The euro end game?

The crisis of the euro seems to be heading to another climax, perhaps even to the end game.  Banks and other purchasers of government bonds increasingly refuse to buy more Spanish government paper, driving the cost of borrowing each extra euro for the Spanish government towards 8% a year, an interest cost that will make it impossible to meet the fiscal targets on the budget deficit and the public debt set by the Euro leaders.  At the same time, corporations and households are beginning to worry about the safety of their cash deposits in Spanish banks, as they are told every day in the press that these banks are holding huge amounts of bad debts from defaults on mortgages and loans to building developers, now that the Spanish property bubble has burst big time.  So deposits are leaking out of the Spanish banking system – nearly €100bn in the last three months (see graph below) – a similar sort of pace that the Greek banks have experienced in recent months.

It looks increasingly likely, despite the desperate efforts of the Spanish government to avoid it, that Spain will have to ask for Eurozone funding to get it through its loss of ability to borrow in bond markets.  But here’s the problem.  Spain’s government would need about €500bn over the next three years (budget deficit: €130bn; sovereign bond rollovers €150bn; regional debt rollovers €100bn; T-bills €75bn and bank recap €100-130bn).  The bond markets are not closed to Spain yet, but even allowing for this, the combination of budget deficit, regional and bank re-financing would add up to €330bn.  If you add in Italy, which the markets would focus on next, that could be another €400bn.  If that amount has to come from the existing Eurozone fund mechanisms, the EFSF (the current temporary funding mechanisms) and ESM (the permanent one supposedly starting in July), it will use up all the funds being contributed by the Eurozone governments and borrowed by them in the bond market.

Spain will then have to comply with draconian fiscal measures demanded by the dreaded Troika, just as Greece, Ireland and Portugal have to now.  And, given the difficulties that the Troika programmes are having in trying to meet the fiscal targets set, despite the huge efforts of these governments to impose austerity on their people, private sector creditors are not convinced that they will work.  Instead, after Spain, Italy would come into the firing line.  And if Italy is forced into a bailout, the game would be up.  There is just not enough money in the current Euroland kitty to handle that for three years.

On top of this, of course, is the serious risk that the Greek people will elect a government totally opposed to its existing Troika austerity package, or at best pledged to ‘renegotiate’ the package.  Then that would pose the issue for the Euro leaders about whether to continue to finance Greek banks and the Greek government through the ECB and the EFSF.  If that ceased, then Greece would default and the issue of its exit from the euro would become immediate.

The Greeks are furious.  A recent poll showed that 42% of Greeks ‘blame themselves’ for their situation as opposed to only 26% of Spaniards and only 19% of Italians and Britons.  They are really referring to their leaders, in both public and economic circles.  The poll also found that the Greeks thought they are the hardest workers in Europe.  And as I have reported before in other posts (see An alternative programme for Europe, 11 September 2011), the statistics show that in 2010 a Greek worker worked an average 2,109 hours per year, well  ahead of the average slacking German who works only 1,419 hours and ahead of the UK worker (1,647 hours) and indeed even the two-week holidaying US worker (1,778 hours, incidentally the same hours as Italy!).   So the answer to why Greeks think they are the hardest workers in Europe is simple. The Greeks think they are the hardest workers because they are!  The Greeks’ economic misfortune is attributable to other factors (e.g. low tax collection and corruption from the rich and lack of capital investment by the weak Greek capitalist sector among other things) and not due to the stereotypical laziness of the nation that so suits the German tabloids.

Also 80% of Greeks want to stay in the euro.  They know that leaving the Eurozone and the European Union would be no solution.  Re-adoption and devaluation of the drachma would cause the value of Greece’s government debt, already at 160% of GDP, to soar, probably doubling or trebling.  So any devaluation would have to be followed by a default.   Also, devaluation would not save Greece’s exports of shipping charters – which are priced in dollars anyway – but default would cause great harm to Greek banks and Greek savers who own the greatest proportion of Greek government bonds. They would be wiped out by an outright default. Converting their assets and liabilities into drachmas, like the pesofication of deposits in 2000 in Argentina, might keep Greek savers and banks afloat for a while.  But a huge devaluation would also drive up inflation, making Greek savings worthless.

The point is that Greece’s real income and wealth will fall sharply in any case, regardless of whether Greece exits the Eurozone or not. The choice is between an economic slump with inflation or one without inflation. A devalued drachma will not help Greece’s economy recover faster from the deep recession. In the last drachma period before 2001, there was a recurrence of currency crises resolved through devaluations that did not improve the ‘competitiveness’ of Greek capitalism on a lasting basis.  Indeed, no country has ever devalued its way to prosperity. What Greece needs is relief on its burden of debt and new investment in technology and jobs, not devaluation.

If Greece drops out of the Eurozone, the inevitable adjustment to a lower standard of living will be unfairly distributed because it will happen through inflation. Citibank economists have estimated that Greece would experience 20% inflation and a 20% decline in GDP from 2007 to 2016 (see graph below).  The majority of working Greeks are the most exposed to inflation because they do not own foreign bank accounts or other inflation-protected assets. It is also doubtful that Greece would attract much investment from abroad. Who would guarantee the stability of the drachma after its devaluation? No Greek exporter, hotel, or restaurant would convert euro income into drachmas, knowing that the drachma tomorrow would be worth less each day. The drachma would be the main currency for government employees and pensioners only.


The flipside is that ‘letting Greece go’ will also hit the rest of the Eurozone, with direct losses of up to 5% of Eurozone GDP, along the dynamic losses of output and incomes (see my post, Greece: heading for the exit?, 17 May 2012).

So is there any way out for the Euro leaders from a Greek exit, a Spanish and Italian bailout and the eventual break-up of the euro?  Well, the history of currency unions that have survived like the US dollar or the UK pound shows that they only do so after political as well as economic integration.  Political means moving to a federal government where the fiscal powers of the centre are strong enough to control the bulk of taxation and spending – a fiscal union.  Economic means a banking system that is integrated across all the region.  Both the US and the UK took hundreds of years of conflict and agreements to achieve that. The US dollar is a ‘successful’ union of 50 states after a turbulent history of more than 200 years that included defaults of eight US states on sovereign debt in the early 1840s; the Civil War; the emergence of the Fed as a key institution and the greater fiscal role of the federal system following the Second World War. The Eurozone is a ‘baby union’, facing its first major crisis.

The Euro leaders need to find a way to move towards fiscal union and a pan-European banking system.  Fiscal union would mean that budgets, taxation and spending policies would be decided by a supranational body.  Banking union would mean a a pan-European government guaranteeing bank deposits (to stop a run on banks) plus a pan-European regulator to impose common rules for capital and risk.  Then the ECB could become a proper lender of last resort for European banks and governments, as the US Fed, UK Bank of England or the Bank of Japan are.  At the moment, the ECB is not legally able to be so or willing to do so, when there is no fiscal union.

This euro crisis has created powerful centrifugal forces that threaten to kill the baby euro currency union in its relative infancy.  The extent of these forces is revealed by the ‘Target 2’ settlements between the various central banks of the Eurosystem.  These are the net balances of euro credits and debits in the various countries in the Eurozone.  Before the crisis began, there was little or no difference between the German Bundesbank’s net balance of claims or liabilities with the ECB/Eurosystem than that for the Bank of Greece.  But now the Bundesbank has a massive credit with the Eurosystem, while the peripheral weak states in the euro area have combined accumulated net liabilities of equivalent size (see graph below).

What this shows is that the trade deficits being run by the likes of Greece, Spain or Italy with the likes of Germany and Holland are no longer being funded by cross-border private sector bank loans or corporate investment.  German banks will not lend to Greek banks and German corporations have stopped investing in Greece,  So the deficits are having to be covered by each national bank printing euros and lending this to importers and banks in the weak deficit economies.  That is a necessary process as long as the euro is one currency, where a Greek euro is equivalent to a German euro.  Stopping this funding would mean the end of the currency union.  But the fast-growing imbalances in Target 2 settlements show that the currency union is being stretched to breaking point.

Achieving fiscal union and banking integration are momentous tasks in such a short time –  and time is running out.  The ‘financial markets’ (banks, pension funds hedge funds and the rest) may still be convinced that a euro break up can be avoided if the bailout funds are doubled and there is a euro-wide agreement to support Spain and Italy through their austerity measures, along with new fiscal controls.

But as Mick Brooks put it in his excellent account of the euro crisis (,”the EU decision-making process is hopelessly flawed. …. The survival of the Euro is not, and never was, a matter of pure capitalist economic rationality. No such thing exists. The Euro’s future will be the outcome of a complex interaction of political and economic factors. (We may have) underestimated the collective stupidity of the EU authorities  .. (so) the Euro’s survival hangs by a thread.”

Apparently, the Euro leaders are drawing up plans to move towards fiscal and banking integration in time for discussion at the Euro summit at the end of this month.  But the Germans will only agree to a banking union and ECB support for Spain and Italy if the measures for fiscal union and more supranational control over government taxes and spending are agreed.  The French want the former, but not the latter.  They want German money, but not German control.  The Germans want more control for more money.  Mrs Merkel could not sell more funding to her electorate without that.  Things are coming to a head.


10 Responses to “The euro end game?”

  1. dzonko Says:

    “Things are coming to a head.”

    Indeed. Buckle up.

  2. stephenbouquin Says:

    Reblogged this on Solidariteit met het Griekse volksverzet tegen de trojka.

  3. H.A. Cox Says:

    I am a little bit taken aback by the implicit message of your analysis.

    “The Euro leaders need to find a way to move towards fiscal union and a pan-European banking system. Fiscal union would mean that budgets, taxation and spending policies would be decided by a supranational body. Banking union would mean a a pan-European government guaranteeing bank deposits (to stop a run on banks) plus a pan-European regulator to impose common rules for capital and risk. Then the ECB could become a proper lender of last resort for European banks and governments, as the US Fed, UK Bank of England or the Bank of Japan are. At the moment, the ECB is not legally able to be so or willing to do so, when there is no fiscal union.”
    Is this your audience: ‘the Euro leaders? Have we spent all this time discussing Marx’s theory of capitalism in order to advise them about how to escape ‘their’ crises? This crisis is breathtaking in terms of its extent and depth, and it is not just another cyclical crisis, but a grave social crisis in which working people are under severe attack world-wide. There will be ups and downs in the world economy, but this social crisis will be resolved either by a major war or ‘socialist’ ‘revolution’. Wow, I used the ‘s’ and ‘r’ words. But do not worry about looking silly because those ‘Euro leaders’ do not listen and argue with Marxist economists unless there is a working class movement behind them- a movement that Marx spent his whole life trying to build and towards which Capital was directed.
    We are in a period much like that of 1914 to 1945. Working people need to hear that only they will be able to solve this crisis. If not from you, then from whom?
    I think that academic Marxist have been worn down by TINA. We learned from Capital how bad capitalism is, but some of us do not really believe that it can be abolished. Would a capitalist pan-European government that is politically and financially integrated really solve this crisis, even if such a union were feasible? You do not need to be discussing what best way to prop up capitalism. They are not listening to you, anyway.
    It has been quite awhile since capitalism has experienced such a crisis as the one we are going through-and it is world-wide. It is not pre-determined that the producers of the world will resolve this crisis in their favor, but it is horrifying to think about what the alternative will be.

    • michael roberts Says:

      Of course, I am not ‘advising’ the Euro leaders how to get out of their crisis. But fiscal union and monetary (banking) integration could be the response of the Euro leaders, although as George Soros has just said in a speech, such ‘integration’ would only come about through the hegemony of German capitalism.

      My posts are trying to say that what the logic of the euro crisis shows is that it is only a pan-European solution that will solve it. But as capitalism cannot avoid recurring crises, even that would not a lasting solution. The only permanent answer would be a socialist plan democratically controlled by workers governments on a pan-European basis.

      Under capitalism, there are three possible outcomes from here. The first is that all the other euro states capitulate to Germany and agree to their interminable austerity measures for the rest of the decade – not likely and probably not feasible. Alternatively, Germany could decide to cough up trillions of euros, without wanting hegemony, in order to to hold the single currency together – again difficult to envisage, but maybe. The third is that the Eurozone (and EU?) breaks up into different parts – a serious prospect, but not yet.

      None of these options benefit working people.

  4. raffaele sciortino Says:

    Dear Michael,
    I’d like to post you and your readers the english translation of my article “Chicken Game: Eurocrisis, Again” on:

    it’s a quite different view on the current crisis even if it covers a middle-range level of analysis
    very grateful if you could have a look at it…
    raffaele sciortino

  5. representingthemambo Says:

    Reblogged this on Representing the Mambo and commented:
    Really glad that the focusof the media was the Jubilee this weekend. Glad to see they got their priorities spot-on…….

  6. H.A. Cox Says:

    ‘None of these options benefit working people.’
    I could not agree more.
    Thank you for your response. As we treat the various manifestations of this crisis, it is useful to point out the various attempts to resolve the crisis on the part of the ruling class, but there is still much too little about how the victims of this crisis can solve the crisis. Right now, the main opposition group in Greece is advocating reforms to make the European Union work better. Greek workers need to hear:’The only permanent answer would be a socialist plan democratically controlled by workers governments on a pan-European basis.’ It would be true utopianism to think that Greek workers could make a socialist revolution by themselves. But there are millions of workers in the UK, Spain, Portugal, Italy, etc. who are quite disgruntled by the assault being leveled on the working class of Europe. Unless the world capitalist class can create another bubble, the horrors in store for working people will generate even more allies for the Greek-and Spanish working class.
    I realize that when you write your post that you will not always be clear as what has to be done. But working people are being flooded with explanations of how to fix the damn thing-Krugman, Reich, Klein, Harvey,etc. whereas very few are saying what you said in your response to me. In fact, I think your response was a more adecuate explantion than the original post. Of course, be prepared for some snickers on the part of those who do not really agree with Marx’s theory of capitalism.

    • Warren Celli Says:

      I got the same impression from this you did, that the analysis was in the box and the audience was the Euro leaders and/or what they may or not do. This is not an economic crisis, it is a morality crisis. You only need one chart to explain economics;

      The analysis should be to explain how the self anointed elite have us all by the short hairs — its called Forced Complicity Crimeunism — where the crime we engage in is now in great part the extinguishing of our own spirits. It is forced complicity because our governments, ALL, have been hijacked through the Noble Lie and we the people no longer decide our own futures, what we will produce and the sustainability of that production. Further, it should be obvious to any sentient being by now that this is an intentionally manufactured crisis, an intentional herd thinning with the goal being a two tiered world of ruler and ruled. There is no bumbling ineptitude here. Greenspan, Bernanke, et. al., now precisely what they are doing. The ruled will be left in a perpetual conflict with each other when all is said and done. This is a final solution rout!

      Marxism needs an upgrade. The aberrant psychopathic elite have co-opted and poisoned the working class in so many ways through propaganda that they have no unity, worse, they have propagandized most all people to love and adore their wealth, the self anointed elite’s wealth, and they all believe that they will be the next millionaire. Ain’t gonna happen!

      Drop the Marxist language it is the wrong struggle! Don’t get me wrong I love the guy. This is at its core a moral struggle of have against have not, rich against poor. The rich are aberrant psychopaths afflicted with a contagious disease. The disease is called Evilism, it has mutated into the more pernicious Xtrevilism. There are many symptoms buy they all manifest in overly fat wallets achieved through corruption. The cure is simple. Fairism! Democratically arrived at limits on income wealth and asset wealth! The incentives will then be redirected to one for all and all for one socially beneficial rewards.

      Deception is the strongest political force on the planet.

  7. purple Says:

    I think the dialectic between the international expansion of capitalism and its historical rooting in a national bourgeoisie is coming into play here. There is no historical example in the capitalist era of fully developed nation states merging together, and one can expect Euro the fail because of this.

    The limitations of capitalism as a progressive force in the mode of production are revealing themselves. The nation state is a backwards institution today much as the fiefdom once was.

  8. Nadeem Mahjoub Says:

    a good analysis and a good response to H.A. Cox. Thanks.

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