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From Eurofudge to Eurofail, Again

“Can we have a summit?” asked Zerohedge’s twitter feed last night.  The effects of the last European summit (yet another agreement to agree at some undisclosed point in the future) are wearing off and the exuberance is out of the markets.  Though central banks are printing money as fast as they can, asset prices are once more sinking around the world, and the euro has been flirting with the $1.30 level for the first time in a year.

Since the exuberance of the summit last week, it’s become increasingly clear that the ECB isn’t going to backstop all European bond issues and that the process of developing a new set of agreements for Europe’s fiscal governance is going to be long and contentious with no guarantees about what it will produce.  Greece is still sinking, and the ability of Italy and Spain to access capital markets on reasonable terms is by no means assured.

Markets are beginning to understand that the Europeans who write the new treaties and organize the new institutions will be the same fallible people who made the current mess, and that they will be riven by the same disputes and their deliberations will reflect the same errors and the same vested interests that made the current system unworkable.

This doesn’t mean that failure is guaranteed, but it does mean that summit communiques are not the same thing as solutions to pressing problems.  America and the whole world need for Europe to succeed; that does not mean that it will.

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  • Anthony

    Can one fiat currency – Euro – unite a region without common political governance? Are we witnessng market/capital finance via Euro intended purpose now devolve on itself by neglecting to establish simultaneous governance apparatus for Eurozone countries and participating nations (of course hindsight is said to be 20/20; still 27 countries, 17 Eurozone members…)? Solutions undoubtedly are intertwined in continent’s history WRM.

  • Luke Lea

    I’m starting to wonder if failure isn’t guaranteed. Chapter Two in the new Depression.

    The only good I can see coming out of all this is a fundamental rethink of the discipline of economics — or, rather, the discipline of political economy as it ought to be called.

    The notion that economics is a science is absurd, that it can be divorced from politics naive.

  • Mark Michael

    Thought experiment: If each of the 17 countries using the euro had its own currency but was on a gold standard, and the problems that exist today with the PIGS were facing those eurozone countries, would the political elite still say, “Portugal, Italy, Greece, Spain will be unable to solve their problems unless the other 12 European nations on the gold standard join them in a more tightly integrated political union and help bail them out with the hard-earned cash of the Germans, Dutch, French, et al”? (If all 17 nations are on the gold standard, have open borders & free trade among them, as a practical matter for day-to-day commerce, it’s little different from having the euro as a common currency, I’d think.)

    So in the “elite” mind, Greece can’t take steps to reduce its massive government deficit spending, its ridiculously bloated government workforce, deregulate its private sector so it could generate jobs more easily without a more integrated union? Why not?

    In the 19th Century, there were no government central banks, no tightly integrated federation of European nations, yet the big powers were on the gold standard. What happened when some country decided to spend promiscuously and drive itself deep into debt? Were the other gold standard countries forced to come to their rescue some way?

    Yes, the international bankers in the various larger countries may have felt it to be in their interest to help bail out a profligate country. It might reduce their losses by doing so. But (I suspect) it was more an economic decision rather than a humanitarian decision. Or any big idea of “saving the world” from financial contagion.

    The Keynesian view of the world is so deeply ingrained among our elite that they can’t imagine anything but government control of the big economic picture, I guess. It involves a few very critical unspoken assumptions that are highly problematic IMO.

  • Jacksonian Libertarian

    Welcome to the darkside Mr. Mead, the whole EU is going to come apart like a Jet engine losing integrity.
    I am so sick of the gold standard bots, and fiat currency sucks bots, and fractionated banking sucks bots. The capital needs of modern civilization so far exceed the limits of those primitive systems, that the adoption of the present system was a necessity. It was the development of the present financial system that allowed mankind its accelerating cultural growth of the last few hundred years. And it was the dumping of the gold standard that allowed the building of the American Global Trading System, the largest and most efficient market in history. The AGTS is responsible for 20% or $15 Trillion of the world’s GDP of $75 Trillion and has uplifted Billions of people out of abject poverty.

  • Mark Michael

    In answer to Jacksonian Libertarian, comment No. 4, I’d point out that the period after the Civil War until WWI was one of 4% per year real growth, and we and the U.K., etc. were indeed on that gold “barbarous relic” standard. They were able to find enough capital despite that restrictive gold standard to grow major corporations that spread railroads across the country, created great steel mills, invented the telephone and connected much of the nation. Edison invented the incandescent light and much of the theory and practical electrical engineering needed to distribute electrical power widely to factories.

    The (IMO) was the real key to the vast expansion of man’s living standards after, say, 1870, was the obscure “Company Act” in 1862 in the U.K. It established the limited-liability stockholder corporation. It limited the liability of common stockholders to no more than the money they used to buy the stock. They no longer were on the hook for the debts of the company if it went into bankruptcy. There was an explosion in the growth of corporations after that.

    That innovation spread to the U.S. and continental Europe very quickly. We then saw companies like Montgomery Wards, Sears, U.S. Steel, P&G, Edison’s companies, Great Northern, etc. arise. The book, “The Company – A short history of a revolutionary idea” by the Economist’ writers John Micklethwait and Adrian Wooldridge, 2003, provide the history of this movement.

    I would also point out that the Western World had fixed exchange rates under the Bretton Woods Accords, 1944, until Nixon closed the gold window in 1971. We were (sort of, admittedly) on the gold standard also at that time. The explosion of the world’s economy you cite after WWII was under that fixed-exchange rate regime for 25 of those years you cite as a counterexample in your post.

    What really is important is that a currency retains a reasonably stable value, not the details of how that is enforced. If central banks and their political masters had the discipline not to expand the money supply too much and cause excessive inflation, fiat currencies would be just fine. The problem is that level of discipline seldom exists.

    It’s easy to mistake correlation for cause-and-effect. I’m susceptible to it, just as I think you are when you attribute the big expansion after WWII to easy money and fiat currency.

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