Bring Back the Deutschmark
My plan for Europe. In comments JackD asked me what I thought of Italy leaving the Eurobloc. The problem is that it is easier said than done — the instant it becomes a serious possibility there will either be the mother of all bank runs or a banking holliday. Everyone (including your humble blogger) will want to get our hands on paper Euros which can’t be converted into Lire or Italos or whatever. So it has to be done quickly and by surprise — oh and the new currency has to be printed (quickly and secretly). Not going to happen. Even Greece stuck with the Euro in spite of absolutely appalling (unnecessary) costs.
On the other hand, Germany could leave the Euro bloc. Germans never liked the Euro anyway. I trust they would gladly wait for a chance to get Deutschmark’s again (actually German kids probably don’t remember the DM but they don’t have lots of money anyway).
I’m sure the DM would appreciate compared to the Euro. This would reduce Germany’s huge current account surplus and, therefore, also reduce Germany’s huge and very dangerous capital account deficit. As is, they are buying foreign assets or loaning to foreigners who, sometimes, pay them back. Germans recognize that this is a problem — they are close to obsessed.
Aside from the effect on employment, currency appreciation is fun — things get cheaper. Germany is really actually at roughly full employment. Their main problem is Putin no focus on economics is the rest of the world finances its current account deficit with Germany by borrowing from German institutions and German’s worry that Greece won’t be the last debtor to become insolvent.
I admit I want Germany out of the Euro bloc so they can’t impose austerity on other countries, but, the point is that they feel they have to do that to protext the assets which they accumulate due to the missalignment of the German Euro and the normal country Euro (that is the weirdly low price level in Germany).
On the other hand, uh I don’t see anything on my other hand. What’s the problem ?
We should re-Gauss Europe
I never agreed with the rationale for the euro. When I started in finance each euro country had its own currency: deutschmark, lira, drachma, etc. which value rose and fell with each countries prospects. There was an active trading market.
Then the Euro idea came along. To “facilitate exchange”….. even though “there was an active trading market”? With each different euro country facing differing economic conditions, you have a single currency? Sounds like a recipe for disaster.
The Euro is a monetary roach motel: you can’t go in, but you can never leave. This is its fatal flaw. Like Venezuela, these problems were seen 20 years ago. The states have not adhered to their agreement never to run deficits exceeding 3% of GDP. Now they are up to their eyeballs in debt. The debt should be reneged on, the banks should collapse, the depositors should lose their money, and gold should once again reign supreme.
The debt must be jubileed out of existence; it can never be serviced, let alone paid, without hyperinflation like Venezuela.
Dale:
Welcome to AB. First comments always go to moderation to weed out spammers and advertsing.
” Their main problem is Putin no focus on economics is the rest of the world finances its current account deficit with Germany by borrowing from German institutions and German’s worry that Greece won’t be the last debtor to become insolvent.”
WTF!!!
Someone hacked your sentence or you meant to write: “There maim problem is the rest of the world finances………..”
Good post from the real PGL. Someone earlier commented posing as me but that was not my comment.
Pgl:
Resident impersonator. Sorry, he has not been a round in a while and I forgot.
Robert:
It has been my experience the Germans and the Swiss do not like much outside of their native homes.
In Stuttgart, I was up there with the #3 man for Marquardt at Cannstatter Volksfest. I asked a question about the stand of 100 year old Sycamores there which were to be cut down to make way for an underground railway station. You would think I had asked for a loan.
It would appear the old German efficiency has resulted in failure in this case with a cost to build Stuttgart 21 tripling and renamed as Stuttgart 23. I guess one could blame it on the natives and welfare state which is a major complaint. How about that Swiss tunnel> I guess Merkel said it needed a little more German work?
The US could learn from this in its delay on infrastructure. The Germans had the money to start the projects in the Ruhr and other places and could have funded it with “some” debt. Instead it delayed and delayed and now the entire place needs refurbishing. Wow, building a concrete platform 40 meters minimum above a water table is going to be interesting.
The Irish had sat with us at our table. They were bemoaning the several hundred million Euro cost due to collapsing banks. Unbelievably small compared to issues in the US.
My German boss asked me what I thought of the welfare spending in the US when he was here. “Work our way out of it in spite of the idiots.”
Correct me if I’m wrong (could easily be), but it seems to me one reason Germany wouldn’t want to drop the Euro is that they seem to get an awful lot of clout and power over other countries because of their de facto control of the Euro.
Maybe the biggest mistake US economist, investors,strategist have made over the past decade has been to underestimate the strength of the European’s support of the Euro.
Every time some issue emerges within the Euro, Americans jump to the conclusion that the Euros days are numbered. Time after time they have been dead wrong. I wonder what it would take to change their anti-Euro stance.
Spencer:
What would change their anti-Euro minds or maybe their silliness about Europe? Probably the same realization or coming to the conclusion that “tax breaks expands the deficit, reducing savings, and expand the savings-investment gap which is equal to the current account deficit. So crowding-out works much more through the dollar than through interest rates. The single item most responsible for the decline in manufacturing has been the Republican tax cuts.”
Someone else we know made that comment.
Heritage, consummate war mongers, are modestly miffed at the Europeans not pulling their “weight”. In spite of the Europeans, outside the Baltic and Ukraine elites, not worrying about “aggressive Putin”, Heritage says US arming up in Europe is in the US’ “national interest”, even though the Germans won’t be bothered.
The constitution says “common defense” to which Obama’s European Reassurance Initiatives (ERI) added nothing. The main line pentagon trough advocate and US liberal empire salesperson says “national Security”. Now to get the mark in deeper they add “national interest” to fill the pentagon trough.
Shoddy long article, selling making permanent an additional $6B a year to arm up the US forces Europe. Ignore the fact that US boys and treasure are “over there” where local EU boys and money would be if the EU governments bought the Heritage blither and cared to support US liberal imperialism.
https://www.heritage.org/europe/report/congress-should-transform-the-european-deterrence-initiative-enduring-commitment
Note some of the argument about priority of the EDI is wrongheaded from a “why we keeps forces” deployed. But these guys are really out to fill the pentagon trough.
Keeping the euro keeps their deficits low which means their war profiteers are out in the cold.
Isolationist, Putin adoring Trump presides over a huge increase in the ERI become EDI.
JDM and Spencer are both asking the wrong question as their comments seem to go whether or not the Euro WILL survive? Maybe it will but the policy question is whether it SHOULD survive. On that question – the answer is clearly no.
Issuing currency in an open market is fairly simple, it is just statistical accounting, high school kids can do it (and are doing it actually). Issuing currency with all member banks beholding to their governments won’t work. The statistics of money get lost in the latter case.
I say keep the Euro, make it optional everywhere in Europe. The Euro governments can sell goods and services in Euro while maintaining their own discount coin. Member banks in the Euro can be any european citizen group as long as they pay the congestion fee.
Then having a secondary discount coin, the various governments can do the political money issuance all they want, and still get a bit of money illusion from the voters. Use the discount coin to offer discounts on government goods.
I disagree with comments that Germany “wants” to be in the Euro. They clearly don’t, now that all countries have flouted the rule they agreed to in the Maastricht Treaty not to run deficits more than 3% of GDP.
Take Italy. According to the national statistics agency ISTAT, the country’s deficit for last year has been revised to 2.3% of gross domestic product, compared with the 1.9% the agency announced at the beginning of March. Now that’s while the global economy is running hot. What are they going to do when things cool off?
The country’s debt–one of the highest in the eurozone–was revised up to 131.8%, from 131.5% of gross domestic product.
Spain recorded a Government Budget deficit equal to 3.1% of GDP in 2017. They averaged a 3.84% of GDP from 1995 until 2017! These are not countries you want to pair up with. Yes, Germany “gets” to export with a weak euro, but they would rather have a strong currency, because they can always lower wages to make sure they can still export profitably. Merkel wants an EU because she is a socialist at heart, but now that the AfD is the 3rd largest political party, it’s clear that sensible German men are starting to see the disaster of teaming up with undisciplined countries who run up enormous debts that they can pay for with low interest rates due to Germany’s economic engine making the Euro appear legitimate. I agree with Jim Rickards on a lot, but he is absolutely wrong about the Euro. It’s a matter of time before the Euro is devalued like crazy to prop up the banks.
“JDM and Spencer are both asking the wrong question as their comments seem to go whether or not the Euro WILL survive?”
Well, no. I’m saying that I think Germany gets a benefit from being in the Euro that I don’t see recognized: they get to control a lot of other countries’ financial actions. They wouldn’t have been able to dictate to Greece nearly as much as they did if Greece was using their own currency, for instance. This gets factored into their embrace of or distancing from the Euro, regardless of whether that’s overall a good idea.
Again, I could be wrong about the Euro giving Germany a lot of control over other countries that they wouldn’t otherwise have, so please correct me if I’m wrong about that.
“They wouldn’t have been able to dictate to Greece nearly as much as they did if Greece was using their own currency, for instance.”
This is precisely why Greece, Italy, Portugal, and Spain should abandon the Euro. Which is THE point.
And not Ireland? All of PIIGS?
Run,
Interesting comment on Ireland. Yes, I think they should go, even if their debt to GDP ratio is shrinking. An Irish columnist said part of the reason for that is the transfer of intellectual property rights from the US into Ireland (to take advantage of Ireland’s lower corporate tax rate) and the level of multinational activity in Ireland flatters the level of economic activity, meaning that while there undoubtedly has been an improvement in Ireland’s debt burden, it is not nearly as impressive as the debt-to-GDP ratio might indicate. Ireland has taken on the third highest debt per capita in the world for their Celtic Tiger economy; they have yet to experience the pain a global slowdown will bring.
Dale:
When I sat at Cannstatter Volksfest drinking litres with the #3 at the German company I worked for and was in country with at the time, the Irish joined us. They were complaining (2011?) about being a few hundred billion in debt and suffering. A small amount compared to the $trillions in the US. Jokingly, I said to them . . wait a minute and I will write a check for it as we are in the hole $7 trillion. A pittance compared to what the US was in the hole.
A union is precisely that and there will come a time my German comrades will be in default. Ireland’s issues are small compared to the deficit and debt Trump has created with his tax cut, and what Bush II created, and what Reagan created. The EU is a good counterbalance to the Republican pox.