European Sovereign Debt Crisis: One year on.

andrew

The longer term dynamic of the sovereign debt crisis was discussed last week at a round table organised by the Policy Institute and the Institute for International Integration Studies (IIIS), chaired by Philip Lane, Head of the Economics Department, Trinity College Dublin.

The speakers were Peter Boone, Mike Dooley, Jean Pisani-Ferry and Ciarán O’Hagan (small bios for whom are available here.)

A video of the event can be found here (1121MB!), audio is here (41MB), and the PDFs of each presentation are also online:

Peter Boone (PDF, 734KB)
Mike Dooley (PDF, 572KB)
Ciarán O’Hagan (PDF 340KB)


I was at it, and to be honest it was pretty depressing. Mike Dooley in particular (and at a lecture he gave to our class the day before), felt that this crisis would drag on in a similar fashion to the Mexican debt crisis, hampering growth for a significant period of time. The divergent opinions most speakers seem to have, though, seems to indicate that really, nobody knows what'll happen. Thoughts, anyone?

nesf

Haven't watched it yet (on mobile broadband here in hospital) but what interests me is this:

This crisis has badly shown up the lack of planning and preparation for a single currency by the EU. The lack of political integration has created a monster that is going to take years to solve combined with widely divergent business cycles in the member states.

Eurobonds might be an answer but they require at minimum some kind of centralised control of budgets for it to work as well as credible overseers (which means deterrents have to be real).


That all said, have been pretty ill the past year and a half so am no where near as up to date on things on the debt crisis so the above might have some glaring holes in the logic etc.

andrew

nesf wrote: »

Haven't watched it yet (on mobile broadband here in hospital) but what interests me is this:

This crisis has badly shown up the lack of planning and preparation for a single currency by the EU. The lack of political integration has created a monster that is going to take years to solve combined with widely divergent business cycles in the member states.

Eurobonds might be an answer but they require at minimum some kind of centralised control of budgets for it to work as well as credible overseers (which means deterrents have to be real).


That all said, have been pretty ill the past year and a half so am no where near as up to date on things on the debt crisis so the above might have some glaring holes in the logic etc.

I'm not sure what the exact quote is, and can't think of the name, but someone said that the only way the EU would ever progress, or develop, is through crisis.' Maybe it was Jean Monnet. Anyway, they had to have known that Europe isn't an optimum currency area. They had to have known that, without integrated fiscal policy, countries would have little choice but to run deficits beyond the 3% stability and growth pact limit. They had to have known that a 'one size fits all monetary policy' would leave some countries with crazily high/low interest rates.

I think that it was either one of two things. Maybe it was optimism/naivety; that the Euro would lead to more economic integration and turn europe into an OCA and everything would be fine. Or maybe they knew that the kind of integration necessary for a common currency was too much to introduce at one time, and that once it had a foot in the door, a crisis would bring about the push toward the integration which the euro really needs.

Hope you get well soon nesf.

nesf

andrew wrote: »

I'm not sure what the exact quote is, and can't think of the name, but someone said that the only way the EU would ever progress, or develop, is through crisis.' Maybe it was Jean Monnet. Anyway, they had to have known that Europe isn't an optimum currency area. They had to have known that, without integrated fiscal policy, countries would have little choice but to run deficits beyond the 3% stability and growth pact limit. They had to have known that a 'one size fits all monetary policy' would leave some countries with crazily high/low interest rates.

I think that it was either one of two things. Maybe it was optimism/naivety; that the Euro would lead to more economic integration and turn europe into an OCA and everything would be fine. Or maybe they knew that the kind of integration necessary for a common currency was too much to introduce at one time, and that once it had a foot in the door, a crisis would bring about the push toward the integration which the euro really needs.

Hope you get well soon nesf.

Yeah, I'd tend to agree that the political will for fiscal integration was only going to come when the wolves were at the door. This crisis is bad but it might be the best thing to ever happen to the Eurozone.

I think there might have been a naive hope that our business cycles might align in the same way that women's menstrual cycles align if they live together or something. I'm not too worried about Ireland over the medium term (the relative size of our export sector should spare us the worst of it) but Greece etc are in for a hellish ride. We at least have in the zeitgeist the experience of knuckling down through a recession due to the 80s and that might be the key to us staying cohesive socially through this period of austerity. The Greeks, Italians and so on never have had to do this in living memory, so it's going to be bloody messy.

andrew

our business cycles might align in the same way that women's menstrual cycles align if they live together or something

Ha! I've got an essay entitled "Does monetary union require fiscal union" coming up...I wish I could use that line.

nesf wrote: »

Yeah, I'd tend to agree that the political will for fiscal integration was only going to come when the wolves were at the door. This crisis is bad but it might be the best thing to ever happen to the Eurozone.

I'm not too worried about Ireland over the medium term (the relative size of our export sector should spare us the worst of it) but Greece etc are in for a hellish ride. We at least have in the zeitgeist the experience of knuckling down through a recession due to the 80s and that might be the key to us staying cohesive socially through this period of austerity. The Greeks, Italians and so on never have had to do this in living memory, so it's going to be bloody messy.

I agree in that we do at least have a clear path for some sort of growth from exports; unlike Greece which has...shipping, and Iceland which has fish. But since we depend on the rest of the world so much, I'm not as hopeful the medium term will be OK if the world economy were to tank again.

nesf

andrew wrote: »

I agree in that we do at least have a clear path for some sort of growth from exports; unlike Greece which has...shipping, and Iceland which has fish. But since we depend on the rest of the world so much, I'm not as hopeful the medium term will be OK if the world economy were to tank again.

There is definitely that, but we at least have a path and we've the advantage of having our export sector mostly filled with new or strong areas of growth, we're not trying to export into dying markets if you know what I mean (this was a big problem for us in the 80s if I recall correctly with not being able to compete on many export markets).

Our fate is very much in the hands of the economic gods and the performance of our trading partners but that is a much better prospect to us being reliant on domestic markets recovering. We're in for a long and painful period of debt restructuring I think. I think (but have not worked it out) that our M1 to M2 ratio has shifted a fair bit over the past 4 years with all that that entails for domestic demand.

[Jackass]

andrew wrote: »

I'm not sure what the exact quote is, and can't think of the name, but someone said that the only way the EU would ever progress, or develop, is through crisis.' Maybe it was Jean Monnet. Anyway, they had to have known that Europe isn't an optimum currency area. They had to have known that, without integrated fiscal policy, countries would have little choice but to run deficits beyond the 3% stability and growth pact limit. They had to have known that a 'one size fits all monetary policy' would leave some countries with crazily high/low interest rates.

I think that it was either one of two things. Maybe it was optimism/naivety; that the Euro would lead to more economic integration and turn Europe into an OCA and everything would be fine. Or maybe they knew that the kind of integration necessary for a common currency was too much to introduce at one time, and that once it had a foot in the door, a crisis would bring about the push toward the integration which the euro really needs.

Hope you get well soon nesf.

I agree with the sentiment, I think primarily it was a hit and hope approach, in that they were aware of the problems they would face, particularly with an integrated monetary policy and one central bank, but they had hoped / presumed that Europe would integrate further, a lot further, in an extremely short space of time.

Obviously this wasn't the case when multiple constitutional amendments were met with such opposition, particularly in Ireland, but the whole process has been riddled with opposition and the (perhaps) end goal of a united states of Europe (including full military integration etc.) has fallen apart, and thus the Economic situation became somewhat unsustainable.

A central Government would be able to sort this out, but essentially, no one seems to want that, and the downside for countries like Germany and France is that they're providing contributions from their own GDP as though this was a unified Government and sharing of wealth is spread out, but they are not gaining any of the advantages, such as controlling fiscal policy in any of the countries, or at least having a large input.

I'm still optimistic that the union will survive, as will the currency, but as a nation, we will play a massive roll in this, and there is a dilemma of now that we've been bailed out, how much are we willing to give back, or how much are we willing to lose as a result?

I think at the moment the Irish are having their cake and eating it, and the incentive to major nations to contribute is diminishing by the second, the more defiant we are to their wishes in response.

Justin1982

There is that many unknowns that I think predictions are a waste of time as to the ultimate outcome.

Can someone actually show me some realistic figures that show Ireland can pay off its debt? Similarly for Italy, Greece and Portugal?
It cant be that hard for someone to actually create a simple spreadsheet with figures that proves PIGS can pay their current debts.
Most of these countries seem to be just barely on the right side of the abyss financially if you believe the cra*p you hear in media and basic incomplete figures you find on the web. We are at best going to be in a state of unstable equilibrium for many years and we are hoping that Europe can magically generate enough growth to get us out of this mess when positive growth figures we rely on are constantly being pulled back.

The Germans are playing a game as far as I can see. Prevent ECB printing cash and buying sovereign bonds, keep the pressure on the muckheads around the fringes to get their financial act together (which I dont think will happen in a meaningful way same as it didnt in Greece). They can drag this out for a long period and as a result dampen growth throughout the EU for the same period as everyone waits nervously to see what happens. Probably the Germans will loose eventually, after the Italians make some tiny efforts to sort out their finances, and will have to print the cash to buy the bonds and take the pressure off PIGS? Problem there is that inflation becomes a pr*ick and the PIGS get back to making a mess financially and problem isnt really solved.

Alternatively, some countries like Greece or Italy leave the euro. Very low chance of this happening. They know it wont solve their problems. Instead will probably create havoc in their economies.

What all the PIGS should do is follow the Latvians lead. Face up to the fact that we are all fu*cked, then cut the hell out of government spending until it matchs tax take. And stop whinging about how painful it is. It could be done easily in fairness. If it was sudden then people will adjust very quickly to the new reality.

PS. I die a little everytime I hear muppets talking about debt/gdp ratios. What a stupid figure! Debt/TaxTake ratio should be the quoted figure. People might actually see clearly how ridiculous european sovereign debt is and the mess we are in

Any takers for my opinion?

andrew

Justin1982 wrote: »

There is that many unknowns that I think predictions are a waste of time as to the ultimate outcome.

Can someone actually show me some realistic figures that show Ireland can pay off its debt? Similarly for Italy, Greece and Portugal?
It cant be that hard for someone to actually create a simple spreadsheet with figures that proves PIGS can pay their current debts.

It's hard, because whether a country can pay of it's debt depends on it's future income stream, and there's a lot of uncertainty around this. For example, to what extent is Ireland's income fall temporary and to what extent is it permanent?

What all the PIGS should do is follow the Latvians lead. Face up to the fact that we are all fu*cked, then cut the hell out of government spending until it matchs tax take. And stop whinging about how painful it is. It could be done easily in fairness. If it was sudden then people will adjust very quickly to the new reality.

PS. I die a little everytime I hear muppets talking about debt/gdp ratios. What a stupid figure! Debt/TaxTake ratio should be the quoted figure. People might actually see clearly how ridiculous european sovereign debt is and the mess we are in

Any takers for my opinion?

The debt to GDP ratio is used because the government's tax take comes from GDP. Your tax take can only grow year on year to the extent that GDP grows, and it's the growth path of GDP which determines whether debt is sustainable.