European debt deal

[Atreides]

If that's right, it looks like Europe found a new way to screw over the world.

[WrathOfTinyKittens]

Speaking realistically... What's Germany's endgame here? I know Merkel has been talking EU, EU, EU, but at the same time thy won't let the ECB function as a central bank. Is their goal to use this crisis as a spur to political integration for Europe?

If not that, then the only thing I can imagine is that they desperately want the markets and the southern Euro bloc to solve its problems without the ECB. I don't think that the world financial system will collapse - in the end, even the Germans will have to realize that unless they allow a lender of last resort, we are all fucked. Hell even an announcement that the ECB will act as such will probably calm markets enough that they might not even have to exercise the power.

[Horza]

Speaking realistically... What's Germany's endgame here? I know Merkel has been talking EU, EU, EU, but at the same time thy won't let the ECB function as a central bank. Is their goal to use this crisis as a spur to political integration for Europe?

Something like that. They want to use the crisis to push through internal devaluation in the southern economies and are afraid that any monetizing of the debt will lessen their leverage over them. Longer term, if they can keep those countries in the Euro great, if not plan B is for a tighter fiscally-integrated eurozone around the stable exporting economies.

[WrathOfTinyKittens]

Something like that. They want to use the crisis to push through internal devaluation in the southern economies and are afraid that any monetizing of the debt will lessen their leverage over them. Longer term, if they can keep those countries in the Euro great, if not plan B is for a tighter fiscally-integrated eurozone around the stable exporting economies.

Is it possible to do this without causing a financial crisis? And, who would be in this tighter Euro-zone? Germany, Holland, Austria? France? Pretty soon they'll run out of people they want at the table with them. Tighter integration through eurobonds, and ECB as an actual central bank seems to be the best way out at this point.

[Shryke]

Speaking realistically... What's Germany's endgame here? I know Merkel has been talking EU, EU, EU, but at the same time thy won't let the ECB function as a central bank. Is their goal to use this crisis as a spur to political integration for Europe?

If not that, then the only thing I can imagine is that they desperately want the markets and the southern Euro bloc to solve its problems without the ECB. I don't think that the world financial system will collapse - in the end, even the Germans will have to realize that unless they allow a lender of last resort, we are all fucked. Hell even an announcement that the ECB will act as such will probably calm markets enough that they might not even have to exercise the power.

I think it's a mistake to see this as some sort of plan by Germany. Like so many of these types of things, Germany and the ECB are acting in a reactionary fashion. They don't want to guarentee anyone's debt and they are terrified of inflation. The bad consequences of their actions here is something they just don't believe will occur. It's not part of their worldview, so it can't happen.

[The Marquis de Leech]

No, but its much better than the alternative.

Reality is the alternative.

As soon as chickens and goats become close to competing with the dollar, they become illegal.

Evidence?

Why eat now when you can starve tomorrow? Joke aside money is directly related to production, and as such it is subject to the supply and demand equilibrium..

Deflation is an incentive to defer *discretionary* spending. Which is most spending.

1893 panic was caused by the government when it tried to introduce the "Free silver act", and the 1929 depression was caused by the Federal Reserve and its over expansion of credit. Though I am glad you mentioned those two. Do you notice it too? The 1893 panic ended that same year with no government intervention while the 1929 depression last almost 10 years when the government intervened (and later backed off for that same reason). Interesting, don't you think?

See Shryke's post. I'll also think you'll find that 1893 was merely the start of a massive depression, and that the post-1929 period kept getting worse until the US went off the Gold Standard (ditto the UK, which recovered after going off gold in 1931). But severe depressions aren't supposed to happen in your free-market utopia, are they?

ok...

Yes, there is a market for money, and demand for money has a rather specific meaning (hint: it isn't your meaning).

The main thing is that people pay with their goods and services.

But why buy a car now when it'll be cheaper tomorrow? You still haven't answered that question.

People demand money not for the sake of holding it, but to use it as an exchange.

Yes, and a liquidity trap arises when money, because there is no inflation, starts becoming a store of value in its own right. Money can only really behave properly if there is some disincentive to stash it under the mattress (the disincentive is called infation).

That's why Austrian economist believe that a liquidity trap doesn't come from savings, but from the lack thereof.

Austrian economists don't believe in liquidity traps. We're talking about people who refuse to use econometrics because they think data interferes with their view of the world.

Lending can only come from real savings.

So if I could magically pull $10 out of my shoe (let's say I could), I couldn't lend it?

I go to the store, and my dollar is unable to buy what it used to 1 year ago. A candy bar now cost more than a dollar, when only 5 years ago it used to cost 10 cents.

Try looking at the concept of the Consumer Price Index.

[The Marquis de Leech]

My thoughts on this are more philosophical than economic. I'd advocate for the end of currency arbitrage and nationalism in favor of a single world economy. The us and eu together would have the heft to bully the world into accepting our laws and standards within 75 years.

Right now, Beijing would be laughing it's head off.

[The Iceman of the North]

Not necessarily we would call a lot of the shots.

What makes you believe this would be so? The US would be one of 30-50 partners (depending on how many would be willing to join in), even if they for some reason would have a double-vote they'd be outvoted on most issues.

[generic]

I think it's a mistake to see this as some sort of plan by Germany. Like so many of these types of things, Germany and the ECB are acting in a reactionary fashion. They don't want to guarentee anyone's debt and they are terrified of inflation. The bad consequences of their actions here is something they just don't believe will occur. It's not part of their worldview, so it can't happen.

I'd add that in the short term the crisis increases the political power of Merkel and the ECB. So actually solving it would imply not only an implicit admission that prior policy was misguided but also a massive loss of influence.

Treating it as a crisis of overspending by the state on the other hand justifies prior policy.

[Shryke]

I'd add that in the short term the crisis increases the political power of Merkel and the ECB. So actually solving it would imply not only an implicit admission that prior policy was misguided but also a massive loss of influence.

Treating it as a crisis of overspending by the state on the other hand justifies prior policy.

Yeah, the really important thing here is that they can't admit they were wrong. So they will stubbornly continue doing the same thing.

[WrathOfTinyKittens]

I dunno. I can understand that, but I still believe that they aren't stupid enough to throw the

European economy and global financial system

into chaos. Eventually cooler heads will prevail.

[Zoë Sumra]

One word: groupthink.

[Padreic]

Just imagine US politics in place of Germany's. Imagine Obama in place of Merkel, and congress as German parliament. Now add to that Obama's base being the conservative part of the population. And now, imagine Obama being publicly in favour of effectively assuming the debts of other nations. What happens? Exactly. And that's all you need to understand why "Germany's" position is as it is.

[Horza]

Fair overview of Merkel's position at der Spiegel.

[The Marquis de Leech]

I dunno. I can understand that, but I still believe that they aren't stupid enough to throw the

European economy and global financial system

into chaos. Eventually cooler heads will prevail.

Essentially:

- The ECB is arguing (not without reason) that it doesn't have the legal authority to buy up the debt of sovereign nations.

- The German Supreme Court has ruled that if Germany is to shoulder the debt burden of other countries, it must be approved by the German Parliament, the Bundestag.

- Even if it wanted to, the ECB doesn't have the resources to bail out the likes of Italy: other countries can't prop up Italy without endangering themselves. A solution is to print more money, but that way leads to inflation (which Germany is paranoid about).

- The sort of fiscal union required to solve the mess requires jumping through procedural hoops (would the 17 different countries agree to such a union, and live with the public outcry)?

So, while the personalities at the centre of this are making things worse, it's not simply a matter of everyone cooling down. There are severe structural flaws in the Euro.

[Shryke]

Essentially:

- The ECB is arguing (not without reason) that it doesn't have the legal authority to buy up the debt of sovereign nations.

- The German Supreme Court has ruled that if Germany is to shoulder the debt burden of other countries, it must be approved by the German Parliament, the Bundestag.

- Even if it wanted to, the ECB doesn't have the resources to bail out the likes of Italy: other countries can't prop up Italy without endangering themselves. A solution is to print more money, but that way leads to inflation (which Germany is paranoid about).

- The sort of fiscal union required to solve the mess requires jumping through procedural hoops (would the 17 different countries agree to such a union, and live with the public outcry)?

So, while the personalities at the centre of this are making things worse, it's not simply a matter of everyone cooling down. There are severe structural flaws in the Euro.

Technically if the ECB just said it WOULD print more money, there wouldn't be a problem and they wouldn't need to actually do it.

[LuisDantas]

It seems that there are myriad advantages to nations having their own currencies, and that the US, Japan, Argentina, and the UK are all examples of this not to mention China. My silly question is this: What was the primary rationale for the Euro in the first place?

Are there really many (or any) significant advantages in having their own currencies?

Far as I can see (admitedly not a whole lot) separate currencies have two major effects: they make the exercise of local economic policy significantly easier and more insulated, and they give local governments more leverage to try and impose their own terms when negotiating with other countries.

Neither is automatically a good thing, IMO. It depends entirely on how economically healthy and how politically responsible the individual countries are - and in this case, how that compares and how good is the transit with whomever is running the larger economic decisions of the European Union.

Ultimately, if it is true that Greece (or Argentina, etc) is basically consuming more than it earns, then it will eventually reach them with a vengeance. The more they postpone it, the more painfull it will be.

I had high hopes that the European Union would be a sign that such nationalists concerns had been left behind in the trail of History. Apparently not.

[Horza]

Never write nationalism off.

It's been declared dead more times than jazz, punk and rock combined and yet it's obituarists rot while it still walks among us.

[Shryke]

Are there really many (or any) significant advantages in having their own currencies?

Far as I can see (admitedly not a whole lot) separate currencies have two major effects: they make the exercise of local economic policy significantly easier and more insulated, and they give local governments more leverage to try and impose their own terms when negotiating with other countries.

Neither is automatically a good thing, IMO. It depends entirely on how economically healthy and how politically responsible the individual countries are - and in this case, how that compares and how good is the transit with whomever is running the larger economic decisions of the European Union.

Ultimately, if it is true that Greece (or Argentina, etc) is basically consuming more than it earns, then it will eventually reach them with a vengeance. The more they postpone it, the more painfull it will be.

I had high hopes that the European Union would be a sign that such nationalists concerns had been left behind in the trail of History. Apparently not.

Having control of your own monetary policy has a ton of advantages that have nothing to do with either of the points you mentioned.

And in this case, the people running the ECB are morons and so there's a huge advantage with not being stuck with those people either.