Euro is a disaster for countries that do everything right

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Euro is a disaster for countries that do everything right

Post by bobalot »

The euro is a disaster even for the countries that do everything right

The euro might be worse for you than bankruptcy.

That, at least, has been the case for Finland and the Netherlands, which have actually grown less than Iceland has since 2007. Iceland, you might recall, basically went bankrupt in 2008.

Now, it's true that Finland and the Netherlands have had their fair share of economic problems, but those should have been manageable. Neither country is a basket case, and both have done what they were supposed to do. In other words, they've followed the rules, and the results have still been a catastrophe. That's because the euro itself is. Or, if you want to be polite, the common currency is "imperfect, and being imperfect is fragile, vulnerable, and doesn't deliver all the benefits it could." That was European Central Bank chief Mario Draghi's verdict on Thursday.

So what's happened to them? Well, just your run-of-the-mill bad economic news. It's only a slight exaggeration to say that Apple has kneecapped Finland's economy. Its two biggest exports were Nokia phones and paper products, but, as the country's former prime minister Alex Stubb has said, the iPhone killed the former and the iPad killed the latter. Now, the normal way to make up for this would be to cut costs by devaluing your currency, except that Finland doesn't have a currency to devalue anymore. It has the euro. So instead it's had to cut costs by cutting wages, which not only takes longer, but also causes more economic damage since you have to fire people to convince them to take pay cuts. The result has been a recession longer than anything in Finland's living memory, longer even than its great depression in the early 1990s. It hasn't helped, of course, that the rules of the euro zone have forced Finland's government to cut its budget at the same time that all this has been happening.

It's been a different kind of story in the Netherlands. Its goods are more than competitive abroad—its trade surplus is an absurd 10 percent of economic output—but its domestic spending is a problem. The Netherlands had a huge housing bubble, fueled, in part, by the fact that interest payments are fully tax deductible, that has since deflated some 20 percent. That's left Dutch households with a bigger debt burden than anyone else in the euro zone. On top of that, there's been the usual austerity to keep its recovery from being much—or any—of one. Indeed, the Netherlands' economy was slightly smaller at the end of 2014 than it was at the end of 2007. That's a lot better than Finland, whose economy has shrunk 5.2 percent during that time, but, as you can see below, it still lags the 1.1 percent growth Iceland has eked out.

Image

Now, it's hard to do worse than Iceland. It basically turned its entire economy into a hedge fund that collapsed in 2008. Its banks defaulted, its government had to be bailed out, and its currency collapsed 60 percent. Not only that, but, between 2009 and 2014, Iceland did nearly twice as much austerity as the Netherlands and 12 times as much as Finland. And if that wasn't enough, Iceland's economic jeremiad also includes high household debt and capital controls that have prevented people from moving money out of the country and dissuaded them from moving it in.

But despite all this, Iceland has still managed to outperform Finland and the Netherlands. How is that possible? Well, it doesn't have the euro. It has its own currency, the krona. And as much as it hurt Iceland's people to lose 60 percent of their purchasing power on imported goods when the krona fell that much, it helped Iceland's economy by making their goods more competitive overseas. That was enough to keep what could have been a depression from turning into anything other than a bad recession.

The euro, though, does the opposite. Countries can't devalue their currencies or cut interest rates or even spend more when they get into trouble, and so they stay in trouble. All they can do is cut wages, cut spending, and then cut wages some more as penance for whatever economic transgressions they may or may not have committed. The euro straitjacket, in other words, turns ordinary problems into extraordinary ones (Finland) and extraordinary problems into historic ones (Greece). And that can happen whether or not you follow the rules.

The euro is a capricious god, meting out punishment to sinners and saints alike.
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Re: Euro is a disaster for countries that do everything righ

Post by K. A. Pital »

Well, none of this is any news to people who had been following the story from around 2002; some even predicted that the inequal currency union will only benefit the few whose otherwise expensive exports will suddenly cost a ridiculous amount of money due to Euro running down to dollar parity. I am not going to call names, though. But we know.
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Re: Euro is a disaster for countries that do everything righ

Post by Starglider »

The focus on two countries is unfortunate, as it is open to the accusation of cherry picking the worst examples. To appreciate the effects of the eurozone as a whole you need this graph;

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Re: Euro is a disaster for countries that do everything righ

Post by Thanas »

The Eurozone has 19 countries. I don't see 19 on the graph.
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Re: Euro is a disaster for countries that do everything righ

Post by Starglider »

Thanas wrote:The Eurozone has 19 countries. I don't see 19 on the graph.
Countries with less than 3M population are ommitted to reduce clutter. Including them does not change the conclusions.
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Re: Euro is a disaster for countries that do everything righ

Post by Thanas »

Starglider wrote:
Thanas wrote:The Eurozone has 19 countries. I don't see 19 on the graph.
Countries with less than 3M population are ommitted to reduce clutter. Including them does not change the conclusions.

Not really, factor in Greece and you get areound 98% of GDP level before the crash, factor out Greece and the Eurozone has recovered fully and gained GDP growth.

The main problem is not the Euro, but the lack of a political union anyway. If there were a political union it would be no problem to have transfers between the nations.
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Re: Euro is a disaster for countries that do everything righ

Post by Guardsman Bass »

Jesus, only three countries have grown beyond where they were six years ago, with a fourth (France) essentially back where it started and going nowhere fast.
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Re: Euro is a disaster for countries that do everything righ

Post by Starglider »

Thanas wrote:Not really, factor in Greece and you get areound 98% of GDP level before the crash, factor out Greece and the Eurozone has recovered fully and gained GDP growth.
Firstly, this is due to Germany benefitting disproportionately; the whole point of the previous graph is that 'no significant GDP growth' means 'Germany doing well, most other countries contracting'. Secondly, the eurozone as a whole is currently between -5% and +2% from the peak in real terms depending on whose figures you use, and this performance is pathetic compared to international contemporaries;

Image

(China and India have higher growth of course but developed vs developing is not a fair comparison)

In particular contemporary pension systems are predicated on continuous GDP growth. The problem hasn't hit yet due to the stock market bubble, but price-to-earning ratios cannot continue to increase indefinitely.
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Re: Euro is a disaster for countries that do everything righ

Post by FTeik »

Starglider wrote:
Thanas wrote:Not really, factor in Greece and you get areound 98% of GDP level before the crash, factor out Greece and the Eurozone has recovered fully and gained GDP growth.
Firstly, this is due to Germany benefitting disproportionately; the whole point of the previous graph is that 'no significant GDP growth' means 'Germany doing well, most other countries contracting'. Secondly, the eurozone as a whole is currently between -5% and +2% from the peak in real terms depending on whose figures you use, and this performance is pathetic compared to international contemporaries;

Image

(China and India have higher growth of course but developed vs developing is not a fair comparison)

In particular contemporary pension systems are predicated on continuous GDP growth. The problem hasn't hit yet due to the stock market bubble, but price-to-earning ratios cannot continue to increase indefinitely.
And how much of that US-growth is due to the Fed throwing money around like confetti?

As for the Euro-Zone, how much potential for growth that doesn't turn into a bubble is there, with the markets largely developed/sated and the populations being stable and/or declining?

Come to think of it, the creation of growth might be a bigger problem in the future no matter, if you are part of something like the Euro-Zone or not, if you look at the discussion about the "abolition of cash" by some economists (which would allow the Central Banks the use of negative interests to stimulate growth).

Just a few post to illustrate the discussion:

http://www.forbes.com/sites/timworstall ... lish-cash/
http://cointelegraph.com/news/114279/ge ... tral-banks
http://oliverhartwich.com/2014/11/27/wh ... the-money/


and an older article from the WashingtonPost discussing the end of the times of growth:
http://www.washingtonpost.com/blogs/won ... ic-growth/
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Re: Euro is a disaster for countries that do everything righ

Post by Vendetta »

FTeik wrote:And how much of that US-growth is due to the Fed throwing money around like confetti?
You mean "Doing basic Keynesean response to recession"?

The government and reserve bank throwing money around is what they're supposed to do in an economic slump because that's what makes growth happen!
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Re: Euro is a disaster for countries that do everything righ

Post by Starglider »

FTeik wrote:And how much of that US-growth is due to the Fed throwing money around like confetti?
Oh quite a bit of it, and most of the rest is statistical and market manipulation, but the existence of these things cannot be acknowledged by the pseudosocialist consensus in which eurozone supporters float. Besides it isn't as if the ECB hasn't done a fair bit of quantitative easing of its own, albeit later and with more obfuscation.
As for the Euro-Zone, how much potential for growth that doesn't turn into a bubble is there, with the markets largely developed/sated and the populations being stable and/or declining?
If only everyone was as productive as Germany, the problem would be solved;

Image

Whether this is practical or even possible under the existing eurozone financial arrangements is not normally considered.
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Re: Euro is a disaster for countries that do everything righ

Post by FTeik »

Vendetta wrote:
FTeik wrote:And how much of that US-growth is due to the Fed throwing money around like confetti?
You mean "Doing basic Keynesean response to recession"?
To be honest, I have little faith in Keynes. To be clear on that, not the theory itself, but the practical application. What is often forgotten when discussing a Keynesian approach is, that aside from increased spending in dire times (=increasing debt), the deficit should be reduced (to reduce the burden of debt and interest) once the situation has improved. And I can't think of any example, where that was ever done, so consequently economies enter the next dire times usually with even more debt.
Vendetta wrote: The government and reserve bank throwing money around is what they're supposed to do in an economic slump because that's what makes growth happen!
You're sure you are not confusing growth with inflation? Because the Central Bank "throwing money" around increases the amount of money, not necessarily the demand for goods and services. All you get are bubbles like the housing-bubble in Spain a few years ago or the current bull-trend at the stock-market, because the people don't know, where to put the money with interests as low as they are.
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Re: Euro is a disaster for countries that do everything righ

Post by Arthur_Tuxedo »

Vendetta wrote:
FTeik wrote:And how much of that US-growth is due to the Fed throwing money around like confetti?
You mean "Doing basic Keynesean response to recession"?

The government and reserve bank throwing money around is what they're supposed to do in an economic slump because that's what makes growth happen!
Yeah, except the federal government never fulfilled its end of the bargain. When you subtract the contracting budgets of state and local governments from the Federal stimulus, it disappears, so there was no net stimulus. At least the US didn't follow the Eurozone and actively make cuts during a recession, which is the dumbest thing you can do, and probably responsible for most of the delta in that graph.

As for Fed policy, I'm not sure it's actually contributed much to growth, but rather re-inflated asset bubbles in stocks, real estate, and venture capital due to safe assets being so painful to hold (negative real interest rates) that investors have felt forced to extend duration and risk. This could end very badly, since it's hard to imagine a price floor when masses of investors begin fleeing positions they never wanted to take in the first place, but either way the relationship between asset price levels and economic growth is weak. Lower interest rates do make it easier for businesses to borrow, of course, but even at rock-bottom rates, you need to see that the demand will be there before you consider expanding.

The US certainly made better decisions than most of Europe, but the correct solution would have been to let the banks fail following the Swedish model (receivership, good bank continues operating, bad bank with toxic assets is slowly unwound, stock value = 0, bondholders take a haircut, execs who broke the law go to jail) and instead use the bailout money for consumer debt relief and a serious jobs program. Instead, the taxpayers got thrown under the bus so that well connected thieves could keep their spoils and stay out of jail at the cost of the entire economy remaining mostly stagnant for almost a decade. Better than the austerity model, but certainly not great.
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Re: Euro is a disaster for countries that do everything righ

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FTeik wrote:To be honest, I have little faith in Keynes. To be clear on that, not the theory itself, but the practical application. What is often forgotten when discussing a Keynesian approach is, that aside from increased spending in dire times (=increasing debt), the deficit should be reduced (to reduce the burden of debt and interest) once the situation has improved. And I can't think of any example, where that was ever done, so consequently economies enter the next dire times usually with even more debt.
Well there's these 2 countries called Australia and Canada, you should known of them, though I understand you may have a bit of trouble finding them on a map. But yeah, they both did what Keynesian theory says you should do.
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Re: Euro is a disaster for countries that do everything righ

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aerius wrote:
FTeik wrote:To be honest, I have little faith in Keynes. To be clear on that, not the theory itself, but the practical application. What is often forgotten when discussing a Keynesian approach is, that aside from increased spending in dire times (=increasing debt), the deficit should be reduced (to reduce the burden of debt and interest) once the situation has improved. And I can't think of any example, where that was ever done, so consequently economies enter the next dire times usually with even more debt.
Well there's these 2 countries called Australia and Canada, you should known of them, though I understand you may have a bit of trouble finding them on a map. But yeah, they both did what Keynesian theory says you should do.
Yeah, and Canada is doing so well right now with the dollar dropping value and banks cutting lending rates quarter over quarter.
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Jub wrote:Yeah, and Canada is doing so well right now with the dollar dropping value and banks cutting lending rates quarter over quarter.
Blame Harper for that one. That stupid fuckface and his Harpercons went full retard and fucked up everything.
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Re: Euro is a disaster for countries that do everything righ

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aerius wrote:
Jub wrote:Yeah, and Canada is doing so well right now with the dollar dropping value and banks cutting lending rates quarter over quarter.
Blame Harper for that one. That stupid fuckface and his Harpercons went full retard and fucked up everything.
Trust me if I could blame him for more things I would. It just goes to show that there are many more ways to ruin an economy than there are to fix one.
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Re: Euro is a disaster for countries that do everything righ

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aerius wrote:
Jub wrote:Yeah, and Canada is doing so well right now with the dollar dropping value and banks cutting lending rates quarter over quarter.
Blame Harper for that one. That stupid fuckface and his Harpercons went full retard and fucked up everything.
While blaming Harper feels doubleplusgood in my book, can I have an explanation as to how he fucked up everything? In other words, can you tell me why you think that?

Thank you.
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Re: Euro is a disaster for countries that do everything righ

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It's funny that the Euro advocates basically have no response to this economic reality. This issue was pointed out in the early 90's as a major problem with the EU, but why bother objective evidence when you can make policy on the basis of stereotypes about the Greeks being lazy scrounging welfare addicted tax avoiders who all retire at 50 to spend time in their private swimming pools drinking ouzo.
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Re: Euro is a disaster for countries that do everything righ

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bobalot wrote: when you can make policy on the basis of stereotypes about the Greeks being lazy scrounging welfare addicted tax avoiders who all retire at 50 to spend time in their private swimming pools drinking ouzo.
Could you show where this is happening?
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Re: Euro is a disaster for countries that do everything righ

Post by His Divine Shadow »

I seem to remember a lot of things like that from the media and papers over the course of many years. It's one of those things' that's so prevalent and everywhere, that it's hard to nail down a single thing. But the image of greece as a country like that has certainyl been cultivated over the years.
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Describing something as "so prevalant that it´s hard to find" seems rather odd...
Abundance = scarcity?
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Re: Euro is a disaster for countries that do everything righ

Post by Crown »

salm wrote:Describing something as "so prevalant that it´s hard to find" seems rather odd...
Abundance = scarcity?
You're looking for the definitive statement of 'Greeks are lazy/tax dodging/liars etc and that's why their economy is fucked up' but you're never going to find it. Just like you'll never find a single statement of the Bush Administration outright saying Saddam had anything to do with 9/11.

But the Pavlovian classic conditioning is evident in both this situation and the Bush era as well. Just mention that Greece needs help, but must 'reform' and mention that consistently just like Bush Administration saying we need to stop another 9/11 so that's why we're going after Saddam and the sheeple will just link the two, even if you're not being explicit.

It's not a hard or new concept really.
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Re: Euro is a disaster for countries that do everything righ

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salm wrote:
bobalot wrote: when you can make policy on the basis of stereotypes about the Greeks being lazy scrounging welfare addicted tax avoiders who all retire at 50 to spend time in their private swimming pools drinking ouzo.
Could you show where this is happening?
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Re: Euro is a disaster for countries that do everything righ

Post by Simon_Jester »

salm wrote:Describing something as "so prevalant that it´s hard to find" seems rather odd...
Abundance = scarcity?
It's like asking for evidence that American politics is corrupt due to private individuals and corporations having so much power over election funding.

There is ample evidence for it, but any individual piece of that evidence can be dismissed as "just an isolated incident" unless you can step back and look at the whole pattern.
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