Worldwise: The Euro Roller Coaster (Robert Wright & Franco Pavoncello)

[Bloggingheads]

[Florian]

Congratulations bhtv. This is the second diavlog on Europe in several weeks from a perspective that isn't American. A German, an Italian, what's next? Et les français alors? Thank you Bob for your intelligent questions.

On the question of national debt in relation to GDP, the following chart from the IMF is rather illuminating (click on country). Note that the US has a higher ratio than Germany, the UK or France....yet no one seems to be suggesting that the dollar is doomed. I am also mystified by the fact that Germany, with a debt that is almost as great as that of France in relation to GDP, is nonetheless considered a better risk by the bond vigilantes. Can someone explain this?

http://chartsbin.com/view/2108

[Unit]

Originally Posted by Florian

Congratulations bhtv. This is the second diavlog on Europe in several weeks from a perspective that isn't American. A German, an Italian, what's next? Et les français alors? Thank you Bob for your intelligent questions.

On the question of national debt in relation to GDP, the following chart from the IMF is rather illuminating (click on country). Note that the US has a higher ratio than Germany, the UK or France....yet no one seems to be suggesting that the dollar is doomed. I am also mystified by the fact that Germany, with a debt that is almost as great as that of France in relation to GDP, is nonetheless considered a better risk by the bond vigilantes. Can someone explain this?

http://chartsbin.com/view/2108

I don't pretend to have an answer, but my impression is that investors try to guess a country's ability to raise tax revenues in the future. If for some reason there are doubts, either about the political class ability to raise revenue, or about the economy's potential to generate growth in the future, then people will buy less of that country's bonds. No?

[Florian]

Originally Posted by Unit

I don't pretend to have an answer, but my impression is that investors try to guess a country's ability to raise tax revenues in the future. If for some reason there are doubts, either about the political class ability to raise revenue, or about the economy's potential to generate growth in the future, then people will buy less of that country's bonds. No?

Yes, that's true. But the wild girations of the bond markets over the past few months have little to do with the creditworthiness of France or the other core EU nations (which, unlike Italy, have no difficulty collecting taxes). Last week even the auction for German bonds failed to find buyers. IMO, this whole crisis is the making of Wall Street, which would like nothing better than to see the euro collapse. Perhaps also the secret wish of Washington?

But, of course, that isn't going to happen.

[Don Zeko]

Originally Posted by Florian

Yes, that's true. But the wild girations of the bond markets over the past few months have little to do with the creditworthiness of France or the other core EU nations (which, unlike Italy, have no difficulty collecting taxes). Last week even the auction for German bonds failed to find buyers. IMO, this whole crisis is the making of Wall Street, which would like nothing better than to see the euro collapse. Perhaps also the secret wish of Washington?

But, of course, that isn't going to happen.

The way I've been reading it is that the bond markets aren't reflecting the fundamentally creditworthiness of Euro countries, they're reflecting concerns that the Euro will become a glorified deutchmark as countries leave the Euro and devalue to escape their debt burdens. If that's true, then it explains the difference between rates for Germany and France, neither of which have the actual debt problems that Greece or Italy do.

[Florian]

Originally Posted by Don Zeko

The way I've been reading it is that the bond markets aren't reflecting the fundamentally creditworthiness of Euro countries, they're reflecting concerns that the Euro will become a glorified deutchmark as countries leave the Euro and devalue to escape their debt burdens. If that's true, then it explains the difference between rates for Germany and France, neither of which have the actual debt problems that Greece or Italy do.

No one wants to leave the euro. But Greece (and Italy and Spain and Portugal) could be forced out of the eurozone if they have to borrow at exorbitant rates (7% is approaching exorbitant). The bond market, i.e. Wall Street, seems in effect to be pushing highly indebted countries towards the exit by casting doubt on their ability to repay. Even France is feeling the pressure, as rating agencies threaten to downgrade its triple A status.

Europe is not like the US. If and when the US loses its triple A status it can always borrow (or print) money to its heart's content. What else are the Asians and Gulf Arabs going to do with their excess dollars but lend them to the US?

[Don Zeko]

Originally Posted by Florian

No one wants to leave the euro. But Greece (and Italy and Spain and Portugal) could be forced out of the eurozone if they have to borrow at exorbitant rates (7% is approaching exorbitant). The bond market, i.e. Wall Street, seems in effect to be pushing highly indebted countries towards the exit by casting doubt on their ability to repay. Even France is feeling the pressure, as rating agencies threaten to downgrade its triple A status.

Sure, no one wants to leave the Euro, but the decision-making process in place seems to be incapable of avoiding an outcome that will force countries out. And once one country goes, it looks like we'll see a sovereign debt bank run that will force others to leave as well.

[Florian]

Originally Posted by Don Zeko

Sure, no one wants to leave the Euro, but the decision-making process in place seems to be incapable of avoiding an outcome that will force countries out. And once one country goes, it looks like we'll see a sovereign debt bank run that will force others to leave as well.

Maybe, but I think Americans are acting a bit like Chicken Little. The skies are not falling yet. Greece may very well be forced out (it only accounts for 2-3% of EU GDP), but I tend to agree with Mr. Pavoncello: the euro is not going to dissolve overnight. There is too much at stake for all concerned. Just wait until next week..... Merkel and Sarkozy to the rescue.....again!

[Sulla the Dictator]

Originally Posted by Florian

Maybe, but I think Americans are acting a bit like Chicken Little. The skies are not falling yet. Greece may very well be forced out (it only accounts for 2-3% of EU GDP), but I tend to agree with Mr. Pavoncello: the euro is not going to dissolve overnight. There is too much at stake for all concerned. Just wait until next week..... Merkel and Sarkozy to the rescue.....again!

Except that each time they do that, and the problem isn't comprehensively dealt with, the bond markets get a bit more skeptical. That is how things got as bad as they are. I don't think European leaders appreciate how damaging that stunt Papandreou almost pulled was to market confidence. Nor did the casual manner Berlusconi seemed to deal with the crisis.

The crisis pulls away layer after layer of illusion, leaving investors with the truth. "Europe" is simply Germany, and Germany has consistently stated where it draws the line in preserving the illusion.

[Unit]

Originally Posted by Florian

Yes, that's true. But the wild girations of the bond markets over the past few months have little to do with the creditworthiness of France or the other core EU nations (which, unlike Italy, have no difficulty collecting taxes). Last week even the auction for German bonds failed to find buyers. IMO, this whole crisis is the making of Wall Street, which would like nothing better than to see the euro collapse. Perhaps also the secret wish of Washington?

But, of course, that isn't going to happen.

How is a collapse of the Euro going to benefit Wall Street? I'm not sure of the mechanism you're thinking of. Also hasn't Washington already had to intervene, I don't see what good could Washington possibly get out of a major default.

[Baz]

Originally Posted by Florian

Last week even the auction for German bonds failed to find buyers. IMO, this whole crisis is the making of Wall Street, which would like nothing better than to see the euro collapse. Perhaps also the secret wish of Washington?

I would think the last thing Washington wants is a collapse of the Euro which would mean a major decentralization of political and economic power in the Euro area. Why on earth would Washington want this?

The markets are either gonna break up the Euro or destroy the welfare state in Europe.

[Florian]

Originally Posted by Baz

I would think the last thing Washington wants is a collapse of the Euro which would mean a major decentralization of political and economic power in the Euro area. Why on earth would Washington want this?

The markets are either gonna break up the Euro or destroy the welfare state in Europe.

Washington does not want a competitor of the dollar, the world's reserve currency. The euro is the only currency at present that could rival the dollar.

The markets are not going to succeed in destroying the welfare state in Europe. The European "welfare" state, if by that you mean the states of France, Germany, UK, Scandinavia, Benelux etc, are probably financially healthier than the American "welfare" state. See the chart above.

Originally Posted by Florian

Washington does not want a competitor of the dollar, the world's reserve currency. The euro is the only currency at present that could rival the dollar.

The markets are not going to succeed in destroying the welfare state in Europe. The European "welfare" state, if by that you mean the states of France, Germany, UK, Scandinavia, Benelux etc, are probably financially healthier than the American "welfare" state. See the chart above.

Is that why all of those countries are slowly but surely turning their backs on socialism?

[Don Zeko]

Originally Posted by apple

Is that why all of those countries are slowly but surely turning their backs on socialism?

They are?

[miceelf]

Originally Posted by Don Zeko

They are?

Sure. That's why Republicans almost never conflate European and socialist any more.

[Baz]

Originally Posted by Florian

Washington does not want a competitor of the dollar, the world's reserve currency. The euro is the only currency at present that could rival the dollar.

The markets are not going to succeed in destroying the welfare state in Europe. The European "welfare" state, if by that you mean the states of France, Germany, UK, Scandinavia, Benelux etc, are probably financially healthier than the American "welfare" state. See the chart above.

Florian its breaking my heart what Europe is doing at the moment...since the financial crash Europe has gone in the opposite direction to what I hoped...the markets are dictating public policy all over the place...Greece is currently being destroyed from inside and out and my own country is buried under mountains of private debt which we had no responsibility for. Europe is in for a whole lot of pain over the coming years unless there's a radical shift...even the socialist parties are becoming neo-liberal fanatics.

But come on Florian, the Euro challenging the dollar...

[Sulla the Dictator]

Originally Posted by Florian

Washington does not want a competitor of the dollar, the world's reserve currency. The euro is the only currency at present that could rival the dollar.

I think you mean "was". I remember there being a great deal of talk about this, from about 2006-2008. This crisis, however, has cast a shadow over the stability of the European model. It's probably saved the dollar's global role for another twenty years, at least.

[Sulla the Dictator]

Originally Posted by Florian

The markets are not going to succeed in destroying the welfare state in Europe. The European "welfare" state, if by that you mean the states of France, Germany, UK, Scandinavia, Benelux etc, are probably financially healthier than the American "welfare" state. See the chart above.

Also, we'll see about that. Europe still has foreign interests, and in its hubris, strained relations with the United States over the aughts. You will find yourselves involved in more Libyan type adventures, at the same time you find yourselves confronted with higher interest rates for borrowing. You have benefited from a credit bubble masking the cost of your health care systems. We shall see how long 35 hour work weeks and cradle to grave entitlements last when you have to secure strategic objectives in a more chaotic world, an aging population creating strains on the system, and have to pay competitive rates for borrowing against private markets.

There was a time when it wasn't strange for sovereigns to be paying 8% on debt service. Now, as you note elsewhere, that is considered catastrophic. Indeed, it will be, for this model of creditonomics.

[Florian]

Originally Posted by Sulla the Dictator

Also, we'll see about that. Europe still has foreign interests, and in its hubris, strained relations with the United States over the aughts. You will find yourselves involved in more Libyan type adventures, at the same time you find yourselves confronted with higher interest rates for borrowing. You have benefited from a credit bubble masking the cost of your health care systems. We shall see how long 35 hour work weeks and cradle to grave entitlements last when you have to secure strategic objectives in a more chaotic world, an aging population creating strains on the system, and have to pay competitive rates for borrowing against private markets.

There was a time when it wasn't strange for sovereigns to be paying 8% on debt service. Now, as you note elsewhere, that is considered catastrophic. Indeed, it will be, for this model of creditonomics.

American conservatives have been singing this tune for as long as I can remember: that the European "welfare" state is doomed. France, in particular. As the above IMF chart shows, the US welfare state is more heavily indebted than France, the UK, or Germany, to say nothing of the Benelux and Scandinavian countries. And this despite the fact that the US, unlike the EU, enjoys the privileges of having a national currency that is also the world reserve currency.

Prophesy doesn't interest me. I happen to agree with you that the world faces serious challenges in the future from overpopulation, scarcity of resources and climate change, but Europeans, by virtue of their long and tragic history, are better prepared for catastrophe than Americans, the spoilt, self-indulgent children of the planet.

[Sulla the Dictator]

Originally Posted by Florian

American conservatives have been singing this tune for as long as I can remember

And behold, the harvest that was clear to all willing to look as realists.

that the European "welfare" state is doomed. France, in particular. As the above IMF chart shows, the US welfare state is more heavily indebted than France, the UK, or Germany, to say nothing of the Benelux and Scandinavian countries. And this despite the fact that the US, unlike the EU, enjoys the privileges of having a national currency that is also the world reserve currency.

Couple of things though. As I'm sure you know, since you've made some references to market trading in the past, at least 50% of market movement is based on perception. What do we have in the United States? We have a century long record of economic dynamism. We have a moderately healthy fertility rate. We have a demonstrated history of honoring debt. We have a 200 year old dollar. Our long term fiscal situation is solved by moderate growth, a change in Medicare and Social Security eligibility, maybe a 10% defense haircut, and a 3% increase in taxes across the board. Now, that is the worst case scenario. The battle is fought over how much is cut, verses how much is taxed. But the world knows that our choices exist.

What is perception for your state, though? Your banks are over leveraged in PIIGS debt, France has a history of anemic growth over the last 100 years, you're on your fifth Republic, with no control over your currency, and seemingly at the mercy of a Ferris wheel of fiscally moribund nations. Frankly, the numbers don't matter. It is perception which is going to kill the Euro in trading, and it is perception which is going to increase rates on your debt. The world was given assurances that Europe wasn't just like the United States, it was better. Greece and Italy and Spain are making that look like a lie, and the Germans are demonstrating that they're the only iron in the glove. There was a Germany before the Eurozone; investors are asking themselves, why wouldn't there be one after?

Another problem; between Greek and English riots, French general strikes, and Italian anarchy, the populations of Europe have demonstrated a militant unwillingness to accept rational reductions in their welfare payments. Investors see that too.

Prophesy doesn't interest me. I happen to agree with you that the world faces serious challenges in the future from overpopulation, scarcity of resources and climate change, but Europeans, by virtue of their long and tragic history, are better prepared for catastrophe than Americans, the spoilt, self-indulgent children of the planet.

I would like to agree with you, but I cannot. The war did away with Europeans who were "better prepared for catastrophe". Or, more accurately, the European Boomers did away with those Europeans. They were too provincial, too blunt, too old fashioned.

No my friend, I'm afraid that you have become what you hate. You Europeans are the cartoon you portray Americans as. We at least have bastions of vitality in various regions of the nation. There is nothing about the standard of living in Southern Italy that was earned by the people there. Same with Greece. Same with Spain. Same with Portugal. The entire scheme was a game of pretend, where credit created fake export markets for German products.

As darkness descends, Europeans will once again look West towards us. Of that I am sure.

[Florian]

Originally Posted by Sulla the Dictator

Couple of things though. As I'm sure you know, since you've made some references to market trading in the past, at least 50% of market movement is based on perception. What do we have in the United States? We have a century long record of economic dynamism. We have a moderately healthy fertility rate. We have a demonstrated history of honoring debt. We have a 200 year old dollar. Our long term fiscal situation is solved by moderate growth, a change in Medicare and Social Security eligibility, maybe a 10% defense haircut, and a 3% increase in taxes across the board. Now, that is the worst case scenario. The battle is fought over how much is cut, verses how much is taxed. But the world knows that our choices exist.

What is perception for your state, though? Your banks are over leveraged in PIIGS debt, France has a history of anemic growth over the last 100 years, you're on your fifth Republic, with no control over your currency, and seemingly at the mercy of a Ferris wheel of fiscally moribund nations. Frankly, the numbers don't matter. It is perception which is going to kill the Euro in trading, and it is perception which is going to increase rates on your debt. The world was given assurances that Europe wasn't just like the United States, it was better. Greece and Italy and Spain are making that look like a lie, and the Germans are demonstrating that they're the only iron in the glove. There was a Germany before the Eurozone; investors are asking themselves, why wouldn't there be one after?

Another problem; between Greek and English riots, French general strikes, and Italian anarchy, the populations of Europe have demonstrated a militant unwillingness to accept rational reductions in their welfare payments. Investors see that too.

I would like to agree with you, but I cannot. The war did away with Europeans who were "better prepared for catastrophe". Or, more accurately, the European Boomers did away with those Europeans. They were too provincial, too blunt, too old fashioned.

No my friend, I'm afraid that you have become what you hate. You Europeans are the cartoon you portray Americans as. We at least have bastions of vitality in various regions of the nation. There is nothing about the standard of living in Southern Italy that was earned by the people there. Same with Greece. Same with Spain. Same with Portugal. The entire scheme was a game of pretend, where credit created fake export markets for German products.

As darkness descends, Europeans will once again look West towards us. Of that I am sure.

Spenglerian melodrama. As I said, I am not interested in prophesy. Why will Europeans look "once again" towards the US? Are you predicting war among them? If so, you are living in a time warp. And surely you don't think that Europeans will look towards the US for political inspiration? American politicians are the laughing-stock of Europe: Badly educated, uncurious, incapable of intelligent debate. The system as a whole has become as inflexible as the US constitution, a relic of another age.

What else is there for Europeans to admire in the US? An expensive, inefficient and inequitable health care system (twice as expensive as that of France)? Military Keynesianism? Dilapidated infrastructure? Wastefulness? Tolerance for extreme social inequalities? A mediocre secondary school system? An overly expensive higher education system? None of these things inspire envy in France or among Europeans in general. The only thing that seems to inspire admiration in Europeans is American technological ingenuity. (The question is: will technological ingenuity destroy us before it saves us?)

You have not made a case for the superior fiscal situation of the US. The figures speak for themselves. You are also mistaken if you think that there has been no debate in Europe about welfare state expenditures: about raising the retirement age, increasing co-payments for health care, reducing borrowing, increasing taxes on the wealthy. Political debate is about nothing else in fact. There is another factor that you seem to be forgetting: the high rate of personal savings in European countries, including Italy, and the very low rates of savings in the US.

[Sulla the Dictator]

Originally Posted by Florian

Spenglerian melodrama. As I said, I am not interested in prophesy. Why will Europeans look "once again" towards the US? Are you predicting war among them? If so, you are living in a time warp.

Of course not. I believe Europe will craft some last minute "Euro Bond" when things really get bad, enough to make the Germans temporarily forget about Weimar. I don't expect this to happen until panic has set in in the bond markets. So when it does, like at every stage of this crisis so far, it won't have the effect that it would have if it were done, say, six months ago. So to jump start it, I expect your President and the Chancellor will ask Washington for help.

Now, what that will be could be only one of two things. Either you would try to get us to use the FED to buy a bunch of these garbage bonds, or you will try to get us to coordinate with the IMF and the Chinese for some large foreign bailout of your bond markets.

So, don't get too focused on war. Have you aided you before in war? Sure. But we also saved Europe from famine after WWI. We rebuilt the place after WWII. And we garrisoned the limes of the West from 1945 until today. Crisis is when Europe comes to America, Florian. And war is just one form of crisis.

And surely you don't think that Europeans will look towards the US for political inspiration? American politicians are the laughing-stock of Europe: Badly educated, uncurious, incapable of intelligent debate.

Your politics is sclerotic. The argument in Europe is a matter of inches about "how far left" to go. The only genuine space you have for political debate is about how Islamic you're willing to allow portions of your nations to become, which is an absurd thing to even debate.

Your politicians never have to defend first principles, they argue over minute policy differences. Even still, even with a homogenous political culture of the left and a lobotomized media, your politicians seem incredibly foolish. The Italian Prime Minister and his underage prostitutes; what a clown that man was. He referred to the Chancellor of Germany, the lynchpin of the entire Eurozone exercise, as an "unfuckable lardass". I'm sure you think he's equally absurd, put pass it off as an "Italian thing". But your President more or less did the same thing, gossiping about butter and Merkel's weight, or making serious International blunders on live mic regarding Israel. What is more ridiculous? That Merkel seems to take these kinds of comments personally.

European politics is a circus. That everyone is educated at the Sorbonne only makes it clear that the elites are bankrupt in every fashion, not just fiscally. And don't take that as a slur against Europe. I loathe our Ivy League more than your grey, faceless technocrats.

The system as a whole has become as inflexible as the US constitution, a relic of another age.

One would think that a man from a nation on its fifth Republic and second Empire, bordering Germany with its fourth government in 100 years, Italy which is barely a real country, and Spain which had to concern itself with the real possibility of Fascist coups only thirty years ago, would have a little more humility and respect when speaking about an enduring Republic that has lasted over 200 years with the same government and same currency. The Constitution is a sacred compact between the citizen and the state, made so by the blood of heroic sacrifice. It isn't some ridiculous "Treaty" subject to change at a politician's whim, or the vagaries of circumstance.

It would be better to not exist as a polity than to do so without the Constitution.

What else is there for Europeans to admire in the US? An expensive, inefficient and inequitable health care system (twice as expensive as that of France)?

You don't need to admire it, but you need to learn from it, as you will be adopting something like it soon enough. If you examine a ten year window of the United States' health care cost explosion, and compare it to your shared currency, you see that at exactly the same time health care costs are sky rocketing in the United States because of medical advances, your Euro is shielding you from the costs. I can guarantee you this, Florian. Paying for modern medicine with francs will be impossible under your current system. What your state will probably do is offer care for a certain cost level, and then you'll do something intrusive like demand that all people purchase health care coverage from a private provider at above that cost.

Military Keynesianism?

War is the organizing principle for civilization. Defense from enemies was precisely what forged communities. Therefor, an effective and potent military capability is the first duty of the state. That your governments have dismantled your defensive capabilities in preference for bribing electoral segments is an act of criminal negligence. As we let you handle more of these ugly little brush wars, you will find that to be true.

Dilapidated infrastructure?

Myth.

Wastefulness?

Do we retire people with full benefits at 55 if they worked in a hair salon? Do we try to impose a 35 hour work week? Has Spain completely signed onto the French energy grid yet, after they dismantled their own in the name of Green energy?

Tolerance for extreme social inequalities?

Outcomes are the business of the state? Interesting. I suppose that is why you have so many waiters in France with degrees in literature.

A mediocre secondary school system?

That is the consequence of Unions and progressivism. You don't seem like the type to object to either of those.

An overly expensive higher education system? None of these things inspire envy in France or among Europeans in general.

According to surveys I have seen, 30% of Frenchmen would like to live in America.

You have not made a case for the superior fiscal situation of the US. The figures speak for themselves.

I have, though. If the United States grows a 3%, if you raise the Medicare eligibility age to 67 or 68 and SS to 70, and raise taxes by some small amount, and maybe a 70 billion dollar defense cut, you solve the long term deficits in the United States.

Your problem is that no one believes Italy, for example, will ever see 3% year over year growth. And since this is true, no one believes Italy will pay back its debt, which is large. And no one believes Germany will pay Italy's debt, or France. Then, people ask who owns that debt. Turns out it is French and German banks.

The risk of bank runs in the Mediterranean and the exposure of Northern European banks to sovereign debt means you're all in the same boat. And that boat is leaky.

You are also mistaken if you think that there has been no debate in Europe about welfare state expenditures: about raising the retirement age, increasing co-payments for health care, reducing borrowing, increasing taxes on the wealthy.

First of all, look at what happened to Sarkozy's popularity when he proposed a rational increase in the retirement age. The Socialists are running against him promising to undo even the MINOR reforms he has accomplished. Look at what Papandreou almost did in Greece. Look at the riots in Athens. The people are not willing to tolerate cuts. The people are your weak link.

There is another factor that you seem to be forgetting: the high rate of personal savings in European countries, including Italy, and the very low rates of savings in the US.

Seems like a double edged sword to me. The personal savings of Italians...in Euros. One panic, on one day, brings the whole thing down.

You are right about the US, though. We should have a greater focus on personal savings, especially when it is the planet's safest currency.

[Florian]

Thank you for your thoughts, sulla. But I do not have the time, the patience, or the inclination to correct your childish misconceptions about Europe and European history.

[Sulla the Dictator]

That's fine. I notice that S&P is talking about downgrading 15 European nations now. You're probably right, things are going to go well.

[Florian]

Originally Posted by Sulla the Dictator

That's fine. I notice that S&P is talking about downgrading 15 European nations now. You're probably right, things are going to go well.

The threat of a downgrade by the rating agencies has been hanging over European markets for months. It is not going to destroy the eurozone or the euro. At most, it will allow Wall Street traders to make more profits, by shorting the euro, government bonds etc.

As I said earlier, the fiscal situation of the US government is no better than that of the core countries of the EU (see IMF chart I quoted above). In fact, it is a little worse, but the gap between revenues and expenses is disguised by the "exorbitant privilege," as De Gaulle once famously put it, which the United States enjoys in the world economy: the US government can repay its debts in dollars (loans from foreign central banks) by printing more dollars. In effect, it can repay foreigners with a devalued currency, inflating its way out of debt. (When there was a gold standard this would have been impossible).

Moreover, the US can also run huge trade deficits (i.e. Americans can import and consume more than they produce and export---as they have done for decades), without having to face what usually happens when countries are in a similar situation: the demand by lenders for a risk premium, a higher return on the money they lend, which normally would cause yields on bonds to rise and a devaluation of the currency. Asians, Arabs and others have no choice but to lend their surplus dollars to Americans.

Connaly, American Secretary of the Treasury under LBJ: "The dollar is our money, but it is your problem." Your= the rest of the world.

I wish BHTV would devote a diavlog by economists to this topic.

[ohreally]

Originally Posted by Florian

I am also mystified by the fact that Germany, with a debt that is almost as great as that of France in relation to GDP, is nonetheless considered a better risk by the bond vigilantes. http://chartsbin.com/view/2108

Flight to safety. There are two things running against France. One is its huge exposure to Italian debt and its over-leveraged banking sector; the other is the risk of losing its AAA rating.

But here's the funny thing: France risks losing its AAA because of higher spreads with German bonds, and the spreads are widening because France risks losing its AAA...

[Florian]

Originally Posted by ohreally

Flight to safety. There are two things running against France. One is its huge exposure to Italian debt and its over-leveraged banking sector; the other is the risk of losing its AAA rating.

But here's the funny thing: France risks losing its AAA because of higher spreads with German bonds, and the spreads are widening because France risks losing its AAA...

Yes, I am aware of the exposure of French banks to Italian and Greek debt. That has been a major factor in the disagreement between France and Germany on the proper role of the ECB, i.e. whether it should be more like the FED and be authorized to purchase "eurobonds" (which of course don't exist yet) and thereby calm the markets when they are in a downward spiral.

But the main reason for the flight to safety and the widening of spreads is, as you say, that "funny" thing known as bond markets and rating agencies.

[Diane1976]

Originally Posted by Florian

Congratulations bhtv. This is the second diavlog on Europe in several weeks from a perspective that isn't American. A German, an Italian, what's next? Et les français alors? Thank you Bob for your intelligent questions.

On the question of national debt in relation to GDP, the following chart from the IMF is rather illuminating (click on country). Note that the US has a higher ratio than Germany, the UK or France....yet no one seems to be suggesting that the dollar is doomed. I am also mystified by the fact that Germany, with a debt that is almost as great as that of France in relation to GDP, is nonetheless considered a better risk by the bond vigilantes. Can someone explain this?

http://chartsbin.com/view/2108

I would appreciate it if you would talk more about what's going on in Europe, Florian. I feel worried about it, and it's hard to know from here what's really happening. Personally, I admire very much what Europe has accomplished, and I'm hoping they will get their act together, but I have no idea how.

[thprop]

I wish they had talked about the speech Polish Foreign Minister Radek Sikorski gave in Berlin on Monday. It has been getting a lot of press in Europe - pretty much ignored in the US. David Frum did a good job of writing about the speech.

Here is the Economist on the speech.

The whole speech is here.

And I demand of Germany that, for your own sake and for ours, you help it survive and prosper. You know full well that nobody else can do it. I will probably be first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity.

You have become Europe’s indispensable nation.

You may not fail to lead. Not dominate, but to lead in reform.

Provided you include us in decision-making, Poland will support you.

[ohreally]

The current crisis, both in its American and European versions (two sides of the same coin), is the indictment of Anglo-American capitalism, in particular a deregulated financial sector given free rein to build Ponzi schemes for the benefit of a tiny, wholly unproductive plutocracy.

It's the countries with strong democratic welfare states that have fared the best: Sweden, Germany, Denmark, Austria, etc. The worst culprits, Greece, Portugal, Spain, Ireland, the UK, and the US etc, all have one thing in common: much weaker welfare states. France's mortal sin has been, surprise, surprise, to let bankers-gone-wild run the show in cahoots with corrupt politicians: in other words, France's unforgivable mistake has been to look at the Anglo-American model and go, "Hey I can do that, too!"

So if there is one lesson to learn from this mess it's the need to return to welfare states with a tightly regulated financial industry. Amen.

[Don Zeko]

Originally Posted by ohreally

It's the countries with strong democratic welfare states that have fared the best: Sweden, Germany, Denmark, Austria, etc. The worst culprits, Greece, Portugal, Spain, Ireland, the UK, and the US etc, all have one thing in common: much weaker welfare states. France's mortal sin has been, surprise, surprise, to let bankers-gone-wild run the show in cahoots with corrupt politicians: in other words, France's unforgivable mistake has been to look at the Anglo-American model and go, "Hey I can do that, too!"

I'm right there with you on the need to heavily regulate the financial sector, but this business about welfare states protecting countries from the euro crisis is nonsense. After all, the US has the weakest welfare state on the list, so if that were really the key factor, you'd expect us to be doing as badly as Greece or worse, when nothing of the sort is happening. This is the mirror image of the conservative argument that the Euro sovereign debt crisis was caused by excessively generous welfare states, in that both arguments are appealing in their simplicity and the way in which they reinforce the worldviews of those making them, but both require you to ignore far too many contradictory facts.

[ohreally]

Your entire argument is based on one fact, which unfortunately happens to be false. Spain's and Greece's social expenditures are 22% of GDP, in the US it's 26%, so the US has more of a welfare state than both Greece and Spain.

Let me repeat it: it's the countries with strong democratic welfare states that have fared best. Democratic is the key word. (Digression: Greece's profligacy is the cozy deal that got the junta out of the way. And must I remind you that their borrowing binge was "advised" by Goldman Sachs?The average Greek citizen has yet to see the benefits of that profligacy. So much for a welfare state.)

Second, countries with strong democratic welfare states are much better equipped to deal with downturns: the 20% underemployed in the US are much worse off than their counterparts in most of Europe. So, in fact, the US is worse off than your average European country.

So countries with a strong safety net and strong regulations (historically, the two things have gone hand in hand) are showing the way out of the crisis.

[Baz]

Originally Posted by ohreally

The worst culprits, Greece, Portugal, Spain, Ireland, the UK, and the US etc, all have one thing in common: much weaker welfare states.

Ireland would have been in a decent position now financially if not for the disastrous bank guarantee/bailout scheme that the government implemented back in 2008 and has just extended this week! Ireland has even paid out tens of billions to unsecured bond holders (who were not guaranteed) at the request of the Germans.

And in the middle of the worst economic crisis to hit the Irish state the EU demanded all states reduce their deficits to 3% of GDP by 2014.

[Monkey Corp]

Great work Mr Wright

[sugarkang]

Lifetime job security in Italy. Awesome. Italy, can you please take all of our liberals? Thanks.

[miceelf]

Originally Posted by sugarkang

Lifetime job security in Italy. Awesome. Italy, can you please take all of our liberals? Thanks.

??? Seriously, what American liberal promotes such a notion?

[thouartgob]

Originally Posted by miceelf

??? Seriously, what American liberal promotes such a notion?

As long as Somalia will take our libertarians ...

[Florian]

Originally Posted by thouartgob

As long as Somalia will take our libertarians ...

But I think Sugarkang would prefer Italy, where libertarians (=mafiosi) have always been well received, where the food is better and the scenery more picturesque.

[thouartgob]

Originally Posted by Florian

But I think Sugarkang would prefer Italy, where libertarians (=mafiosi) have always been well received, where the food is better and the scenery more picturesque.

True Enough. I would say that the the desolation and brutality of Somalia would offer more "efficient price signalling". They price of being on your own that is.

[sugarkang]

whut.