[Mikes]

The best thing that could ever happen to Europe right now would be Germany to leave the Euro. Ain't gonna happen for bloody obvious reasons.

You do speak nonsense.

[Luis Dias]

No actually I do not. I'm speaking high level macroeconomics analysis, but the handwaving snark manner of the comment makes it look crazy I do admit.

[Mikes]

I'm speaking high level macroeconomics analysis

Haha

Ha.

Good one.

[Luis Dias]

No. Forreal. Want me to go on?

I haz some minutes (waiting for a render so).

So here's the big problem within the Euro: Germany and other countries of the so-called "core" have too much productivity when compared with the PIIGS, however they do not like a debasing-the-currency policy (aka inflationary policies), which is what it would take for a synchronization of all european economies (increasing wages of Germans while maintaining wages of the periphery). Right before the fan was hit by ****, the peripherical countries were buying and borrowing too much due to the historical lows of the loan yields. In 2009, Merkel made a very infamous speech in which she declared that each country should face their own banking problems, and when the markets slowly figured out that she was speaking for real, all the peripherical countries' borrowing yields skyrocketed.

Without the Euro, what would normally happen would be that the countries with productivity problems would devalue their own currencies  against the Mark, increasing their own productivity against Germany, empoverishing every citizen by an equal amount. The pain would be sharp, but quickly dealt with. However, Portugal, Greece, etc., cannot devalue their own Euro against Germany's Euro right now.

If Germany left the Euro, all the remaining countries could devalue the Euro against the Mark. Given that all debts are issued in Euros, this would in turn solve the debt problem by itself. The countries could abandon their austerity measures and start more Keynesian measures for the prosperity of the economy (one can include in these the lowering of taxes, for instance). The Mark's slow rise against the Euro would stop the latter of devaluing too much, since a freefall of the Euro would mean the total destruction of Germany's exports for these countries (still a majority of its exports). The Euro would be, in this scenario, balanced by the Mark.


All this precludes many other discussions of course. It's just one scenario. And between them all, this is one of the most positive ones. The one which we are currently facing is far, far, far worse. A continuing of "doin nuthin, whistle whistle" will mean the perpetuity of austerity measures and the destruction of the welfare systems of the peripherical countries, a massive unemployment that will create an immense rise of inequality. We have all seen this before, in every single country the IMF has bothered to enter into.

[Mr. Vega]

The only real solution to the problem I've seen minus the entire euro periphery defaulting and leaving the eurozone: the reworking of the euro as a special drawing rights currency, ala the original idea for the Bretton Woods system envisioned by Keynes.

http://www.debtdeflation.com/blogs/2012/07/26/the-euro-as-the-sdr-of-europe/

[LordMelvin]

No. Forreal. Want me to go on?
[snip]

That analysis sounds a lot the kind of stuff Krugman's been screaming from the rooftops (and his classroom, and his blog, and his newspaper column) for a good few years now. Of course noone listened to him when he was warning about the housing bubble either...

[Sarafan]

No. Forreal. Want me to go on?
[snip]

That analysis sounds a lot the kind of stuff Krugman's been screaming from the rooftops (and his classroom, and his blog, and his newspaper column) for a good few years now. Of course noone listened to him when he was warning about the housing bubble either...

That's because he's Krugman disguised as a portuguese, nobody would see that coming.

http://www.dw.de/dw/article/0,,16297765,00.html

More bad news from Portugal.

[Luis Dias]

Yes, I do tend to read Krugman a bit. /hides

edit: but actually that idea was Soros' not Krugman's.

I like Vega's link quite a lot btw.

http://www.dw.de/dw/article/0,,16297765,00.html

More bad news from Portugal.

That's what I was referring to the previous page. We are all psyched!!

[Al-Rik]

Without the Euro, what would normally happen would be that the countries with productivity problems would devalue their own currencies  against the Mark, increasing their own productivity against Germany, empoverishing every citizen by an equal amount. The pain would be sharp, but quickly dealt with. However, Portugal, Greece, etc., cannot devalue their own Euro against Germany's Euro right now.

If Germany left the Euro, all the remaining countries could devalue the Euro against the Mark. Given that all debts are issued in Euros, this would in turn solve the debt problem by itself. The countries could abandon their austerity measures and start more Keynesian measures for the prosperity of the economy (one can include in these the lowering of taxes, for instance). The Mark's slow rise against the Euro would stop the latter of devaluing too much, since a freefall of the Euro would mean the total destruction of Germany's exports for these countries (still a majority of its exports). The Euro would be, in this scenario, balanced by the Mark.

So, if German products - for example Porsche, BMW, Mercedes - became more expensive, the customers will buy more sport cars from Greece ?
Or do they buy more I-Phones from Spain and Portugal ? 

Even without Germany in the Euro ( an Idea many Germans find appealing ) Greece would face still competition from nations like Spain, France, Italy and Portugal who are still inside the Euro and have a higher productivity.

The second thing is what you can't nowadays compete over the price.
The Chinese are always cheaper.
Nobody buys a Porsche, a BMW or a  Mercedes because it's cheaper than a Seat, a Lancia or a Peugeot or a non existing Greece sports car.
The customer pays for quality and service (and the name of the brand), if that's not important he buys Chinese.

Well, I don't have any Idea who to fix that, but thinking anything would be better if German Goods became more expensive could be false.
The next thing is what even the Greeks don't want to left the Euro for a weaker currency. A weak Euro without Germany is the same - a weak currency they don't want.

[AtomicClucker]

Well depending on view, the Greek economy was pretty weak sauce to begin with. Simply put, tourism played a heavy factor to my understanding, but the danger was attempting to float a weak economy on a strong currency, something it could never really do in the first place.

[LordMelvin]

...
The second thing is what you can't nowadays compete over the price.
The Chinese are always cheaper.
Nobody buys a Porsche, a BMW or a  Mercedes because it's cheaper than a Seat, a Lancia or a Peugeot or a non existing Greece sports car.
The customer pays for quality and service (and the name of the brand), if that's not important he buys Chinese.

Well, I don't have any Idea who to fix that, but thinking anything would be better if German Goods became more expensive could be false.
The next thing is what even the Greeks don't want to left the Euro for a weaker currency. A weak Euro without Germany is the same - a weak currency they don't want.

You're drawing the comparison in a flawed manner, with the one type of good (expensive brand-name luxury items) that is least relevant to this kind of discussion.

The benefits to this kind of policy are most likely to be apparent in areas like perishable foodstuffs, things that you can import from a neighboring country, but that it's impractical to import from halfway around the world, or quick-turn-around items, where shipping from china is highly impractical due to the transit times required.

[Al-Rik]

You're drawing the comparison in a flawed manner, with the one type of good (expensive brand-name luxury items) that is least relevant to this kind of discussion.

The benefits to this kind of policy are most likely to be apparent in areas like perishable foodstuffs, things that you can import from a neighboring country, but that it's impractical to import from halfway around the world, or quick-turn-around items, where shipping from china is highly impractical due to the transit times required.

And foodstuff and quick-turn-around items are the most imported exports from Germany in Greece, Spain, Portugal, France and Italy ?

[Luis Dias]

Al Rik, that wasn't even a wrong analysis. That was an abomination of snarkiness against what is practically one of the most established truths of macro-economics, namely the relationship between a currency's value and both the import-export balance sheet of a country and its relative productivity.

Really, before going all out snark against common truths, at least have the courtesy of spending more than the few seconds of thought you obviously deemed too much for such an observation.

To take your "example", if say a Portuguese is thinking about buying a BMW but it costs 30% or 50% more due to the devaluation of his own currency, the chance that he will do so is diminished. This is so frakking obvious that I just can't see what went through your mind here. If the iPhone costs more, then the quantity of Italians who buy them will also diminish and substitute those buys for middle range smartphones. This substitution is obviously good for the balance sheet.

The contrary is also true. If to a German, a portuguese shoe costs 40% less than it used to, the chance he will buy one will rise by a predictable amount.

Do you get it now, or do I have to teach you economics 101 first?

Well, I don't have any Idea who to fix that, but thinking anything would be better if German Goods became more expensive could be false.

It is definitely not. It's actually what every goddamned top economist is saying everyone. Why do you think Krugman asked for a 20% reduction in salaries in Portugal? Why do you think everyone talks about the problems of "productivity" in the periphery? What do you think they are refering to?

The next thing is what even the Greeks don't want to left the Euro for a weaker currency. A weak Euro without Germany is the same - a weak currency they don't want.

A "weak" currency is a million times better than a completely flawed one. Ask Argentina.

[Al-Rik]

To take your "example", if say a Portuguese is thinking about buying a BMW but it costs 30% or 50% more due to the devaluation of his own currency, the chance that he will do so is diminished. This is so frakking obvious that I just can't see what went through your mind here. If the iPhone costs more, then the quantity of Italians who buy them will also diminish and substitute those buys for middle range smartphones. This substitution is obviously good for the balance sheet.

If the BMW costs 30% to 50% more he will buy a French or a Italian car - not a car made in Portugal.
And the middle range smart phones are - like the I Phone -  produced in China.

And this should be good for the balance sheet ?

The contrary is also true. If to a German, a portuguese shoe costs 40% less than it used to, the chance he will buy one will rise by a predictable amount.

Shoes from Morocco, China or Vietnam are still cheaper.

It is definitely not. It's actually what every goddamned top economist is saying everyone. Why do you think Krugman asked for a 20% reduction in salaries in Portugal? Why do you think everyone talks about the problems of "productivity" in the periphery? What do you think they are refering to?

Productivity in what field ?
How low must the salaries be to reach the productivity of a shoemaker in Morocco, China or Vietnam ?

And even without Germany, they still will face competition by France and Spain...

The next thing is what even the Greeks don't want to left the Euro for a weaker currency. A weak Euro without Germany is the same - a weak currency they don't want.

A "weak" currency is a million times better than a completely flawed one. Ask Argentina.

And still the Greeks don't want to leave the Euro. Maybe they should ask the Argentinians ?

[el_magnifico]

DISCLAIMER: I'm no economist.

The next thing is what even the Greeks don't want to left the Euro for a weaker currency. A weak Euro without Germany is the same - a weak currency they don't want.

A "weak" currency is a million times better than a completely flawed one. Ask Argentina.

Are you sure you can so happily draw such parallelisms? While I certainly respect your wisdom in this field and I agree with pretty much everything I've read from you so far, and while it IS true that every economist I've ever heard or read agrees in that devaluing a country's currency is a quick, easy and foolproof way of regaining some competitiveness against another country's larger economy, the differences between pre-collapse Argentina and nowadays Greece are, as far as I know, quite significant.
Argentina, even in its darkest hours, still had a large, dormant industrial capacity; a highly skilled workforce; one of the most competitive, export-oriented primary sectors in the world; some interesting high-tech exports like cars, nuclear reactors and fissionables; and a sizeable internal market. Also, our best exports suddenly raised in price just a few years after the devaluation, just in time for us to capitalize on it. So it was a combination of devaluing to regain competitiveness, reorienting our industrial production to our internal market, reprioritizing our exports towards our neighboring countries, and actually HAVING something to compete with in the international economic arena in first place. And luck. Lots of luck.
As far as I know, Greece's situation is totally different.

So my question to you is: Would just devaluing the currency work for Greece? Would it solve their problems?

And still the Greeks don't want to leave the Euro. Maybe they should ask the Argentinians ?

But that's the problem, isn't it? Everybody wants a stronger economy, and everybody knows in the long run it will benefit everyone. But here and now, nobody wants to pay the price. It was the same here in Argentina. it was no secret that the dollar-peso parity was untenable, and yet nobody wanted to get out of it. And in stupidly delaying the unavoidable, we were only making the situation worse and worse with each passing day. That is, until it blew up in our face like bubbles tend to do.

[Luis Dias]

If the BMW costs 30% to 50% more he will buy a French or a Italian car - not a car made in Portugal.
And the middle range smart phones are - like the I Phone -  produced in China.

And this should be good for the balance sheet ?

Yes. First, if the car is bought in France / Italy, then it will improve France/ Italian balance sheets, two countries which would be under the new "euro-without-the-mark". These countries would be better off, and in a better position to buy whatever goods Portugal is able to export.

Shoes from Morocco, China or Vietnam are still cheaper.

Does not matter one iota. If Portuguese shoes are cheaper than they are right now, they will be bought more than they are now, irrespectively of other countries' own exports. This is econ 101.

Productivity in what field ?
How low must the salaries be to reach the productivity of a shoemaker in Morocco, China or Vietnam ?

They don't have to reach the "productivity" of other places. They only need to synchronize their own productivity with Germany's. Germans may have high salaries, but they compensate with a very organized economy. Without such organization (which is a very wide, subjective concept: it includes the whole economy's overall efficiency, from political institutions to mechanical processes of construction, etc.), countries must compensate with lower salaries, etc.

And even without Germany, they still will face competition by France and Spain...

France and Italy suffer the same problems that Portugal faces against Germany. In simple words, they are economies "used to" some form of inflationary economic policies, which were abandoned in favor of a strong stable currency by the Mark standards. While Germany stabilized prices and salaries, France, Italy, Spain, Portugal and so on rose them. The reason why they did this is multiple, but a strong case can be made that the lowering of borrowing rates "fooled" everyone (public and private) in these countries into thinking they had more money in their pockets than they used to (and so they could "share the wealth" to the employees, who then borrowed money from the banks with the low rates, which in turn created another level of risk and so on).

And still the Greeks don't want to leave the Euro. Maybe they should ask the Argentinians?

They might have no choice on the matter. Argentina wouldn't have been any better off continuing to peg its currency to the dollar once they figured out they were in deep trouble. It would only have made matters worse before they were forced to unpeg their currency.

Greece is doomed to continue their completely unpopular "austerity measures" forever if they insist on being inside the eurozone. It would be much better for them to reach a deal where their debt would be nominated in Drachmas (whose value would be negociated politically), and then make them leave the eurozone. The fact that their debt is now in Drachmas makes sure they do not enter in hiper-inflation, and further measures can be taken so that the capital does not run off from panic (a long weekend may be required to secure every bank militarily so that no one is able to run off with the money, print new Drachmas and make the change in 3,4 days. A very difficult task, no doubt).

[Luis Dias]

Are you sure you can so happily draw such parallelisms? While I certainly respect your wisdom in this field and I agree with pretty much everything I've read from you so far, and while it IS true that every economist I've ever heard or read agrees in that devaluing a country's currency is a quick, easy and foolproof way of regaining some competitiveness against another country's larger economy, the differences between pre-collapse Argentina and nowadays Greece are, as far as I know, quite significant.
Argentina, even in its darkest hours, still had a large, dormant industrial capacity; a highly skilled workforce; one of the most competitive, export-oriented primary sectors in the world; some interesting high-tech exports like cars, nuclear reactors and fissionables; and a sizeable internal market. Also, our best exports suddenly raised in price just a few years after the devaluation, just in time for us to capitalize on it. So it was a combination of devaluing to regain competitiveness, reorienting our industrial production to our internal market, reprioritizing our exports towards our neighboring countries, and actually HAVING something to compete with in the international economic arena in first place. And luck. Lots of luck.
As far as I know, Greece's situation is totally different.

Yes, it is. Your analysis is spot on from what I know. Every analogy is somewhat flawed, and Argentina's case is different even in historical reasons. However, Argentina did have to unpeg their currency and it devalued 2 to 3 times its value in 2003. Its burden of external debt caused its hyperinflation in 89, the main reason why was because of most of it was nominated in foreign currencies.

So my question to you is: Would just devaluing the currency work for Greece? Would it solve their problems?

They would have to turn their debt from "euros" to "drachmas". A political decision on this matter is fulcral before leaving the eurozone. Only then, a devaluation is inevitable. It is a means of empoverishing everyone involved in the country in an equalized fashion (sharing the burden so to speak), diminishing the problems of sharp inequalities and so on, so that the whole economy gets in tandem with everyone else around them.

But that's the problem, isn't it? Everybody wants a stronger economy, and everybody knows in the long run it will benefit everyone. But here and now, nobody wants to pay the price. It was the same here in Argentina. it was no secret that the dollar-peso parity was untenable, and yet nobody wanted to get out of it. And in stupidly delaying the unavoidable, we were only making the situation worse and worse with each passing day. That is, until it blew up in our face like bubbles tend to do.

Right on. That's only too human.

[SF-Junky]

Germany leaving the Euro ist probably not the most stupid idea, but I would not be so sure if that could solve to basic problems of this messed up currency union. These are:
1) wage increasments differ from productivity increasments which leads to different inflation rates in the single countries which means that some countries lose their competetiveness against others which they can't compensate by devalueing their national currency
2) no common political body that has any economic responsibilities to speak about

These problems are not solved by single countries leaving the Eurozone. This measure could solve the current crisis to a degree but it wouldn't solve the currency union's structucal deficits.
The biggest problem atm is that Germany is currently governed by the most stupid and incompetent band of jerks EVER! This government has not understood anything and absolutely everything they do has nothing to do with the actual crisis which is not a crisis of public budgets but a balance of payment crisis. Especially the FDP and CSU are so far away from reality how one can possibly be. Alas, most of the german voters somehow still think that Merkel's policy would be the best way to solve this mess. Must be because of the great success she's having so far in containing public debt.

[Luis Dias]

Yeah, and the last reports from the FMI, which can be read as an "ooopsie daisy, we made a slight blunder on our proposed policies" - basically the "contractionary multiplier" was off by a lot (assumed a 0.5 multiplier, and an observed 0.9-1.7 one) - is a big slap in the face to everyone who suffered through the austerity measures.

heyaaa'll, good news folks know those sacrifices you had to endure? They made things worse! Ain' it great? Let's have caaaaaake!!!

Merkel now wants to make Europe be able to dictate national budgets (the #%$#$&!), and our government is about to pass in the parliament another "package" of austerity taxes (the ones referred to above) which we now know makes matters worse.

You can imagine my feelings. Filled with daisies and green pastures. And reavers.

[MP-Ryan]

Seems to me the problem isn't so much that Germany needs to leave the Euro but rather that everyone should have been a lot more selective on who was allowed in in the first place.  Reading about Greece's fiscal situation makes me just about shake my head off my shoulders.  I have a great deal of difficulty feeling sorry for people who want top-notch social programs but refuse to pay the taxes necessary to fund them - and problem that seems to be fairly common in the nations in Europe that are in serious financial difficulty.  If you elected governments that left your fiscal liabilities unfunded and didn't ever question their books, you pretty much deserve what you've been sold.