Should Germany quit the Euro?

[DanS]

European Monetary Union.

[C0ckney]

if you look at what happened in ireland then it becomes more clear. there was an enormous property bubble, encouraged by an orgy of crazy lending, which burst, leaving the irish banks with crippling losses. ireland then guaranteed its banks in order to prevent a total collapse, and said that they would cover their losses (a decision born out of sheer panic, suicidal stupidity, politicians being too close to the banks or some combination of the above, i wonder). so billions and billions worth of losses (the full extent of which have only become clear recently), suddenly moved from the bank's balance sheets to the government's, effectively bankrupting ireland. now ireland has this gigantic milestone of insolvent banks around its neck, being funded by its own taxpayers and taxpayers from all over the EU. it needs to get rid of it. the sooner, the better.

greece's problems stem from years of the state spending too much and collecting too little in tax. portugal's stem from a general lack of economic competitiveness, even in the 'boom' years. the problems the three countries face have different causes. as for defaults, it terms of benefits it's ireland, then greece (which will be horrible, but the least worst of a set of very bad options), and then portugal, maybe. i'm not convinced that portugal needs to default. it terms of timeline, all the attention is on greece and if greece defaults, the others will not be far behind.

as for actual numbers, i've read quite a bit about this and will try to locate some of the better articles (with numbers) for you. it will have to be tomorrow though as i'm about to go to bed.

[C0ckney]

it's also worth remembering that the response to european debt crisis is really a banking bailout...i.e. if these countries default you can kiss goodbye to the european banking system (or alternatively we see the nationalisation of just about every bank in europe).

hopefully northern european taxpayers will soon decide that keeping this particular house of cards upright is not worth it.

[Barnabas]

The problem is that there is no painless solution for the problem.
The Portuguese and Greeks and Spaniards have been living above their means, and for the crisis to end they have to impoverish themselves, be able to buy less nice things than before, either through severe adjustments, like cutting wages, or through a devaluation, which is the easier thing to do in most of the world.

In Argentina we lived through something like that, but it was not so tragical, among many other things because we all suspected we were living a party that could not last forever (third world hairdressers going on vacations to Cancún and Miami) and because we are south americans, so, at worst, the devaluation left us on an even level with our neighbours.

For a european country, I imagine, suddenly becoming poorer must be much more painful, for psychological, nationalistic pride reasons.
Is any of these countries having deflation problems? Just asking

If Germany wants to be kind, something to which they are not obligated, instead of throwing money into a bottomless pit, should let those countries leave the Euro, stay in the EU, help them renegotiate their debt and with the banking problems that always arise in these cases.

[C0ckney]

dan, here's an article which i think summaries the crisis very well. it's from irish economist morgan kelly, who predicted the collapse of the irish housing markets and its banks. here it's quite long but a good read for anyone interested in the topic.

Irish insolvency is now less a matter of economics than of arithmetic. If everything goes according to plan, as it always does, Ireland’s government debt will top €190 billion by 2014, with another €45 billion in Nama and €35 billion in bank recapitalisation, for a total of €270 billion, plus whatever losses the Irish Central Bank has made on its emergency lending. Subtracting off the likely value of the banks and Nama assets, Namawinelake (by far the best source on the Irish economy) reckons our final debt will be about €220 billion, and I think it will be closer to €250 billion, but these differences are immaterial: either way we are talking of a Government debt that is more than €120,000 per worker, or 60 per cent larger than GNP.

......

National survival requires that Ireland walk away from the bailout. This in turn requires the Government to do two things: disengage from the banks, and bring its budget into balance immediately.

First the banks. While the ECB does not want to rescue the Irish banks, it cannot let them collapse either and start a wave of panic that sweeps across Europe. So, every time one of you expresses your approval of the Irish banks by moving your savings to a foreign-owned bank, the Irish bank goes and replaces your money with emergency borrowing from the ECB or the Irish Central Bank. Their current borrowings are €160 billion.

The original bailout plan was that the loan portfolios of Irish banks would be sold off to repay these borrowings. However, foreign banks know that many of these loans, mortgages especially, will eventually default, and were not interested. As a result, the ECB finds itself with the Irish banks wedged uncomfortably far up its fundament, and no way of dislodging them.

This allows Ireland to walk away from the banking system by returning the Nama assets to the banks, and withdrawing its promissory notes in the banks. The ECB can then learn the basic economic truth that if you lend €160 billion to insolvent banks backed by an insolvent state, you are no longer a creditor: you are the owner. At some stage the ECB can take out an eraser and, where “Emergency Loan” is written in the accounts of Irish banks, write “Capital” instead. When it chooses to do so is its problem, not ours.

At a stroke, the Irish Government can halve its debt to a survivable €110 billion. The ECB can do nothing to the Irish banks in retaliation without triggering a catastrophic panic in Spain and across the rest of Europe. The only way Europe can respond is by cutting off funding to the Irish Government.

[DanS]

OK, so that's about how I understood the situation. 160% of GDP after it is all said and done. Looks like a ~ 10% fiscal deficit this year, with minimal economic growth (while still positive).

It doesn't look to me like Ireland is in any worse situation than Greece (and maybe Portugal). It seems that at least Ireland has a functioning government that can act on austerity decisions.

[C0ckney]

ireland's situation is in many ways better than greece's and portugal's. in that most of its problems stem from its banks and their enormous losses. if ireland cuts them loose and defaults on the bank's debts, then they would be in a much better position going forwards than greece or portugal would be after a default. this is why ireland would benefit most from a default.

we should also remember that both ireland and greece cannot afford to keep up payments on their debts as things stand. they have already been 'rescued' once and the markets have sent a very clear message (in the form of astronomical bond yields) about their ability to pay going forward.

[VetLegion]

Euro was a very bad idea and every country that can quit it, should, and
every country that did not join it yet, should not.

[DaShi]

I don't think much is in it for Germany to be so entwined with Portugal and Greece -- Portugal and Greece should be kicked out of the union.

Alternatively, Portugal and Greece should be allowed to declare bankruptcy and given no help by the others in the EMU.

Joke?