Sinn: Twilight Of The Euro?

Authored by Hans-Werner Sinn via Project Syndicate,

Twenty years after the formal creation of the euro, few can honestly say that the single currency has been a success. After fueling a massive credit bubble in Southern Europe in its first decade, it gave rise to an array of complex monetary-policy and transfer schemes in its second – and more trouble is looming as it enters its third...

In May 1998, irrevocable conversion rates for the currencies that would be merged into the euro were implemented. In a sense, this makes the single currency just over 20 years old. The first decade of its life had the feeling of a party, particularly in Southern Europe; but the second decade brought the inevitable hangover. Now, as we enter the third decade, the prevailing mood seems to be one of increasing political radicalization.

The original party was a cornucopia of cheap credit, which capital markets happily issued to the countries of Southern Europe under the protection of the euro. For a while, these countries finally had enough money to increase public-sector salaries and pensions, as well as spur private consumption and investment.

But the credit flooding into these countries created inflationary bubbles, which burst when the 2008 financial crisis in the United States spread to Europe. As capital markets refused to extend further credit, Southern Europe’s previously halfway-competitive but now overpriced economies soon ran into serious trouble.

The Southern Europeans’ response was to start printing what they could no longer borrow. Aided by the European Central Bank – which loosened its collateral policy for refinancing credits and increased its tolerance for emergency liquidity assistance and credits under the Agreement on Net Financial Assets – they drew hundreds of billions of euros out of the monetary system through so-called Target overdrafts. And from 2010 onward, they were the recipients of EU fiscal rescue packages.

But, because financial markets viewed these rescue packages as insufficient, the ECB, in 2012, issued a promise to cover unlimited member-state government bonds under its “outright monetary transactions” program, turning them into de facto euro bonds. Finally, in 2015, the ECB launched its quantitative-easing program, whereby member states’ central banks bought €2.4 billion ($2.8 billion) worth of securities, including €2 billion of government bonds. Accordingly, the eurozone’s monetary base grew dramatically, from €1.2 trillion to over €3 trillion.

But, rather than using the extra money to lubricate their domestic economies, Southern European countries used it to carry out payment orders to Germany. They forced the Bundesbank to credit the purchase of goods, services, real estate, corporate shares, and even whole companies – or at least to credit the filling of bank accounts in Germany that would be readily available for asset purchase should the risk of a euro breakup arise. The purchases of goods and services are one of the reasons for Germany’s huge export surpluses.

By mid-2018, the net amount of payment orders to Germany through the Target system had risen to €976 billion. As a perpetual overdraft drawn from the Bundesbank, this money was not unlike the International Monetary Fund’s Special Drawing Rights, except that there is much more of it – a sum greater than all of the funds IMF countries are willing to loan to one another. Spain and Italy alone drew down about €400 and €500 billion, respectively.

Despite – or because of – this windfall, Southern European countries’ manufacturing sectors are still a long way from regaining competitiveness. In Portugal, for example, the output of the manufacturing sector is still 14% below what it was in the third quarter of 2007, after the first breakdown of the European interbank market. And for Italy, Greece, and Spain, that figure is 17%, 19%, and 21%, respectively. Meanwhile, youth unemployment is above 20% in Portugal, more than 30% in Spain and Italy, and almost 45% in Greece.

Now that we are entering the euro’s third decade, it is worth noting that Portugal, Spain, and Greece are all governed by radical socialists who have abandoned the concept of fiscal responsibility, which they call “austerity policy.” Worse still, Italy’s establishment parties have all been swept away. The country’s new populist government – comprising the Five Star Movement and Lega Nord – intends to increase the country’s debt substantially to pay for its proposed tax cuts and guaranteed-income scheme; and it might threaten to abandon the euro altogether if the EU refuses to play along.

In view of these facts, even the most committed euro enthusiast cannot honestly say that the single currency has been a success. Europe has quite plainly overextended itself. Unfortunately, the great sociologist Ralf Dahrendorf was right to conclude that, “The currency union is a grave error, a quixotic, reckless, and misguided goal, that will not unite but break up Europe.”

It is hard to see a clear path forward. Some argue for still more debt socialization and risk sharing at the European level. Others warn that this would push Europe into an even deeper quagmire of financial irresponsibility. The attendant capital-market distortion would cause severe economic damage, which Europe can scarcely afford, given its difficult global competitive position vis-à-vis an emerging China and an increasingly aggressive Russia and America. One way or another, the euro’s third decade will decide its fate.

Comments

Dutti Goodsport 1945 Tue, 07/31/2018 - 05:45 Permalink

First, the state takes over the responsibilities of the individual.

Then, in Europe, the super-nanny-state-bureaucracy (the EU) takes over the responsibilities of the individual countries.

It is natural for people not to resist if  they are offered free goods and services. In fact, after a while, more demands are made.

For a politician in a not so productive society to be popular, the easiest way is to offer more free shit.

It all works out for a while - until socialism/communism eventually collapses because they run out of other people's money to pay for this insanity.

In reply to by Goodsport 1945

thisandthat Kayman Tue, 07/31/2018 - 11:51 Permalink

Who is this cunt of an author?

"The original party was a cornucopia of cheap credit, which capital markets happily issued to the countries of Southern Europe under the protection of the euro"

The euro was created specifically to destroy national goverments ability to pursue their own independent economic policies, and to usher in the "need" for a federal europe, to be economically and politically controlled by private sector - Monet even explicitly states this end goal.

European investment loans to southern countries were taylored so that, at the end of the loan period, interest payments alone would've amounted to more than 100% of total investment, even though they represented typically 20% of said investment. So these loans were, in fact, effectively a subsidy TO central/northern european (German, French) economy BY southern european countries, not the other way around.

Also, EU heavily subsidised DIVESTMENT, not investment, by southern european industries, so that they wouldn't compete (directly or indirectly) with central/northern european ones - here's the main talked about examples in Portugal:

Subsidies towards divestment in (mostly artisanal) fisheries, to the benefit of (heavily industrialized, and mostly unaffected) Spanish fishing industry (entering the EU, Portugal had as many fishermen as the whole of EU, while Spain caught as much fish as also the whole of EU).

Subsidies towards divestment in (mostly small sized) farming, to the benefit of German, French big-agro industry (btw, the main beneficiaries of european farming subsidies, which, together with subsidies to fisheries, amount to essentially half of eu budget).

Subsidies towards divestment in (net exporter) textile industry to the benefit of Chinese exports, so that German industry could keep selling them machinery.

Incidentally, none of this is (was) news to (current) Portuguese PM, who actually had no qualms (casually, as usual) "denouncing" it publicly years ago, when he was still mayor of Lisbon.

In reply to by Kayman

Farqued Up Heros Tue, 07/31/2018 - 07:58 Permalink

Rockerfuckers donated the land for the UN, but I did not know that the UN is also a registered CORPORATION. Wonder whose name graces the Chairman seat on those Articles of Incorporation?

My retarded brain is detecting a sense of ownership being claimed via private ownership of the UN, the Fed and other central banks, the City of London, and even the USA in 1871 was incorporated in Fairfax, VA. I need to research this more to see whose names are on the docs filed with the Sec. of State in Richmond. This is hard to believe.

if Trump is for dismantling all of that nonsense, he deserves at least a little respect.

”Here come da’ Trolls”.

In reply to by Heros

shovelhead Farqued Up Tue, 07/31/2018 - 10:55 Permalink

It ain't hard to believe at all.

See, under incorporation, you and your heirs in perpetuity are responsible for the 'corporations' debt to the Central Bank.

You co-signed the car loan for your drunken, irresponsible and criminally inclined child and he's driving under your self insured agreement.

It's enough to make a guy glow with pride.

In reply to by Farqued Up

wildbad Dutti Tue, 07/31/2018 - 08:53 Permalink

@Dutti-even easier when no democratic process is engaged and the real goals, methods and  tactics remain hidden.

Your average €uropean only knew that they wouldnt have to show a passport anymor in intra euro travel and wouldn't have to do math to buy shit on vacation.

That was enough.  Never mind that all decisions about their future would be made by dictators in Brussels and that anyone with no scruples and a pulse could get a tax free job there and work 24/7 on creating strangulations that would erode all rights without pesky user input.

FUCK THE €U and its tyrants!

In reply to by Dutti

Offthebeach Goodsport 1945 Tue, 07/31/2018 - 07:05 Permalink

 

 

Planning is fun, and easy.  Planning a bright and shinning future, new clean, new carpet and paint smell offices, new young secretaries, setting up the MacBook Pro...  

After all those years in school.  Planned courses on planning, advanced degree in planning, you now get to be a planner, planning.  Brussels, Berlin, conferences, all very exciting.  And clean, too.  Not like working at some municipal or, God forbid, private bus company.  Checking repair invoices.  The whole place slightly smelling of diesel exhaust, and the secretaries old cranky gals that are always catching you errors.  Plus, you never would be interviewed on a public policy access show, broadcasted all over Europe( granted 5AM, Sunday ) if you worked at some stinking bus company hauling drunks, students, filthy laborers from Hamburg to Achen.  

 

If the Euro is to go, it will need planning!  And planners! New, young, dynamic men and women from the best public policy schools!  A new building, in a different city than Brussels!......

 

In reply to by Goodsport 1945

PrivetHedge johnjkiii Tue, 07/31/2018 - 08:55 Permalink

Medicare for all worked well in Europe before the hordes of immigrants arrived.

In the 'enlightened' US system you pay health insurance instead of a tax to cover healthcare. You then claim (if you are lucky) to pay profit center hospitals and profit center drug companies. Half the money you pay goes to greedy shareholders instead of your health. To make more money they actually want more illness.

Europe simply cut out the middle men: you paid the tax and you got the treatment.

I'm still puzzled as to why you think that is such a bad idea. In Iran you can casually get an MRI scan for $30 without waiting. How much do you pay in the US for that? How many forms do you have to fill in? What happens if your insurance company refuses to pay?

In reply to by johnjkiii

bunkers Tue, 07/31/2018 - 05:48 Permalink

And ALL have to borrow, borrow, borrow from the IMF, making ALL debt slaves over money they never received. The way it's constructed, bankers own everything.

Singelguy Tue, 07/31/2018 - 05:51 Permalink

The money printing continues under Draghi, who has singlehandedly destroyed the bond market in the EU. The ECB is the only buyer. When the printing stops next year as Draghi has promised, interest rates are going to spike significantly. EU member states continue to borrow, despite the high levels of taxation. The inflow of thousands of migrants puts more pressure on the social welfare states. As interest payments begin to consume more tax revenue, the EU will be painted into a corner. Taxes cannot be increased any further without doing serious damage to the economy, and continued printing and borrowing will likely trigger a severe inflationary effect. The days of the euro are numbered.

JIMSJOE2 Singelguy Tue, 07/31/2018 - 07:46 Permalink

I totally agree. It is ironic how this is all unfolding as forecast by Martin Armstrong. I have commented before on this but it bears repeating because many still do not understand what has been happening. Before the Plaza Accord meeting in the 80's US officials met with him and ask how do we remove the dollar as THE worlds reserve currency and his reply you cannot as there is nothing to replace it which is the same problem the US has today. European officials met with him also and ask his advice and he said it would eventually collapse. One reason is the EU has no federalized bond market guaranteed by all members because countries do not want to guarantee other members debt. One reason why the dollar is still the worlds reserve currency is treasuries which is the second most liquid market on the planet where currencies are parked until needed to settle trade or service dollar denominated debt. The second is countries need to weaken or strengthen a currency as economic conditions dictate and this ability was taken away and to offset this they has to take on massive debt loads and to pay for this especially in the PIGS they raised taxes, cut government salaries and jobs, pensions, social benefits, etc, etc etc. When this much capital is removed to service debt instead of moving into the real economy, collapse follows. This caused businesses to layoff or fail and then effected the banks causing NPLs to skyrocket. It did not help when Draghi went to negative rates and not only destroyed the bond market but banks and then economies. Instead of parking excess capital at the ECB they opened branches in the US and simply converted euros to dollars and parked at the FED and this is one reason why the FED has so much in excess reserves. The migrant crisis also did not help as it also bankrupting the whole EU.

    Back in 2009 Armstrong Economics computer models forecast the Europe is beginning  to collapse and capital will move out to dollars and dollar based assets. This capital accelerated in 2011 and caused dollar strength and the Dow to break record after record as capital was simply parked and this will not only continue but will accelerate again. Back then the Dow was only at around 6000 and the forecast was for 22,000 then 23,000 and finally to 40,000 at the end of the collapse. Now the models are also forecast this capital will move again at the end of 2018 and around 2020/21 the shit hits the fan in Europe. The models forecast that the EU, euro, most banks, many corporations, (also cut off from capital markets), and countries will not survive in its present form. The end of socialism in Europe is coming to an end as most are broke. Armstrong said that capital has already started to accelerate again not only from Europe but also from emerging markets. The models forecast that emerging markets go first followed by Europe. Of course all this capital will flow into dollars and dollar based assets and will cause the last move up for the Dow. This has created enormous problems for the FED as they are desperate to weaken the dollar as they bring rates back to normal as they have no choice. Yellen and Powell have realized that Bernanke kept rates too low for too long destroying savors, retirees, pensions and the bulk of America's retirement funds held by other entities like insurance companies. If these go so does the economy. As fund managers in the US dump equities these are quickly bought up by foreign capital. There is few places to park where markets are large and liquid enough but the US. Armstrong said there is trillions in capital parked in cash all waiting for the final shoe to drop in Europe and move into dollar based assets.

     

   

In reply to by Singelguy

shovelhead Singelguy Tue, 07/31/2018 - 11:28 Permalink

The interesting thing about the Spanish Real was the fact that even actual gold coin was not immune from the inflation brought on from the flood of gold coming into Europe from Spain and Portugal's S. American colonies.

Further proof that inflation is always a monetary policy issue of an unnatural growth in the money supply leading to supply and demand disruptions in the marketplace.

In reply to by Singelguy

fockewulf190 shovelhead Tue, 07/31/2018 - 11:43 Permalink

Having experienced the currency shift from Deutsch Mark to the Euro, there is no doubt whatsoever that living on 3000 DM after taxes provided a higher standard of living vs. what you have now with €1500.  The conversion rate of DM 1.95583 to the Euro was the biggest heist in the world.  It is no wonder that the Germans nicknamed the Euro “Teuro”, a combination of the word teuer (meaning expensive) and Euro.  No vote was ever offered to the citizens of Germany...the politicians knew it would have gone badly if it were allowed to happen.  

In reply to by shovelhead

Jota Tue, 07/31/2018 - 06:02 Permalink

"Spain governed by radical socialists" HAHAHAHAHA. Trust me, I'm from Spain. Pedro Sánchez is even more europeist than Rajoy. Neoliberal in disguise.

finnzero Jota Tue, 07/31/2018 - 06:26 Permalink

I just watched a documentary about Spain's radical communists how they took up in arms against the government and ended up having Franco in power. That didn't work so well.

But what was intriguing was the contrast with communists of that time and communists now. Modern day communists whine in internet just about everything. Communists before actually did something. Modern day communists look like petulant children in the sandbox to me.

In reply to by Jota

Offthebeach finnzero Tue, 07/31/2018 - 07:24 Permalink

The first Russian communist revolt , 1890?, was upper income youths of affluent parents and good schools.  They did light killings, and lots of 1960's type street theater. The Tsar wacked them down easily.  The next generation of communists weren't from the wealthy, and were well ready, and said so, to kill millions.

This pre revolution followed a generation later by the nessasary killers was a pattern in communist takeovers.  The Black Book of Communism  is full of this depressing tale.

The only young people I see with a cause, a vision, networks and willingness to kill millions are muslims.

In reply to by finnzero

finnzero Offthebeach Tue, 07/31/2018 - 12:15 Permalink

Come to think of it, what has these radicals achieved. Franco in Spain. Lenin and Stalin in Russia/Soviets. They had part in Hitler's uprising. Even in Fench revolution they managed to bring up the idea of nationalism, which they now despise, some turned to communism and some to hard core capitalism.

Well nationalism was a good "invention" but otherwise their track record is not so good. What will they next come up with, third world war?

In reply to by Offthebeach

Heros Tue, 07/31/2018 - 06:06 Permalink

"It is hard to see a clear path forward. Some argue for still more debt socialization and risk sharing at the European level."

The path forward is clear to anyone who is at least halfway woke:  The Third Temple to Solomon in Jerusalem, the World Court in Jerusalem, and full implementation of the Noahide laws.