen Cross's picture

 Wrong. The euro will consolidate, and the $usd will crash.

GlassHouse101's picture

They put ALL their eggs in the Euro basket . . If it goes, they will be back to square 1 again. Until they figure out a new system, the USD will be off the chart deflationary.

DrunkenMonkey's picture

Listen to Yen, they are amping the 'distressed europe' press stuff to shake out the weak hands in euros and then it will head skyward (probably using your crazy pres as motive and likely to be an easy sell).