France Germany Surrender
Feb0
The Euro troubles of Macro Economy aren’t new.
Usually it’s the difficulties of abundance and a rapidly appreciating currency with local member treasuries overstepping their marks and/or overstating the good and hiding the ugly…
Now though it might be a bit different….
The countries that use the euro should now be wondering metaphorically speaking and in economic terms – if they will hang together or apart – as Ben Franklin admonished the colonists two hundred and fifty years ago.
They basically face a similar decision…
The central core of the 16-nation euro bloc — most notably Germany and France — looks solid but they must hang with the other smaller nations who might be still reeling from the recession and tottering on the brink of depression or a W recurring nightmare…
But some countries of the Eurozone are in deep financial trouble, with high unemployment, clearly unsustainable budget deficits and economies that no longer appear competitive with their European counterparts.
How Europe chooses to deal with the problems of the countries on the edge, among them Greece, Spain, Portugal and Ireland, may determine the future political shape of Europe, and the future of the euro itself.
World markets shuddered Thursday in the face of signs that skittish investors were growing more fearful of lending to Portugal. That country had to scale back a short-term borrowing plan, something Europe is not used to seeing.
If investors were to walk away, or demand truly exorbitant interest rates, that would put pressure on France, Germany and others in the euro zone to decide just what they would do. Would they bail out their troubled neighbors? Or would they simply allow them to default — an outcome that would have major repercussions for Europe and financial markets worldwide?
At the heart of the problem is Europe’s unwillingness more than a decade ago to choose either unification or separation. It wanted economic unification and continued political independence of nation states.
In short, it wanted the best of both worlds, and for a time it seemed to have succeeded in that goal. The success amazed many economists, most of them from Britain and the United States, who had argued that a single currency would require much more political unification.
There remains a widespread view that the fringe countries can count on their more prosperous neighbors for a bailout if one is necessary.
But such a bailout, if it comes, will raise the question of terms. How much political sovereignty will the bailed-out countries be forced to surrender? Will they be forced to cut spending, or raise taxes, more than the local voters are willing to accept? Will the rest of Europe force major changes in government pension plans, or the firing of state workers? How can they do that, even if they wish to do so, if national Parliaments will not concur?
There would also be political questions within the core. Many West Germans were appalled by the cost of national unification when East Germany merged into the current German state. If they did not like subsidizing people who in some cases were their cousins, how will they like subsidizing Greeks or Portuguese?
Perhaps of more importance, how can the troubled economies regain competitiveness within Europe? Before the use of the euro, when Europe tried to maintain exchange rate stability but kept separate currencies, there were periodic sharp devaluations of some currencies, most notably the Italian lira. That made those countries competitive again, for a time.
Europe’s Growth and Stability Pact, which sets the rules for euro membership, limits the size of budget deficits. It was supposed to prevent such problems. But it was largely toothless, especially after Germany and France found it convenient to violate its terms when it suited their economic needs.
Political union would not cure the underlying economic problems, but it would make it easier for a European government to provide assistance to ailing areas through transfers of tax revenue and special spending programs, and for Continentwide laws to be enacted even if they were deeply unpopular in some areas.
Even then, problems could arise. In the United States now, some states, including California, are in severe financial straits. California represents a larger part of the American economy than Greece does of the European one, but even if it did default it would not create a national debt crisis, and Washington could provide help.
The world has sought currency stability across national borders many times. The gold system was such an effort, but it retained separate national currencies whose value against gold could be adjusted if need be. Some economists think that maintaining artificially high exchange rates was a cause of the Great Depression.
More recently, Argentina tried to use a currency board to maintain stability with the United States dollar. That eventually blew up.
What could be different in the current euro zone is that the legalities provide no possibility of departure. It is supposed to be the “roach motel” of currency unions, a name taken from a pest trap that used to advertise that once the roach checks in, he can never check out.
If a country were to try to leave, there would be huge questions. What would the new exchange rate be? How would existing debts denominated in euros be handled, whether they were national debts or money owned by companies or individuals?
If they had to be repaid in euros, that would provide a new shock to any withdrawing economy, much as countries that owed dollar-denominated debt have struggled after they were forced to devalue. If, on the other hand, a country declared that the debt could be repaid based on some other exchange rate, so that a 100-euro debt could be repaid with local currency now worth less than 100 euros, that would seem wildly unfair to creditors.
To some extent, the United States once faced that same issue. Many bond contracts issued before President Franklin D. Roosevelt devalued the dollar during the Depression specified that repayment would be in “gold dollars” at the historic ratio of gold to the dollar.
The Supreme Court, in an opinion that may have relied more on economic necessity than on the letter of the law, ruled those contracts unenforceable, and said that debt denominated in gold dollars could be repaid in devalued dollars.
There is no guarantee that such extreme measures will be required, now or ever. Europe could well muddle through, with vague promises of change satisfying lenders and a world economic recovery reducing the need for harsh action.
But optimistic forecasts that European countries, faced with the unavailability of currency devaluations, would liberalize their economies to make them more competitive, proved to be wrong.
If anything, the opposite happened. A common currency, with closely linked interest rates, made it possible for countries to postpone changes, or to try to do them so gradually that they made little difference. It is not easy to persuade politicians to take steps that are likely to lead to them being voted out of office.
If the euro problem does turn into a crisis, however, 2010 could turn out to be the year of the currency fights. The United States and Europe are both showing more irritation at China’s refusal to allow the renminbi to appreciate against the dollar, a decision that makes the Chinese export economy more competitive when it is already running large trade surpluses.
Currency adjustments are no panacea. Competitive devaluations were common during the Depression, and did no good for the world economy. But some flexibility is needed when economic circumstances change. In some critical parts of the world economy, that flexibility is not there now.
Yours,
Pano
PS:
The Euro is solid and represents the largest Economy on earth – so a largesse from it’s central Bank is warranted towards the economies that lag behind.
After all let’s not forget that the UK has a greater debt ratio than Greece or even Portugal….
How is that for perspective?
World history has been marred by some truly epic conflicts which have killed hundreds of millions often over very petty local matters. Out of the debris of these wars, some great superpowers like the erstwhile the British Empire and later, USSR and USA emerged. In this paper, we quickly summarize the five most important and famous wars in human history which have shaped world history in a definitive fashion. The following list is in no particular chronological fashion.
TOP 5. Gulf War
As opposed to the Vietnam War, the Gulf war showed the world the efficiency and strength of the US army. In the early eighties, Iran and Iraq had long been at loggerheads which had resulted in a protracted war which ended in a stalemate. At that time, both Iran and Iraq were militarily strong. Iraq had long considered Kuwait as an irritant due to a number of reasons. It had consistently lowered its oil prices against the OPEC agreement which had forced Iraq to lower oil prices as well. This hit their oil revenues which were the main drivers of their economy and military expansion, already burdened with rising debt. Further, they suspected the Kuwaitis of drilling across the border and taking Iraqi oil. Taken along with the fact that Kuwait had barely any army and would be an easy target allowed Saddam Hussein to summarily annexe Kuwait on 2nd August 1990 after sending in his most elite Republican Guard which reached Kuwait city just 4 and a half hours after crossing the border. Huge troop deployment occurred in Kuwait by Iraqi forces and neighboring Saudi Arabia was highly alarmed and feared an invasion. USA rushed to Saudi Arabia’s help along with a consortium of other nations like France, Britain and other Arab countries. In January 1991, Iraq attacked a small Saudi town on the border but was immediately repulsed. The US forces then launched a swift and decisive aerial assault which killed almost all air fighting capabilities of the Iraqi’s. A few days later, a ground offensive effectively sealed the war over the next few weeks and George Bush withdrew his troops on 28th of February 1991.
4. Vietnam War
The Vietnam was the first war which the United States officially lost. The origins of Vietnam conflict originated in a freedom movement started by Ho Chi Minh before WW2. After WW2 ended, he expected to establish a democratic Vietnam but was disappointed when instead Vietnam was carved up into a communist north later headed by Ho Chi Minh when the French withdrew after a protracted struggle and a US supported autocracy in the south. Though the Geneva accords under which the division had been made called for free elections between the north and south after two years, the US backed government in the south disregarded the same. By the early sixties, a communist group called National Liberation Front started full scale guerrilla warfare against the South Vietnam government. Though it had no links with the Ho Chi Minh government in the North, the US thought it necessary to bomb North Vietnam because of the communist link and to cut off perceived supply lines from the north to the south which were supposedly fuelling and supplying the rebels. What the US failed to understand was that the nationalist undercurrent in the country was strong and that the guerilla war was not just a war simply of North vs. South, but rather of a unification struggle between two different factions. Coupled with a style of warfare the army was not used to and difficult terrain, the result was over 60,000 dead and a shameful exit for the US, the first time in history.
TOP 3. American War of Independence
Though not a global war by any standard of measure, the American Revolution was one of the defining moments of world history as it heralded the rise of a great superpower in coming centuries. The roots of the American Revolution lay in the unhappiness of the Americans on not getting adequate representation in the UK parliament and increased taxes imposed on the colony due to the stress put on Britain’s finances after expensive revolts in India. To win independence, a group of rebels started what was called the ‘Continental Army’ to fight the British. They laid siege to Boston, at that time an important trading port which ended in British troops withdrawing from the city. Britain offered to pardon the rebels in exchange for surrender but the offer was summarily rejected by the rebels who declared their independence in the famous declaration on 4th of July 1776. The war didn’t end here however. The British sent troops to fight George Washington and managed to push his army from New York down to New Jersey. George Washington then won two more victories after which the British committed the fatal mistake of dividing their army to concentrate on two fronts at once. The British were decisively defeated at the Battle of Yorktown in 1781 which ended the war in the mainland at least. In 1788 had France declared war on Britain as well, and had been covertly supporting the rebels all throughout with resources and training.
TOP 2. World War 2 The second major war to involve all the major countries of the world was World War 2 (henceforth called WW2). WW2 bore its origins from WW1 in which tough economic and military sanctions were imposed on Germany for its action in WW1.
These conditions were used by Adolf Hitler’s Nazi Party to blame the West for the current situation of the Germans and later used by him to declare war on their neighbors. On September 1 1939, Germany invaded Poland from the west and Russian consequently invaded it from the east carving up the country between the two nations. Two days later, France and Britain declared war on Germany and a state of emergency was declared in Britain. Germany continued its rapid advances into Belgium and Holland while taking over large parts of France in a unique form of warfare called ‘Blitzkrieg’. The Japanese attack on Pearl Harbor in 1941 precipitated the entry of USA in 1945 which till then had maintained military neutrality. In 1941, Germany was held back at Stalingrad in Russia and consequently in 1943 it surrendered there in the first major defeat for the Germans. In 1944, Allied forces invaded France and liberated Paris in August. From here on after, Germany and its main surviving ally (Italy had surrendered) Japan suffered major setbacks which culminated with Hitler’s suicide on 7th May in 1945 after Allied forces reached Berlin and the end of the war with the dropping of the atom bombs in Hiroshima and Nagasaki in Japan on 14th August 1945.
TOP 1. World War 1
World War 1 (henceforth called WW1) was the first truly global conflict and killed almost 50 million people directly or indirectly. Starting off as a local dispute between Austria and Serbia sparked off by the assassination of Duke Franz Ferdinand, the would-be heir to the Austrian throne by a Serbian national. What ensued was fierce fighting between Austria and Serbia which ultimately led to the taking of sides by neighboring states. One of the main reasons for this conflict increasing in scale was the emergence of Germany as a regional superpower after 1871. In August 1914, Germany declared war on Russia as it pledged support to Serbia and France declared against Austria as it had a treaty with Russia. Germany invaded neutral Belgium to get closer to France and Britain was obligated to enter into the war based on another treaty to help defend France. Soon, Japan and Italy also entered the war based on different treaties with nations already in the war and the war finally became a World War. The war finally turned after USA entered the fray in 1917. In 1918, Germany tried launching a major offensive towards the west in France but was held back by Allied forces of Britain, France and USA. Eventually, the Allied forces were able to regain much of the lost territory in France and an Armistice was signed with Germany on November 11, 1918 which officially ended the war. Over 37 million were directly killed as a result of the war and over 11 million were indirectly killed during the war period due to disease and civilian deaths.
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