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If I were a German - by Charles Gave


giofranchi
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For anyone who might be interested.

 

giofranchi

 

  I think he is wrong in his assessment of the crisis. Spain had a much lower public debt/GDP than Germany when all this started.  Our problem has been a huge housing bubble, funded by the same "idiots in Dusseldorf", i.e. the German regional banks with 50.000€/yr analysts who bought all that subprime debt. Spain kept a balanced budget for years, but suddenly the Spanish tax receipts went down by almost 7% of the GDP, whereas all the social expenses shot up because of the unemployment benefits.  We certainly need lots of reforms, as many other European countries, and it was dumb as hell to let the bubble inflate so much, but this is not a story of profligacy versus thrift. This is a story of going of trying to survive one of the worst asset bubbles in the world while keeping something similar to a gold standard. Look at what happened to Germany, the US or other countries which tried it in the 30's. That's why Ray Dalio always mentions us as a textbook example of ugly deleveraging. If Spain or Italy had their own central banks they would not be much worse than the US of UK in terms of dealing with this situation.

 

  The short term costs of a euro breakup for Germany are much lower than usually considered. All those TARGET transfers are basically numbers in a computer, and a new, independent Bundestag could erase them with a click. The real issue is the huge mass of Spanish and Italian euros in the German banks. But Germany could solve that by converting to the new DM only the euros of German residents. And bailing out the German banks will be cheaper, and politically easier, than paying the ESM contribution.

 

  The real problem for Germany (and the reason why BMW, Siemens and all the big German companies are desperately lobbying to keep the euro) is that the new DM would shoot up like the Swiss franc with respect to the dollar, whereas French, Italian and Spanish manufacturers would see their currency devaluate strongly. So the southern countries would go through a few months of turmoil, debt restructurings, etc. but suddenly they would be selling stuff 50% cheaper than their German competitors.

 

  In the short term I think we are getting close to the endgame. Strange things are happening. Spain was ready to ask for the bailout but Germany told us to wait, apparently they want to pass all requests (Cyprus, Slovenia) through the Bundestag in one go. Now German ministers are saying that we actually may not need a bailout, which obviously means that we will get one soon. Greece is hanging in midair like Wile .E. Coyote, but nothing happens. I have the impression that after the US election Greece will leave the euro (Samaras has said that the Government will run out of cash before December). Obviously that will create a huge Lehman-style crisis. And what better chance for the UE and the national governments to pass all the legislation and measures required to implement the Draghi plan to save the euro: the ECB prints away all the legacy debt and things are arranged so that this does not happen again (bank supervisions+budget controls) and certainly neither Germany nor any other country has to transfer money on a continuous basis. Those transfers will probably have to be curtailed even inside states (Scotland, Catalonia, Veneto).

 

  If that does not work (and there is a significant probability it won't), then the euro is toast and we will soon see those single-digit Shiller's P/E...

 

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And what better chance for the UE and the national governments to pass all the legislation and measures required to implement the Draghi plan to save the euro: the ECB prints away all the legacy debt and things are arranged so that this does not happen again (bank supervisions+budget controls) and certainly neither Germany nor any other country has to transfer money on a continuous basis. Those transfers will probably have to be curtailed even inside states (Scotland, Catalonia, Veneto).

 

txitxo,

my greatest contention with the whole Euro project is that FIRST you do what you have written, then, IF AND ONLY IF you have been successful in doing so, you establish a common currency. A common currency is the easy part, all the rest is what really matters and what is really difficult to implement. Start with the easy part, in the hope that the hard part will follow?!?! So much (southern) European… And never a good idea!!

 

As far as Mr. Charles Gave is concerned, I think his thesis has merits. He affirms that France will be the last domino to fall, and also the one most dangerous to the Euro survival. Why disagree? France is actually in very bad shape and is behaving like a socialistic country of the past, scaring businesses away. If you find yourself in a hole, stop digging?! Well, it seems in France they have decided to do the exact opposite! It gets worse: the IMF forecasts Debt/GDP for France exceeding 200% by 2040, even assuming “radical restructurings”. Radical restructurings that won’t occur, unless a crisis unfolds…

 

giofranchi

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And what better chance for the UE and the national governments to pass all the legislation and measures required to implement the Draghi plan to save the euro: the ECB prints away all the legacy debt and things are arranged so that this does not happen again (bank supervisions+budget controls) and certainly neither Germany nor any other country has to transfer money on a continuous basis. Those transfers will probably have to be curtailed even inside states (Scotland, Catalonia, Veneto).

 

txitxo,

my greatest contention with the whole Euro project is that FIRST you do what you have written, then, IF AND ONLY IF you have been successful in doing so, you establish a common currency. A common currency is the easy part, all the rest is what really matters and what is really difficult to implement. Start with the easy part, in the hope that the hard part will follow?!?! So much (southern) European… And never a good idea!!

 

As far as Mr. Charles Gave is concerned, I think his thesis has merits. He affirms that France will be the last domino to fall, and also the one most dangerous to the Euro survival. Why disagree? France is actually in very bad shape and is behaving like a socialistic country of the past, scaring businesses away. If you find yourself in a hole, stop digging?! Well, it seems in France they have decided to do the exact opposite! It gets worse: the IMF forecasts Debt/GDP for France exceeding 200% by 2040, even assuming “radical restructurings”. Radical restructurings that won’t occur, unless a crisis unfolds…

 

giofranchi

 

  Giofranchi, I am not discussing how the UE should ideally be, but how it actually is. For the Draghi plan to work, all governments involved have to get very painful measures approved. Footage of the poor Greeks queuing at pharmacies or gas stations and a huge drop in the stock market would help convince both German and Spanish voters that more sacrifices are required.

 

  I have no doubts that France is in pretty bad shape. The French have been living for the last 20 years as if the Berlin Wall had not fell down and China did not exist. That's fine if you can afford it, but they are reaching the limits of their system. However, I disagree with Gave: the euro will fall apart well before the fire reaches France. The first option is Germany, Finland and the Netherlands getting fed up and leaving, so that the rest of Europe can print as much money as they want, devalue and solve the problem the traditional way. The second, if the current austerity madness continues, is big countries like Spain and Italy leaving the euro, with the remaining countries forming a tighter, more homogeneous union. I really don't see any scenarios in which France is left alone and has to reintroduce the franc.

 

I don't know how things are in Italy, but the possibility of Spain leaving unilaterally is real. There is a powerful fraction in the government who want to reintroduce the peseta if the UE demands much stricter budget cuts. They see how Greek Economy and even Democracy are being destroyed by austerity and they do not want to suffer the same fate.

 

That's why I think that there is going to be a strong attempt to implement the Draghi plan soon, the situation is much more unstable than it looks. We are in the eye of the hurricane. If the ECB loses its credibility, the situation can degrade very fast.

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  I have no doubts that France is in pretty bad shape. The French have been living for the last 20 years as if the Berlin Wall had not fell down and China did not exist. That's fine if you can afford it, but they are reaching the limits of their system. However, I disagree with Gave: the euro will fall apart well before the fire reaches France. The first option is Germany, Finland and the Netherlands getting fed up and leaving, so that the rest of Europe can print as much money as they want, devalue and solve the problem the traditional way. The second, if the current austerity madness continues, is big countries like Spain and Italy leaving the euro, with the remaining countries forming a tighter, more homogeneous union. I really don't see any scenarios in which France is left alone and has to reintroduce the franc.

 

Well, maybe you are right… Generally, though, I genuinely admire Mr. Charles Gave as a man of great financial learning. I think his ideas are always very well researched and expressed. Of course, you could disagree with his conclusions… but I find it difficult not to enjoy his all-encompassing knowledge.

 

giofranchi

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