On The Euro’s Fading Future: In conversation with Henry Farrell (with a reference to the ill fated Baroso eurobond proposals)

In this video conversation with Henry Farrell (Professor of Political Science and International Affairs at George Washington University) we are discussing the euro crisis. Note that at around the 20th minute of the discussion I explain why, in my opinion, Baroso’s eurobond proposal is dead in the water. I argue that Baroso’s European Commission is desperately trying to reassert its authority (in the face of Berlin’s and Paris’ determination to bypass Brussels). It is in this context that we should interpret the Commission’s eurobond proposal: A good proposal (much influenced, if I may say so myself, by our Modest Proposal) will be shot down by Merkel and Sarkozy not only because Merkel is not ready for eurobonds but, far worse, because shooting ‘Baroso’s eurobonds’ down will now be part of the ongoing campaign to sideline the European Commission.


  • Below is nice tale from Warren Buffett where he once described the role of current account surpluses/deficits in his wonderfully simple way. Think of Germany when you read ‘Thriftville’ and think of Greece when you read ‘Squanderville”. Here it is.

    “Take a wildly fanciful trip with me to two isolated, side-by-side islands of equal size, Squanderville and Thriftville. Land is the only capital asset on these islands, and their communities are primitive, needing only food and producing only food. Working eight hours a day, in fact, each inhabitant can produce enough food to sustain himself or herself. And for a long time that’s how things go along. On each island everybody works the prescribed eight hours a day, which means that each society is self-sufficient.

    Eventually, though, the industrious citizens of Thriftville decide to do some serious saving and investing, and they start to work 16 hours a day. In this mode they continue to live off the food they produce in eight hours of work but begin exporting an equal amount to their one and only trading outlet, Squanderville.

    The citizens of Squanderville are ecstatic about this turn of events, since they can now live their lives free from toil but eat as well as ever. Oh, yes, there’s a quid pro quo — but to the Squanders, it seems harmless: All that the Thrifts want in exchange for their food is Squanderbonds (which are denominated, naturally, in Squanderbucks).

    Over time Thriftville accumulates an enormous amount of these bonds, which at their core represent claim checks on the future output of Squanderville. A few pundits in Squanderville smell trouble coming. They foresee that for the Squanders both to eat and to pay off — or simply service — the debt they’re piling up will eventually require them to work more than eight hours a day. But the residents of Squanderville are in no mood to listen to such doomsaying.

    Meanwhile, the citizens of Thriftville begin to get nervous. Just how good, they ask, are the IOUs of a shiftless island? So the Thrifts change strategy: Though they continue to hold some bonds, they sell most of them to Squanderville residents for Squanderbucks and use the proceeds to buy Squanderville land. And eventually the Thrifts own all of Squanderville.

    At that point, the Squanders are forced to deal with an ugly equation: They must now not only return to working eight hours a day in order to eat — they have nothing left to trade — but must also work additional hours to service their debt and pay Thriftville rent on the land so imprudently sold. In effect, Squanderville has been colonized by purchase rather than conquest.

    It can be argued, of course, that the present value of the future production that Squanderville must forever ship to Thriftville only equates to the production Thriftville initially gave up and that therefore both have received a fair deal. But since one generation of Squanders gets the free ride and future generations pay in perpetuity for it, there are — in economist talk — some pretty dramatic “intergenerational inequities.”

    Let’s think of it in terms of a family: Imagine that I, Warren Buffett, can get the suppliers of all that I consume in my lifetime to take Buffett family IOUs that are payable, in goods and services and with interest added, by my descendants. This scenario may be viewed as effecting an even trade between the Buffett family unit and its creditors. But the generations of Buffetts following me are not likely to applaud the deal (and, heaven forbid, may even attempt to welsh on it).

    Think again about those islands: Sooner or later the Squanderville government, facing ever greater payments to service debt, would decide to embrace highly inflationary policies — that is, issue more Squanderbucks to dilute the value of each. After all, the government would reason, those irritating Squanderbonds are simply claims on specific numbers of Squanderbucks, not on bucks of specific value. In short, making Squanderbucks less valuable would ease the island’s fiscal pain.

    That prospect is why I, were I a resident of Thriftville, would opt for direct ownership of Squanderville land rather than bonds of the island’s government. Most governments find it much harder morally to seize foreign-owned property than they do to dilute the purchasing power of claim checks foreigners hold. Theft by stealth is preferred to theft by force”.

  • Klaus perhaps this tale is a touch too simplistic. you do not seem to mention that some of the food sold to Squanderville was smelling foul (submarines, does this ring a bell with you?), the prices of the food were set by Thriftville. In addition the problem was not that Squanderville inhabitants did not work. the problem was that they did not pay taxes. This is a CRUCIAL Point in the story. the bonds and the food and the working hours are just the wrong explanation of what happened in Greece. In addition to that I am afraid that Trhiftville is much too worried about its own internal political problems (and electoral campaigns) with small parties in government that are not experiences, the Christian Democrats in Bavaria having lost power after xxxxxxx decades and hence instead of thinkgin how we can now do things well for both Squanderville(s) and Thriftville(s) they are only thinking of their own food, if they can think at all (this is a comment about how Merkel’s non-leadership and difficult party coalition that does not let her do her job properly, is destroying the Eurozone). after all the ‘salvation’ of Greece (and others) through ineffective policies was voted more in the logic of appeasing rather ignorant German voters rather than to really solve the problem for all. Equally ignorant Greek citizens now think they can have their cake and eat it for one last time because the entire Europe or the ‘financial companies’ or whoever has conspired against them. perhaps we would do more service to ourselves if we tried to say in simple words the WHOLE truth. Yannis at least IS trying. have a nice day, Anna Triandafyllidou

    • ” In addition the problem was not that Squanderville inhabitants did not work. the problem was that they did not pay taxes.”

      …and furthermore, the people of Squanderville did not PRODUCE. It is even rumored that, some time ago, they started importing olive oil from Thriftville – a country whose olive tree number lies in the order of… zero?


    • As I already replied to Ilias, this is Buffett talking (and not me) and he is not talking about Greece but about the USA instead! Obviously, there are always nuances in the detail to be taken into account but overall, Bufffet’s tale is a fair overall desciption of the mathematics in the relationship beetween surplus/deficit countries.

  • Is there a chance that yesterday’s disaster with the German 10-year bonds might shake the waters a little bit and move things towards the right direction?

    Maybe the French cries for ECB intervention and the signs of relaxation from Berlin (according to the Bild article) mean something?


  • It is always very interesting, useful and particularly profitable to hearing your opinion, and your rational, well-documented arguments and extremely correct (unfortunately for us all; blame it on our EU leaders) predictions. Though I have a strong disagreement point* which, albeit not directly connected to the current economic situation, still it is very important for the human societies around the globe, and the imbalances that have been created through years. My point of objection is at ca. 9th min in which you are referring to “Plato’s retroactive win”.

    Plato’s view of political system has nothing to do with what is going on in nowadays in Greece and Italy. The politicians, the governors that Plato envisioned in ‘Politeia’ has no direct or indirect linkage to the technocratic bank-related elite of oligarchs which hold the “steering wheel”, so to say, of these two countries (essentially they hold the “steering wheels” of almost every country, but we are now talking about these two undisguised versions of). Plato’s first and foremost value was indeed justice. It is at least erroneous to compare Plato’s philosophical proposal about an ideal society, where all members are aware of their positions and their duties and demands, with what is in nowadays the situation in Europe in general, and in Greece, in particular. In ‘Politeia’ Plato unfolds his negative criticism and abhorrence to oligarchy, i.e., the rule of a small band of millionaires that only respect money. How come you see any connection between philosophy-oriented governors (Philosopher kings) to these technocratic (in Italy) and pseudo-technocratic (in Greece) governments? The fact that during years, a theory may have been continuously, violently misused or orderly misinterpreted does not imply that the theory is wrong or that it was meant to have been applied in this way. This is exactly what has happened to, e.g., Capitalism, Marxism, Democracy, Christianity etc. In all cases, a few people’s irrational motive reinforced with any kind of mania one can think of, has led to a caricature of the initial proposal.

    * Essentially, it is one of only few disagreements that I have with you Yanis; I have read hundreds of your texts and watched or heard tens of TV or Radio interviews that you have given, respectively, both in Greek and English. I agree with the crushing majority of them.

  • Yanis
    What I find particularly chilling is that both of you are sadly right.

  • Dear Yanis

    The lacking investments by the surplus countries for setting the huge youth employment in a.o. Greece and Spain to an end, make that the crisis will last longer. I heard the ILO said this.
    Also the 500.000 Greeks (ca 5% of Greek population) without a source of income will surely cause this. Do you think that these facts make a change of view by Frau Merkel?

    • There are more people without a real income in her own country. Especially in the eastern state dhe is from. What do you guess her priorities are?

  • If the discussion in the Halls of Power would be conducted in the way these both gentlemen are communicating, we would be well on our way out of this Gordian knot scenario created by Bank products that are designed on the grounds of deliberate fraudulent risks.

    Sadly, although I have no flies on the wall, I would think it to be reasonable to say that the discussions in these Halls are performed on a much lower level of intelligent concern, but probably could be described as political bickering instead.

  • Why would someone go in person to a electricity company to pay a bill or to cancel the contract? Is the mail service or the telco on strike?

    “Crisis of democracy” Exactly, we need to get rid of the unelected EU Commission.

    “Head of German Exporter Association: We will be just fine without the Euro. We will do the Swiss model”. Finally you got it that Germany does not need the Euro. First noone buys German products based on price. Second the share of value add that happens in Germany is low. Thirdly it is better to work less than work all the time for the ClubMed.

    • “No one buys German products based on price.” If you really believe this you are in for a nasty, nasty shock. One that the average hard working German does not deserve.

    • Empty threats. I used to sell German products. If you want customized, turnkey solutions you have little choice, if you want the stuff to work. Deadline is way more important than price.

      PLUS: The domestic market of the Germans is much bigger than their expart market. They will be just fine. If they are smar they get out of the Euro.

      That would also help the South. The ECB could buy everything they like. The Euro bonds would be created. –> All problems solved.

      Oops wait. what about the deficits (before interest) and the lack of competitiveness of the South….