The Euro Is Dead

Tyler Durden's picture

The 'tragedy of the commons' or 'free-rider' dilemma of game theoretical cocktail parties is a great framework for considering the current tug-of-war between individual sovereign fiscal actions among the European Union and the over-arching monetary policy of the ECB. If the ECB is dovish and too many states decide to suckle on the teat of liquidity - as opposed to fiscally 'behave' - then everyone loses (as we see currently evolving). The lack of any Nash (stable and dominant) equilibrium among the European nations and their hoped-for benefactor is becoming increasingly problematic for both trading and business investment.

Nomura's Global Macro Strategy group tackle the problem that is now abundantly clear the euro area as currently constructed is not stable and so it will have to change (hence, the Euro is dead!). The direction of travel is being set out by northern European politicians and is worth noting – more Union not less. But two points are critical to note; first that the new euro area may be so different from the one the current members signed up to as to make a process of voluntary re-application for euro stage II necessary to determine future membership, and second that any new variable geometry euro will take a long period of time to set up. How then to cover the intervening period?

Kevin Gaynor, of Nomura, goes on to point out that while the market and global political pressure for the ECB to act as the bridge is now very loud indeed, many feel this option is not likely now. Kevin then sets up the framework for considering how the Euro will change and potentially emerge:

Game theory offers a route for thinking about these issues in a fruitful but parsimonious way. We can simplify this complex situation into a repeated “game” between the ECB and the fiscal authorities of the euro area. Each player can choose one of two strategies in this game, setting up four outcomes. The table below sets out the situation.




The fiscal authorities can behave or cheat. “Behaving” means instituting and sticking with substantial fiscal and regulatory adjustment. “Cheating” means avoiding that outcome.


The monetary authority can be hawkish, which in this context I take to mean no QE or dovish, offering full support for announced fiscal programmes that are aimed at guaranteeing future solvency.


Now the critical part is to consider how the actions of each party (ECB or sovereign nation) are dominant (or best) for themselves (or overall) and how that can lead to the free-rider (or unintended consequences) problems we have often discussed:


Let’s think about the pay-offs in each box. Behaving on the part of fiscal authorities leaves the ECB deciding whether to support or not. If the ECB takes a hawkish stance then the economy does badly and inflation falls below target – this is not a good pay-off for the ECB and makes the fiscal adjustment harder for the fiscal authority, and so hence I score it -1, -2 for the ECB and governments respectively.


However, if the ECB is dovish in this fiscal scenario then the economy, while doing badly owing to the fiscal tightening, does better than under the hawkish strategy, and so in this context I score it 0,0. This is the best combination of strategies available overall.


Now consider the “cheat on the fiscal stabilisation” strategy. If the fiscal authorities cheat and the monetary authorities go hawkish they both lose. Let’s call this the “leave the euro” box. The ECB doesn’t want the euro to break up, nor individual (or at least “important”) members to leave – its credibility would be lost and its independence could be put at risk. Similarly, we assume most governments would consider “exit” as a fairly substantial negative (we can debate this point of course since some would argue exiting would lead to better medium-term economic outcomes). I score this box as -2, -3 then. 


Finally, we have the fiscal cheat and dovish ECB outcome. This is by far the best for the government and the worst for the ECB since its monetary credibility would be considered to be severely eroded in this outcome leading to free-rider problems whereby other governments start to renege as well. You may or may not agree with the scores, but it is how they rank that really matters in any event.


The question then is, is there a stable solution to the game? And the answer, in my view, is no. If the ECB unilaterally decides to go dovish then the fiscal authority is better off cheating which leaves the ECB worse off than if it had remained hawkish. Therefore, it doesn’t have a “dominant” strategy. Equally, there is no dominant strategy for the fiscal authority independent of what the ECB does.


But the game does have some important things to tell us. First, the ECB doesn’t want to drop into the break-up scenario and so it engages in tentative QE, better known as the SMP. It wants to keep the game alive, in other words. This is akin to the sort of signalling one expects in this sort of repeated game – rather like the USSR and the US at the height of the cold war. Taking the analogy further one tends to see proxy battles being fought in these scenarios – in which case Greece is our cold war Vietnam whereas Italy is the Cuban missile crisis.


How then to move forward? If the ECB is dovish then it invites a free-rider - we-can-ignore fiscal restraints attitude from the sovereigns BUT if the ECB is hawkish it crushes growth expectations and further exaggerates the potential downward spiral austerity-facing nations believe credibility will save them from.

Credible pre-commitment on the part of the fiscal authority is required in order for the ECB to decisively move to the dove camp. Fiscal tightening and regulatory reform are necessary but not sufficient conditions for the move to the behave/dove camp, in our view. Given it’s a repeated game, good behaviour should be rewarded but only in a marginal and reversible fashion.


That leaves markets facing an asymmetric risk/reward pay-off for the simple reason that the fiscal policies being undertaken are multi-year, painful, difficult to execute and conditional on stable political follow through. A virtuous circle where governments learn about the revealed preference of the central bank is entirely possible but would take time and would offer continual bouts of risk aversion on every opposition speech. Moreover, if the authorities look like they will not be a member of euro stage II then the central bank’s commitment should be expected to erode.


The other alternatives are more creative but, we think, entirely plausible. That is to make the cost of cheating much higher or remove the option entirely. In other words you make the behave strategy the dominant one under any ECB strategy. This could be achieved in three ways.


Option one is to ask an external body to take over fiscal powers – most obviously the IMF – in other words give up fiscal independence in the same way these countries have given up monetary independence.


Option two is to give up fiscal independence domestically by setting up a temporary but powerful independent fiscal policy making group (the supposed technocrat approach we are being told is occurring currently) – an option that has been discussed in academic literature before.


Neither of these options are particularly palatable and would be seen as a significant loss of sovereignty.


The final option is make the cost of exit higher in a credible manner. Beefing up contract law on debt wouldn’t help since default would still be possible since the debt is owed. Instead, it would be better to take an asset out. The most obvious one is FX and gold reserves. On the most recent IMF data, Italy, for example, has 78 million fine troy ounces of gold on its central bank balance sheet and around USD35bn of hard currency reserves. In contrast, Italy’s contribution to the ECB’s reserves is around EUR7.1bn. It remains anachronistic that the single currency area still has such an extensive system of national central banks (around 48,000 employees vs 19,000 at the Fed) and the bulk of currency and gold reserves held at the national level. Indeed, taken more broadly the region has around USD607bn of gold reserves at current valuations and USD204bn of hard currency reserves.


Thus, one option for making exit seem even less palatable is to not just withdraw and provide monetary support depending on behaviour but to ask for the national reserves to be pledged to a European authority to be held in escrow. Euro exit or losses for the ECB from support, or indeed financial sector losses from future backsliding could then be paid out of the lost reserves. This would no doubt be hugely unpopular and possibly illegal given central bank independence, but the point is of course that the reserves would not be lost if good behaviour is followed.


These options are highly unusual and politically dangerous, and so are only likely to be used in extremis. Instead, the real situation is likely to continue flopping back and forth between hawk/cheat and dove/behave boxes. Leaving aside whether the game is stable, we must ask whether that outcome is economically stable. And that depends on the fundamentals. A worsening growth environment, tightening private sector financial conditions and balance sheet deleveraging suggest that the short- to medium-term outlook is not conducive to the sort of reforms being promulgated. Moreover, a key component of the adjustment is supply-side reform; by its very nature this is about reducing the price of goods and services at any given level of supply. As such buying time for the fiscal adjustment to take place will be harder not easier.

Right now the onus is on new governments setting out their plans, for which the ECB is signalling its pleasure. But the next round of the game will likely be between the populations and the fiscal authorities, with the skew being toward weaker growth and higher unemployment.


And most poigniantly from the perspective of a Euro that stands relatively strong versus many other global fiat currencies - yet whose core faces not just the highest aggregate credit risk of any block but turmoil so potentially binary in nature that - as the title suggests - the euro as we know it now is indeed already dead and simply, slowly morphing to something else:

Without credible pre-commitment on the part of either the ECB or the fiscal authorities, the game framework indicates either a loss of independence for the ECB under substantial political pressure to shift unilaterally to the dove camp or EFSF/IMF assistance and the pooling of fiscal risks against the backdrop of a political agenda for a new euro area.

Perhaps given our earlier discussion of the EFSF's need to buy its bonds and the proximity of an election cycle (given the implicit US-Bailout that an IMF save would mean), we are more likely to see the ECB fold'em...though this week's schizophrenic EURUSD price action is impossible to know what is being priced in.

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lolmao500's picture

Iran is considering pulling out of Non-Proliferation Treaty (Ch. 10)

Uh oh.

And you betcha that any ``reform`` of the euro is gonna end up with more power to the ECB and less sovereignty.

Michael's picture

I nominate my hero Alan Greenspan to be the next face to grace the side of Mount Rushmore. He is the architect of the greatest financial catastrophe in the the history of the planet. Only he could engineer the complete and total destruction of the international banking cartel/Illuminati by making their entire banking system go bust on themselves. 

DavidPierre's picture



This is the end
Beautiful friend
This is the end
My only friend, the end

Of our elaborate plans, the end
Of everything that stands, the end
No safety or surprise, the end


dlmaniac's picture

Never expect a sound currency from a union full of rampant socialists and lazy welfare addicts. Mathematical impossibility.

Expect periodical devaluation instead.

Peter K's picture

Some people just can't handle the truth:)

JW n FL's picture

some people dont pay 30% in Taxes.. I mena Most people dont pay Taxes.. and then Bitch when the things that seperate us from the animals are causing a drain..


7% - 8% of GDP to pay for ALL! Social Service Programs.

in a good economy that number is 3% - 4%.

and in America.. "We the Rich" will not pay at least 10% to cover it.. They need the money to put into the Bank so Bernake can Print it away.

Bernake Prints.. the Rich Hoard.. the economy grinds to a hault.

Thank God Peak OIL! Oops.. I dont want to offend the idiotic here.. Peak Affordable Oil, Peak Lite Sweet Crude, Peak $50bbl (a Barrel) Oil.. has come and gone.. and America's production capablity from Heavy or Sour Crude SUCKS!

Why do I bother? Ignorance is Bliss and Stupidity is Heaven.. You fucking Morons are a Plague upon ALL Nations that needs to be swept away.. so that a happier more intelligent World can be born.. and there is no better way to do that.. than to let you dumb fucks kill each other.. the rest of the idiots, the pockets of stupidity can be easily dealt with after the majority has killed itself off!

I guess in the end all will be well.

redpill's picture

Happy morning to you too sweetheart!

More immediately, a temporary cessation of use of the Euro could be a potentially massive destabilizing event. The rickety three legged table of global currency flows depends on the Euro, USD, and the JPY. The Japanese economy can't withstand a substantial and sudden appreciation given how high it already is. Which means there will be an ugly race between the US an Japan to devalue to keep export prices down. Gold should do well.

the_magician's picture

I like you. Wanna go go for tea sometime?

SamAdams1234's picture

Better song: Dogs - Pink Floyd - Animals

Dogs (Waters, Gilmour) 17:06

You gotta be crazy, you gotta have a real need.
You gotta sleep on your toes, and when you're on the street,
You gotta be able to pick out the easy meat with your eyes closed.
And then moving in silently, down wind and out of sight,
You gotta strike when the moment is right without thinking.

And after a while, you can work on points for style.
Like the club tie, and the firm handshake,
A certain look in the eye and an easy smile.
You have to be trusted by the people that you lie to,
So that when they turn their backs on you,
You'll get the chance to put the knife in.

You gotta keep one eye looking over your shoulder.
You know it's going to get harder, and harder, and harder as you
get older.
And in the end you'll pack up and fly down south,
Hide your head in the sand,
Just another sad old man,
All alone and dying of cancer.

JPM Hater001's picture

Would the collapse just happen already?!?!

My blood pressure is skyrocketing in anticipation.

Michael's picture

Thank you William.

In other news, the corporate fascist CFR fucks at CBS limited Dr Paul to 89 seconds of airtime in tonights debate;

Video: Ron Paul's 89 Seconds in the CBS News GOP Presidential Debate


Sizzurp's picture

Ron Paul doesn't bow to the corporate hierarchy, he doesn't take their money, and he isn't corruptable.  In short, he is the a nightmare for the ruling elite, and they will, by all means of nasty propaganda and psyops, marginalize him, and silence him before he awakens too many of the entranced masses.  Paul's vision for America is liberty, but the elite don't want you to have it.  They prefer you to be an easily managed slave, not a free man thinking for himself and acting in his own best interest.

Mark123's picture

Ron Paul....the one modern day politician that should be carved into Mt Rushmore.

YearZero Institute's picture

Ron Paul doesn't bow to the corporate hierarchy,

He just wants a kind of private hell hole for Americans where unelected private entities will control American society or what little is left of it.

he doesn't take their money, and he isn't corruptable.

You have no evidence of that.

In short, he is the a nightmare for the ruling elite,

He is part of `the ruling elite` if you hadn't noticed.

and they will, by all means of nasty propaganda and psyops

Stop watching the Matrix.

marginalize him, and silence him before he awakens too many of the entranced masses.

Unlike visionaries like yourself who can see through it all.

Paul's vision for America is liberty

A word that is only defined by the person who says it has no meaning. `Liberty` I mean by the way.

but the elite don't want you to have it.  They prefer you to be an easily managed slave, not a free man thinking for himself and acting in his own best interest.

In your next post could you fit in more cliches you read off the internet please.

e2thex's picture

After Nixon died they did a poll asking people if they had voted for him for President. With few exceptions everyone said, "No."  No one wanted to admit otherwise.

When they had the Congressional vote for the first Quantatative Easing (QE 1) , Paul voted for it. People don't mention that now.  The bottomline is that Paul acts, when need be,  in his OWN SELF-INTEREST.  He understands consensus. He understands being reelected. He is  NOT like the late Senator Wayne Morse of Oregon,  who was one of ONLY two men in Congress that voted against our FIRST involvement in Vietnam. In short, all our Statesmen are dead and gone.

Do you remember what Hunter Thompson said about Nixon ? He said Nixon belonged in the belly of a White Shark.

Hunter S. Thompson was a Statesman.


aleph0's picture

Thanks Michael for the RP 90 secs.



Just disgusting how many in the audience did NOT applaud what he said.
( while the camera scanned their faces between 2:04 and 2:08 )



title examiner's picture

When he was Ayn Rand's little pet, she called him the Undertaker.  Aptly named.

fiddy pence haff pound's picture

that's why I've said that Ayn, or Alesya, was actually a Communist spy. She convinced the

fascistic financial/government elite of the US to screw capitalism fatally.

I think you'll find that Marx foresaw that the end of Communism would bring the end

of capitalism. @sarc

Melin's picture

No, she identified and described the foundational problem besotting Western society; altruism. Where self-sacrifice is held as a virtue, the politics-of-pull peddlers thrive assisting you in your own oft-stated demand to be forced to server another, any other, as long as it's not you.  

She understood in fine detail the effects of such a culture and wrote Atlas Shrugged. It's a great read and mystery and if you've actually read and understood her work, you'd see she loved life, she loved America because of its grounding in individual rights and that she would've really dug it if people had read AS and treated it as a warning.

Alan Greenspan understood her and her heroes perfectly.  He chose to be a villain.

redpill's picture

Given some of Greenspans historical writings on gold and such, I've always half-wondered if he intended to be Francisco D'Anconia on a grand scale and usher in the end. If you look back on video clips of his cryptic testimony and vague suggestions before Congress from the point of view that it was a satirical effort to distract the momo masses whilst inflating the mother of all bubbles, it becomes quite surreal.

Melin's picture

He has to have known the consequences of his actions but his actions were the moral opposite of d'Anconia's.  D'Anconia didn't hold the government's gun as Greenspan did.  Government is force.  Producers trade or refuse to trade; no initiation of force.

redpill's picture

I see your point, but at the same time his "government gun" was one of temptation.  He didn't force people to borrow as much as making it so lucrative that everyone charged forward with zeal to borrow without thinking about the eventual consequences.  If it was an attempt at a D'Anconia-esque stunt, it was certainly a bit perverted to be sure.  The reality is I don't think we'll ever know his true motives, but whatever they are I don't believe it was something as simple as price stability and full employment.  He had to have known what he was doing and what it would eventually cause.

Melin's picture

Printing unbacked money takes a government gun to accomplish and is hidden behind bread and circuses.

Doomsday Profit's picture

You are exactly incorrect Sir.  The printing of unbacked money has taken a very private, destructive and greedy hand to accomplish....a hand that controls all forms of government.  Your support of the Demon Rand's philosophy of Objectivism is foolish at best and evil at worst.  Greenspan was simply a disciple....a pride-filled, stupid pond of a disciple (and unfortunately that's the most charitable description I have for him). To promote a philosophy that argues that the deeply flawed being known as Man is capable of self-regulating against the irresistable temptations of the seven deadly sins - while simultaneously demonizing the prime virtue of Charity is frankly evil to the core! Those that have been tricked by their own sinful faults into believing such toxic soul-destroying bile should seek whatever form of redemption is available to them....and they should do so quickly.....time is running out!  

Melin's picture

So, "the deeply flawed being know as Man" is incapable of self-regulating but has a fantastic knack for choosing his regulators?

Her view of Man is a heroic being, with reason as his means and his own life and pursuit of happiness as his rightful end.  There's no demonization of charity in her philosophy, there's an objection to the idea that self-sacrifice is a virtue.  Altruism doesn't mean charity, it means "other" and is a rejection of the idea that self-interest is virtuous.  People are charitable and have every right to help anyone they wish.

Rational self-interest isn't evil, it's a requirement of Man's life. 

Doomsday Profit's picture

"there's an objection to the idea that self-sacrifice is a virtue"

You're playing word games with objection to "self-sacrifice as a virtue" is an objection to charity - as all charity requires self-sacrifice. Please, go and pull the wool over someone else's eyes.  If you really can't comprehend the evil of Randian philosophy - which has brought us to the brink of financial least try to refrain from singing her praises.

StychoKiller's picture

Charity != Altruism

Check your premises, then alleviate some suffering:


williambanzai7's picture

I agree she was a very interesting intellectual.. However, the idea that markets will self regulate fraud and other adverse behavior has been proven to be a consummate pipe dream.

Melin's picture

The US Constitution is the law governing fraud.  Your desire seems to be to insert a gubmint regulator between yourself and someone you'd voluntarily trade with even tho no fraud has occurred.  Why?  Why assume people who have goods or services to trade are inherently fraudulent requiring supervision?  If fraud can reasonably be assumed to have occurred, that's when gubmint should step in.  When you invite gubmint into your every transaction, you get the politics-of-pull; i.e., corruption.

StychoKiller's picture

Brainz are in short supply around here when it comes to understanding "Atlas Shrugged".

Lots of folks confuse Altruism with Charity and thus come to incorrect conclusions!

fiddy pence haff pound's picture

so, what you're saying is that the very people who worshipped

that Aynus managed to misinterpret her, and that's why we're

in the sheep dip, now.

So, wise guy, has anybody successfully employed the Randy One's

ideas and not ruined an economy?

Dream on, and watch the movie Atlas Shrugged because it's as

pointless as any of that Randy Aynus' scriptural feces.


Zero Govt's picture

Ron Paul will not save you ...sooner RP fans take their lives into their own hands the better

You will not be led, indeed should not look to be led, to the Holy Land. You are standing on the Holy Land, it's the space below your toes

You do not need to vote for someone or something. Your vote is worthless. Ron Paul doesn't stand a cat in hells chance. The US Govt has never been wise in its entire sorry history. The futility is 100%

You can only sort yourself out. Period. So if you want one political policy, enact it yourself: Stop Paying Your Taxes

RP is not the Messiah just as Obumma was not. You are all you are looking for. You have all the power to change course. You want change, just change yourself (everything else is fuking BS)

Zero Tax = Zero Govt = Freedom

Oh regional Indian's picture

Well said ZeroG. The messianic mantle on Ron Paul's head will crack his clay feet.

We are our own bestest saviours.


AssFire's picture

Oh great, more of your wisdom like:

"It is the man with yellow feet who pisses in the shower"

RockyRacoon's picture

Why don't you two take it out in the parking lot and let some grown-ups have a discussion here?

Abitdodgie's picture

The police here in America (the Corporation) are here to protect one thing ,THE Corporation and to punish employee code breakers, if you have a social security number or a birth cert, you then are an employee of the Corporation from birth , that is why they tell you how to live . You gave up being one of "We The People" your sovereignty to the real United States of America ( you know the constitution) when your perents entered you into contract with a birth certificate to " United States" a corporation , so if you want to stop the system then take back your sovereignty and file your UCC-1 , and stop being a slave

DosZap's picture


How do you file a UCC1, and this gets you off the radar?.

Explain pls.

Abitdodgie's picture

Download " The Errent Sovereigns Handbook " by Augustus Blackstone it is a free publication and it tells you how to become a Sovereign again how to opt out of the tax syestem and stop prorerty tax , how to get supreme title for your land etc . If everyone did this the corporation would die very quickly . When you have done this the only laws that apply to you is the constitution

trav7777's picture to get eventually put in jail by the taxation authority.

Your moonbat shit on sovereignty is absurd fringe bullshit.  You're going to FILE something with the sovereign to declare yourself not subject to their laws?

RiverRoad's picture

I wish Tyler would put out that great post on "Expatriation"  again.......

Cathartes Aura's picture

trav, aren't you a lawyer?

anyone interested, here's a link to Chumbawamba's post



Americans, if you've ever listened to Chumbawamba before, hear (er, read) me now:

I searched a long time and studied a lot of crap before I found this.  I am telling you, this is the real deal.  In one fell swoop, this simple, unadorned website simultaneously teaches you how you were fooled and gives you the remedy for correcting what ills us in America.  Like anything good in life, it requires hard work and a lot of determined study, but if you've ever wanted to drive your car without needing a license or having to have it registered, if you've ever wanted to stop being forced to pay income taxes (state and federal), if you've ever wanted to start a business without having to get a license, basically if you've ever wanted to live your life truly in liberty without having to ask permission to do so, this is the website for you:

There is nothing to buy, there are no dues to pay (other than time), you don't need to fill out huge complex forms, there is no magic or trickery involved.  It is simply the simple, elegant Truth.

I am Chumbawamba.

DosZap's picture

Zero Govt

You can only sort yourself out. Period. So if you want one political policy, enact it yourself: Stop Paying Your Taxes


Be more than happy to, when you can explain to us how you stay out of jail, and not lose everything you own.

The IRS frowns on non taxpayers, and loves to seize their property and wealth, and garnish wages if you have a job.

You going to sleep on the street?.

StychoKiller's picture

In my movie, I just crash at my CyberHouse in cyberspace...

redpill's picture

The two are not mutually exclusive. One can take one's own life into their own hands while still voting for champions of liberty when the rare opportunity arises.  If you believe the system will ultimately be unable to help, then you've nothing to lose by voting for him anyway.  But you may save the lives of a few million Iranians.

Melin's picture

Again, read Alan Greenspan when he was her so-called "puppet" and what you'll find is a proponent of sound money. His later actions are the precise opposite of what she advocated.

Conrad Murray's picture

The Road to Roota Theory postulates that there is a group of people in the United States as well as around the world that are working to remove and destroy the financial banking powers that have secretly controlled all aspects of our lives for hundreds of years. The original idea of this group sprang from the mind of Alan Greenspan and involved rigging markets with computer programs that he had invented in the 1960's.

Waffen's picture

it a nice theory, but I just dont buy it, unless of course that Alan greenspan is part of the plan to bring in a global currency

FutureShock's picture

You know Greenspan admited his mistakes following the very first derivative lawsuit when he and Larry Summers and the former Goldman guy shut down that female Brookeley Born chic that was the first person on the planet to see this shit storm we are now in. So what happenes Obama puts these guys back to business NEVER regulating derivatives. Geithner was 35 then and all in that shit too. Those guys should have been gone faster than the Athletic department at Penn State.

I am all for less regulation but this problem happened was bandaided but never fixed. The entire Congress had thier hands in this and never corrected it. It is way more than just Alan but sure as shit he could tried to do more even after he was out.

The US is in a great positon compared to the world to reapir and re-start the US and not pay the interest to other countries which means war. How many of those Capital hill dumb fucks will actually realize what their inactive and lobbying bank accounts have done to this country and the lives it will take.




Conrad Murray's picture

This is a good documentary about Brooksley Born and the whole mess. Free to watch for anyone with an interest.