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Instructive post by Becker. Note the parallel between the structural flaw in the common European currency and the U.S. dollar, the common currency of 50 states, some of which are fiscally irresponsible and effectively free-ride on their responsible brethren (with lubrication by the Federal Reserve and Congress).

U.  Von Stahler


The hypocrisy of the Northern Europeans:

Countries of Northern Europe are economically stronger (well “stronger” in quotes because even the “dynamic” economies of Europe grow at a lackluster below-par annual growth rate of around 2% average). That, against the backdrop of a world that is growing at around 5% as a whole. So, essentially, even the “stronger” economies of Europe are simply just declining at a slower rate.

The Southern countries (where European level tax rates make it easier for citizens to place secondary importance on work and head for the beach), are declining even faster, with 0-1% average growth rates in the last decade and low growth rates for at least a generation. With the massive economic awakening of Asia and other developing nations (representing half the world’s population) these slower growth amongst slow growth Southern European countries are simply floating into economic oblivion at a very fast rate, by historical standards.

So the only intermediate solution is for the European North to “help” the European South through wealth transfers from the slower declining North to the more indolence prone South.

Hence here comes the Welfare-State hypocrisy of the Northern countries, who essentially advocate Socialism for me but not for thee. So while those less productive amongst Germans, Dutch, Austrians have a right to be supported by their more productive countrymen, the same support is denied to the less productive citizens of the south.

In a Unified Social-Democratic Europe, obligation to support those who choose indolence becomes universal. It does not matter whether the less productive are Germans, Austrians, Greeks or Italians. Social Democracy obligates productive to support less-productive, less-competent etc. There can be no exceptions and any other stance by countries who collectively call themselves Social-Democracies is ethically inconsistent and hypocritical.

So here indeed comes the hypocrisy of European democracy. The only reason Southern European indolence does not have access to German wealth is that the South does not vote in Germany. But with further unification, citizens of the south will either directly or indirectly GET those voting rights… and claim their Social-Democratic entitlement.


There is more to being a seamless economic zone than just simply creating a unified currency. As the Eurozone has found out. With the loss of multiple currencies controlled individually by member Nations, this has removed a invaluble tool from the National Economic toolbox. By allowing Countries to float their currency value on the Market by either inflating or devaluing it (sounds an awful lot like the Yuan issue) dependent on the underlying economic requirements and required actions.

As for the basic problem, it all comes down to the issues of "quantity" and "velocity" of currency flow. Such that, during the Boom years, there was an incredibly high quantity and velocity of currency flowing through the Zone. Which covered the interest on debt and the debt itself which was incurred. With the collapse of this economic high velocity order the weaker Economic States were left high and dry and unable to service its debt. Hence the problem.

As for the development of Euro Bonds, it hopefully will allow the Eurozone to modify the large quantity, high velocity Currency system to a more slow paced and rational Currency flow that the weak Economic Nations can sustain and hopefully keep a portion of the World's Currency system from spinning out of control again. But, only time will tell...

Back Taxes

China will lead us out of this mess. I hope....

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As an addendum to your post, in Rogoff and Reinhart's recent book "This Time is Different", [apologies if my numbers are somewhat off] they found that >50% of sovereign foreign defaults involved debt to GDP rations below 60%.

My general sense is that if - a big IF - Italy were to make some of the needed structural reforms, it could grow out of its debt problems, which are more manageable as Italy is a nation of savers who own a lot of debt. In that sense, Italy's high interest rates are more of a confidence or liquidity problem, and therefore more deserving of a stopgap loan program.

Certainly Greece, and probably Spain and Portugal, have no economic base to support their debt and should be put through and orderly default.


Tans -- A rare opp for agreement! Yes, it's naive to expect all regions of a huge economic system to grow and prosper equally. As you point out here in the US most of our "red" states and even "red" counties have a long history of being net parasites on the public purse. But, "all in" (private sector and all) it's likely less true and perhaps not true at all... id publicly costly "western water projects" likely give us a good return via cheaper ag products. And while gobs of money is coined on NY's Wall Street, it's what they term "flyover country" that provides them with cheap corn flakes.

One good thing in the US, that may be difficult to implement in the EU is the right of labor to move where it pleases. Imagine if former slaves were trapped in their states while the auto and industrial boom took place in MI, IL, OH and others. Or as farming become so automated and productive were labor stuck in Nebraska.

One thing the potentially "revolting" taxpayers of Germany and France will have to learn is that throwing in together is likely to have more benefits overall, than the losses of having to pay one, two or more laggard's bills. Will they have the patience and tolerance for E pluribus unum?

Suppose that in the mid-1800's the US had decided it shared to little from one region to another and we had become two nations? or after that the West splitting off. Or the Louisiana Territory remaining with the Spanish or French?

Today, Ha! post-air conditioning we've a net migration to the formerly lagging "sun belt" states.

Message? Think longer term than a short term fiscal crisis?


Back taxes: You and the other desperate spammers really ought, out of fairness, contribute more........ or at least something to justify your existence. Thnx!


that's really a bad news.


American people has much more money. He must give to European who needs now. To Greek to Italian to Spanish. American people take all the world money and now other people poor. American salary $50,000 must give to other 90% of world only $5,000 salary. World democratic, poor people vote take from rich American give to poor many. American with $50,000 must give half money to poor world. Obama now maybe understand he good democratic make American work for also other of world. One day we all vote and American $50,000 no more. World become more justice.

D. Fong

Investors have lost hope that people operating under the flat effort-reward curve of the welfare state (europe) will be able to compete with a rising humanity of three billion in the ascending BRIC countries. Therefore if you lend money to a croup that is loosing competitiveness, you'll likely loose your money, especially since the proposals are to further flatten the European effort-reward curve by expanding intra-national welfare transfers to cross-national welfare transfers across the European union.

It's just as simple as that.

People in Asia have finally awaken, albeit to a still limited form of capitalism and are baffled at European lemmings hanging on to preserve prosperity under the ever flattening effort-reward curve of the welfare state. Can one imagine what will happen once the three billion in Asia take on the full freedom and production of capitalism?
Europe will be history. Well. They already are. They are declining so fast that they don't even have time to digest it.

Calista Moves

Yet some more pessimistic news on the Euro crisis. The unfortunate thing is that there were plenty of signs that called for a more adequate reaction way in advance!


I have a question, what is the difference between a revaluation and a default. If I'm a bond-holder and I get less than 100% of principle back, is revaluation of the currency better? Isn't it just a transfer of wealth from the savers to the spenders? Is it because it would hide the cost in the form of more expensive goods and deterioration of savings? Would it truly lead to long term fiscal balances between expenditures and tax revenues?

From what I understand there is sentiment in Greece that Germany should pay for their liesure time in the form of early retirement and lower taxes because Germans are rich. I've even heard that the Germans made out because Greeks bought German goods. I'm not sure how the Germans would be better off if the Greeks did not in fact pay for those goods, i.e. defaulted on the loans to pay for said goods. It seems like the myth that rich countries make poor countries poor so they owe them something.


Jack -- with doubts, I'd say we may agree on the principle. But we plainly disagree on the example to illustrate the point. To give it a try, the plain fact is that productive residents of California are unable to devalue their currency to compensate for the abominable fiscal decisions of California lawmakers out to buy votes from nonproductive residents. Consequently, as is well documented by now, productive Californians are voting with their feet and moving to "red" states like Texas.

Now consider the parallel between currency valuation and an electorate voting with their feet. 100 words or less, please, Jack.

Back Taxes

Im not a spammer, you are jack. With your Budlight drinking, nascar watching, hardass ideals.


TAANSTAFL, The point is exactly to create a strong and just central government in Washington that will prevent people from escaping via  what you call “voting with their feet”. This is especially true since these are the people who can produce (..according to their ability) and must thus provide for the many (..according to their need). Once the dream of a just centralized government prevents the competent from escaping then the long sought HOPE can be implemented. That is the hope that productive/competent/hard working  people  will:
(a)    Either be CONVINCED to work NOT for their families but for distant unknowns instead
(b)   Or be FOOLED not once and twice but time and again in perpetuity via macroeconomic gimmicks which retrospectively confiscate a large portion of past work so that the reward can be used to benefit the general public, rather than the original producer
(c)    Or finally, if need be, COERCED into rewardless production.
As a matter of fact we in America (who somehow serendipitously became the most prosperous nation in the world through the world despised cowboy mentality of selfishness) seem to be the only nation that is now figuring out how to move forward: We are now finally discovering that the key to prosperity is coercion.
If only other nations would see how motivated people become when all citizens work for each other under a centralized plan, to now benefit not their families but distant others as a whole, then all those other nations would also prosper. Like we will under HopNChange. Funny how nobody else seems to have figured that out before. I’m telling you, America is a special place. America can copy others but somehow still succeed in staying most prosperous country in the world. There’s just something inexplicably ethereal about America’s destiny of success. So nothing to worry, just copy Europe.

Ken McKenna

"[T]he weaker 'Mediterranean' countries ... anticipated much lower interest costs on their sovereign debt because they expected the strong EU nations to provide a guarantee of their debt. These countries also expected that the Maastricht Treaty and other fiscal rules would prevent their governments from running up large deficits. At first, these expectations were met, as interest rates on the sovereign debt of weaker countries fell to levels not much above that of Germany’s..."

That's one explanation, but has this theory been verified? It's odd (to me, at least) that an implied northern guaranty could have such a big effect, since Germany and the rest of "northern" Europe can't support the Mediterraneans unless the Mediterraneans seriously reform both politically and fiscally. There was never a guaranty of Mediterranean reform. What would be Germany's credit rating if it outright guaranteed the debts of Greece, Italy, Spain, Portugal and Ireland without the confirmed and extensive political and fiscal reform of these debtors? Junk?

And how important could the Maastricht Treaty and other fiscal rules really have been in determing those near-German Mediterranean interest rates, since the rules were openly flouted pretty much from the beginning? Greece even lied egregiously about its deficits before joining the Euro, and many knew or seriously suspected that.

A country that issues debt denominated in its own fiat currency can substantively default by either (1) not paying or (2) paying off the debt in debased currency. When the Mediterraneans joined the Euro they gave up the possibility of substantively defaulting by method (2), debasement of the currency of denomination. Would it not make sense that post-Euro bondholders would demand less interest for that removed risk, at least until the breakup of the Euro became a practical prospect? That breakup will impose huge costs on ALL of Europe, northerners and Mediterraneans alike. Would it make sense that bondholders relied more on the disinclination of all of Europe to incur those huge costs than they were on an implied guaranty of northerners to pay debts they couldn't meet in the first place?

Is this an alternative explanation, a wrong explanation or just a rephrasing of the original explanation?


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