Two eurocrisis guest posts: Diagnosis (by Jan Toporowski) and cure (by Stuart Holland)

While preparing for my tak at the LSE, organised by the Hellenic Observatory, I thought you may be interested in two guest posts. One is by Jan Toporowski (on the deeper causes of the eurozone crisis) and another by Stuart Holland (in which the author draws the parallel between the essence of our Modest Proposal and the US New Deal). Enjoy. [And if you are around the LSE tonight at 18.15, pop into the lecture.]


  • What do you make of the cognizant point in the EFSF S&P conference call, where it was pointed out the “Voluntary Haircut” on the Greek Bonds essentially BROKE the bond system as a hedge, since the CDS insurance was manipulated into inaction. I have to agree, that the system that ordained that haircut now should understand that the kind of manipulation there, makes their future bonds riskier.

  • Thank you for introducing me to the works of Jan Toporowski and Stuart Holland.

    I did a little googling and came up with this gem — a video of theTEDxCoimbra event given by Stuart Holland in Portugal last year titled “How to Cut the Gordian Knot on Debt.” I think the readers here will find it not only very informative but quite entertaning as well.

    Excerpt from the event:

    Stuart Holland to the audience: How much debt does Europe have? Any answers? [No hands were raised.] Few billions? Few trillions? Who owns this European debt? Whose got it — whose got it in their pocket? [Silence from the audience]

    Now … let’s make it easier. TEDx is about making things simple. Who holds Portugal’s debt? You do. [Laughter] Well, I hope you got a credit default swap on it. You have insured it, have you?

    Because the reason that none of you can answer question — “How big is Europe’s debt?” — is because until May of [last year], it had none. None. Zero. Zilch. It didn’t have any. There is only national debt.

    • Some more great (funny) moments from Stuart Holland at the TEDx event last fall in Portugal:

      Just after the revolution in Cuba, Fidel got the commandantes together and said “Right … ahh … Who’s an economist?” And Che Guevera said “I am an ‘economist'”. He thought that Fidel has asked “Who’s a communist?”

      Well, I am not a communist. I very nearly didn’t become ane-co-no-mist. Because I attended a course in mid-western America at one time, and I found that they’re all talking a private language game. They’re all talking about equilibrium this, proximation that, running calculus, all changes linear, incremental, smooth — but all changes from one equilibrium to another.

      You have some very clever economists who keep getting Nobel prizes … for telling us what we already know — for putting it in their own words. Or others who told us the financial markets are rational; financial markets can be predicted … with mathematical certainty — that markets always clear. And that if there is a perturbance, there will be a return to equilibrium.

      But it didn’t work out that way. In 2007, there was a financial collapse by hedge funds and banks who had believed this theory. So what went wrong?

      Btw, by “clever economists who keep getting Nobel prizes … for telling us what we already know” I imagine he was thinking of Paul Krugman 😉

    • But to be sure it is better to have most money in German bank accounts. If nothing happens one Euro stays one Euro. If the Euro breaks up, you have the “local Euros” with the highest value.

    • PCARX (as a means of reply):

      From your commentary you seem like a fellow who engages in currency speculation or perhaps are an investor of 3X Bear Funds.

      If so and you want to short the euro, then Germany is your best friend. As an exporter, Germany’s job is to keep the euro as low as possible and as such it’s a disadvantage for Germany to ever help solve the crisis vs. prolonging it as much as possible.

      Problem is that Germany is the only winner of the last 2-year crisis in Europe and sooner or later she will have to return the ill-gotten profits and then some.

      So if I were you, I would keep my money in Swiss francs or gold or some other currency and certainly not in accounts located in Germany.

    • I am not a speculator. I just want to protect my personal savings. If I want ot do this in Euros for whatever reason, what I said above is the dominant strategy. If I would not want to do it in Euros, I would do it in Gold or other currencies that are not the EUR or USD

    • So if I were you, I would keep my money in Swiss francs or gold or some other currency and certainly not in accounts located in Germany.

      Are you aware, Dean, that the Swiss franc is pegged to the euro?

      If I were PCARX, I would seek professional financial advice for any financial/investment questions.

    • “Profsssional financial advice?”

      I think this is the scariest thing one could do with his own money!

    • At the end of the day, the decision with what to do with your money rests with you. It’s your resposibility to gather the necessary information and associated risks on any investment; in other words, do the due diligence before making a decision. If you don’t, then it is highly probable that you and your money will soon be departing … forever.

      And for starters, PCARX, and that was the crux of my previous reply, advice on online forums should be taken with a kilo of salt.

  • Let’s be realistic here.

    Given Merkozy’s track record there is no way a satisfactory deal will get done. So, this thing(latest Merkozy effort) is headed towards failure. Question is: what then?

    My view is that after the manifested failure, some other processes will take over.

    Yani has been telling us for quite sometime that Greece is a microcosm of Europe, then Europe a microcosm of the globe and so on.

    So, I’d say to you look at the evidence. How did the Greek issue evolve? By kicking out politicians and replacing them with technocrats. Same in Italy, Portugal, Spain, Ireland (albeit with the veneer of a democratic process; in reality the outcome is pre-determined).

    Same I think will happen at the European level. After the Merkozy failure they will be both brushed aside and a more techno solution will be implemented. My money is on some Brussels figure (Van Rompuy might be thsuch figure, but let’s not fight about it now)

    At that point the markets will calm down. As long Merkozy shows its face, there is no way we will ever see a solution. No way. They both have to go.

    And the reason I am saying this is because we have established a clear pattern of incompatibility between politicians and economy. The default position now is: politician = a person unable to steer the economy.

    Maybe we are into something new here but I can see a future whereby the President of a country is a financial technocrat and the PM is a political animal.A future where finance is supremo and politics secondary until of course the politicians throw us into a world conflict in an effort to regain lost power.

    IMHO this trend of politicos unable to produce economic results is a world wide phenomenon not confined to Europe by any means. Finding a politician with an economic touch is the highest sought after worldwide attribute at the moment.

  • Martin Wold puts it this way (I couldn’t agree) more:

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    The summit on Friday is a huge moment. What we have heard from Mr Sarkozy and Ms Merkel does not create confidence. The problem is that Germany – the eurozone’s hegemon – has a plan, but that plan is also something of a blunder. The good news is that eurozone opposition will prevent its full application. The bad news is that nothing better seems to be on offer.

    The German faith is that fiscal malfeasance is the origin of the crisis. It has good reason to believe this. If it accepted the truth, it would have to admit that it played a large part in the unhappy outcome.

    Take a look at the average fiscal deficits of 12 significant (or at least revealing) eurozone members from 1999 to 2007, inclusive. Every country, except Greece, fell below the famous 3 per cent of gross domestic product limit. Focusing on this criterion would have missed all today’s crisis-hit members, except Greece. Moreover, the four worst exemplars, after Greece, were Italy and then France, Germany and Austria. Meanwhile, Ireland, Estonia, Spain and Belgium had good performances over these years. After the crisis, the picture changed, with huge (and unexpected) deteriorations in the fiscal positions of Ireland, Portugal and Spain (though not Italy). In all, however, fiscal deficits were useless as indicators of looming crises (see charts).

    Now consider public debt. Relying on that criterion would have picked up Greece, Italy, Belgium and Portugal. But Estonia, Ireland and Spain had vastly better public debt positions than Germany. Indeed, on the basis of its deficit and debt performance, pre-crisis Germany even looked vulnerable. Again, after the crisis, the picture transformed swiftly. Ireland’s story is amazing: in just five years it will suffer a 93 percentage point jump in the ratio of its net public debt to GDP.

    Now consider average current account deficits over 1999-2007. On this measure, the most vulnerable countries were Estonia, Portugal, Greece, Spain, Ireland and Italy. So we have a useful indicator, at last. This, then, is a balance of payments crisis. In 2008, private financing of external imbalances suffered “sudden stops”: private credit was cut off. Ever since, official sources have been engaged as financiers. The European System of Central Banks has played a huge role as lender of last resort to the banks, as Hans-Werner Sinn of Munich’s Ifo Institute argues.

    If the most powerful country in the eurozone refuses to recognise the nature of the crisis, the eurozone has no chance of either remedying it or preventing a recurrence. Yes, the ECB might paper over the cracks. In the short run, such intervention is even indispensable, since time is needed for external adjustments. Ultimately, however, external adjustment is crucial. That is far more important than fiscal austerity.

    In the absence of external adjustment, the fiscal cuts imposed on fragile members will just cause prolonged and deep recessions. Once the role of external adjustment is recognised, the core issue becomes not fiscal austerity but needed shifts in competitiveness. If one rules out exits, this requires a buoyant eurozone economy, higher inflation and vigorous credit expansion in surplus countries. All of this now seems inconceivable. That is why markets are right to be so cautious.

    The failure to recognise that a currency union is vulnerable to balance of payments crises, in the absence of fiscal and financial integration, makes a recurrence almost certain. Worse, focusing on fiscal austerity guarantees that the response to crises will be fiercely pro-cyclical, as we see so clearly.

    Maybe, the porridge agreed in Paris will allow the ECB to act. Maybe, that will also bring a period of peace, though I doubt it. Yet the eurozone is still looking for effective longer-term remedies. I am not sorry that Germany failed to obtain yet more automatic and harsher fiscal disciplines, since that demand is built on a failure to recognise what actually went wrong. This is, at its bottom, a balance of payments crisis. Resolving payments crises inside a large, closed economy requires huge adjustments, on both sides. That is truth. All else is commentary.