Defaultation... The EURA A dumb idea...?

fatboypee

Hey all,

Just something rattling about in my pathetic space for a brain but wondered if I'm totally stupid or if there maybe a modicum of potential here.

Anyway, the nub of the issue appears to be WTF will happen WHEN Greece defaults and it got me a-thinkin of all the horrible scenarios that could evolve from this, not least the precedent that will be set in the first country to do so.

To me, there appears to be a head > sand mentality in the top of Europe where nobody wants to really consider this, or its wider impact and if we don't consider it fully, its not real.. so, everything collapses back to the Drachma, Euro removed, debts, costs the whole she-bang is meted out to Greece / whomever. No saftey net, no help, no consideration (well, thats how it seems in the wider reading I'm reading?), so it got me thinking, there are bail outs and re-negotiations and bail outs again etc, debt on debt on debt... so...

Would there be any value in an interrim measure positioned differently in moving a defaulting economy to a sub-prime Euro in its trading and markets. I'm not 100% sure what I mean by this but something in the line of building in margins into a trading currency that is offset to the Euro (for the sake of argument call it the EURA). I doubt it would work without creating a black economy on the Euro I suppose however if some way could be found to tether markets etc to the EURA in that country which is offset, instead of bailing out and bailing out again, this trading currency would be a mechanism to rebuild reliability within an economy by trading at an offset. Each potential defaulting country could be moved to the EURA for trading with other European partners / investors maybe.

I dunno if I'm just rambling but ya get meh ? After a set recoup off of trade the Eura would dissolve back into the Euro for that country..

To me, in my small brain this has the potential of resolving a full default and will potentially create an alliance of default-likely nations all in the EURA and thus they don't fully collapse back to their original currency.. ?

I dunno, maybe just a ramble ? Sorry if its inane nonsense...

fbp.

later12

Ah, you're talking about the PIGS dollar! That prospect was getting a lot of attention last Autumn when the crisis started to deepen for Ireland and the other peripherals




I can't claim ownership of that picture, by the way, but I would like to see that coin with, perhaps a banana on the back of it.

Now it's hard to talk rationally about a project like this without resorting to reading tealeaves, and only speaking very vaguely, but there are two good things to be said for the PIGS dollar

1. It is a neat way of developing monetary policy that is geared towards our economic landscape - not that of the core European economies, without politicising or altering the ECB
2. Nominal devaluation, depending on how the currency is fixed to the euro, presumably it would not simply float.

However, there are also many problems.

1. Whether or not the Daddy Euro would start to become uncompetitive. At the moment, the PIGS are the anchor that prevent the euro from soaring - what if we were cut loose? Would the core euro become the equivalent of the Swiss Franc? Surely it would just be a Deutschmark by another name? That would not be helpful - our currency is in a race to the bottom, not a race to the top.
2. How would it impact upon the single market and possible competitive devaluations by economies who have retained their own currencies.
3. There is also the question of how this would benefit Ireland. Too great a devaluation and our economy would suffer - why would anybody leave their savings in PIGS currency? And what of the inflationary pass through, what effect could it have on economic stability and the sustainability of private debt? How could an increase in the cost of the traded commodities affect us? In other words, is the real exchange rate adjustment realistic?

I don't have the answers to these questions, but the development of a PIGS currency certainly is an interesting idea. But its success would be far from certain. I think that while it is a novel idea, there are more realistic methods of bringing about economic stability and sustainability for the peripherals of Europe.

I would rather see Europe try to integrate further as opposed to divide itself further - that is to say, an economic government for the Eurozone, as well as a Euro sovereign treasury. Although it too would face practical problems as well as a moral hazard - or should that be Gewissensbisse? - ultimately it is a far simpler model. And in public policy, as well as in life more generally, the best option is usually not to complicate things un-necessarily.

hmmm

fatboypee wrote: »

Would there be any value in an interrim measure positioned differently in moving a defaulting economy to a sub-prime Euro in its trading and markets.

The simplest solution is for Germany, Finland, Austria & the Netherlands to set up their own currency and leave the incompetents to devalue the Euro.

Solair

I don't really see how this would resolve anything.

Greece, Ireland, Spain, Portugal and Italy as as incompatible with each other economically as they are with Germany.

What exactly does the Greek situation have in common with the Irish situation?

Ireland has a massive housing credit bubble and subsequent banking collapse.
Greece has a massive state spending bubble.

Other than the countries share the fact that they are in a credit bubble crisis, their overall economies have very little in common at all.

Spain and Portugal might have, due to their geographical proximity and similar history etc.

A Euro for the PIGS would be as likely to fail as the overall Euro project.

I don't really see how this is a solution.

If anything, Ireland has far more in common with the UK and Iceland and probably the US than it does with Greece or Italy.

We've a fair bit in common with Spain, in terms of the property bubble, but we don't have the labour inflexibility, the floundering exports, the massive dependence on tourism etc etc ..

Also, politically, Ireland would have nothing in common with Greece really at all.

Ireland - centrist / centre right - very stable and politically functional democracy that just ousted a government dramatically without social meltdown.

vs Greece ... riots on the streets, ultra hardcore left vs right stuff going on...

Nijmegen

The solution is simple: A full and proper fiscal and political union, or we go our separate ways.

Option three is we struggle along and China reinvests the money we spend with them in our trade deficit into bailing us out all the time.

Only stupid superpowers drop bombs for influence anymore.

Solair

Nijmegen wrote: »

The solution is simple: A full and proper fiscal and political union, or we go our separate ways.

Option three is we struggle along and China reinvests the money we spend with them in our trade deficit into bailing us out all the time.

Only stupid superpowers drop bombs for influence anymore.

The problem is that a fiscal union is not possible without some kind of political union and nobody's prepared to even discuss a federal Europe with a system of democratic accountability.

Instead, we're ending up with a kind of a la carte federal Europe, with bits and pieces of a federal setup e.g. a currency and all sorts of harmonised laws, without the political apparatus that it needs to support it and the democratic structures to make it legitimate.

Realistically we need to look at pretty much photocopying the US Federal Government setup i.e.

i.e. Parliament takes on the role of the House of Reps
Commission gets swapped for an elected senate.

The US could not agree on a weighted by population arrangement for the Senate, each state gets two regardless of population. I think the EU is going to have to go for some kind of a compromise like that too.

Finally, I think we might also have to look at an elected president of the EU along the lines of the US president.

The problem with all of this is that :

1) There are 27 different political systems with incompatible parties and structures.
2) There's open opposition to the very idea of a federal Europe all the time. To the point that "federal" is a dirty word.
3) There are massive language barriers, which make campaigning across Europe difficult / impossible.

So, we're kinda stuck with a bit of a mess.

The Euro should never have been embarked upon because there was no possibility of putting the political structures in place to support it.

If we go down the road of a bureaucratic fiscal union, it's just not democratic and that won't go down well in most countries.

fatboypee

I get the points you all raise (thanks for replying btw), I was looking at a more Keep it Simple Stupid solution along the same lines as the PIGS dollar but not as integrative, i.e. the EURA / Dollar would simply be used as an offset when trading outwardly with European stakeholders, i.e in direct representation of the bailouts received.

I thought it may be a method of repaying the existing bailouts via a trade negotiation, not a loan. Once a significant percentage of repayment was made, the Eura would revert.

In terms of savings in Euro etc, that would remain, nothing would change on the currency or market front in any other way.

To my overtly simple brain this could even potentially be extended to repayment in goods and services ? or perhaps a percentage thereof using the currency offset ?

To my mind, the debt owed by Ireland is going back to "Europe" the entity. If, say, France takes Irish exports of X value and is subsidising Y value ofthe bailout fund, I see no reason why France (French companies) could not be incentivised to take goods and services they already get in place of their subsidising of the bailout fund..

thats at its simplest conclusion, yes yes, wont work, many obstacles, funds not related, monies already given etc etc but bottom line, the Eura could potentially be a mechanism for trading our way out of deficit bailout beans, thus, in itself, stimulating the economy....

I know, ramblings of a mad man but hey, it is Saturday

fbp.