As I have said in prior posts, I am a bit of a eurosceptic. It is my view that the Euro is a political construct just as the expanded European Union has been and just as the reunification of East and West Germany on a 1 for 1 currency basis was. When politics come before economics, bad things happen.

Did joining the eurozone bust Ireland?, Jul 2008

I am still very much behind those remarks now three years later. Yes, I am a eurosceptic and have always been. But we are here now. The euro exists. And that does change things.

It would easy for me to say something like, “see I told you so. The euro is an abomination and the peripherals should simply leave or be tossed out of the euro zone.” I even remember suggesting the Irish should threaten this to get the most leverage before their banking sector imploded:

Ireland must threaten to leave now if it wants to maximize any EU help it expects to receive, before the scope of other EU banking crises become apparent. Weakness in the financial sector has infected all of the Eurozone members. I have mentioned that Austria has a weak banking system…. But, there is even growing evidence that Germany too has a fragile banking system. To be clear: this is an ‘every nation for itself’ strategy pitting Eurozone members against each other, where those nations savvy enough to request help sooner are likely to benefit at the expense of others.

The Eurozone and the spectre of banking collapse, Jan 2009

Ireland didn’t do that. In fact they did the opposite:

This is the core of the problem in Ireland. The housing bust. Prices are falling and will continue to fall for some time. Ireland has seen the fastest housing growth in the developed economy over the past 10 years. Their housing sector will fall more than others.…

In the end, all of this will pass. Ireland will go through its own lost decade much as Japan and Germany did after their own property bubbles in the 1980s and 1990s. However, the underlying dynamism of the Irish economy will help to pull Ireland out of its funk sooner than either Japan or Germany with their statist-lite economic paradigms.

What would be a cause for concern is if Ireland began to intervene in the unwind process, propping up zombie companies and bailing out the financial sector. The U.S. seems on this road as we speak. Hopefully, Ireland will not follow its example. If the calls for government to do something, anything, lead to a statist model of dealing with the bust, expect a very long and difficult decade.

Ireland: the bust after the boom, Jun 2008

But, again, we are here now. The political imperatives for closer European ties that created the single currency are still with us. And the negatives of abandoning it are many, both politically and economically – in the periphery and the core. I recognize this.

I read a post in the Irish Independent this morning by Gary O’Callaghan on “the top 10 misconceptions of the euro crisis”. I still think repudiating Irish bank debt is a viable option and O’Callaghan thinks “the Morgan Kelly proposition that Ireland can reject responsibility for bank debt and still maintain a good sovereign reputation” is bunk. O’Callaghan is promoting a pro-European view. Nevertheless, on the whole, I found his list quite reasonable.

So when I talk about the euro zone these days, despite my euroscepticism, I am not pushing an anti-Euro line. It is just the opposite; I am suggesting ways the euro zone can best remain intact despite the political and economic impediments.

That’s why I have said the ECB is the difference. As I said yesterday: “The problem here is that as more and more countries keep getting plucked off and put into the penalty box, there are fewer and fewer players left to skate.” Spain and Italy are already in the penalty box and Belgium and France will be too in due course. That leaves Germany as the only enforcer left to skate.

But the ECB is a player too. The ECB is acting as if it has retired from the game. But I think they will have to come back for one pivotal season. As Goldman’s Dirk Schumacher says:

This is a liquidity, rather than solvency, crisis for Italy and Spain. We have discussed in the past on several occasions the solvency of Italy and Spain, and we remain of the view that it is feasible for both countries to stabilise their debt and return to a sustainable fiscal path. The concern now is a self-reinforcing run on sovereigns that, in our view, does not reflect any new fundamental information on either of these two countries.

I know some people think Italy is insolvent. But, the point still holds that this is a liquidity crisis and the way to deal with liquidity crises is by providing liquidity. The only player left on the ice that can credibly provide that liquidity is the ECB. Once the liquidity concerns are dealt with, the euro zone can move to deal with its structural deficits. But if the ECB doesn’t step in, the euro zone won’t have the opportunity.

  1. Philip Pilkington says

    Politics always comes before economics.

    On another note, just to clear up a point there — me being a little bit familiar with (what passes for) economic debate in Ireland:

    “…the Morgan Kelly proposition that Ireland can reject responsibility for bank debt and still maintain a good sovereign reputation…”

    The Morgan Kelly proposition was actually batshit insane and only two or three people in the media actually noticed. I wrote something on it ages ago:

    Kelly is big in the Irish mediasphere because he called the housing bubble. But I’ve corresponded with him (to try and get him to plug the Mosler tax-backed bond plan in the media) and I found him to be VERY weak on a lot of the key issues.

    But general debate in Ireland is not much better. Me and a politico friend of mine are trying to get the Mosler plan out there and, I’m telling you, it’s not easy. I hate to denigrate my fellow countrymen and play into long-held stereotypes, but an awful lot of Irish people — at least those in positions of power — are not only remarkably unoriginal, but they’re also a bit dim.

    1. Edward Harrison says

      Everything you write could be said about the US, though. That’s the funny thing about it. The Irish are no different than the US on this I suspect.

  2. Moopheus says

    “When politics come before economics, bad things happen.”

    To paraphrase von Clausewitz, economics is just politics by another means. Therefore –> bad things always happen.

  3. David Lazarus says

    The problem of any government is that if they do as Hayek or Keynes recommend when times are good they will be accused of holding back business. Then when they blow up the bubbles they expect a Keynesian response to keep the whole sorry mess going because it appears to be the less painful route. Though what inevitably happens is that as soon as they feel safe again they criticise the government for fiscal irresponsibility for running a deficit. So the government policy is to get it wrong on the way up and get it wrong on the way down. This applies more to market driven economies than others. The only alternative I see is that business lobbying needs to end.

    Thew problem for Ireland during the run up to the crash was that Ireland with its cheap access to money went on a speculation binge that was destined to fail. The government were weak to not crack down on the bubbles. If they had decent capital gains on homes they could have sucked additional funds out of the sector and had an even bigger surplus prior to the crisis. It might have killed the bubble off entirely. Then when the bubble burst they bailed out the banks. They should have crushed the banks and started afresh. With new banks. That would have stopped the bank losses climbing on to the sovereign account.

    All through out the crisis they have extended and pretended and taken the easy way out. Ultimately I now see this crisis getting to the point that I fully expect Belgium to collapse, taking France into the depths. Germany will also find that they become a target of speculation. Not now but before this crisis is over, whether it be a year or a decade. The Euro was flawed, but politicians made this collapse inevitable. By taking the easy route they encouraged asset bubbles and to keep the economies going they went on easy fiscal route till that collapsed because there was still too much mal-investment out there being held up by QE.

    1. Dave Holden says

      It seems to me that the problem with any theory of economics that heavily relies on government, is that government rarely acts as they expect it too*. I think they to often see government as some idealized representation of all of the people all of the time, or even just most of the people most of the time. But in reality, more often than not, it acts as a representative of “capital and power”.

      Certainly, there are times when the interests of “the many” and those of “capital and power” align, and I would suggest its during these times that it’s important to establish as many politic and legal structures as is possible so as to “lock in” that benefit for “the many”.

      Another opportunity to forge useful political and legal structures that benefit “the many” is during a “managed crisis” and I would describe 2008 as one of those. However this requires the “capital and power” constituent to see past their own short term interests and note their medium to long term interests also align with “the many”. On that, I think we’ve seen complete failure. Of course this isn’t without consequence. “The many”, now ignored, start turning on “government”.

      I think we can see some of this in the US. Obama has been a big disappointment, the people voted for change but got none. Just the same people doing the same things and for the same reasons.

      As someone from the UK, I’m always having to check myself when I realise that many Americans take the likes of Bachmann and Palin somewhat seriously. But then what they espouse happens to both combine an anti government message with a austerity message that on the whole “capital and power” is happy to get behind. That’s a powerful combination.

      What can be achieved during an “unmanaged” crisis is anyone’s guess.

      * I’ve started following Steve Keens Lecture series and it seems the same applies to their expectation of and individual’s actions as well ;)

      1. David Lazarus says

        Well the 2008 crisis went to waste, both in the UK and the US. The banks should not have been bailed out. The depositors should be protected and that is it. We should have laws that force bank share holder to take 100% losses if they get into trouble and the banks branch networks should be nationalised. This can be temporary until they are privatised at some point in the future. Though I would recommend a completely new structure since the last failed. So maybe rather than a national bank it could be come 4 banks, 2 with regional emphasis and 2 national. Then allow customers to migrate to the bank of their choice.

        I am a Keynesian but do not think that Hayek is contradictory. If we had forced property markets to crash through refusing to lower interest rates to incompetence levels we would have had a floor to property prices. Those with excessive lending would be wiped out. Then we would have people buying into the market. What we have now is uncertainty about the market direction. They will fall because banks will not make mortgages available, or require much more equity than the bubble years led people to believe was normal. Though people will hang on until it is impossible. So rather than walk away and rebuild their finances people struggle on just in case. That is why we will have a depression.

        I do think that huge deposits or equity should be the norm. It will eliminate bank losses in future. This should be regulated into law to protect all concerned. Housing is way to important to allow it to become a bubble investment.

        So once the bad investments have been written off bad loans exposed and accounted for should governments consider stimulus over and above unemployment benefits. Then and only then should we consider any form of stimulus.

        Though the problem for small government advocates is that small governments cannot come to the rescue of big business. It would require huge tax increases to fund such measures. Longer term though the US will basically slash its own throat for tax cuts and make it inevitable that it declines in power and influence. The GOP and Tea party are even better at destroying America than Al-Qaeda.

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