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Has bailout mania finally reached Europe?
The 16 nations that make up the Eurozone are seriously exploring the creation of a "European Monetary Fund," a bailout fund that would help euro-member countries that can't pay their debts.
This has the potential to be a pretty good idea. If structured correctly, the EMF could provide the discipline and stability that the euro needs.
However, I'm not holding my breath: Given the EU's track record, the EMF bailout plan will most likely evolve into yet another slush fund for politicians - as well as a drag on the European economy.
The 16 nations that make up the Eurozone are seriously exploring the creation of a "European Monetary Fund," a bailout fund that would help euro-member countries that can't pay their debts.
This has the potential to be a pretty good idea. If structured correctly, the EMF could provide the discipline and stability that the euro needs.
However, I'm not holding my breath: Given the EU's track record, the EMF bailout plan will most likely evolve into yet another slush fund for politicians - as well as a drag on the European economy.
Even when the euro was founded in 1999, it was obvious that its central weakness was the lack of control over budget deficits. As the following chart demonstrates, the so-called "Maastricht Criteria" had established theoretical limits of 3% of gross domestic product (GDP) for such deficits. But there were no proper mechanisms for enforcing those limits, or for preventing the bankruptcy of a country that fell into such difficulties.
Since the birth of the euro 11 years ago, an additional problem has appeared. Well-run, highly disciplined economies such as the one in Germany keep their inflation rates low, their productivity growth high and their wage costs under control. The upshot: These economies gradually become more internationally competitive, and run balance-of-payments surpluses.
This tendency was hidden in the euro's early years by Germany's struggles to integrate the former East Germany, whose much lower productivity was a drag on the economy. However from about 2005 the costs of integrating East Germany began to diminish and Germany's true economic superiority became more obvious.
At the other end of EU's economic spectrum, Europe's Mediterranean countries - now delightfully referred to as the "PIGS" (Portugal, Italy, Greece and Spain) - turned out to have much less discipline. Even before they joined the Eurozone, these countries had relatively high interest-and-inflation rates. The advent of the euro gave them low real interest rates, particularly as their domestic inflation continued and productivity growth remained low.
Since the birth of the euro 11 years ago, an additional problem has appeared. Well-run, highly disciplined economies such as the one in Germany keep their inflation rates low, their productivity growth high and their wage costs under control. The upshot: These economies gradually become more internationally competitive, and run balance-of-payments surpluses.
This tendency was hidden in the euro's early years by Germany's struggles to integrate the former East Germany, whose much lower productivity was a drag on the economy. However from about 2005 the costs of integrating East Germany began to diminish and Germany's true economic superiority became more obvious.
At the other end of EU's economic spectrum, Europe's Mediterranean countries - now delightfully referred to as the "PIGS" (Portugal, Italy, Greece and Spain) - turned out to have much less discipline. Even before they joined the Eurozone, these countries had relatively high interest-and-inflation rates. The advent of the euro gave them low real interest rates, particularly as their domestic inflation continued and productivity growth remained low.
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The result in Spain, for example, was a gigantic housing bubble. Italy had the poorest productivity performance, falling behind Germany at a rate of almost 3% a year and so becoming hopelessly uncompetitive. On the other hand, Italy's budget discipline was fairly good - far better than that of Greece, a country whose current woes underscore the inability of the EU to adequately police the finances of its member countries.
Since it joined the EU in 1981, Greece has been much poorer than other member countries, and so has treated the EU as a never-ending source of free handouts.
That brings us back to the EMF proposal. It would be possible to design a fund that solves this problem. If you staffed it entirely with Scrooge-like bankers - the type that likes throwing foreclosed widows out in the snow on Christmas Eve - then it could achieve two things.
First, it could force Greece and any other country that needs money from the fund to reform their economies properly. This would involve cutting back the public sector, making everybody retire at ages closer to 70 than 60. It would also force down wage rates in the parts of the economy that were heavily unionized, and that had been extracting rents from their fellow citizens (or in Greece's case, from German taxpayers). Because it won't actually be a political body, an EMF of this kind would be invulnerable to the strikes, demonstrations, whining, squawking and Europe-wide lobbying which this process would undoubtedly cause.
The second achievement of such an EMF would be the creation of a bailout process that is so unpleasant and onerous that other countries end up being "scared straight" - to the point that they actually take aggressive steps to reform their own systems so as not to be subjected to the fund's sado-banking.
The precedent for such an institution would be the Bank of England of 1931, an institution led by the BOE's greatest-ever governor, Montagu Norman (in office 1920-1944).
Britain had a sloppy minority Labour government in 1929-31 that permitted public spending bloat; it was also on the "gold standard," a very deflationary monetary system at a point when the Great Depression was beginning to bite. Norman took Britain off the gold standard - but only after the Labour government had been replaced by a fiscally responsible National Government, with the flinty Neville Chamberlain as Chancellor of the Exchequer.
Sidney Webb, Lord Passfield - a Labour cabinet minister and author of "Soviet Communism: a New Civilization" - bleated: "They never told us we could do that."
Quite right, they didn't. Norman had deliberately not given the Labour government the option of devaluing and wasting the benefit of devaluation through sloppy Keynesian spending. The result of Norman's duplicity and Chamberlain's firmness was an end to the Great Depression that involved far less pain than was experienced here in the United States - followed by an astonishing economic recovery: During the period from 1932-37, Britain enjoyed the highest economic growth rate in its history.
Alas, lost joys. An EMF with, say, Otmar Issing - the hard-money former European Central Bank (ECB) chief economist who's now advising German Chancellor Angela Merkel not to bail out Greece - might repeat Norman's success.
In the real world, however, if a European Monetary Fund does come into existence, it will be the typical sloppily statist international institution, leeching yet more money from productive taxpayers and lending it to Europe's worst-run countries, without any proper controls.
Clearly, Europe would be best served to not create it at all.
[Editor's Note: Martin Hutchinson has terrific foresight. He warned investors about the dangers of credit-default swaps - half a year before those deadly derivatives ignited the worldwide financial firestorm. Hutchinson even predicted where and when the U.S. stock market would bottom (a feat that won him substantial public recognition).
During the stock-market rebound that started in the middle portion of March 2009, Hutchinson's calls on gold, commodities and high-yielding dividend stocks made winners of investors who took his advice.
Experts are taking notice. And so should you.
Hutchinson is now making those insights available to individual investors. His trading service, The Permanent Wealth Investor, combines high-yielding dividend stocks, gold and specially designated "Alpha-Bulldog" stocks into winning portfolios.
To find out more about The Permanent Wealth Investor, please just click here.]
News and Related Story Links:
Since it joined the EU in 1981, Greece has been much poorer than other member countries, and so has treated the EU as a never-ending source of free handouts.
That brings us back to the EMF proposal. It would be possible to design a fund that solves this problem. If you staffed it entirely with Scrooge-like bankers - the type that likes throwing foreclosed widows out in the snow on Christmas Eve - then it could achieve two things.
First, it could force Greece and any other country that needs money from the fund to reform their economies properly. This would involve cutting back the public sector, making everybody retire at ages closer to 70 than 60. It would also force down wage rates in the parts of the economy that were heavily unionized, and that had been extracting rents from their fellow citizens (or in Greece's case, from German taxpayers). Because it won't actually be a political body, an EMF of this kind would be invulnerable to the strikes, demonstrations, whining, squawking and Europe-wide lobbying which this process would undoubtedly cause.
The second achievement of such an EMF would be the creation of a bailout process that is so unpleasant and onerous that other countries end up being "scared straight" - to the point that they actually take aggressive steps to reform their own systems so as not to be subjected to the fund's sado-banking.
The precedent for such an institution would be the Bank of England of 1931, an institution led by the BOE's greatest-ever governor, Montagu Norman (in office 1920-1944).
Britain had a sloppy minority Labour government in 1929-31 that permitted public spending bloat; it was also on the "gold standard," a very deflationary monetary system at a point when the Great Depression was beginning to bite. Norman took Britain off the gold standard - but only after the Labour government had been replaced by a fiscally responsible National Government, with the flinty Neville Chamberlain as Chancellor of the Exchequer.
Sidney Webb, Lord Passfield - a Labour cabinet minister and author of "Soviet Communism: a New Civilization" - bleated: "They never told us we could do that."
Quite right, they didn't. Norman had deliberately not given the Labour government the option of devaluing and wasting the benefit of devaluation through sloppy Keynesian spending. The result of Norman's duplicity and Chamberlain's firmness was an end to the Great Depression that involved far less pain than was experienced here in the United States - followed by an astonishing economic recovery: During the period from 1932-37, Britain enjoyed the highest economic growth rate in its history.
Alas, lost joys. An EMF with, say, Otmar Issing - the hard-money former European Central Bank (ECB) chief economist who's now advising German Chancellor Angela Merkel not to bail out Greece - might repeat Norman's success.
In the real world, however, if a European Monetary Fund does come into existence, it will be the typical sloppily statist international institution, leeching yet more money from productive taxpayers and lending it to Europe's worst-run countries, without any proper controls.
Clearly, Europe would be best served to not create it at all.
[Editor's Note: Martin Hutchinson has terrific foresight. He warned investors about the dangers of credit-default swaps - half a year before those deadly derivatives ignited the worldwide financial firestorm. Hutchinson even predicted where and when the U.S. stock market would bottom (a feat that won him substantial public recognition).
During the stock-market rebound that started in the middle portion of March 2009, Hutchinson's calls on gold, commodities and high-yielding dividend stocks made winners of investors who took his advice.
Experts are taking notice. And so should you.
Hutchinson is now making those insights available to individual investors. His trading service, The Permanent Wealth Investor, combines high-yielding dividend stocks, gold and specially designated "Alpha-Bulldog" stocks into winning portfolios.
To find out more about The Permanent Wealth Investor, please just click here.]
News and Related Story Links:
- Money Morning Special Investment Research Report:
Germany: The "Must-Invest" Economy. - Money Morning Special Investment Research Report:
Why You Should Invest in the "New" Germany. - Wikipedia:
Montagu Norman. - The Wall Street Journal:
With EMF, Europe Seeks To Reinvent The Wheel. - Wikipedia:
Euro Convergence Criteria/Mastricht Criteria. - Library of Economics:
Balance of Payments. - Wikipedia:
East Germany. - Investopedia:
Real Interest Rates. - Wikipedia:
Spain. - Money Morning News Archive:
Greece News Stories. - Wikipedia:
Ebenezer Scrooge.
- About.com (Economics):
What Was the Gold Standard?
- Money Morning News Archive:
Italy.
- 42explore2.com:
The Great Depression.
- The BBC:
Neville Chamberlain.
- Wikipedia:
Otmar Issing.
- Encyclopedia Britannica:
Chancellor of the Exchequer.
- Wikipedia:
Angela Merkel.
- Spartacus.Schoolnet:
Sidney Webb.
- Library of Economics and Liberty:
Keynesian Economics.
- Sydney Morning Herald:
Merkel Denies Greek Bailout.
- European Central Bank (ECB):
Official Web Site.
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Tags: Bailout, Central Banks, Crass Keynesianism, Emerging Markets, EMF, Europe, Eurozone, Global Markets, Greece, Martin Hutchinson, PIGS, Recession
I understand Greece only collects about 24% of the taxes due from its businesses and citizen; many other countries including the USA have the same difficulty or unwillingness especially with multinational companies. Unless the European Union shakes the daylights out of the banks in it's tax haven countries, this proposed plan will be another good intention that was never intended.
I am writing this in my hotel room in China,…
I have been reading the article about the EU and Euro and their problem countries. The article is correct, but by not mentioning the even bigger problems the USA is facing, the US reader might get the idea that everything is under control for the US. The reality is slightly different.
*)Although the money printing machines in Zimbabwe are the number 1 in the world, the US is THE runner up.
*)The government deficit is record high, bigger than the Total of the Euro countries. The deficit grows every day and is out of control. The US taxpayer will never be able to bring this to an hold.
*)the debt per average debt of every family in the US is over $ 500,000. To pay back this debt in 20 years the income which the American family can use for normal living spending declines with 20,000 $. So the money that is left to spend will never be enough to bring the consumption back to the level what is needed to make the US economy healthy. This with the result that:
There will be no new jobs , probably more jobs will disappear.
The profits of the businesses will stay too low,…
Which means lower tax incomes ,…
Lower public spending will also reduce GST income.
The Euro might not be sound. Obviously the US$ is very ill and since the value of the different currencies is always compared to the other. So I would not put my money in the USD.
So your article over the Euro should have had a few second thoughts over the $,…. because the value of the one is the result of the value of the other!!
My opinion keep cash in Chinese RMB, not in stocks and not in buildings!!
Thanks
Harmen de Bondt, Holland
sloppy Keynesianism – but it was Keynes who lobbied hard for the leaving of the Gold Standard (including his lobbying of President Roosevelt)
(sse his "the economic consequences of Mr Churchill" who had put Britain back on the Gold Standard)
economic growth – more due to the "Imperial Preference" put together by Chamberlain in order to protect trade within the empire at that time – more than anything, this insulated Britain from the storms of world depression
go re-read your economic history
If we Italians could harness our creativity and flair to Japanese or German productivity we could take over the world! Or at least after a good lunch, siesta, ice cream & passeggiata!
America, and Britain and Euroland, are flirting with hyper-inflation. The money supply has been inflated out of all reason, with only the most pallid pretence of arrangements to reduce it. Catastrophe has not struck – yet – because inflation depends on this times money's velocity of circulation, which is near-zero due to the loan famine – which is precisely what the Fed and the BoE are working to correct! What happens when – not if – they succeed?