Euro-Australia: An instructive counter-factual

In this counter-factual history I narrate (in ‘real time’) the disintegration that would have befallen the Federation of Australia if, in 1901, its founding fathers had used the Eurozone as a template. (A piece commissioned by www.theconversation.edu.au)

Suppose that in 1901 Australia’s founding fathers had designed the Commonwealth differently. The states were to retain all powers to tax and had to finance themselves (including health, education and social security) entirely, either through taxes or through issuing debt. Imagine further that in the interest of fiscal rectitude, the Constitution specified that no state was allowed to lend money to another or, indeed, to borrow on another’s behalf. Also, that a state’s banks were to be supervised by the state government who would be fully responsible for the smooth functioning of the state’s banking sector.

As for the federal government in Canberra, since it would have no capacity to tax, its revenues would come directly from the states, on the basis of some given formula that specified payments from the states to the centre in proportion to each state’s gross domestic product. Canberra would then use these state-sourced revenues to indulge in nation-building projects, provide structural funds for greater convergence between states, fund the Australian Federal Police, armed forces, and so on. Lastly, the Commonwealth would be equipped with one central bank (the Reserve Bank of Australia): the purpose of which would be to act as the guardian of the Australian dollar, targeting inflation as its only policy objective, and explicitly banned from printing money to fund either the federal or the state governments.

Advocates of so-called states’ rights may find such a system heartwarming. It would stop Canberra politicians who have never been to Perth from deciding on how much income tax Western Australians pay. It would allow states leeway to decide how generous they want their social security system to be, as opposed to the current one-size-fits-all. It would create more accountability at a state level. And it would mean that the federal government would never be in deficit while the Reserve Bank concentrates on the sole task of keeping the Aussie dollar inflation-free and creditable around the world.

Be that as it may, had the Commonwealth of Australia been founded on such principles, it would not have survived to this day. Come to think of it, the structure that I described above is that of our embattled Eurozone: a kind of Commonwealth which is imploding precisely because it was structured in this manner. To see why it is disintegrating, consider what would have happened in Australia following the great financial crisis of 2008 had the founding fathers elected the Eurozone model instead of the existing federal-state structures.

Once the credit crunch hit New York, London, Dubai, Europe, etc., two of the above arrangements would have ensured Australia’s fragmentation: one is the notion of perfectly separable banking sectors; the other the idea of perfectly separable budgets or debts. Let’s see how these two principles would unleash destructive forces that would bring down the Commonwealth.

The first effect of a credit crunch is that capital becomes generally scarce and, in particular, flees from states and regions that are deemed riskier. Liquidity recedes like an evil tide and, under the above structure, would dry up totally in deficit states such as Tasmania and South Australia. The Reserve Bank would then step in to refloat all the banks by means of loans in exchange for collateral.

But that would not suffice. Financial markets would know that the more vulnerable states, left to their own devices as they would be, would find it impossible under the new circumstances to fund not only their increasing fiscal deficits, but also the recapitalisation of their insolvent banks. They would instantly require of these states interest rates that they simply cannot afford.

Tasmania would go bankrupt overnight. And so would all the banks in Hobart and Launceston. The Reserve Bank might keep them running by means of liquidity provision, but their insolvency would be common knowledge and the bank run would be unstoppable. Tasmanians would transfer their savings to Perth or Brisbane, they would try to sell their houses to do likewise with the proceeds, house prices would collapse, and jobs would become scarcer than Tasmanian tigers as no sensible business person invests under such dire circumstances. The Hobart government would respond by increasing taxes and cutting wages, thus sinking deeper into the debt-deflationary spiral.

Before long, speculation would be rife that the next domino to fall would be South Australia. Or New South Wales; Victoria, even. Calls will be going out to the resource-rich states of Western Australia and Queensland, asking them to take decisive steps to come to the aid of the “fallen”, or those about to fall. However, the Constitution would have banned such fiscal transfers, not to mention that its citizens would be averse to paying for the other states’ woes. Meanwhile, the Reserve Bank’s governor would protest that his Charter prevents him from doing anything other than providing liquidity (loans) to the banks.

Under the real threat of the Commonwealth’s demise, even if the states were to band together and create a bailout fund for lending to the fiscally stricken states, it would not work as long as this form of solidarity took the shape of loans from one state to another. Indeed, the states would have resembled a group of inane mountaineers that bind each other with a single rope but forget to pin it onto the rock face. Thus, as the weaker mountaineer falls, the rest must bear the additional weight; the result being that the second weakest climber falls too until the strongest (Western Australia) finds it impossible to carry all the rest and cuts the rope to survive.

Once this vicious dynamic begins, nothing but a new arrangement, a drastic re-design of the centre-periphery relationship will do. Alas, in Europe, when the rot set in two years ago, we pretended we could address the crisis by means of loans and austerity that reduces the income from which they will be repaid. Europeans opted for demonisation of the “fallen” (countries like Greece) over a rational analysis of our catastrophe’s causes. They decided to reject as “permanent bailouts” – what Australians sensibly refer to as … Tasmania.

79 Comments

  • Have you read this speech by Dr Andreas Dombret Member of the Executive Board of the Deutsche Bundesbank?
    http://www.bundesbank.de/Redaktion/EN/Reden/2012/2012_06_12_dombret_euro_area_sovereign_debt_crisis.html

    The root of crisis:
    “The root causes of the crisis are well known by now, so I shall be brief on this.

    The convergence of long-term interest rates at low levels attracted large capital flows to the peripheral countries of the euro area. Yet, those member states failed in many respects to put these funds to productive use. Instead, they spent the cheap money on public or private consumption – as in Greece and Portugal – or they allowed their residential construction sectors to boom, which eventually led to oversized and vulnerable banking sectors – as in Ireland and Spain. Sharp reversals of credit booms or persistent losses in competitiveness can very easily put the solvency of governments at risk – which is exactly what happened.

    And this is of particular relevance in a monetary union, since member states are no longer capable to offset losses in competitiveness by devaluing their exchange rates. Higher-than-average rises in unit labour costs therefore require internal and often painful adjustments in order to regain price competitiveness in international goods and services markets. In a nutshell, several member states failed to meet the requirements of European Monetary Union membership. They did not implement the necessary adjustments.”

    And near the conclusion there is the sentence which makes everything clear (if it weren’t already):
    “The euro area consists of independent member states.”

    It seems the Bundesbank is one of the leading institutions aimed at euro-disintegration.

    • “It seems the Bundesbank is one of the leading institutions aimed at euro-disintegration.”

      Of course! The Bundesbank always was a reserve bank that put the interest of the people over the interest of the politicians!

    • I love this guy. He puts the value of people’s labour and property above all else.

      If any more evidence was needed that Merkel and Germany are fighting for the average man/woman….

    • He is right! In the interest of the German people, who are the owners of the Bundesbank!

    • The Bundesbank owns the German people. And now tries to control all Europe. As the FED in US is a private corporation.

      Do not be fooled just because they cover themselves and the crisis hasn’t hit you yet. Now you have paid more money for nothing.

      I really do not underdtand how you do not understand. Or maybe you do ,but because your country has all the power now ,you just do not mind about the manipulation in other countries.

      Once more. You do not pay for the Gips. You pay for their cover mostly. All of us.

  • Was Australia also divided by 17 or so different languages, 17 different national histories each ranging over several hundred years, several wars in several ally and fiend constellations, several actual and very different work ethics, cultures, religious rigours and so on?

    No. So, no common ground to bas a comparison on. And it was also not plagued by the vampire finance industry the world is paying tribute to since some decades.

    Therefore your comparison is not just scientifically way off.

    • A strawman argument. Yanis is not arguing here whether Europe could ever possibly be a ‘single country’ as you put it or not. This is an issue which requires a lot of elaboration and is indeed an interesting discussion topic, touching on issues such as the return of supra-national stated and so on. Yanis is simply arguing that a currency union constructed like the EZ could never survive, not even in a federation of countries sharing a common language and history.. So, in fact, what you present as a counter argument, just serves to underline Yanis’ narrative.

    • As one economy, different cultures do not matter that much.
      It seems to me that the only reason this is mentioned is to also diminish the culture(s) of Greece ,again by using the already established notions for the Greeks by media propaganda.

      If this is not so it still does not matter.
      The EZ is destroyed by the greed of the few and we the people could have changed that ,if we knew the games played so long. But it appears that many prefer the division based on hatred or not.

    • Just likey comparing supporting a close relative in trouble with supporting some poor guy far away in Afrika or Bangladesh

  • I have to concede you made this an interesting read, thanks. A question.

    “The Hobart government would respond by increasing taxes and cutting wages, thus sinking deeper into the debt-deflationary spiral”

    If this is the base option, what is the alternative to get out of the “debt-deflationary spiral”? I mean, Hobart can, maybe, increase debt, but then the the spiral tightens further, no? What is the choice Hobart has?

    • If i understand your argument,you say that an attempt to stimulate the economy by deficit spending would result in more debt which would lead to insolvency?

      If thats what you say,then i’d be more than interested if you could explain this:

      http://tinyurl.com/dxluutj

    • @ Crossover

      Are you seriously comparing the US with Hobart (Greece)? The largest economy of the world, reserve currency issuer, with a country which ecomomy is about a 10th of a percent or so of the size, and no souvereign currency?

      This must be a joke.

    • Excuse me but debt/gdp is a measure that allows one to compare any 2 countries.I dont understand why 80% Debt to gdp is more of a problem for say Albania than it is for USA.In both cases the debt amounts to 80% of their national income.And what about Japan with 200% debt to gdp?

      Show me one country that its bond rate rose as a result of increased debt,while the bonds were denominated in the domestic currency (apart from the eurozone since our countries are not sovereign issuers of euro).
      Or maybe you can show me one country that didnt manage to pay debts in its own free floating currency?

    • im sorry i just noticed this: “and no souvereign currency?
      So are you finally starting to realise that the problem is how Eurozone decides to treat the euro and that debt only is a problem for currency users in contrast to currency issuers ?

  • Australia = one country, one demos, a common language
    Europe = several countries, several people, many languages, many cultures

  • Proffesor, i think you should put more effort in explaining that,from an economic perspective it doesnt matter whether Eurozone is one country or not.Just as you very often explain what would happen if USA functioned like Eurozone, in the case of Australia too you are going to face similar arguments like: Australia is one country,eurozone is not etc
    Maybe providing stats that show how Eurozone has the same characteristics to those of a single-country economy (the break down of the eurozone gdp for example..) combined with the fact that we use a common currency, could help…Just a thought…

  • Yani:

    We need to get beyond the “according to you” theories of Eurozone structure.

    This is a pure political fight and you know it. Only a total Merkel defeat will suffice at this point. Your orders are: no prisoners and the bitch has to go.

    • If you needed any more evidence that Merkel was fighting for the average Greek check out the post below re the governor of the Bundesbank

    • We will see 2 Greek exits in the next days. One from the Euro and another one from the Euros!

  • The situation described as imploding the country of Australia basically created the most prosperous economy ever known, ie the USA. Independent states, with independent taxation, NO CENTRAL BANK at all and small central government.

    On that point alone I do not see how the argument in this article stands up to any scrutiny.

    One thing that strikes me is that you appear to find it acceptable for an entity to spend more than it takes in. I am not sure why. You want politicians taking out loans in your name to serve their political interests?

    You also seem to think it is bad for entities to fail such as banks.

    It would be nice to live in a perfect world with no bumps in the road but unfortunately we are simply not rich enough to create it.

    If I can use road safety as an example. If a politician promised to eliminate all road deaths by passing laws forcing all car exteriors and all road furniture to be fitted with huge airbags people would be up in arms because the cost is obvious.

    Sure you could say it is the right thing to do but the fact is the money does not exist to make it happen and people simply do not want to pay for it.

    The same goes for the banking system. Sure it would be nice for it to work perfectly but the cost of making it a reality is too much. ie the cost outweighs the benefit. If the benefits were greater you can be sure the private sector would have done it already.

    In summary it seems your problem with the Eurozone is the fact that governments are no longer able to run trade deficits. I would argue that creates a beautiful opportunity for the Greek people in that the government has to cut taxes and regulation to make the country competitive. Unfortunately the core problem is being treated as an unalterable fact which it plainly is not.

    • “One thing that strikes me is that you appear to find it acceptable for an entity to spend more than it takes in. I am not sure why. You want politicians taking out loans in your name to serve their political interests?”

      And this is what we call propaganda.
      It appears to you…..this ,that etc.

      This is not the case ,but why repeat myself. You’ll do the same.

    • “The situation described as imploding the country of Australia basically created the most prosperous economy ever known, ie the USA. Independent states, with independent taxation, NO CENTRAL BANK at all and small central government.”

      The states of the US dont have to worry about their trade deficits (which very well exist) since they are being taken care of by the federal government through transfer payments.We have independent regional taxation in Greece too…we pay municipal taxes for example….but the general goverment taxes us aswell…and thats also the case for USA.And what is that crap about No Central Bank?What is the Fed then?

      Im still wondering how USA is different from the model proffesor V is proposing.Dont USA use transfer of payments to keep the flows that drive the economy alive?Dont they have a unified banking sector?
      And you are proposing is that by doing the opposite USA managed to become the most prosperous economy ever known…wow….

    • Richard

      “Ill bite if you want. Your saying its not the case that politicians take out loans in the name of the taxpayer?”

      Ofcourse they do and ofcourse we want them gone. My answer was for assuming that the solutions proposed are for the continuation of the same practices. NO WAY.

      EVERYTHING MUST CHANGE. Step by step. With the policies followed ,today things get worst. I for one do not mind if this whole system is destroyed. But this also means pain for those that do not deserve it. Not cool.

      Step by step ,although now ,maybe it is too late for the MP anyway.
      No time. So ,take a deep breath and hang on.

    • Richard the Fed was created in order to be able to avoid economic crises which were far more usual before its establishment….
      Im not saying USA cant function without Fed.If Fed goes away the central government should assume its role on monetary policy.So abandoning the central bank is one thing,abandoning it and having an other entity assuming its role is another one.

      As for Greece i dont see how city-states would solve the trade imbalances which need a solution at a European level, let alone how would the poorer areas of Greece survive if say the Attica taxes were to stay in Attica…..i dont want Greece to become a smaller Eurozone in that sense.With that being said,there have already been taken steps towards decentralization especially after Kalikrates II has been imposed.

    • Demetri: We are in 100% in agreement. The measures in Greece have nothing to do with making the country competitive and everything about extracting cash from the hands of Greeks. It obviously did not have to be this way. The government simply had to balance the books and leave taxes as they were. That was the only logical solution. I may have left the link already but if not http://independence4wales.com/2011/8-ways-papandreou-sabotaged-the-greek-economy

      Crossover: “Richard the Fed was created in order to be able to avoid economic crises which were far more usual before its establishment….” – You are correct, that is why it is created.

      However you are wrong about crises. The economy of the USA was much more stable before the FED, this is a fact. http://www.nasdaqomxbaltic.com/files/tallinn/bors/konverents/Jeremy_Siegel.pdf
      http://en.wikipedia.org/wiki/File:US_Historical_Inflation_Ancient.svg

      About Greece and city states. There would be competition in tax rates inside the country stopping local government from taking the piss for lack of a better expression, like central government does now.

      If you don’t like the taxes in Attica you move. Its about getting rid of the monopoly. If you were forced to buy a car and the only car you could buy was a Toyota Corolla do you think Toyota would take advantage of the situation by charging you higher prices for a worse car? As an example.

      “let alone how would the poorer areas of Greece survive if say the Attica taxes were to stay in Attica”About Attica and “poorer” areas.

      If you take a border village in the North and Athens. I am not sure why you would think the border village would not survive if it had control of its taxes?

      What exactly do you think the border village needs help with? And how do you think Athens helps it at the moment?

    • “What exactly do you think the border village needs help with? And how do you think Athens helps it at the moment?”

      As is the case in US,and as is the case in every currency union there are deficit regions and surplus regions inside a currency union.It goes without saying that the border village is and will always be in deficit vis a vis Athens.Given that there is no stabilizing mechanism in order to balance the trade between Athens and the village (such as floating exchange rates),the only way to keep the trade going between the 2 regions is for Athens (or put any other surplus region in Greece instead of Athens) to finance this deficit through transfer payments or investments.This is only possible through central government taxation.If the village were to live by the revenue it alone can raise via taxing its citizens and only through this,then it would have to buy a lot less than what it buys now and equally athens would sell a lot less than what it sells now to the village.

      Thats precisely what is happening now in the Eurozone.Thats NOT what happens in US.

    • Crossover, your scaring me. You seem to think the government is key to the prosperity of a country. Your also giving me the impression that you think Greece cannot be self sufficient, ie Greece cant export the same amount of goods as it imports. This is not the case, not even close.

      About the US, you have lost me. Your saying states are self sufficient in the US and not in the Eurozone? If you are, Im not sure what your point is, it just shows that Greece can be independent, ie not dependent on bailouts of its government.

    • Ι dont know what cant you understand.US states ARE NOT self sufficient some of them run surpluses some of them run deficits..without a gvt moving resources from those with the surpluses to those with the deficits,their economy would be far worse.
      This is what they dont want in Eurozone….and btw….we cant all be net exporters Richard.

    • Richard

      Government being key by itself? NO NO.

      Crossover just explains how the situation works now and how it should work if we are to accept the system as it is designed correctly.
      The problem in Europe is that they made the “mistake” of not controlling the transfers.

      But it was not a mistake. The crisis of today was known from back then.
      Why they let it happen? Simply because of the political and economic opportunity it would bring. These crises are inherent in the system. That does not mean natural in general. It means natural for the system since the system is totally controlled. TOTALLY CONTROLLED.

      In other words the system is wrong anyway since it is so much controlled by a few and now they made it worst on purpose.

    • First of take a look at some of this guys videos http://www.youtube.com/watch?v=zyBOEBWO-yA&feature=plcp

      To your comment

      “Ι dont know what cant you understand.US states ARE NOT self sufficient some of them run surpluses some of them run deficits..without a gvt moving resources from those with the surpluses to those with the deficits,their economy would be far worse.”

      Crossover, don’t take this the wrong way but you don’t understand the situation. Each state has a budget, if they have a surplus great, if they have a deficit they borrow. That’s it. They don’t get bailouts from the federal government. Let me say that again. The states in the USA do not get bailed out by the federal government.

      Why the uneven redistribution of federal taxes? Because the donor states are richer and hence pay more tax. Richer states don’t pay more taxes so the money can go to poorer states. It is simply down to progressive rates in income tax, ie the more you earn the more you pay.

      The distribution is driven by wealth not by how badly run the “needy” states are.

      “As the table makes clear, far more than is realistically possible. California alone would need to receive more than half of the nation’s discretionary spending. The lesson? The distribution of federal taxing and spending is mostly driven by tax burdens, …”

      http://taxfoundation.org/blog/why-do-some-states-feast-federal-spending-not-others

      http://visualizingeconomics.com/2010/02/17/federal-taxes-paidreceived-for-each-state/#.T97VBBf9N1A

      also, imbalanced states receiving government funding gives the government of those state zero incentive to improve the conditions of the state economy for its citizens if they get free money from the federal government and if an improving economy might put that federal funding in jeopardy. It is a huge moral hazard. Just because a state is receiving more federal cash than it receives does not mean that state is run well.

      In short the wealth comes first and then the deficit, likewise the bad economy come first and then the federal surplus. The federal surplus is a symptom of how much government screws the state economy rather than the other way round. I think you would agree the situation is the same for Greece. The contribution from federal government would be reversed if the state simply got its finances in order and created a pro business environment with low taxes and low regulation. People would earn more (good) pay more taxes (bad) balance of federal tax inflows would balance (good) Dependence is not something to be encouraged.

      “and btw….we cant all be net exporters Richard.” – No offense but this is complete and utter garbage, a multi billion dollar business can balance it books, a citizen of Greece earning 20K a year can balance their books. No reason why the government cannot do it.

      Also there are many countries with much less going for them than Greece who are net exporters https://www.cia.gov/library/publications/the-world-factbook/rankorder/2187rank.html

      For Greece not to have a MASSIVE trade surplus shows how many measures have been put in place over decades to deliberately keep the country down. To take such an amazing country and turn it into a complete basket case takes immense effort, no way it can happen by accident, absolutely no way.
      I have given this link before on this blog http://independence4wales.com/2012/3-reasons-salaries-in-greece-should-be-the-same-as-in-germany

    • But we all could have a balanced trade account! It cannot be, that a country decides to be have a trade deficit (have its core competence in conuming) and others have to produce the stuff and on top of them give the consumer the money to buy it.

    • Im not even talking about GOVERNMENT BUDGET BALANCE.
      When i talk about surplus states and deficit states im talking about their trade position.
      That being said,every state’s TRADE deficit is taken care of by the federal government’s budget and policy.It couldnt be any other way.A trade deficit equals to money leakage outside of the deficit economy.If its not financed it is likely to cause demand shocks with bad outcomes for both sides (havent you realised already that this is what is happening in the eurozone now?)

      “Why the uneven redistribution of federal taxes? Because the donor states are richer and hence pay more tax. Richer states don’t pay more taxes so the money can go to poorer states. It is simply down to progressive rates in income tax, ie the more you earn the more you pay.”
      The point it to check where the federal money GOES not where the Federal money COMES from.And im not even arguing that this happens on purpose.The biggest part of this situation is simply built-in in the system. http://www.theatlantic.com/business/archive/2012/05/the-difference-between-the-us-and-europe-in-1-graph/256857/

      “No offense but this is complete and utter garbage, a multi billion dollar business can balance it books, a citizen of Greece earning 20K a year can balance their books. No reason why the government cannot do it.

      Also there are many countries with much less going for them than Greece who are net exporters https://www.cia.gov/library/publications/the-world-factbook/rankorder/2187rank.html

      For Greece not to have a MASSIVE trade surplus shows how many measures have been put in place over decades to deliberately keep the country down. To take such an amazing country and turn it into a complete basket case takes immense effort, no way it can happen by accident, absolutely no way.”

      Are you basically advocating that ALL countries can be net exporters?You do realise that one’s exports are exactly equal to another one’s imports?Unless we can export to aliens WE CANT be all net exporters.This is pure reality.
      Theoretically yes Greece CAN become a net exporter but this means that several other countries must keep being net importers or run smaller surpluses than before.
      But now lets get down with the truth.
      2/3 of EU trade comes from trade between EU members.This means that our trade position is more affect by our trading relationship with the other EU and especially Eurozone members.If there is ONE thing that all troubled countries have in common,its their trade deficit.
      It also goes without saying that the trade imbalances are the cause for all this.With that said,if we all try to fix the imbalance by following the troika recipe then the outcome is not likely to change.Competitiveness for example is a relative thing.When everybody tries to increase his competitiveness in the end nobody can increase it.
      Just like when you devalue your currency while the others do the same then there is no actual devaluation.

      You focus too much on Greece and you forget the bigger picture.Looking at Greece (or any other economy) out of context leads to false views.If Greece becomes a surplus economy that doesnt solve Eurozone’s problem a bit.

    • Look at a continent scale, a country scale, a region scale, a personal scale the point is the same. About net exporter, things are not static, some years you have a surplus, other years the citizens buy more cars because they saved money from the previous year.

      Whatever the case may be things always balance out in the end unless you have a government, that spends the same no matter what, keeps taxes the same not matter what, has the same regulations not matter what.

      People respond according to their financial position, government do not and that is the problem.

      I think we agree the government is holding back Greece/UK/France/Spain etc. You acknowledge the Greek can balance its books so lets move the conversation on and look at why this is not happening, EVEN with the government on the brink of default. Even on the brink of default they still do not want to do what needs to be done. The question is why.

    • Anyone that compares personal finances with those of a nation knows NOTHING about economics. In your haste to make economics simple, and of course proffer simple solutions, you ignore things like “balance of payments” “monetary policy” “fiscal policy” “aggragate demand” “resource allocation” “trade policy” – all of which do not enter into personal budget considerations. Please stop such nonsense. Makes you sound like Glen Beck.

    • Hello Barry, you sound like a professional economist!

      you say

      “balance of payments” “monetary policy” “fiscal policy” “aggragate demand” “resource allocation” “trade policy” – do not enter into personal finances, sorry, what?

      Normal people deal with all these things on a daily basis. Ill humour you and give some real world examples.

      Balance of payments = not spending more money that you make or not as the case maybe
      Monetary/fiscal policy = how much you are going to borrow/save
      Aggregate Demand = How badly you want something
      Resource Allocation = Should I take the bus or the car
      Trade Policy = Should I buy from the high street or from the internet.

      Do me a favour, unless you can concede only the scale is different we cant have an intelligent conversation.

      About the technical terms, please spare me, if I want to hear nonsense like that I would watch BBC business, MSNBC etc rather than reading books

    • Goddammit No EU D,when we had our own currencies the trade was mostly balanced because the exchange rates could fluctuate and at the same time any trade deficit as large as 4-5% is really not a problem for a normal economy.And by normal i mean an economy with moderate growth and moderate inflation.

      Arguing that regions inside a common currency area can have balanced trade at all times is like saying that all regions of a country have balanced trade at all times.You’re not going to find ONE.

    • Demetri.

      I do not mean this in an insulting way but I think your perspective has been warped by the propaganda.

      You think the Euro has been a Trojan horse to demolish Greek sovereignty.

      The media in Greece agrees with you which should set alarm bells ringing immediately.

      You have politicians in Greece blaming Germany for the problems in Greece, again that should set massive alarm bells ringing.

      Anyway, moving on to Germany,

      Think about what Germany is asking for and what it would mean to achieve what they ask for.

      Germany wants the Greek government to balance its books. This is not a bad thing. This would mean the Greek government borrowing less meaning less interest payments for Greeks to pay meaning less taxes and Greece being more independent than it is now not less.

      If Greece did what Germany asked for, Germany would have less control over Greece NOT more.

      This balancing of the books would also make Greece more competitive because the government would no longer be able to finance the massive bureaucracy that is the ball around the neck of the Greek economy.

      The spanner in the works is the PRIVATE ECB and PRIVATE central banks. If Greece were to stop borrowing so much they would have a massive reduction in revenue and massively less control over the Greek economy.

      That’s not the end of the propaganda though.

      The single biggest piece of propaganda being pumped out ad nauseam by the Greek media and Greek politicians is the “Memorandum” and how important it is. Again MASSIVE alarm bells should be ringing when politicians and the media are telling you something matters so much.

      Why are these groups not addressing the real issue?

      ie why is Greece not making progress towards a 3% government deficit. If Greece was making progress the memorandum would not be an issue, the would be no uncertainty over the next installments

      It all boils down to 3 options

      1. Greece is controlled by the EU because the Greek gov doesn’t not want to give more control to the citizens and it wants the Euro

      2. Greece is independent, has the Drachma and is free to do what it wants

      3. The Greek government gets its house in order and uses the Euro

      You are correct, the situation is TOTALLY CONTROLLED controlled.

      It is controlled by the central banks and the large banks because they do not want to see government borrowing less because it will hit their bottom line.

      The Euro was brilliant. It could limit control of economies away from the central banks.

      The central banks know this which is why they inflated the Greek government into the crisis it is in now.

      The end game is this.

      1. Either the central banks want monopoly control over the Euro which Yianni wants to help them do

      2.Or they want to destroy the Euro and return countries back to their original currencies.

      They much prefer option one because the entity will be massively more powerful and easier to manage than option 2.

      Germany wants option 3.

      3. Limit the control of the central banks by forcing governments to stop borrowing so much money in the name of their citizens. This will lead to lower taxes and a more prosperous Europe. Its bloody genius. Unfortunately I think they were extremely naive in the amount of resistance that they would face. I believe Germany was counting on market forces to make the change inevitable, I don’t think they bargained on how much liquidity central banks around the world would pump into failing economies to maintain the status quo.

      If you want, okay, its a German takeover but that German takeover will lead to government being in less debt, their citizens paying less taxes and people being more free.
      http://independence4wales.com/2012/germany-vs-usa-proxy-war-in-greece

    • Richard

      I never talked about a specific German takeover Richard.

      And you can be assured that in no way do i hear the insanities of Greek media.
      The things you say for the Greek media propaganda are totally opposite. On the contrary ,except the insults against the Greeks they do their job of maintaining the status quo. So ,no ,they do not propagandise against Merkel or Germany or the banksters specifically. They just keep quite in Greece since we have the problem. So they do not overdo it.
      And they do not give more focus in the memorandum. We all do because we read enough of it.

      Moreover i do not say that the euro was a trojan horse to bring down Greek sovereignty.

      Let us go at it one more time.

      In the system we use ,crises are inherent. Every time a severe crisis occurs is because the banksters have decided to decrease the amount of money in circulation. When that happens assets get redistributed. When they have succeeded ,thay start the cycle of economy again by increasing the amount of money in circulation.

      Every crisis is an opportunity. Every crisis is also a tool to blackmail people and politicians to pass laws that give the banksters more power.

      Whatever they want ,listening to Merkel (since you present her as the fighter against the banksters) would have done nothing ,because the propositions do not help stability and reform. Only asset redistribution.

      As i have said again ,this crisis in the southern periphery is a cover up of the bad debt of the banks ,your northern countries are exempt from the pain you should have felt and while it seems you bail us out ,it is the exact opposite. We bail you out and we are being asked to give you our assets as well.

    • Demetri. I agree with your comments more or less but

      “Whatever they want ,listening to Merkel (since you present her as the fighter against the banksters) would have done nothing ,because the propositions do not help stability and reform. Only asset redistribution.”

      Merkel/the Euro has taken the Greek central bank out of the equation to a large extent in Greece. How does that not help stability and fight the banksters?

      Also, how can you say Merkels demand for the Greek government to cut spending does not help stability? The only problem in Greece is the government spending too much money, I would say anything that curbs that will make the country more stable and more independent from Germany.

    • Richard

      Balancing the books is a good thing.
      It was also very easy to happen without any bailouts.

      SO WHY ALL THESE?

      BECAUSE the money from the bailouts DO NOT GO TO THE ECONOMY OF GREECE or any other sovereign for that matter. So the austerity and the reforms have nothing in reality to do with helping Greece balance the books which should have been done anyway.

      Even if they were balanced we would have the same problems today because noone is bailing out the sovereigns. ONLY THE BANKS.

      Also balancing the books would have been temporary ,except if we had agreed in not proping up the surplus of Germany.
      In other words ,you stop earning as much and we earn more.

      It can not be otherwise. The deficit of one is the surplus of another.

    • Richard

      I wrote:
      “I never talked about a specific German takeover Richard.”

      Correction

      I did but in the context of Germany being the primary servants of the banksters. The official Germany.

      So no there is no German takeover. There is a bankster power hunger for control. Germany is just another tool.

      As for the link you posted about the USA ,there is an old theory that Germany will play the bad cop and America will play the good cop eventually. Maybe ,maybe not.

      America is already occupied so there is no true difference for America specifically wanting what happens here. She could only be another tool ,another way of convincing the people do the same thing at the end.

    • Crossover, EU D is right on the money.

      You say devaluing the currency, wrecking peoples pensions, wrecking peoples savings through inflation was fine and this allowed the country to carry out “without problems”. ie printing drachmas and creating inflation.

      But why do you think inflation created by the government and the central bank was acceptable given the damage it did to pensions and savings and buying power.

      Having the Euro forced EZ countries to stop robbing/taxing people through inflation.

      Instead of saver feeling the brunt of government mismanagement government now have to deal with it. But they don’t like so they are destroying the Greek economy like a spoilt 5 year old.

      They should man up, and get there act together, They cant rob the people anymore through the inflation tax and this is good for citizens.

    • Richard

      Are you saying that all other non eurozone countries have suffering people that are robbed off by their gvts because they use free floating currencies?WTF?

      As for money printing itself,i gave you a detailed reply already at “Germany’s constitutional conundrum” when you claimed that allowing the ECB offset its “losses” by printing would be inflationary.Im not going to repeat myself here.

    • “You acknowledge the Greek can balance its books so lets move the conversation on and look at why this is not happening, EVEN with the government on the brink of default. Even on the brink of default they still do not want to do what needs to be done. The question is why.”

      I acknowlege that Greece can theoretically have a balanced trade as long as others in the eurozone either keep having deficits or reduce thei r surpluses or switch from surplus to deficit.I dont acknowledge that Greece,Portugal,Italy,Spain,France can all have trade surpluses and also Germany and the rest of the north get to keep their surpluses too.Which is also theoretically possible but it cant ACTUALLY happen.Ever.

      This basically means that if it wasnt Greece,it would be someone else in the same position,and you would be hanging at a similar blog and you would be advocating the same things.Only the country would change.
      Unless you can find one country that all its regions run balanced trade with each other,then you have to accept that this cant happen in a currency union either.
      And please dont start with that “eurozone is not a single country” crap as others have done.Because i wont even bother reading further.Economically it makes no difference as long as they function under the same currency.It might even be harder for countries instead of states or regions.Regions dont pay for defense for example.

    • “Look at a continent scale, a country scale, a region scale, a personal scale the point is the same.”
      Damn…those stupid pricks at the university teach 2 separate courses.One is called microeconomics,the other called macroeconomics.Tell them how profoundly wrong they are.

      Maybe you should have a look at this for a start: http://bilbo.economicoutlook.net/blog/?p=19873

    • Germany bad cop. This had occured to me also. But would they let their entire country be viewed as the bad cop? I dont know, maybe they dont care how they are viewed in which case it is a possibility but it would also explain why the German PR machine is invisible.

    • Crossover
      June 19, 2012 at 01:07 #
      “You acknowledge the Greek can balance its books so lets move the conversation on and look at why this is not happening, EVEN with the government on the brink of default. Even on the brink of default they still do not want to do what needs to be done. The question is why.”

      I acknowlege that Greece can theoretically have a balanced trade as long as others in the eurozone either keep having deficits or reduce thei r surpluses or switch from surplus to deficit.I dont acknowledge that Greece,Portugal,Italy,Spain,France can all have trade surpluses and also Germany and the rest of the north get to keep their surpluses too.Which is also theoretically possible but it cant ACTUALLY happen.Ever.

      This basically means that if it wasnt Greece,it would be someone else in the same position,and you would be hanging at a similar blog and you would be advocating the same things.Only the country would change.
      Unless you can find one country that all its regions run balanced trade with each other,then you have to accept that this cant happen in a currency union either.
      And please dont start with that “eurozone is not a single country” crap as others have done.Because i wont even bother reading further.Economically it makes no difference as long as they function under the same currency.It might even be harder for countries instead of states or regions.Regions dont pay for defense for example.

      Crossover
      June 19, 2012 at 01:37 #
      “Look at a continent scale, a country scale, a region scale, a personal scale the point is the same.”
      Damn…those stupid pricks at the university teach 2 separate courses.One is called microeconomics,the other called macroeconomics.Tell them how profoundly wrong they are.

      Maybe you should have a look at this for a start: http://bilbo.economicoutlook.net/blog/?p=19873

      A government that cannot print its own currency does not have a choice, it must balance its trade account.
      You think people cant adapt to balance the trade account, I disagree.

      Yes damn those stupid pricks, the article you sent reinforces my position, the writer does not know what money is

      Which leads me to ask, can you define money?

      This is the most fundamental thing we should agree on if we can have a conversation about economics.

    • “Yes damn those stupid pricks, the article you sent reinforces my position, the writer does not know what money is”

      I just give up after that…..whatever

    • That’s Bill Still. He unsuccessfully sought the 2012 U.S. presdential nomination of the Libertarian Party.

  • We will find what we seed. Going for a “integrated Europe” we find national decision-makers in the Eurozone impoverishing peoples, so that a “properly integrated Europe” exists as a political union.

    In doing this Europeans are not adding anything new to human history in Europe. No evolution detected. Actually, one can detect involution for Europe as all historic attempts to political union resulted in increased general pain leading to delayed development, including wars.

    The arguments for positive effects of past attempts do not make sense today. The Napoleonic invasions disseminated republican and democratic thinking? Today, this can be done at incredibly faster speeds with people being sit via Internet. No invasions and cavalry and artillery needed.

    Now the limiting factor in the dissemination of ideas is not the velocity of transmission of information – electronic engineers took care of that – but the acceptance of ideas by people.

    The greatest wealth of European nations is their incredibly diversity. Scan the continents and try to find one with more national diversity per Km2. I guess you will find none.

    National diversity translates into diversified political independence, an instance of national freedom, something ex-colonial European states subscribed to after WWII.

    Any logic for an European political union requires a World political union. It is the negation of the virtue and right of national political independence, the great political advancement of the World after WWII. That was really evolution!.

    In tackling the actual situation, one may take human evolution as the value to preserve and grow. In this case, both the political diversity of Europe, their founding values and the economic health and wealth of European countries.

    That means a political community centred around the four common interests of

    – common market
    – defence (self-sufficiency)
    – energetic self-sufficiency
    – cooperation in research and development

    And well-functioning economies using a multi-national currency system keeping and increasing the distributed wealth of Europeans.

    How reality fares against this view?

    A regressive way of thinking engulfs political decision-making in the Eurozone. One can interpret current reality as a political union being forced under the threat of economic disruption by the loss of labour income:

    http://slackwire.blogspot.pt/2012/06/pain-is-agenda-method-in-ecbs-madness.html

    How does one can inflect such policies? In a sense, maybe one does not need to care as the current configuration of the Eurosystem is slowly crumbling under the amount of epicycles piled over, to use a Wiener’s expression. But even if the current policies will be abandoned – which is uncertain – one must reflect on the policies that will substitute current policies.

    It is a tenet of cooperative decision theory that a cooperator must cooperate first time and mimic the behaviour of the other in the interaction afterwards: cooperate if cooperate, defeat if defeat.

    How does one deals with a threat of economic disruption with the aim to force a redistribution of income? In this case, the threateners will be engulfed in the mayhem they generate: at the best they can aspire to be the masters of an impoverished Eurozone. So, the threat is not really a threat as it will backfire – at considerable cost to all, but it will backfire.

    Of course, one goes better for economic disruption if one has a promising perspective of putting the economy functioning well.

    For economy I understand here the distribution part of production systems. Distribution in the sense of making available to citizens a given diversity and amount of goods and services, not of logistical distribution of transporting goods.

    Distribution cannot avoid choosing values. A simple value to choose for technologically intensive production systems of today is that to all citizens be granted a minimal amount of income given minimal commitment to production and available resources.

    Under this option altering the shares of labour versus non-labour must be assessed by commitment. Now, how does it seem the commitment of someone that reduces the global production to increase its share?

    Very badly, I think. Not to mention its intellect. It is easier and more sustainable to increase one’s share with increasing production than with decreasing production.

  • Idiocy Is Not To Be Answered With Further Idiocy

    Nouriel has completely lost it, as has Niall Ferguson.

    Is it one minute to midnight in Europe?

    The failure of German public opinion to grasp the dire state of affairs in Europe today is inviting a repeat of precisely the crisis of the mid 20th century that European integration was designed to avoid.

    Really?

    Pray tell then, why is it that all these banks in Europe were permitted to issue credit without a single thing backing it beyond the belief that a new sucker would appear and take it off the issuer’s hands, thereby perpetuating a Ponzi Scheme of historic size?

    I mean, it’s not like the consequences of this on an arithmetic basis weren’t known to everyone. Stable economic conditions require that you not do that, or if you do allow it that the people who do it (1) can’t counterfeit the sovereign’s currency and (2) can’t become so intertwined in the financing of governments and major economic centers that their failure becomes an existential threat to your existence.

    But both of those things happened, didn’t they? And why? Because the governments and people sat back and allowed it.

    What is the situation today? Europe’s periphery is in depression. According to the IMF, gross domestic product will contract this year by 4.7 percent in Greece and 3.3 percent in Portugal. Unemployment is 24 percent in Spain, 22 percent in Greece and 15 percent in Portugal. Public debt already exceeds 100 percent of GDP in Greece, Ireland, Italy and Portugal. These countries, along with Spain, are now effectively shut out of the bond market.

    Good. These nations lied to their people about what they could support and spend. They got caught. Now the pain comes. It is unavoidable — all we are arguing over is whether the governments will face the music and so will the citizens and banksters that were involved, or whether someone will try to shove it off on someone else.

    The process of political fragmentation is also speeding up. In the last Greek elections, seven in 10 voters cast their ballots for smaller parties opposed to the austerity program imposed on Greece in return for two EU-led bailouts. Established parties are also losing out to splinter parties in Italy, where the comedian Beppe Grillo’s Five Star Movement has just won control of the city of Parma, and in Germany, where a maverick party called the Pirates is all the rage. Less frivolous populists now have substantial support in France, the Netherlands and Norway. This trend is ominous.

    There’s nothing ominous about it. The people got nothing in Greece for their acquiescence. The banksters got all the loot, and the people got ****ed. Royally, serially, repeatedly ****ed.

    Why should they stand for this? What they should do is rise and remove some heads. Peacefully if possible, the old-fashioned way if necessary. Peaceful political process only works until the political process fails and is co-opted and stolen by the very people doing the looting. Then it’s not a representative government anymore, it’s a jackbooted fascist dictatorship and the people have every right to overthrow it, exactly as was demonstrated here in The United States in 1776.

    Men and women tend to suffer these ignobilities for far longer than they should, and this is probably a good thing on balance, as resolution when a dictatorship has taken over your nation is almost always messy and fraught with the highest of risks. Nonetheless, if this is what has happened the solution is singular and clear to anyone who thinks clearly.

    What we are left with as a question at this time is whether or not this has occurred.

    The way out of this crisis seems clear.

    First, there needs to be a program of direct recapitalization — via preferred non-voting shares — of euro-zone banks both in the periphery and the core by the European Financial Stability Facility (EFSF) and its successor the European Stability Mechanism (ESM).

    No.

    The institutions that lent money that cannot be paid back must take their losses. If they cannot then their stockholders and bondholders must be zeroed if necessary to cover depositors, and any alleged “superior” status on derivative instruments must be voided. In short, depositors must be senior to all; the rest of the capital structure falls where it does. And fall it will.

    That’s fine. These nations should, at the same time, both enact One Dollar of Capital for all institutions going forward and prosecute all banksters who blow sky high for effectively counterfeiting the currency, because that’s exactly what they did. Put them all in prison.

    Of course, over time, sound banks that restore capital through earnings would be able to buy back the public preferred shares. So this partial nationalization would be temporary.

    There is no such thing as a “sound bank” that has lent out more than the sum of its collateral taken against loans and its capital. Such a bank has practiced an effective fraudulent device in that it has issued credit fungible with currency that it knows at the time of issue cannot be repaid in the present tense. It therefore has effectively naked shorted the currency.

    This is a pyramid scheme as indefinite exponential growth, for any positive growth rate, is arithmetically impossible. All we are arguing over is when, not if, the scheme will collapse.

    Pyramid schemes are broadly illegal and must be prosecuted. If the government will not do so then the government must be replaced with one that will.

    Finally, given the unsustainably high public debts and borrowing costs of certain member states, we see no alternative to some kind of debt mutualization.

    Nonsense.

    None of the nations who are in the Euro agreed to this. Committing public frauds for years so as to force someone else to rescue you via “mutualization” and “integration” of political systems is tantamount to the taking of political power by force from the people and giving it to those who are not elected.

    This is commonly known as an act of war and is full and fair justification for those who have this imposed upon them to take arms and repeal the literal subversion and replacement by force of their political process.

    Giving up some sovereignty is inevitable.

    No it’s not — those who committed frauds can be prosecuted and imprisoned instead. This is the correct course of action.

    Ultimately, as Chancellor Merkel herself acknowledged last week, monetary union always implied further integration into a fiscal and political union.

    Perhaps in Merkel’s mind. But she does not speak for the other nations and their people. Simply put, she is not Fuehrer over Europe, and if this is attempted I expect that what Roubini “fears” will come to pass — because it damn well should if Germany, or anyone else, tries to impose “political union” by fraud, threat, coercion or, most-unfortunately, force.

    http://market-ticker.org/akcs-www?post=207222

  • For all Germany bashers and especially for our friend Dean: The accumulated risk that Germany has taken on already in form of direct help, guarantees and Target credits of the Deutsche Bundesbank to national banks in the troubled countries of the Euro zone amounts to 899 Billion US Dollars. Well, I wonder what sum would suffice to make the “Economist” concede that finally the Germans have started the engines. A trillion? Or two?

    The fact is that Germany is not the Father Christmas others make it out to be who would only need to reach into his deep pockets and give freely to everyone. A debt ratio of 80 % of GDP already is very high for a country whose population is declining rapidly.

    “Why Berlin is on a Bailout”:
    http://www.nytimes.com/2012/06/13/opinion/germany-cant-fix-the-euro-crisis.html?_r=1&ref=global

    • “Such schemes violate the liability principle, one of the constituting principles of a market economy, which holds that it is the creditors’ responsibility to choose their debtors. If debtors cannot repay, creditors should bear the losses.”

      That is the true problem Pedro. When they should ,creditors didn’t choose their debtors. Instead they:
      1) Made deals under the table by giving big loans to countries that shouldn’t take loans and
      2) got these money back by getting projects in the debtor countries through manipulation and bribe.

      This way there were many German and French and ofcourse some of the debtor countries’ corporations that got rich at the expense of the people ,German ,Greek ,Spanish etc.

      Has Greece received all these Marshall Plans? In reality ,no.
      The elite has. The banksters. And Bundesbank is part of that elite.

    • That article is one of the worst I have ever read about the European situation. A few examples: the “liability principle” – you must be kidding. There is no such thing. Ever hear of “too big to fail”? In fact NOWHERE are “creditors” bearing losses – they are being bailed out all over Europe by governments. Then the point about the Maastricht Treaty: there are always ways of getting around such niceties (see the BAILOUT of American banks, which TECHNICALLY was “illegal” as well). Or check out the ECB just buying government bonds as a “get-around”! And comparing California to Greece is absurd, the differences in their situations are enormous, not least that California would NEVER be allowed to default because it too is too big to fail. In fact the whole point is derailed by the bailout of New York City in 1975. And lastly, the Marshall plan reference is again an absurd straw man in the apples and oranges manner: the money being sent to Greece only stops off there on its way to GERMAN (and other) banks to pay off PAST DEBTS. And I have nowhere seen such an attitude expressed in a serious source. What people are REALLY saying is that Germany prospered enormously through the implementation of the Euro (ah, the export masters with their resultingly lower currency value at the core) and through the lending of just the monies now owed to the periphery so they would be able to purchase all those German goods. Germany has been the big winner and now it is time for it to put its money where its mouth is concerning its commitment to the European UNION!

    • Barry, I dont think the Germans gained much by the Greek government running up massive debts. Banks maybe but not so much Joe Public

    • Richard – of course the “Germans” gained through the Greek government running up massive debts. The Greek economy was flooded with easy credit and millions of Euros that were used to buy German goods – being the biggest (or maybe second biggest) exporters in the world means jobs and prosperity for the whole German nation (I live in Berlin and see absolutely no sign of there being a “crisis”). Although I hate banks and “banking” as much as anyone, to just assume a disconnect between what banks do and what happens in the real economy is (to be civil) a mistake.

    • Richard

      Ofcourse the avg. German didn’t gain. On the contrary. The common person in every country will pay again. German ,Greek whatever.

    • “Although I hate banks and “banking” as much as anyone, to just assume a disconnect between what banks do and what happens in the real economy is (to be civil) a mistake.”

      Personally I don’t hate banks I love them. What I think is unfair is that some of the big banks force me to take out loans which I then have to service. ie banks who lend to the government. The banks that don’t lend to governments keep the world moving.

      I agree, the health of an economy is directly related to how the big banks interact with government and the economy itself.

  • well, here in germany we are waiting for the apocalypse to come for 4 years now…in my opinion, greek voters should speed the whole thing up a little..because its getting boring

    • “…apocalypse…”

      Interesting choice of words ,since it means “the lifting of the veil” ,”the revealing of the truth”. It is a procedure. Are you sure you would like the truth to come out in the open for everybody? I would.

      To be a lot off topic ,it is interesting and it also becomes funny to say that even prophecies mention that the new era will commence from the mediterranean sea people.

      You want destruction and rebirth? You got it.

  • Hi Yanis, thanks for this post. A useful explanation for your Australian audience, myself included.

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