Pointedstick wrote:
craigr wrote:
I'm trying to remember where I read it, but Spain blows up their currency on average around every 40 years or so. They've had the most defaults of any western country if I recall as well. The entire idea of the euro putting all these countries under one currency was doomed from the beginning. I just wish they'd kick out Greece, Italy, Spain, Portugal and Ireland and get on with life. Or, better yet, dissolve the whole thing and just admit that there is too much history and cultural differences between those countries for the idea of a unified government and currency to have any chance of working.
+1,000
I generally think the folks who are hoping or pushing for a more centralized European government to kick the member nations into line are severely discounting the cultural and linguistic differences between the member nations, and the associated enmity they cause. There's a lot of bad history and old grudges.
Well, first of all, I have no idea why independent countries would willingly agree to give away their sovereign right to create their own currencies unless they truly wanted a unified European government. It's madness.
Second...Europe's problem is NOT limited to a few delinquent countries with bad track records. Europe has a tremendous currency flaw. In the United States, or Japan, when a government spends money, domestic bank reserves inflate (as well as domestic accounts held by the foreign sector) and the excess reserves need to be drained into risk free assets (particularly since banks don't like holding excess reserves). So, the government holds regular bond auctions and, what do you know, banks show up to funnel their excess reserves into the only risk-free assets available for that particular currency (Treasuries or JGBs, etc.). And if not enough banks or people show up to the auction, Primary Dealers are legally obligated to funnel their excess reserves into government bonds. It's like shooting fish in a barrel.
But, when the Spanish or Italian or Greek government spends money, that money might not be used to buy domestic debt. Rather, it tends to leak to bank accounts in Germany, to buy German debt. Or it leaks to France, to buy French debt.
So, the Spanish government spending doesn't necessarily help finance Spanish government debts. And Greek government spending doesn't necessarily help fund Greek debts. And Italian government spending doesn't necessarily help fund Greek debt. Their spending often ends up funding the debt of the stronger Eurozone countries.
In fact, this is nothing short of a recipe for disaster. Because even if you kicked Greece, Spain, and Italy out of the Euro, whichever countries that had the lowest rated debt would simply find their government spending leaking to bank accounts in more stable countries where it would be used to purchase far more stable debt.
Richard Koo's simple proposal to save the Eurozone is to ban countries from selling sovereign debt to anyone that's not domestic, so that all spending and borrowing would stay domestic. I'm not sure how you would properly enforce that, but it's an interesting proposal.
In any case, Europe's problem isn't really about government spending (though, they could certainly stand to be wiser about it). Europe's problem is that countries don't have their own currencies, and their spending is often used to finance the more stable governments in the Euro.
It's almost as if this flaw was created intentionally — to undermine the unstable peripheral nations and keep Germany and France thriving.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
