the euro zone and the credit crunch

geordief

I think we are mostly familiarised with the idea that lending and credit has ballooned excessively in various economies around the world but I wonder does this phenomenon also apply to the Eurozone per se (or even perhaps the whole European project) ?

Would it make sense to suggest that the Eurozone has similarly drawn down too much political credit (in the form of a strong belief of the founders and a sort of "sure it will be bound to work" attitude) since it was set up?

I am not sure if I can flesh out this argument too easily but does anyone else see a parallel between the phenomena of overextended credit in the various economies that have suffered from the banking crisis and the (to my mind ) similar overexpansion of the Eurozone to include as many countries as possible?

I appreciate that not all parallels have to carry too much significance.
Would this one (if it was seen to be a parallel) be significant or not?

Voltex

geordief wrote: »

I think we are mostly familiarised with the idea that lending and credit has ballooned excessively this phenomenon and the Eurozone (or even perhaps the whole European project) ?

Would it make sense to suggest that the Eurozone has similarly drawn down too much political credit (in the form of a strong belief of the founders and a sort of "sure it will be bound to work" attitude) since it was set up?

I am not sure if I can flesh out this argument too easily but does anyone else see a parallel between the phenomena of overextended credit in the various economies that have suffered from the banking crisis and the (to my mind ) similar overexpansion of the Eurozone to include as many countries as possible?

I appreciate that not all parallels have to carry too much significance.
Would this one (if it was seen to be a parallel) be significant or not?

Its an interesting question..and one I cant contribute much to. All I know is that the Euro credit boom was a symptom of a flawed political ideal..the single currency. Its pretty clear now the effects of a monetary union without fiscal union and how the different approaches to the business cycle, growth strategies, inflation management of the pretty diverse cultural elements of the currency resulted in the growth of a localised malignant credit boom.

Scofflaw

Voltex wrote: »

Its an interesting question..and one I cant contribute much to. All I know is that the Euro credit boom was a symptom of a flawed political ideal..the single currency. Its pretty clear now the effects of a monetary union without fiscal union and how the different approaches to the business cycle, growth strategies, inflation management of the pretty diverse cultural elements of the currency resulted in the growth of a localised malignant credit boom.

I suppose one question that poses is whether those national credit bubbles could have been avoided without full fiscal union. I would argue that the answer is sort of yes, sort of no - sort of yes because it's true, they could have been avoided by national politicians, sort of no because you'd be relying on national politicians not to take advantage of the option to buy elections - and then sort of yes again because some countries did indeed avoid it.

A second question it poses is of course whether the overall credit boom as opposed to the bubbles it stimulated was a eurozone affair, and there I think we can say no quite definitely - it was a global credit boom, as can be seen from the damage done in the UK and Iceland, to name but two.

Neither of those, of course, really address the OP's question, which it seems to me draws a parallel between the overextension of financial credit and the overextension of political credit. And I would certainly agree that there are parallels - during the long boom people took credit for granted and didn't work at avoiding debt, and during the boom Europe's politicians took the political credit of the EU for granted and didn't work at avoiding a build-up of political debt. Both are now coming back to bite - people are trapped in debt, and at a moment when the European Union needs a lot of political credit to do those things it needs to do to pull it through a crisis, it has relatively little in some countries, national politicians having spent it unexpectedly and perhaps unwisely over Lisbon.

And the two questions are interlinked more strongly than that - Ireland and the other periphery countries, having put themselves into debt through a variety of country-specific soft options, both resent the terms on which they can only now borrow, and are furiously seeking external villains to blame for their sudden reversal of fortune. Those who avoided such debt are resentful to lesser or greater degrees at being asked to put their own taxes on the line for the peripheral debtors - although, to be fair, it seems that the ire is largely reserved for Greece, while the Greeks appear to be the most outraged by their fall into the hands of their creditors.

Yes, there's food for thought in it, certainly.

cordially,
Scofflaw