How The Euro Exploded, Part 2

Various Euro bills.
Money. It's the root of all ****-ups

Why has the Eurozone gone awry? Why have the economies of Ireland, Greece and – it looks likely – Italy shot off the precipice like runaway trains? Well as in any transport disaster, several things had to go wrong at the same time. Yesterday we looked at Problem one, the credit boom. That was hardly surprising. The next piece of the jigsaw though may be a little more unexpected…

Problem two: The success of the euro. Mad I know, but in many ways the euro crisis was caused by it acting exactly as intended. It immediately improved the economic prospects of the poorer countries of Europe. Well, the poorer ones that were rich enough to join. Currency stability made the ‘peripheral’ economies attractive to money from the richer ‘core’. They became more profitable places to find investment opportunities.

But there were downsides. When a small economy with its own currency enjoys boom times, one immediate consequence is of course inflation. This reduction in the effective purchasing power of the currency generally causes it to drop in value – as if there was a divine law saying the more money you earn, the less it’s worth. But though that’s frustrating, it at least exerts some moderating influence on the economy. It wasn’t long before a strong currency was the very last thing the rapidly-growing peripheral economies of Europe needed. But adjusting it for their sake was out of the question, their interests were secondary at best. The primary goal of the euro, nearly its entire raison d’être indeed, was to be strong. With no possibility of the currency falling it was almost inevitable that these economies would badly overheat.

This was a foreseeable structural problem with the euro. Loosely-attached economies at the fringes were bound to get yanked about violently by the slow but inexorable movements of such a leviathan currency. Yet we still haven’t decided how to deal with it. Had the credit bubble not coincided, we might have had greater time to adjust and put compensating mechanisms in place. But with the bubble and the fluctuation-amplifying mechanism, well, what we got was bursting boilers and third-degree scalding.

And you know what’s the crazy part? With all this turmoil on the bond markets, with all this panic and fear that countries won’t be able to pay their debts, need international aid from the IMF, be forced out of the euro, you might be forgiven for thinking that the euro itself was in trouble. Yet it sails on, imperturbable, as strong as ever. Indeed, many would argue, quite overvalued. Which is really not what you want from the currency that you have enormous debts denominated in.

There is no escaping this: The euro was devised mainly for the benefit of the larger economies, and it is those economies that have benefited most. Yet it is we in the smaller and more vulnerable ones who are being made to suffer for its failings. Here, we’re even expected to return the investments that outside institutions made into our over-inflated property market – the very money that caused it to explode. They want it back.

The enormity of that has still not really sunk in.

Good Morning, Euro. Euro?

Project 365 #125: 050510 Take Note
Will you still be here when I wake?

Sometimes I miss the old lead-times of print publishing, where you’d submit copy to be published hours or even days later. You had to predict, think about the future. So I’m writing this last thing at night, but setting it to be published at 11 a.m. (GMT+1) – seven hours from now, and hopefully when I’ll be getting up.

What I’m wondering is whether, by the time you read this, there will still be a Euro.

How does a currency cease to be? We know of one mode of course. Hyperinflation – when its value evaporates until it’s worthless. However the Euro remains strong – ridiculously strong perhaps, when you consider the condition of the economies that use it. We may in fact be witnessing the previously-inconceivable opposite phenomenon: runaway hypoinflation.

Alas, this doesn’t mean that the Euro notes in your pocket are going to become infinitely valuable. It’s not that opposite. But it means money is getting too expensive. We can’t afford to borrow as much as we need. And that leads to economic collapse just as surely as it becoming valueless would. Unfortunately however, some countries can’t afford it much sooner than others can’t. So the Euro is dying by a process of killing the economies that use it, one by one.

How can we get out of this? We could print the extra Euro notes we need, but that’s illegal. We could drop out off the Eurozone system and print our own currency again, but that’s a drastic extreme that will lose us a lot of friends.

I can think of a simpler way.

Stop checking for forgeries. Don’t accept obvious fakes of course, but quietly turn off the UV lamps and other hi-tech testing devices. If it looks real, take it. There are a hell of a lot of good fake notes floating around the continent, and we could bring them all here, vastly increasing the money supply. At a stroke, we’d have all the cash in circulation we needed. And there’s not a darn thing they could do.

Can We Arrest Property Speculators Now Please?

Quality and Cost of Services Concerns
Investors to sue Financial Regulator for recklessly letting them do whatever they wanted to do.

“An organisation representing property investors and developers is to take a class action in the High Court against the Government, the Financial Regulator and the banks over their roles in the collapse of the property market.” ~ The Times again.

I’d be all for suing the banks. If we weren’t all liable for their debts now, making it just a little self-defeating. But how do property investors get to sue them? These were the ones trying to make money out of house prices magically going up forever. The only people they should have a right to sue are their parents, for breeding them too stupid to breathe and tie their shoes at the same time.

Ah, because the banks lent recklessly. True – though this does overlook the fact that the people they were lending recklessly too were the property investors who were borrowing recklessly. It’s the alcoholic’s justification: they didn’t drink too much. They were over-served.

Having destroyed our economy with their bare-bollocked, dribble-soaked avarice, property speculators have decided that they were the real victims here. So once we’ve finished selling our hospitals to pay off foreign banks, they want whatever’s left.

At what point does it become legal to hunt these people down with dogs?

Cowen Collapses Into Black Hole

This appears to be what happened: Several cabinet ministers did not want to run in the election – particularly once they knew they’d be doing it with Brian Cowen as leader. So he wanted to replace them with fresh new faces, presumably in the hope that voters would fool themselves into thinking they weren’t looking at the same old Fianna Fáil.

The Greens were less than happy with what they perceived as the conversion of the cabinet into an electoral window display. They said they would pull out of government rather than accept the appointments. As that would precipitate an election, Cowen instead shared the portfolios out among the remaining cabinet members, and finally chose the election date – March 11th – in the hope that this would stay the Greens’ hand. (We’ll see.) His backbenchers meanwhile were busy explaining to the press that they wouldn’t have accepted cabinet posts anyway. They now perceive that their best hope of holding onto their seats lies in distancing themselves from Cowen as far and as quickly as possible.

So Cowen’s attempt to assert his authority and remain leader has unravelled. If there is any surprising part, it’s that the man who is inexorably steering his party into its greatest election defeat ever thought he had any authority to assert. No doubt he sees himself not as the man responsible for his country’s woes, but as the man to lead us out of them. The problem is though, that as the Taoiseach who gave us the ruinous blanket bank guarantee and Minister for Finance throughout most of the economy-wrecking property bubble, he is the man most responsible for his country’s woes.

At least, of those still around. Which isn’t quite fair on him of course. More of the blame for the bubble belongs to his predecessor Bertie Ahern, just as responsibility for the party’s corruption under Ahern really belongs more to his predecessor. (It’s easy to imagine that the failures of modern Fianna Fáil can be traced back to character flaws in DeValera himself; flaws which were minor then but have been cultured within the party over decades.) Though this might as well be Cowen’s political epitaph, his going makes little difference. The leader is just the bit stuck on the front. The problem with Fianna Fáil – and of the wider political culture – go right to the roots and require far more thorough changes than one of mere leadership.

The coming election is the first real hope we have ever had of that change.

 

  1. Micháel Martin looks decent and honest and innocent? Remember, we thought that about Bertie Ahern once.