Nov 082014
 
 November 8, 2014  Posted by at 9:13 pm Finance Tagged with: , , , , , ,
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Alfred Palmer White Motor Company, Cleveland Dec 1941

I stumbled upon these few words in an Ambrose Evans Pritchard article the other day, and they hit me almost like some sort of epiphany, which in turn made me feel a little stupid, because it’s all so obvious. What Ambrose wrote (and this time I’m not making fun of him), was about the eurozone (EMU), of which he said:

The North is competitive. The South is 20% overvalued.

And I realized that’s all you need to know about the eurozone, and about why it will fail. Or has already failed, to put it more accurately. There’s no other information required. Other than a bit of context perhaps to clarify.

Before the euro, and the eurozone, countries like Greece, Spain, Italy, Portugal, would perform 20% or more lower economically than Germany or Holland would. And that was kind of alright, because periodically, their governments and central banks would revalue (devaluate) their currencies down against for instance the Deutschmark by those same 20% or so.

Of course Germany hated this to an extent, since it made it harder for its industries to compete against Greek and Italian companies. Which may by the way well be a mostly hidden reason for them to push the eurozone on the Mediterranean. Devaluation still worked for many years, though, and as we presently find, it was the only thing that could have worked.

Today, because they now have the same currency, and devaluation is thus impossible, and southern Europe also still underperforms the north, there’s only one possible outcome: the south keeps getting poorer all the time. It’s inevitable. Unless Greece starts outproducing the Germans, and we all start driving Hellas quality cars, but that’s not in the cards.

The fatal flaw in the eurozone model is that there’s no way, no escape clause, to rectify the inherited differences between north and south. Moreover, because there isn’t, the differences must and will get bigger. There’s nothing any kind of stimulus by the ECB or EU can do about that.

Unless they directly tax the Germans and Dutch and Finns with the stated purpose of handing what they raise directly to the Greeks. Not going to happen. And there was never any intention of doing such a thing. The Germans wanted to expand their distribution markets, and the Greeks were promised they’d get richer by default if they joined the shared currency.

Neither side thought this through, not with a longer – or even medium – term view. The Greeks et al are the first to pay the price, but the Germans will end up paying as well, no matter how the growing tensions and differences end up being resolved.

All anyone ever considered was a tide to lift all boats. But there is no such tide now. There is no economic growth, other than perhaps in a few niche markets (and they will fall too). And no provisions or plans were ever drafted for this to happen.

Ambrose’s 20% may be underestimating things, or overestimating them. It makes no difference other than perhaps in the timing of events. And not all southern nations will be overvalued – and underachieving – vis a vis Germany – by the same percentage. But that doesn’t matter either down the line.

All countries that entered the EU in the past received large sums of money for things like infrastructure projects. But that money is long gone. Now it’s back to the same performance ratios that have existed for many decades, if not for centuries.

The only thing that might help southern Europe here would be debt restructuring on a massive scale. Still, that would be considered far too costly by the north, provided it even could be achieved in a globalized finance system (look at Argentina).

What makes this interesting is that there is now a question of responsibility. Are only the Greeks accountable for their debts, or is the entire eurozone, given that they share a common currency? These are issues that should have been resolved in times of plenty; in times of less they will prove extremely hard if not impossible to solve.

Northern Europeans see their lifestyles being cramped from many sides in the ongoing crisis, and they would not accept more being taken from them to be handed to Greece. Even if 50%+ of young Greeks have no jobs, and over 40% of Greek children grow up in poverty. That’s not how the union was explained to them. And they would not have agreed if it had been.

The fact that Brussels has attracted a highly dubious breed of politician and bureaucrat certainly hasn’t helped, and still doesn’t. But it’s not the core problem. The core is that there never was a mechanism to reconcile the 20% differences, which means we’re fast on our way to 30% and more. Nothing anybody can do about that other than to leave the union.

The EU was founded on ideals of peace. But unless someone does something, fast, it will be the source of bitter and bloody fighting. Better wisen up now, guys (and I don’t mean the leadership, they’ll go on till the end). In math, there are things that just don’t add up. This is one of them.

Home Forums The Broken Model Of The Eurozone

This topic contains 3 replies, has 4 voices, and was last updated by  Dr. Diablo 3 years ago.

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  • #16440

    Alfred Palmer White Motor Company, Cleveland Dec 1941 I stumbled upon these few words in an Ambrose Evans Pritchard article the other day, and they hi
    [See the full post at: The Broken Model Of The Eurozone]

    #16441

    Raleigh
    Participant

    Ilargi – “Before the euro, and the eurozone, countries like Greece, Spain, Italy, Portugal, would perform 20% or more lower economically than Germany or Holland would. And that was kind of alright, because periodically, their governments and central banks would revalue (devaluate) their currencies down against for instance the Deutschmark by those same 20% or so.

    Of course Germany hated this to an extent, since it made it harder for its industries to compete against Greek and Italian companies. Which may by the way well be a mostly hidden reason for them to push the eurozone on the Mediterranean. […]

    All anyone ever considered was a tide to lift all boats.”

    Which one is it: they wanted to lift all boats, or they wanted to make sure their competitors couldn’t devalue? I pick door number two, because isn’t this very similar to the subprime mortgage situation? To think that a whole lot of someones didn’t know what was happening from the get-go and what would happen in the end is really hard to believe. In fact, I don’t believe it.

    It’s just like the Trans Pacific Partnership is touted as going to be beneficial to all, and QE was going to lift ALL boats, and globalization was going to be such a great boon to everyone. Sounds all apple-pieish at first, until you get the bill. But it’s only apple-pieish to us, not the people furthering the agenda. They KNOW they’re going to reap billions while the going is good, and their plan is to throw their hands in the air when it all unravels and say, “Who could have knowed?”

    Of course, they won’t tell us in advance the potential end result (which they already know) because to spell it out would maybe see their plans stopped before they even got started (as people would be up in arms), or they’d have to lie and say that catastrophe could never happen because (fill in the blanks)…..and then they’d perhaps be held liable for the mess they created.

    No, they already know it’s always better to pretend that they haven’t thought things through and then wring their hands and shrug their shoulders when things don’t work out. You can’t really hold people liable for stupidity. That’s what they’re banking on.

    I say they knew it would end like this, but that they were going to make a fortune in the meantime. The strong against the weak (economically-speaking). Subprime countries.

    #16442

    Formerly T-Bear
    Participant

    Maybe slightly OT:

    The Guardian has one of the very finest examples of prostitute journalism up on display today:

    http://www.theguardian.com/commentisfree/2014/nov/08/russia-today-western-cynics-lap-up-putins-tv-poison

    The Guardian has resorted to hasbara journalism, and in all likelihood the contamination must be considered to have spread in some degree to everything else it reports. A sure sign of the cancer of orthodoxy having taken hold is any reference still used of surface to air missiles being used in the downing of MH-17; the BBC is 100% fatally infected. The stenographer of the piece in The Guardian proceeds throughout referring as factual myriad statements for which no facts are in evidence. The writer’s presumption that this is journalism and they are journalists fall into the same category: facts not in evidence.

    Returning now to the regularly scheduled opinions of Professor Constipation aka Locked-in-load.

    #16462

    Dr. Diablo
    Participant

    How many decades do we have to see the same trick played before we stop pretending? Pretending “Oh how could they have knowed?” as Raleigh says.

    The Euro was simple: they wanted to concentrate and centralize POWER, and saw a nice bite would be Europe. But how to get that more power? Europe was doing pretty good since the war. You need a PREMISE, a plausible idea people can get behind, because sure as heck, they aren’t going to get behind your bare-faced plan of taking their national power and handing to a cabal of unelected bureaucrats. (Not kidding here, the EU is about as far from a democracy as the former Soviet Union was, fake elections, “appointments” and all)

    No. So clearly, you need to come up with a way to force the camel’s nose under the tent. A common currency is that way. Then you need bonds. Then, as Armstrong says, if you can’t get the taxation/government/common bond system passed because people are against your power grab, you force it into being in broken form (sans referendums, particularly when all the real referendums are voted down flat), and wait for the inevitable crisis that allows the power grab you wanted all along.

    And so we’re here. EU/ECB–disturbingly the same thing–and Draghi start printing money outside mandate to hold the pig together. Then claim power over the U.K. to make their rules and tax them when they fall a little short or are mad. Then establish international bank oversight, as violent extortion over the nations–more than they already claimed over their budgets–the right to dispose their leaders at will (Italy, Greece), already retaining the right to ignore the will of any nation or leader any time, for any reason, and all based on an end-run Treaty, not even a vote? …need I go on?

    And this was all just an “ill thought-out accident”? Really? When are we going to stop playing pattycake with these guys that are KILLING? MILLIONS of PEOPLE? Millions in suicide, poverty, crime, and despair? And we’re going to pretend–again and again and again–that it’s an accident nobody saw coming?

    Please. We need to call things by their true name and stop pretending if we’re going to get out of this thing with only the few million deaths we’ve already had. Can we start that now?

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