Cross-posted from Credit Writedowns
As I have said in prior posts, I am a bit of a eurosceptic. It is my view that the Euro is a political construct just as the expanded European Union has been and just as the reunification of East and West Germany on a 1 for 1 currency basis was. When politics come before economics, bad things happen.
–Did joining the eurozone bust Ireland?, Jul 2008
I am still very much behind those remarks now three years later. Yes, I am a eurosceptic and have always been. But we are here now. The euro exists. And that does change things.
It would easy for me to say something like, “see I told you so. The euro is an abomination and the peripherals should simply leave or be tossed out of the euro zone.” I even remember suggesting the Irish should threaten this to get the most leverage before their banking sector imploded:
Ireland must threaten to leave now if it wants to maximize any EU help it expects to receive, before the scope of other EU banking crises become apparent. Weakness in the financial sector has infected all of the Eurozone members. I have mentioned that Austria has a weak banking system…. But, there is even growing evidence that Germany too has a fragile banking system. To be clear: this is an ‘every nation for itself’ strategy pitting Eurozone members against each other, where those nations savvy enough to request help sooner are likely to benefit at the expense of others.
Ireland didn’t do that. In fact they did the opposite:
This is the core of the problem in Ireland. The housing bust. Prices are falling and will continue to fall for some time. Ireland has seen the fastest housing growth in the developed economy over the past 10 years. Their housing sector will fall more than others.…
In the end, all of this will pass. Ireland will go through its own lost decade much as Japan and Germany did after their own property bubbles in the 1980s and 1990s. However, the underlying dynamism of the Irish economy will help to pull Ireland out of its funk sooner than either Japan or Germany with their statist-lite economic paradigms.
What would be a cause for concern is if Ireland began to intervene in the unwind process, propping up zombie companies and bailing out the financial sector. The U.S. seems on this road as we speak. Hopefully, Ireland will not follow its example. If the calls for government to do something, anything, lead to a statist model of dealing with the bust, expect a very long and difficult decade.
–Ireland: the bust after the boom, Jun 2008
But, again, we are here now. The political imperatives for closer European ties that created the single currency are still with us. And the negatives of abandoning it are many, both politically and economically – in the periphery and the core. I recognize this.
I read a post in the Irish Independent this morning by Gary O’Callaghan on “the top 10 misconceptions of the euro crisis”. I still think repudiating Irish bank debt is a viable option and O’Callaghan thinks “the Morgan Kelly proposition that Ireland can reject responsibility for bank debt and still maintain a good sovereign reputation” is bunk. O’Callaghan is promoting a pro-European view. Nevertheless, on the whole, I found his list quite reasonable.
So when I talk about the euro zone these days, despite my euroscepticism, I am not pushing an anti-Euro line. It is just the opposite; I am suggesting ways the euro zone can best remain intact despite the political and economic impediments.
That’s why I have said the ECB is the difference. As I said yesterday: “The problem here is that as more and more countries keep getting plucked off and put into the penalty box, there are fewer and fewer players left to skate.” Spain and Italy are already in the penalty box and Belgium and France will be too in due course. That leaves Germany as the only enforcer left to skate.
But the ECB is a player too. The ECB is acting as if it has retired from the game. But I think they will have to come back for one pivotal season. As Goldman’s Dirk Schumacher says:
This is a liquidity, rather than solvency, crisis for Italy and Spain. We have discussed in the past on several occasions the solvency of Italy and Spain, and we remain of the view that it is feasible for both countries to stabilise their debt and return to a sustainable fiscal path. The concern now is a self-reinforcing run on sovereigns that, in our view, does not reflect any new fundamental information on either of these two countries.
I know some people think Italy is insolvent. But, the point still holds that this is a liquidity crisis and the way to deal with liquidity crises is by providing liquidity. The only player left on the ice that can credibly provide that liquidity is the ECB. Once the liquidity concerns are dealt with, the euro zone can move to deal with its structural deficits. But if the ECB doesn’t step in, the euro zone won’t have the opportunity.