"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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Tiwin's picture

Argh Yen , you always say the nicest things..sarc.....

short@106.96 and again at 106.68

vegas's picture

All it took was "HuffPo" and I'm done; you seriously expect me to believe anything in that rag. The fucking Onion is more truthful.

 

www.traderzoogold.blogspot.com

Rich Monk's picture

The EU was just another marxist, colletive attempt by Jews to enslave the masses. Notice that most of the countries in the EU have made it illegal to question anything Jewish, the Hollow-hoax, etc.....?

barysenter's picture

The tale of the commune movement in medieval France is worth knowing. The synagogue of 6s is the biggest plagiarists. Ever.

barysenter's picture

Oh, my. How inconvenient for the invading scourge and phd pirates. The only thing that can top this is a little ice age. Or maybe some of that earlier semitic gift to Europe, the Black Death, against which the surviving northern Europeans have significant immunity.

gcjohns1971's picture

The way  to fix the Euro (and every other currency) is to restrain oneself from breaking them.

Governments and bankers are so accustomed to using monetary policy a legal privileges for the purpose of theft that they cannot understand that the source of their woes is themselves.

 

Withdrawn Sanction's picture

Oh, I think they understand what they're doing just fine.  That's why they and their academic minions go to such lengths to rationalize their organized plunder.  I suspect they're just hoping to exit stage left before the roof falls in.  Their greed, however, will be their undoing, and so most will stay to the bitter end. 

The fix proposed (to restrain oneself) is correct but sadly inapplicable.  No human being could resist the temptation to fiddle w/the currency. Not me, not you, not academics; hell, even Mother Theresa (or fill your own saintly person) would succumb.  Money if far too important a resource to be entrusted to the likes of politicians (or bankers). 

Salsa Verde's picture

I wonder what they will do as soon as the big hedgies start taking massive FOREX short positions against the Euro?  A lot of people are going to lose a LOT of money.

Razor Burn'd Capitalist's picture

Of course its lost...it was designed to be the biggest "Boating accident in history" 

Bigger question? Who benefits the most when the Euro Bonds go poop?

 

Which is what this article is mildly skating around: "Problems of the euro are structural and persistent"

 

...no..even bigger question who presented the world with "FRN 2.0" in the first place? All roads lead to Rome for a golden reason.

 

Answer that and you find the Swiss chill'n in Rome. Gold buys what money cant.

Work for paper, your a slave. Swiss work for gold and trade for paper...ponder that.

 

Want to front run this monkey show and make some paper? Follow the SNB's moves  ask yourself where on the path are they taking it next "REAL" market makers are NOT on Wall Street...

 

For perspective and scope:

https://www.uek.ch/en/schlussbericht/synthesis/ueke.pdf

Hate on jews all you want....meanwhile back at the ranch....Rome's been the freeman's enemy for 500yrs and counting..

Just say'n.....

 

CosmicSauce's picture

Failed experiment.

Time to try something that does work.

Each sovereign country being an adult and figuring out their own mess.

Arminius Hermann's picture

Would be great to see this soon! Deutsche Mark goes up like a V2, massive unemployment follows and the sand niggas invited by Mama Merkel keep saying either 'Gimme some money' or 'Allah oh nudebar - Boooom'. The shit hits the fan and civil war starts.

Always thought the months in Bundeswehr were wasted time. Gradually it now becomes a real asset.

ciscokid's picture

Germany is now the sole owner of the EU.

Dickweed Wang's picture

Germany is now the sole owner of the EU.

 

The Fourth Reich??  Seems to me those old Nazi fucker's plans are progressing exactly as intended . . . conquest not by military means but by financial and trade means.  It is no coincidence that the rise of the Military/industrial Complex in the USA happened right after Operation Paperclip (where thousands of known Nazi's were brought to the USA and plugged right into mainstream science and industry).  Yet that issue is still confined to the realm of "conspiracy theorists" to this day . . . who are the current neo-cons in the USA??  The sons and grandchildren of WWII's Nazi empire . . .

Batman11's picture

The comedy of errors that is/was the Euro.

How is the system supposed to work?

Bankers are given the privilege of creating money out of nothing for loans which they can charge interest on.

In reality it provides a mechanism for you to borrow your own money from the future and the interest you pay is the charge for this service. You pay the initial sum, plus the interest, back in the future and get to spend that money today on a house or a car or whatever.

For large loans banks set the interest rate depending on the risk assessment of the loan.

Loans to countries are large loans and the interest rate is set depending on the risk of default.

Greece and many Club-Med nations used to have to pay high rates of interest as there was a higher risk of default.

Then The Euro came along.

The ECB was helping Germany get over its dot.com bust when the Neuer Markt collapsed by 97%.

The financial sector made an assumption that everyone would be bailed out by Germany if they got into trouble.

Interest rates were set at very low levels across the Euro-zone, due to the incorrect assumption of risk by the financial sector and the ECB’s efforts to help Germany.

The Club-med and Ireland boomed, they had never seen interest rates like these, borrowing was so cheap.

Interest rates in Greece used to be about 18% with the Drachma, it was time to party and stock up on German luxury goods like the Porsche Cayenne, a great favourite in Greece at the time. It’s party time in the Club-Med nations and Ireland.

Housing bubbles inflated in Spain, Ireland, Greece and Holland.

The good times would never end, until they did.

A hurricane blew out of Wall Street and laid low the once vibrant global economy. The Euro-zone nations had to load up on debt to bail out their banking sectors.

The financial sector realised that Germany wasn’t going to be bailing everyone out and re-assessed the risks and raised interest rates accordingly. The sustainable debt became unsustainable and the housing booms turned to bust.

The Euro-zone crisis was in full swing and things were allowed to run for quite a long time before the ECB swung into action and bought down interest rates at the periphery and a lot of damage had already been done.

The EU took the debt off the private banks and placed it on EU taxpayers, they were still very concerned about the health of their banks after 2008.

The vast majority of Greek bailouts just return to the EU as repayments on the debt and less than 10% goes to Greece.

There is plenty of evidence to suggest austerity doesn’t work including the IMF’s own forecasts for Greek recovery with austerity.

The IMF predicted Greek GDP would have recovered by 2015.

By 2015 it was down 27% and still falling.

There are many players in this comedy of errors but Greece and the Club-Med nations get the blame.

The whole thing was a farce from start to finish.

Batman11's picture

Luckily the Euro-zone has a technocrat elite to monitor things as they go along and ensure nothing gets out of whack.

Unfortunately, they were all in a coma for the whole time.

 

Batman11's picture

Everyone was panicking after 2008, after the world has been flooded with Wall Street’s toxic waste of sub-prime, mortgage backed securities.

Christine Lagarde suggested a European Rescue Fund to bail out the troubled Euro-zone banks.

Angela Merkel was insistent that “Every country must clean up its own shit” in a meeting in Paris on 4th Oct 2008.

Nicholas Sarkozy wasn’t happy but was rather amused when the first bank to collapse was German.

It is the market’s reaction to the news there will be no debt pooling that does the damage, especially after the borrowing binge that has been going on since the Euro came into being.

Merkel plays a pivotal role in the death of the Euro.

Withdrawn Sanction's picture

"It is the market’s reaction to the news there will be no debt pooling..."

And there's the rub:  without a federalization of debt, the poor countries are tied to debts denominated in a currency they do not control for debts assigned to them through a conspiracy of bankers and local politicians (think Greece here in the run-up to admission).  This is just a dual-layered control fraud designed to facilitate asset stripping of the various member countries.

I seriously doubt whether this type of failure was designed in from the start (though some days it certainly looks like it).  The leaders and bureaucrats in any country, let alone Europe, are just not that smart.  

 

Ace006's picture

It is good that the technocratic elite is always there to help us when we make the silly mistakes that we do.

Sandmann's picture

This analysis is stupid. Germany has 33% manufacturing capacity of EuroZone and deliberately chose an advantageous DMark/Euro exchange rate of 1.95 when East Germany was sucking in huge amounts of capital and the D-Mark should have appreciated as interest rates rose. Germany funded Unification through FICA putting the burden onto labour costs.

Hartz IV under Schroeder cut employer costs for unemployment and loaded everything onto employees. German Capitalists got Consumers without paying for Unemployed Workers.

The same model was employed across ClubMed states in S Europe with debt being piled onto Target2. Agric producers in Greece and Italy cannot increase productivity or cut unit costs and terms of trade are always against them when trading with manufacturers

tuetenueggel's picture

Good news. We have to get rid of the Brussels communists.

Ghordius's picture

Very Important Message from Uncle Ghordius:

"The detrimental effects of asymmetric shocks can be mitigated by transferring funds from prosperous to declining member states."

NO. There Is No Such Thing As Mitigation. only... subsidy. let's be frank about that

or do you see anywhere a case of a rotting region that became better with funds showered from above? any at all?

Thoresen's picture

Norwegian guy on tonght's Kaiser Report was proposing the possibility of introducing the Keynes idea of the Bancore (?) where countries in the EU area with a surplus would be penalised with interest payments just as those needing loans would also pay interest. He thought it was the only way for the euro, in a different form, could survive.

The Count's picture

The entire Eurozone is nothing more than a Zionist/Leftist quasi Realsozialismus in disguise. No coincidence Merkl was a Stasi trained operative.

oncemore's picture

Robert Coudehove C

Kalergi said , we must unite and be of brown color. Merkel wants to do it that way Robert Kalergi was half Jewish like Merkel. Merkel imports excessive b4own biomass from all planet

 

oncemore's picture

Robert Coudehove C

Kalergi said , we must unite and be of brown color. Merkel wants to do it that way Robert Kalergi was half Jewish like Merkel. Merkel imports excessive b4own biomass from all planet

 

oncemore's picture

Robert Coudehove C

Kalergi said , we must unite and be of brown color. Merkel wants to do it that way Robert Kalergi was half Jewish like Merkel. Merkel imports excessive b4own biomass from all planet

 

KingTut's picture

He was half Japanese, and probably a quarter Jewish.

But some weird insecurity about his ethinic make up led him to advocate deliberately mixing the races to get rid of the tendency for eurpoeans to go to war with eachother.  Not quite the same as Hitler's Arian race crap, but  equally creepy.

The problem is this guy is one of the Fathers of the EU, having founded the Paneuropean Union in 1924 financed by ... wait for it ... the Rothschilds and Warburgs.  That we have this insane migrant policy with Mulsim men saying we are going take over by mating with your women, is right up this dick head's alley.

Look up Jean Monnet for the origins of the anti-democracy beiiefs of EU founders.  The CIA was instrumental in setting up the EU along the lines prescribed by these creeps.  Built to Fail.

Yars Revenge's picture

"Euro may already be lost"

 

Thanks for pointing out what everyone on the planet already knows.

 

What may be unexpected though is what happens after the Euro ceases to be: the US dollar becomes the new offical currency of Europe

Dickweed Wang's picture

What may be unexpected though is what happens after the Euro ceases to be: the Yuan becomes the new offical currency of Europe . . .

 

There, I fixed it for ya . . .

cwsuisse's picture

The Finns are right and the EURO trouble portends to the end of the fiscal system. It is not that the US, Japan and China are so extremely stable. China is creating money at super speed (currently at the rate of 500 billion per month), Japan is mired in Abenomics and the US economy is an over-indebted dead man walking.

falak pema's picture

Damn right; a one legged euro expanded at US demands to include the Eastern Europe countries; after Yugo disaster and US led Dayton deal and then Serbian bombing; it gave the US the upper hand to impose its own Barroso led team of neoliberals and Blairist interventionism (who wanted even to have Turkey invited to please GWB)-- in 2004-2007, and when the Constitution was dropped in 2004 it went on to 28 and that was that. The Lisbon accord was a dud, it allowed the Commission and the Council to be at loggerheads; the Parliament to be a consultative non enforcing body as the Council of heads of government had the real power.

Federal unity on economic and military policy or nothing; in this new new world order of all dangers. 

Doesn't look like it will ever happen. And the Euro will probably die.

Its all upto Merkel and she is not on board; If Schulz wins as does MAcron in France it could change things.

But the Brits can spoil the works by influencing the northern countries.

Batman11's picture

The comedy of errors that is the Euro.

How is the system supposed to work?

Bankers are given the privilege of creating money out of nothing for loans which they can charge interest on.

In reality it provides a mechanism for you to borrow your own money from the future and the interest you pay is the charge for this service. You pay the initial sum, plus the interest, back in the future and get to spend that money today on a house or a car or whatever.

This mechanism has an interesting effect on the money supply as the money comes into the economy immediately and is only removed slowly by the repayments. Very slowly, in the case of long term mortgage debt.

For large loans banks set the interest rate depending on the risk assessment of the loan.

Loans to countries are large loans and the interest rate is set depending on the risk of default.

Greece and many Club-Med nations used to have to pay high rates of interest as there was a higher risk of default.

Then The Euro came along.

The ECB was helping Germany get over its dot.com bust when the Neuer Markt collapsed by 97%.

The financial sector made an assumption that everyone would be bailed out by Germany if they got into trouble.

Interest rates were set at very low levels across the Euro-zone, due to the incorrect assumption of risk by the financial sector and the ECB’s efforts to help Germany.

The Club-med and Ireland boomed, they had never seen interest rates like these, borrowing was so cheap.

Interest rates in Greece used to be about 18% with the Drachma, it was time to party and stock up on German luxury goods like the Porsche Cayenne, a great favourite in Greece at the time. It was party time in the Club-Med nations and Ireland.

Housing bubbles inflated in Spain, Ireland, Greece and Holland.

Germany itself was in a state of shock after the dot.com bust, it didn’t borrow and tightened its belt becoming more competitive.

All this new debt elsewhere, creates money which floods into these economies increasing the money supply, prices and wages. Their competitiveness is going down compared to Germany, but it doesn’t show up as they are consuming with debt that, in itself, creates money that is pouring into the economy.

It is new debt and money creation of housing booms that makes them feel so good, the new money from the new mortgage debt pours into the general economy raising prices and wages. In today’s globalised world the price of goods stays low as they are coming from abroad and in almost infinite supply, the prices of assets and services goes up; the inflation tends not to show up in the headline inflation figures that measures the price of goods. The FED thinks everything is OK as the US money supply is going exponential before 2008.

http://www.whichwayhome.com/skin/frontend/default/wwgcomcatalogarticles/images/articles/whichwayhomes/US-money-supply.jpg 

They see no inflation in the goods that they are monitoring, the inflation is elsewhere.

A similar thing is happening in the Euro-zone, outside Germany, but on a smaller scale.

They thought the good times would never end, until they did.

A hurricane blew out of Wall Street and laid low the once vibrant global economy. The Euro-zone nations had to load up on debt to bail out their banking sectors.

The financial sector realised that Germany wasn’t going to be bailing everyone out and re-assessed the risks and raised interest rates accordingly. The sustainable debt became unsustainable and the housing booms turned to bust.

The Euro-zone crisis was in full swing and things were allowed to run for quite a long time before the ECB swung into action and bought down interest rates at the periphery and a lot of damage had already been done.

The EU took the debt off the private banks and placed it on EU taxpayers, they were still very concerned about the health of their banks after 2008.

The vast majority of Greek bailouts just return to the EU as repayments on the debt and less than 10% goes to Greece.

There is plenty of evidence to suggest austerity doesn’t work including the IMF’s own forecasts for Greek recovery with austerity.

The IMF predicted Greek GDP would have recovered by 2015.

By 2015 it was down 27% and still falling.

There are many players in this comedy of errors but Greece and the Club-Med nations get the blame.

 

Raul44's picture

I like euro. Problem is how everything was handled from the beginning of crisis(or beyond). There should be exit possibilities in place and mantra of the union should be "either you keep up and fix your shit or leave with consequences".

MaxDemon's picture

The chart paints an incomplete picture: what were the growth rates before the Euro?  What have the growth rates of the UK or Switzerland been?  What was the growth rate of the US?  The chart only shows that the Euro was not apparently some miracle food for their economies.

wow017's picture

EU failure built with every decision to remain permanently depended on the US.

That got Trumped.  They are left with a joker in a game of hearts.

They should self-divorce - or perhaps the Pope can annul the failed marriage.  

zippy_uk's picture

I hate to say we told you so, but...

"WE TOLD YOU SO"

The first to leave gets all the benefits and the last to leave gets to hold the empty bag. Thanks Germany.

As the UK was the first to leave a) by not joining the Euro and b) Leaving the EU then the winner is US.

So long suckers...

The Count's picture

Other jews and half jews in the news: Merkl, Lenin, Marx, Engels, Stalin.
Nice folks.