The Problems in the Eurozone may Influence Scottish Voters in their Independence Referendum

Posted by PITHOCRATES - April 27th, 2013

Week in Review

During the Roaring Twenties the American economy was giving the economies of Europe a run for their money.  The Europeans, accustomed to running the world for so long, looked at the economic prowess of America with concern.  And began to talk about a United States of Europe to compete with the economic juggernaut across the pond.  But when Calvin Coolidge chose not to run for a second term the progressives got back into power.  And Herbert Hoover put an end to that surging economy.  Causing a stock market crash.  And throwing the country into recession.  Which FDR turned into the Great Depression.

So there was no United States of Europe.  But there would be a European Union one day.  And after that, a currency union.  The Eurozone.  To compete against the economic prowess of the United States.  But a currency union without a political union.  Without a single fiscal and monetary policy to support that currency union.  Which turned out to be a problem.  For without that political union the currency union was only as strong as its weakest state.  In the Eurozone that state was Greece.  Whose unrestrained government spending caused a debt crisis that threatened to bring down the entire Eurozone.  Unless the other members stepped in to bail out Greece.  Which they have.  But the crisis hasn’t gone away.  For the central governing authorities can only ask Greece to cut their spending.  Which there is a lot of opposition to in Greece.  Putting a lot of pressure on the Euro.

Greece isn’t the only problem.  There was Ireland.  Spain.  Portugal.  And Cyprus.  All sovereign nations.  Sharing a common currency.  Making it all but impossible to maintain a uniform fiscal policy throughout the Eurozone.  Like they can in the United States.  Because the United States of America is a political union.  With one central government.  One central fiscal authority.  And one central monetary authority.  Making it hard for any one state to undermine the currency.  (Though California is making a valiant effort.)  Which is the problem they’re having in the Eurozone.  Many of the states are threatening to undermine the common currency.  Making a very strong case against future currency unions without a political union.  Which is something they are considering with an upcoming referendum on Scottish independence (see UK says “no clear reason” to let independent Scotland use the pound by David Milliken posted 4/23/2013 on Reuters UK).

The euro zone’s experience of countries sharing a currency but not a government shows there is no clear case for an independent Scotland to use the pound, the Treasury said on Tuesday.

The nation of 5 million will hold a referendum on September 18 next year to decide whether to split from the United Kingdom, at the instigation of the Scottish National Party that runs the country’s devolved government.

Pro-independence campaigners want Scotland to keep sterling, at least in the early years of independence, and then to decide later whether to switch to its own currency.

But in a report on Tuesday, the Treasury said there was no clear case for the United Kingdom to agree to a formal currency union with an independent Scotland, which would have an economy of a similar size to New Zealand’s…

“The recent experience of the euro area has shown that it is extremely challenging to sustain a successful formal currency union without close fiscal integration and common arrangements for the resolution of banking sector difficulties,” it added.

Scotland and England have a long history.  Not all of it good.  But if we’ve learned anything from history it is that large economic blocs do better than smaller counties.  As the United States demonstrated.  And as the Eurozone tried to duplicate with their currency union.  But as that experiment showed us a currency union without a political union is a recipe for disaster.  If Scotland breaks from the United Kingdom they will have to go all of the way.  And leave sterling.  Which will make independence more difficult.  Having to set up a new currency with everything else they will have to do.  (Such as dealing with separating their military forces from the UK’s.  And providing for their own defense.  Or forming a military union with the UK.  Which will tie them closely to the UK.  Something many Scots no doubt will consider before voting in the referendum.)

Of course if they do and they devalue their new currency it would make their exports cheaper to those nations with a stronger currency.  But that weak currency will make anything they import more expensive.  As Scotland exports and imports a lot of stuff they won’t get a clear advantage in devaluing their new currency.  So they may peg their new currency to sterling.  The next best thing to keeping sterling.  Which will tie them closely to the UK.  Something many Scots no doubt will consider before voting in the referendum.  Perhaps choosing to stay in the UK.  As Quebec chose to stay in Canada in their past referendum.  Who had less in common with the rest of Canada than the Scots have with the UK.  For they don’t even speak the same language.

They could join the Eurozone.  But recent events in the Eurozone does not make that option as appealing as setting up a new currency.  Or staying a part of the UK.  It would probably be best for the rest of the world if Scotland remained part of the UK.  For the world will need at least one strong reserve currency.  As the Euro is making itself less attractive by the day.  The U.S. dollar may hit the wall soon with the amount of debt the Americans are racking up.  And the Chinese are likely to go the way of Japan before the decade is out.  And have their own Lost Decade with all their malinvestments.  The ultimate cause in the fall of state-capitalism.

Now the UK has its problems.  But their decision to stay out of the Eurozone was clearly sound as a pound.  And pound sterling may grow even more attractive as a reserve currency as these other countries continue to rely on easy credit and debt to pay for their burgeoning welfare states.  And/or their malinvestments.  But one thing the UK is doing that none of these other bloated states are doing is making real cuts in spending.  Even in their venerated NHS.  Giving the UK the edge in responsible governing these days.  And really making a strong argument against Scottish independence at this time.  Even for those who hate England.  For it is better to deal with the devil you know than the devil you don’t.  Especially during uncertain times.

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The Eurozone to fail because they will Never have the Fiscal or Political Union Required to make a Currency Union Work

Posted by PITHOCRATES - December 11th, 2011

Week in Review

The Eurozone is doomed.  For the things they say they need to do they just can’t agree to do (see Like it or not, the euro is doomed by Hibah Yousuf posted 12/9/2011 on CNN Money).

European leaders, particularly from France and Germany — the eurozone’s two largest economies — have had very different views on the ultimate role of the fiscal compact, and the latest proposals are just “too little, too late, and miss the structural problem,” said Leach.

Germany has been strongly opposed to sending the ECB down a path of printing money to stabilize Europe’s economy.

“Printing money is associated with hyperinflation, the collapse of the Weimer Republic, and the rise of Hitler,” noted Leach. “From a German perspective the question is that, once the ECB has lost its virginity printing money, just how promiscuous could it become.”

Hyperinflation and the collapse didn’t happen when they started printing money.  These happened after they printed a lot of money.  It was a progression.  For it takes time to make your currency worthless.  Which is something the Germans don’t want to experience again.  Because it didn’t end well for them the first time.

Afseth said the fiscal union needs to focus more on boosting economic growth, rather than just pushing for budgetary discipline and fiscal austerity. And it needs to advocate for pooling the eurozone’s debt together, so the region can issue eurobonds, another highly contentious topic among Europe’s political leaders.

Despite the multitude and extent of the political disagreements that could lead to the eurozone’s crumble in the near-term, more optimistic experts say Europe’s leaders will likely find a middle ground to avoid the severe economic consequences.

“The political arguments are strong, but they come against a hard economic reality,” said Andrew Milligan, head of global strategy at Standard Life Investments in Edinburgh, Scotland, noting that the costs for a single country leaving the eurozone could amount to at least 15% or 25% of its economy, if not more.

There are those who want the European Central Bank (ECB) to assume the debt of the member states.  Like the U.S. did in 1790.  But the Americans already had a currency union.  And a political union.  As well as a common language.  A common heritage.  Common institutions.  A national post office.  And a lot of other common things.  With only about 100 years of history.  And despite all of this the idea of assumption did not go over well.  It took a fight.  And some wheeling and dealing.  Europe, on the other hand, has only a common currency.  And they’ve been around for about 2,000 years of history.  So chances are all they will have is a common currency.  And they may not be able to save that.

The Eurozone was the answer to the United States.  The world’s number one economy.  Because within her borders was the largest free trade zone in the world.  Which exploded her economic growth to the top spot.  The Eurozone was to replicate that in Europe.  A united states of Europe.  And it worked.  But it probably won’t last.  If only one nation drops out of the Eurozone it could reduce the economy of the united states of Europe by 25%.  And if one goes more will probably follow.  This economic powerhouse will be united no longer.  And it will probably plunge Europe into recession.

“A break-up could result in very major recession in Europe, and so it’s hard to imagine how any politicians and governments could possibly make a conscious, voluntary decisions to leave the eurozone,” said Milligan.

So clearly the Euro failing will be too painful to endure.  So painful that the member states will try everything within their power to prevent that.  Including trying to get the ECB to issue Eurobonds.  And print money.  Much like Richard Nixon did when he abandoned the gold standard in 1971.  Saying he was then a Keynesian, too.  And the U.S. spun out of control with double digit inflation rates.  High unemployment.  Stagflation.  And it wasn’t Keynesian economics that finally fixed this mess.  It was the anti-inflation policies of Paul Volcker of the central bank.  He raised interest rates.  And stopped printing money.  This fixed the inflation problem.  Then Ronald Reagan fixed the economic problem.  By cutting taxes.  Something the Europeans may not be physiologically able to do.

So it really doesn’t matter what they do.  For the end will be the same.  It may be sooner or later.  But the Eurozone will most probably dissolve.  Because they will never have the fiscal or political union required to make a currency union work.

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The Eurozone Contagion Spawned in Spain, Greece and Italy has Infected French Banks

Posted by PITHOCRATES - December 11th, 2011

Week in Review

Here is how a contagion spreads (see Moody’s downgrades top three French banks posted 12/9/2011 on UPI).

Credit rating agency Moody’s Investors Service lowered credit scores for three of the largest banks in France Friday…

The rating service said it was concerned the conditions in Spain, Greece and Italy could deteriorate further, which would mean the French banks would suffer deeper losses on the government bonds they hold.

The whole point of the Eurozone is to replicate the massive free trade economy of the United States.  And it’s been somewhat successful.  The economy of the united states of Europe has matched and even exceeded the economic output of the United States.  But some of the member states cheated to get into the common currency.  The Euro.  By lying about their true debt levels.  And their deficits.  These states are now in trouble.  The costs of their welfare states grow.  Which requires more government borrowing.  And these continuous and growing deficits add to that massive debt.

There comes a point when people doubt whether these states will be able to repay their debt.  And that’s what private investors are now thinking.  So they’re not buying anymore of their debt.  Unless they make it worth their while.  With very high interest rates.  Which increases the cost to service the debt.  In fact their borrowing costs have grown so great that they have to borrow money to pay the interest on the money they borrow.

Of course, this makes it even more doubtful that these countries will be able to repay this debt.  Which scares away more private investors.  Despite those high interest rates.  And threatens the solvency of these countries.  And the common currency itself.  The Euro.  And if the Euro goes so does the Eurozone.  Including the economic powerhouse of the united states of Europe with it.

So other countries of the Eurozone step in and buy these worthless bonds.  To try and save the Euro.  And their own economies.  Now the financial problems of Greece, Spain and Italy are now everyone’s financial problems.  Because of those worthless bonds sitting on the balance sheets of healthier banks.  Which are not quite so healthy anymore.  Because of their exposure to this contagion.

It’s a dangerous game they play.  To save the Eurozone they have to infect themselves with the contagion.  And hope that they are financially immune enough to live through this sickness.  But they are teetering on the brink with their own massive debt.  Their own massive welfare states growing their deficits.  Which will be a problem.  For they refuse to take the same medicine Greece, Spain and Italy are refusing to take.  Austerity.  So the chances are pretty good that they will fall to the contagion, too.  As it continues to spread and infect everyone in the Eurozone.  Until there will be no Eurozone.  Or a united states of Europe.

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