Stone a crow!
This is a description of an imminent armageddon. At the end of the
article in which he examines three scenarios he comes to the
conclusion (if I read him rightly) that there are no solutions that
will work.
But it seems that we eurosceptics were too, too right!
xxxxxxxxxxxxxxx cvs
[This came out of the blue and has delayed my posting on the UK bank
chaos to which I will now turn!]
========================
TELEGRAPH 26.2.09
Blogs [Ambrose Evans-Pritchard ]
Are Germans giving up on the euro
Posted By: Ambrose Evans-Pritchard
Ex-Bundesbank chief Karl Otto Pohl has just said that Ireland and
Greece are in danger of defaulting on their sovereign debts and/or
may be forced out of the Euro, for those who may not be aware of his
Sky interview by my colleague Jeff Randall.
"I think there are countries considering the possibility. It would be
very expensive," he said. "The exchange rate would go down, 50 or 60%
and then interest rates would go sky high because the markets would
lose all confidence."
Professor Pohl said Germany's political class is afraid their country
will ultimately have to pay for the EMU mess. His view is that the
burden should be shifted to the IMF (ie. the US, Canada, Japan,
Britain). Thanks a lot Karl Otto. You broke it, you fix it.
This is more or less what ex-foreign minister Joschka Fischer has
been saying in London over the last two days, although his main point
is that Russia is now the equivalent of Germany in the 1930s: an
embittered nation with a revanchist and dysfunctional leadership class.
Mr Fischer now thinks monetary union is beyond saving. A massive
rescue will be needed. It will not be forthcoming. German-French
relations are the worst since the war, he said. The European
institutions have lost virtually all authority in this crisis. The
half-century Project is collapsing. .. or words to that effect, from
what I hear.
As regards Prof's Pohl's comments, they are revealing. Why should the
currencies fall 60pc unless they are massively overvalued? If they
are massively overvalued by anything like this amount - or even half
- how can they possibly rectify this within the eurozone? Is Germany
going to inflate at 10pc to let them claw back competitiveness? Of
course not. This is pure madness.
Prof Pohl shrinks from the implications of his own logic, as almost
everybody does in Euroland when they near the high-voltage line. EMU
is inherently unworkable. It was launched before there had been real
convergence of productivity growth rates, wage bargaining systems,
legal practices, mortgage markets, etc, and without the fiscal
transfers and debt union that makes monetary union work (badly, but
on balance positively) in, say, the US, Canada, and Britain. The
destructive effect has now brought the EU project to this unhappy
pass, where even Joschka Fischer is giving up on it.
I remember hearing Joschka give a speech in Strasbourg eight years
ago in which he said the euro was a powerful federalizing force -
"quantum leap" - that would lead ineluctably to full political
union.
http://www.telegraph.co.uk/news/worldnews/europe/germany/1347306/
German-minister-backs-fast-track-to-federal-Europe.html
He seems to have changed his mind.
On the same theme, three notes have hit my desk on the risk of EMU
break-up/default -- one from France, one from Benelux, and one from a
Swede in the City
1) Laurence Chieze-Devivier from AXA Investment Managers -- in
"Leaving the Euro?" -- says that the rocketing debt costs of Ireland,
Greece, Spain, and Italy are taking on a life of their own. (Italy
has just revised is public debt forecast from 2010 from 101pc to
111pc. That is a frightening jump. While the CDS default swaps on
Irish debt is are at 376 basis pouints. Austria is at 240. This is
getting serious).
It is far from clear whether all these countries will accept the sort
of drastic retrenchment required to stay in EMU. "By leaving the
euro, internal adjustments would become less `painful'. An
independent currency would re-establish economic competitiveness
quickly, not achieved by a sharp drop in employment or wage cuts".
Mr Cheize-Devivier makes a point often missed. Countries in trouble
may not have a choice. "In our view a FORCED EXIT could be provoked
by investors' distrust."
The AXA view is that the crisis will ultimately lead to the creation
of a new EU machinery -- in effect, an EU economic government --
ensuring the survival of EMU.
(This, of course, is what many Brit, Danish, Swedish, and Gallic
eurosceptics always suspected, which is why wanted their countries to
stay out. Romano Prodi candidly said once that the euro would lead to
a crisis one day that would let the EU do things it cannot do now)
2) Carsten Brzeski for ING in Brussels said the eurozone laggards
were more likely to default than pay the punishing costs of leaving EMU.
"It is difficult to believe that Portugal, Italy, Ireland, Greece,
and Spain, would be better off outside the eurozone. While a
government could possibly get away with a redenomination of its debt,
the private sector would still have to service its foreign debt. We
believe any attempts to leave monetary union would lead to the mother
of all crises, and total isolation in any future European integration"
Mr Brzeski said the bigger danger is that countries will face a
buyers' strike for their debt as a flood of bond issues across the
world saturates the markets.
"A further worsening of the crisis could lead to (partial) sovereign
defaults in one or several countries."
Others would come to the rescue. The "No-Bail" clause in the
Maastricht Treaty would be ignored. The EU would instead use the
"exceptional occurences beyond its control" clause (Article 100.2) to
do whatever it wanted.
There would be a price. "The country in question could be partly
warded and have to fuilfil strict controls".
Quite. This is another long-held fear of eurosceptics: that EMU would
lead to vassal states.
3) Gabriel Stein from Lombard Street Research in "A Road-map for EMU
break-up" says the euro has shielded weaker member from a currency
crisis in this global recession, but only the cost of letting
imbalances get further out of hand. Currency crises are often good.
If you don't get tremors, you get an earthquake.
Mr Stein says a country like Italy that has lost some 40pc in labour
competitveness could in theory do what Germany has done for the last
13 years after the D-Mark was locked into the euro system at an
overvalued rate. It could screw down wages but that was during a
period of global growth. No Greek or Italian government is likely to
opt for mass unemployment, or stay in power if it does so.
(Actually, I would go further. I doubt whether Italy can possibly do
this. Germany was able to pull it off because the Club Med states
were all inflating merrily. Italy would have to deflate against a low-
inflation Germany. If Italy deflated with a public debt of 111pc of
GDP, it would face a debt compound trap. In my view, Italy is already
past the point of no return.)
Mr Stein's piece is a study of break-down mechanics. What would
actually happen? The country's parliament could pass a law
redenominating debt into the new Lira, Drachma, or whatever. But
there would be a pre-emptive run on bank deposits long before then.
"Anyone not desirous of losing money would presumably see the writing
on the wall and transfer any funds beyond the reach of the state. In
other words, close down that account with Monte dei Paschi di Siena
and open a new one with Commerzbank in Germany".
Such a wholesale shift would lead to a collapse in the money supply,
perhaps equal to the 38pc contraction in M3 from October 1929 to
April 1933 in the US -- but concentrated in a much shorter period.
"Banks would be forced to call in outstanding loans, bring about a
collapse in the country's business."
That is something I never thought of before. Italy is really damned
if it does, and really damned if it doesn't. Lasciate Ogni Speranza,
Voi Che Entrate EMU [My Italian is shaky but I’m guessing at “Abandon
all hope those who join the EMU” -cs]
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