On The Inevitability Of EU-thanasia

Tyler Durden's picture

Starting from the level of global savings and forecasts by the IMF, Lombard Street Research's Charles Dumas explains to the FT's John Authers how this 'glut' of global savings exacerbated by 'accounting' of negative economic policies is choking economic growth. This fiscal responsibility versus growth (saving vs. investment) argument is nowhere more evident (for now) than in Europe, where the two chaps progress, in this worthwhile clip, to the extremely dispersed (and not at all united) unit labor costs of European nations as the crux of where Europe goes next. In Dumas' words: "people have got to make up their minds how much they are prepared to pay and for how long" and the longer the time where these relative costs diverge the greater the inevitable costs, leaving only two EU solutions: either the 'Irish' mass-emigration/devalue/economic-collapse in the hopes of improving competitiveness; or 'inflation in Germany' - which is abhorrent to the people of that country. The only possible route back to growth in the short-term is an 'amicable' break-up of the Euro - which as Dumas points out is attractive politically to Ms. Merkel heading into next year's election (as opposed to her keep having to back-down again and again). This is in line with our view that when push comes to a big shove, Germany will be the optimal defection from the game-theoretical game of chicken being played in Europe (and anyone who feels the technical measures from the last summit solve the problems, in Auther's words "is being very 'hopeful' indeed").


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slaughterer's picture

ECB rate cut is not a sure thing this week.  

trebuchet's picture

yeah thats my thinking - they eased collateral rules, are stuffed to gills already with toilet paper, and want politicians to keep fixing the problems.

EUrosummit Fix to date has supported easing liquidity + their collateral "fix" makes the best use of it.  

Eur17 unemployment increase is largely PIIGS and already priced in, euro devaluation is helping Eur17 current account balance. 

inflation is down but not out.

The only reason for lowering interest rate would be to 

a. encourage investment spending - in this world, the lack of spending isnt coz interest rates are too high - its lack of euro certainty, etc which is a political problem. 

And with Spanish bailout/banking union on the cards, there is positive movement in that direction. A central banker would want to wait and see how that played out. 

b. boost exports/aggregate demand via the exchange rate channel and stimulate demand and employment  - but they dont have an explicit mandate to do that... will consider it only as an anti -deflationary measure. 

Are prices/inflation in danger of falling below 1% ?  No. 


So..... the more i think about it, the more i think it will be "stand ready to act if necessary"


Bunga Bunga's picture

Also the ESM is not a done deal. There are six lawsuits at the German constitutional court against the ESM pending. They were filed by all sides of the political spectrum, from the far left to the conservative right after the approval of the ESM by the two German houses Bundestag and Bundesrat last week. The German constitutional court already requested changes to the EFSF-policies in a decision, because they were unconstitutional at the time. The big problem with ESM is that it would take the budgetary sovereignty from the German parliament and delegate it to EU-authorities. That is per highest German law unconstitutional. It's very likely that at least one of the six lawsuits leads to  a substantional delay of the ESM, because it might require either constitutional changes or a people's referendum on the ESM.

macholatte's picture


Agent Smith: You hear that Mr. EU?... That is the sound of inevitability... It is the sound of your death... Goodbye, Mr. EU...
EU: My name... is Merkel!




The common currency union was supposed to benefit the economy of the entire European Union. Now that the euro is struggling, however, it is bringing growth down with it. Germany's economy, once seemingly immune to the crisis, is now facing mounting difficulties. By SPIEGEL Staff


'Fear and Uncertainty'

 The Euro Endangers German Economy





trebuchet's picture

My feeling is there was a deal done or at least agreement in principle at the Summit which suggests increased political union - more powers to and more accountability by - the centre/in Brussels. This could easily lead to referenda and changes in constitutions around Europe. 

This was not in the summit output but the wording since the immediate concern was to calm markets.

Politically, all govs involved have to deal with their national constituents and the democratic process which is fraught with problems as these cases highlight in Germany alone. 

Political union doesnt happen overnight, and so Merkel in return for commitment to that path, conceded immediate steps for banking union etc. 

Overall the summit was a "win" for her view of Europe - one step amongst many in getting European states onto the same page. 

The details of that however, will inevitably cause jitters and there will be setbacks... but the beginnings of a "Grand Europe" was cast at that summit.... we'll see if it gets shot down by cases like the ones you mentioned.



DutchDude's picture

And my Dutch MOF lied to the senate: he convinced them every action taken bij the ESM would be passed through both houses in Holland... so the senate passed the ESM. half an our later v Rompuy said that's not gonna happen :')

september 12th elections; Wilder's freedom party wants to leave the EU completely now; and he's got 20% of the votes and couting, the Socialist Party is at the same rate and they want less europe as well and they are rising as well. Then you have the smaller parties who are sceptical about europe, they combined have about 10~15%... do the math; Holland won't be that easy going on europe after september 12th.

AbelCatalyst's picture

No question Germany is leaving the Euro. But they can't be the cause of the collapse. They are patiently waiting for a crisis to provide them cover to head for the exit. This is all so obvious - not sure why so few see it.

They will play nice and commit to nothing as the mess unfolds, then when one of these countries hit the wall, or war erupts, or a major scandal flares up, Germany will quietly exit the Euro. Then the real fun begins!

Actually, there will be nothing fun about it and ZH readers will find little solace in the fact that they were right all along...

trebuchet's picture

The reason german unit labour costs stayed down is coz of the weak euro - germany forewent currency appreciation and built an massive export industry at the expense of France and italy who when the euro was launched had zero or positive trade balances but now have vry negative ones. 


Its a see saw -  if either side gets off - the other side goes down. 


German euro exit  = German currency appreciation relative to its main trade partners (european countries) and loss of competitiveness. 


PIIGS exit = their currency depreciation and gain in competitiveness. 


So the Euro game is  - lets stay tied to the hips, but as Germany, lets get these guys to adopt competitiveness gains/structural reforms so that the Eurobloc stays competitive relative to the world as a whole while Germany doesnt lose its within eurozone exporot advantage - or rather the loss within the eurozone is offset by the global gain. 

the PIIGS  want to get some of the benefits along the way so they negotiate over the distribution of gains. 


Bunga Bunga's picture

"The reason german unit labour costs stayed down is coz of the weak euro - germany forewent currency appreciation"

Lower labour costs are mainly a result of labour and social reforms, started by the Schroeder-Government in the early 2000s (Agenda 2010). They created a low wage sector, cut benefits for the unemployed, cut the employers share of social contributions, corporate taxes a.s.o. Wages went down even in nominal terms in many sectors. There is not even a minimum wage like in France.

"...built an massive export industry at the expense of France and italy who when the euro was launched had zero or positive trade balances but now have vry negative ones"

German export industry was built up long before the Euro and not at the time when the  Euro was launched. The German industry got very competitive in the 1970s-1990s despite the strong DM. Why this? At the same time countries like Greece or Spain had weak currencies, but why they couldn't leverage this?

Sure, Germany has been benefiting from the Euro to a certain degree, but the Euro is not the root cause for the German success.

"German euro exit  = German currency appreciation relative to its main trade partners (european countries) and loss of competitiveness."

They will make it up like in times when they had the strong DM and will get even more competitive and all will complain again.

trebuchet's picture

"German export industry was built up long before the Euro and not at the time when the  Euro was launched. The German industry got very competitive in the 1970s-1990s despite the strong DM. Why this? At the same time countries like Greece or Spain had weak currencies, but why they couldn't leverage this?"


you are right about that... .  my point was not that the euro was the root cause of German success compared to France and PIIGS but it was a significant contributory factor regarding the growing rebalancing of exports in Germany's favour, since it prevented the offseting currency adjustments that normally ensue. 


Now the option is currency adjustment (exit one party or another) or correcting imbalances via structural reforms (if that is possible). Germany and all parties have opted (to try ) for the latter, simply because the incentives to do so - position in world trade stage, adjustments to correction path - for Germany in particular (as EU engine/paymaster) -  are better than currency adjustment path.

For other members, the structural adjustment path is also better since it is less painful (more drawn out) than a currency devaluation and - despite the structural hardship - at least has Germany on the hook to share some distributional gains and provide the painkillers along the way.

That, to me, is the essence of the current Eurozone economic and political dynamic.


AldousHuxley's picture

German/France wanted Euro in order to subjugate the other European countries under common currency and lead the union against US/UK and BRIC alliances.


rich and power most always initiats acquisitions of smaller, poorer in their terms.

schatzi's picture

The mainstream belief that currency depreciation is the way forward to competitiveness, is imbecilic. Weaker currencies never create sustainable competitiveness. They create inflation and in open economies are offset by higher import costs for raw materials, energy and other goods and services needed for exported wares. They also tend to prevent the stimulus needed for structural reforms such as the public sector or the labour market. Look at Italy's history of currency devaluation pre Euro. All it ever gave them was inflation and an embedding of archaic labour market practices.


Currency values play a central role in competitiveness, but given typical market mechanisms and adjustments, their effect is never sustainable.

mariad88's picture

It is the same issue all over the world and we can not control it. draw something cheat

Freddie's picture

The whole euro/EUSSR tyranny is just like ObamaCare.   The idiots in Greece voted in politicians to give them free stuff, unionized govt jobs (like TSA), retirement at age 55 and other magic beans to give everyone have Germany's standard of living.  The euro was going to life all boats like Hope & Chains.  A chicken in every pot and a Mercedes in every garage.

The Germans pretty soon will have to choose if they want to eventually sink with the Greece's boat anchor around their necks to poverty or get out of the euro.   Yeah it is sad, depressing and I feel for those people but Oba-Amerika is not far behind.   As Thatcher said about when you run out of other people's money.

OneTinSoldier66's picture

@AbelCatalyst +1


Don't know myself(who does?) but you made it sound pretty plausible.


However, I thought that "quietly exit" was an interesting choice of words, especially when reading your last sentence.

falak pema's picture

...No question Germany is leaving the Euro...

Not so easy as it spells financial banking sector armageddon, for all of first world.

Nobody wants to go there, but nobody has a way out other than print to infinity!

Corneille type conundrum; damned if we do damned if we don't. 

Zero Govt's picture

Abel,  "..ZH readers will find little solace in the fact that they were right all along..."

Are you kidding???

i'm tired of the popcorn and waiting... i've got a 'Party Pack' of bubbly, fireworks and caviar for when this Mother blows. The dancing will be an all-nighter too

Bill D. Cat's picture

Why cut rates or print when all they need is a complicit media to keep running the " Markets rally on central bank intervention hopes " ?

The media card will be used for every last drop of effect until they have to print .....and print ......and print .

disabledvet's picture

if the ECB cannot successfully cut rates then you'll have "The End." (and i ain't talkin' Hollywood here.) Right now the yield curve is so steep over there you would think all those cocked up monetarists would be chomping at the bit to by all that "cheap shit" because "growth is about to explode any minute now!" (they're probably coked up instead ..."bombing around" with all those hookers to all those "swank resorts.") Instead "we're steaming headlong into total sovereign default" only..."without the Sovereign" because this is a CURRENCY UNION. Hence the BITCH of the thing called "Mr. Sovereign Interest rate." Folks...THESE INTEREST RATES JUST DON'T GO DOWN UNLESS YOU'RE THE USA. ANY MONEY...OF ANY DENOMINATION...IS TOAST insofar as the EZ is concerned unless and until the USA or the IMF come up with a plan similar to what needed to be done with Mexico and Brazil in the 1980's.

The trend is your friend's picture

when 5 friends go to the bar each week and the same guy who makes the most money gets the bill, eventually he asks for his own tab or simply walks...This is what will happen in germany...they will leave first, only after all bank deposits from the periphery have already moved to their banks 

bank guy in Brussels's picture

Italy 1st to leave euro - now I think first to leave the eurozone will be Italy ...

They have a major export economy which is being stifled by the euro, and they have the stuff (design, clothes, Italian food) people buy, global depression or not.

Italians have much to gain from leaving the euro and little to lose. Their economy was nearing primary budget surplus when the EU-ECB pushed out Berlusconi, they have small household debt, they can stabilise public debt and banks if they can print.

Italians are actually net after debt richer per person than Germans. With their own currency back they can out-export and out-sell the Germans in the upcoming global economic storm.

Italians have a deep radical streak maybe deeper than elsewhere in Europe. The wily Berlusconi is feeling the political ground move and already talking about leaving the euro.

Berlusconi will likely be back, the Italian lira will be back, and Berlusconi may be reading ZeroHedge and already figured out "... he who defects first defects best ... "

magpie's picture

Berlusconi might have bigger balls than Merkel. Who would have thunk.

Freddie's picture

Berlasconi for all his faults is not a Goldman guy (as far as we know) versus Draghi or Monti.  I think Silvio cares more about the welfare of Italians.   EVen if he is Mafia, which I doubt - I will take the Mafia over Goldman Sachs any day.  Goldman cannot even manage their clients portfolios. 

I can tell that most Italians missed the lira and most Germans really missed the DM right after the change over.  Italy can make pretty good stuff and can export but as the other fellow said - the euro is killing Italy. 

This whole euro BS also hit as China was ramping up exports to Europe.  It killed a lot of Italian companies in textiles, furniture and other things.  If I have to choose between made in Italy or made in China with Melamine, arsenic, mercury and toxic pet treats from China - I pick Italy.  The alpine region of Italy has one of the highest GNPs in the world because of lots of small businesses. 

jomama's picture

well fuck, i had to upvote freddie for once.

Coke and Hookers's picture

Me too. He's spot on there.

Treason Season's picture

Imagine that! A whole comment from him w/o mentioning Obamuslim. Whoodathunkit?

malek's picture

Why do you always tend to depreciate some reasonable thoughts, by bullshit generalizations such as Italians are actually net after debt richer per person than Germans ?

Freddie's picture

This may be true in the Alpine region of Italy.  The household GNP is very high. Loads of small companies making pretty high end stuff.   companies like Beretta, Luxottica and a bit further south Ferrari.  Pharmaceuticals are pretty big in norther Italy.

Germany has spots that are comparable like Munich and probably Stuttgart.   On the whole, Germany has a higher standard of living but the Italians are pretty big savers. 

AldousHuxley's picture

northern Italy = Germans


northern France = Germans


half of America = Germans


Germans rule the world. efficient fuckers.


joke: what's the best thign abotu German food?

Food comes out on time.

Doña K's picture

And not genetically modified

AbelCatalyst's picture

Germany would love for Italy to be first one out in order to provide the needed cover for their own exit... That way they don't take the blame, but get what they want (devalued debt and a strong currency with which to pay it off!!). Check mate!

nonclaim's picture

The countries milking it will milk to the last drop.

Don't expect them to leave until kicked or beaten out.

TheGardener's picture

Italy is different, she sucked in the Dreibund and a former
journalist (and member of communist and socialist parties in various neighboring countries) turned it socialist national and got her lobbied towards the entente with great success. The brand name of his movement sold worldwide and in fashion still makes a mark.

malek's picture

 is attractive politically to Ms. Merkel heading into next year's election

That is pure wishful thinking, and nothing else.

Azannoth's picture

That would assume Merkel cares more about the next election that about her life convictions of 'more Europe' I don't think so, politicians DO plan for the long term only in the opposite direction everybody thinks they are, how else would we have gotten the Gulag States of Europe otherwise, hint it was not short term planning that got us here, the Men Behind the Curtain do plan ahead.

Merkel will fall on her sword long before she let's the E(M)U die ..

tekhneek's picture

Tuesday Mid-Week-Weeekend Humor Hijack:

Oh what's that?... Just a 118mph tennis ball to the face. No big deal.


Abraxas's picture

"people have got to make up their minds how much they are prepared to pay and for how long"

It's not up to the people to make up their minds. The people had their chance. Now, their mind will be made for them.

Snidley Whipsnae's picture

A bit off topic... Janet Tavakoli has some good words for ZH in her latest missive... Hat tip to Jesse for listing this bit...


falak pema's picture

+1 MSM seems to be waking up to the fact that hiding the massive financial scam under the carpet  will now have more and more incidental negative costs associated, both political and financial, than imagined. We are in Watergate type spiral and the financial plumbers are now all clearly coming out of the woodwork.

"Thar fixed it" is now a shabby game both in EU-zone and WS/City.

trebuchet's picture

already featured on ZH - look back at recent posts

zorba THE GREEK's picture

They are all wrong. I just saw it on CNBC, Europe's problems are solved.

knukles's picture

I'm coming to think that the next question is what are the component parts worth?
A new DM, Lira, Paseta, Franc, Punt, whatever...
That's where some moollah gonna be made.

And no, I've no idea except the DM and Swissy (if they go that route which they may or may not have to, depending upon the resultant structure) will be the longs and the olde fashioned tripe, the shorts.  (Not to mention the old Lithuanian whatchamacallit.  Remember the old 3 whatchmacallits were worth one idonno?)
There essentially has been no significant change from pre-Euro days amongst the strong haves and beggar have nots.
Which says boatloads about the so called harmonization, integration and harmony horse shit.
Everything in between Time wise, has been wall paper over the cracks.

Go EuroVision 2013!

TheGardener's picture

Dollar was at all times highly overvalued against the DM ,
no matter how big the non trade volume related swings.

Next best trade recommended on ZH would be the extreme
volatility of a new strong Mark unacceptable to a never
dying reserve currency dollar.

Hohum's picture

Growth?  What is growth anyway?  Any definitions out there?

Amish Hacker's picture

I think the definition was changed recently. Growth now means a process by which new debt is substituted for old. 

q99x2's picture

Merkel leaves the Euro with or without Germany.