Financial Crisis: Who is going to bail out the euro?
Earlier this year as the euro trounced the dollar on the exchange markets, it occurred to me that holding euros was much, much more tenuous than holding dollars as it was not the currency of a single sovereign nation. Clearly the Fed has every intention of propping up the dollar, but can the same be said of Germany, France, England or Italy when it comes to their common currency? Highly unlikely, as prescient Telegraph reporter Ambrose Evans-Pritchard writes:
"Who in the eurozone can do what Alistair Darling has just done in extremis to save Britain's banks, as this $10 trillion house of cards falls down? There is no EU treasury or debt union to back up the single currency. The ECB is not allowed to launch bail-outs by EU law. Each country must save its own skin, yet none has full control of the policy instruments.Germany has vetoed French and Italian ideas for an EU lifeboat fund. The former knows exactly where that leads. It is a Trojan horse that will be used one day to co-opt German taxpayers into rescues for less Teutonic EMU kin. One can sympathise with Berlin. But sharing debts with Italy and Spain was implicit when they agreed to launch the euro. A shared currency entails obligations. We have reached the watershed moment when Germany has to decide whether to put its full sovereign weight behind the EMU project or reveal that it is not prepared to do so in a crisis.
This is a very dangerous set of circumstances for monetary union. Will we still have a 15-member euro by Christmas?
Think that's scary? Try these tidbits, from Nouriel Roubini's weekly round-up newsletter of September 26th, 2008:
• Daniel Gros, Stefano Micossi: The 'overall leverage ratio' -- a measure of total assets to shareholder equity -- of the average European bank is 35 due to large in-house investment banking operations, compared with less than 20 for the largest U.S. banks. This means that relatively small writedowns on their assets could have a devastating impact on a their capital --> some EU banks have become too big for any one European country to save while an official cross-border crisis management mechanism with ex ante burden sharing is not in placeFinancial Crisis: Who is going to bail out the euro?• The crucial problem on this side of the Atlantic is that the largest European banks have become not only too big to fail, but also too big to be saved. For example, the total liabilities of Deutsche Bank (leverage ratio over 50) amount to about €2,000bn (more than Fannie Mae) or more than 80% of Germany's GDP. This is simply too much for the Bundesbank or even the German state
(Richard Metzger is a guestblogger)
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The UK does not use the euro.
Yes, we still have the £ here. All the French people I know still convert prices into Francs!
Since when was the € the currency of the UK?
Great Britain still uses the Pound, but they've been having problems, too.
Prophesying disaster for the euro is part of the telegraph's house style. The ECB and its reserves stand behind the euro.
This is actually a very good question. There might be little we can do at this point to remedy the financial crisis gripping the US at the moment. There might be something we can do, however, to help avoid heavier catastrophes in the European and Asian markets.
Evan
With the upcoming elections in mind: the value of a nation's coins seems to be the mere reflection of the nations average IQ these days... hence the devaluation of the Dollar.
Talking about being too big to fail.
Fortis bank was bailed out by BeNeLux, that right, it was bailed out by 3 countries!
Um, yes.
1) It would be "the UK" or "Britain" shoring up the Euro, not just England.
2) ...although we wouldn't because we don't use it.
If the Euro collapses, it just means we can buy all the stinky cheese and fine wines that we can carry back through the tunnel for next to nothing. Well, then our exports will collapse (or maybe not? We get pretty much all our money from sales of weapons and technology these days, and there's always room in governments' budgets for that, tanked economy or no).
Still our economy has enough problems of its own. In addition to all the fun of the financial markets collapsing, it turns out that several county councils (local government) had a lot of money in Iceland's banks which they'll probably never see again. "Only" a few tens of millions for any individual council, but still enough to sting.
Evan,
Your blog link can go on your profile page. Thanks.
Nice to see that a UK publication worries about the euro. Never thought I would see the day.
Clearly the Fed has every intention of propping up the dollar
No, no it doesn't. The Fed has every intention of propping up the stock market, by lowering interest rates, which weakens the dollar.
>What does the ticker say about the Dow Jones?
>IT'S UNDER NINE THOUSAAAAND!
never mind the economics. what about the outsider art? WTF is that thing up there?!
@avraamov:
the first image if you search on google images for "mammon" aka http://globalist.org.ua/?p=1754
See http://en.wikipedia.org/wiki/Mammon
glad to be of service...
WTF is that thing up there?!
Cirith Ungol, next left.
Money and its exchange rate is largely fiction: read the last 5+ years on Zimbabwe -- various claims of inflation reaching 10,000 to 2,000,000,000,000 percent! These numbers are meaningless to the population -- the people have the necessities of life and are coping, but (formerly?) rich colonial capitalists have lost their land and are fighting back.
Money is supposed to be representative of something - labour or land or useful goods - "capital" and "investments" are none of these and subject to emotional fads -- in both directions.
If the euro suddenly became worth a yen, people would do more business domestically in the short term, and the influx of rent-seeking capitalists shopping for bargain wages and land might turn it around and make them *more* successful in the long term.
If your grip on international economics is such that you believe that 'England' uses the Euro it might be an idea to take some advice from Wittgenstein: "Wovon man nicht sprechen kann, darüber muss man schweigen".
The whole point of the Euro is to stabilise its value between Euro using countries so that the whole issue of exchange rates becomes moot. Variable exchange rates led to more instability in the economy and generally make life much harder for people who must trade across borders. A fixed exchange rate can furthermore encourage cross-border trading - important in europe where your nearest potential supplier may well be over the border.
Also people form an emotional attachment to the 'strength' or 'weakness' of their currency which is often at odds with the economic facts - there are circumstances where a 'weak' currency can be a good thing for that currencies economy.
As it is, the US dollar's value has been low for a long time and that has everything to do with balance of payments issues and nothing to do with the latest crisis. The Federal reserve's actions have been to do with preventing a complete collapse of the US banking system and nothing to do with propping up the US dollar's price on money markets.
To the anonymous #17:
By the "people" whom you are asserting " have the necessities of life and are coping" I assume that you're excluding the non-people: tied down in one of Mugabe's rape camps; being eaten by the crocs trying desperately to get across the fortified border that South Africa set up to keep out all the dirty refugees; and those getting their heads blown off by township, shot-gun wielding, anti-immigrant mobs.
Honestly, I'm so sick of people interpreting every single thing that goes on in Africa through the rose-coloured glasses of 1960s US civil rights movements. Talk about Racist Orientalism....
Lol, by the recommendation of a BB commenter (I forgot who), I've been reading Hayek's essay "The Denationalization of Money", which is surprisingly relevant to today's situation (well, it was written during the economic crisis of the 70s, so you could very well imagine).
Anyways, while the entire essay is an argument for the end to government monopoly on money and that governments are always destined to inflate their currencies for their own gain, Hayek warns against any attempt to create a supra-national single European currency, as it would be even further removed from the demands of the money's users. This is just past stupidity taking its long overdue toll.
Mappo @12, the Feds intend to prop up the international banking and finance system.
Nadreck @19, teach and explain. It'll do far more good than snarling at all the ignorance around you.
It's a great Mammon. Too bad neither this site, nor the site that comes up on the image search for "Mammon", nor any other site I could find credits the original artist. Not a point about copyright but just an example of how many iterations of borrowing can result in credit not being given where credit is due.
European politics, and monetary or fiscal politics is no exception, is indeed a bit harder to understand or manage. But not as hard as #18 to a monolingual Anglo-Saxon: "remain silent about what you cannot (or shouldn't?) speak", is what old chap Wittgestein seems to have said.
The UK, in spite of all that European integration gaggle on the continent, indeed opted to go their own way because it appeared favourable to join what they don't like but at the same time to support doubts about the Euro while improving the position of London as a financial market. Equally, some mainland funds could be tapped without returning too much of own efforts or contributions.
In apparent absence of a sizeable producing industry this was the only profitable choice and one could thrive indeed on the growing financial bubble which seems to have burst a few weeks ago, almost as well as on trading big strong lads across the big pond in those glorious old days, weren't they.
The financial institutes invested or involved strongly in structured products, in investment banking, in creative financial money-multiplying machines and all these wonderful gimmicks of the golden boys, have now some trouble to keep up their chins. As it occurs to me, on the mainland many banks were too conservative and tied by nonsense continental laws and financial supervision to be really in trouble. So I would see the Euro in turbulence, yes, but far from the need of being bailed out.
My question would rather be, which island after Iceland will need the financial support of the Russians. Ouch, right, they won't help the Empire. No way. So, who will be on UK's side then? The big broke cousin?
On a matter of pedantry, in English, the plural for Euro is Euro (in the same way as the plural of sheep is sheep, or Lego is Lego).
Saying the translation of "Euros" may be correct in other countries where they have different rules for plural conjugation, but definately not the case in English.
definitely :p
MINDPIMP: The European Commission prefers "euros" (see "English
Style Guide" by the Directorate-General for Translation, section 20 "OFFICIAL LANGUAGES AND CURRENCIES", http://ec.europa.eu/translation/writing/style_guides/english/style_guide_en.pdf )
Who defines what's correct anyway? (Honest question; dictionaries seem to list both.)
while the official plural of Euro is "Euro" (and more ludicrously the plural of cent is "cent"), "Euros" is also acceptable and widely used.
In Irish English, the plural of euro is unchanged. In British English, certainly, the plural is euros. That's the way all journalism here refers to them, so it seems likely that would become the dominant version if we join the EMU.
Every time you say that the currency of the UK is the euro, UKIP kills a kitten. We don't even technically have one currency across the UK, let alone the rest of the EU.
Yes, the Dollar, relying on the strength/weakness of a single country, will need propping up by a national bank when things go sour.
The Euro, relying on the strength/weakness of several dozen countries, needs no such defense. Its foundation is inherently stronger as the risks are spread out among countries. The Euro may see some turmoil but it will not, CAN not collapse.
but didn't the US$ have similiar defense by being the de facto operating currency of many non-American countries?
14, I like the illustration. Mammon looks absolutely bewildered, like he's saying, "Where did I go wrong? Isn't greed supposed to be a good thing?"
22, it looks like it might come from an old pulp novel. The euro and dollar signs could have been photoshopped in.
I do hope you'll forgive us Brits for not quite taking this article seriously considering you got niether the country or the currency used there cortrect.
Wow, are you serious?! England (which, er.. by the way is not a sovereign nation any more than a US state, we are part of the UK, have you heard?) doesn't consider the euro to be it's 'common currency'. We actually use a currency called 'pound sterling' here.. I know people have pointed these small facts out above, but please, if you're going to even _highlight_ someone else's economic story, at least get some basic world geo-politics right.
sigh.
@Everybody who thinks the UK won't be paying for the Euro:
Yes, perfectly true that we don't use Euros. That should have been made clearer in the article.
But we are part of the European Union. And we do pay a lot of money to them.
So if the Euro gets in trouble, are you 100% sure that we won't end up helping to bail it out? I'm not. (But, I'm not an economist.)
Ambrose Evans-Pritchard has a long, long track record of wildly wrong predictions on the economy; he's a longstanding gold bug and something of a joke. Anyway, the European Central Bank is, in fact, backed up by all the member state central banks (the eurosystem).
It bears repeating that the Daily Telegraph is sometimes half-jokingly called the Daily Torygraph. It's a right-wing broadsheet, formerly owned by Conrad Black, and is noted for a Europhobic (anti-EU) editorial political agenda.
In other words, you should give a Euro-knocking think-piece in the Torygraph about as much consideration as you'd give an Obama-knocking piece on Fox News.
Six months ago everyone was thinking oil and the euro were going upward toward infinity.
What happened to the whole "de-coupling" notion? I thought the US was irrelevant in world affairs and economics? After all, the whole "banking crisis" is the US' fault? The US strongarmed poor European banks to give them dumb loans? Just like the CIA funded a front organization to vote down the Irish EU referendum....
Anyways, whatever happens, it will be mildly painful for everyone in the short run, in long run..??
If this is the launchway to a "multi-polar" world, then I am happy.
I look forward to a multi-polar world: I am sick and tired of the US subsidizing European and South Korean defense. I would like to see what a European “response” to Russia screwing up the Baltics and East Europe again without the self-interest of the EU2 or EU3 getting in the way ie energy/marketplace access.
Wasn’t the American Empire(tm) supposed to collapse 60 years ago or at least 1 million times during the 70s?
And what about the ageing “problem” that is being undiscussed in Europe and Russia. Someone is going to pay the bill to support the 25% population of 60+ with their “generous” pensions and medical care 50 years from now.
And why do people continue to immigrate to Anglo countries when they are the root of all capitalist evil?
YES! internet arguments/internet rage!
Thank you Mr. Stross (and thanks for creating).
This is too silly, the painting is fine but the text should not be allowed on a page that takes itself seriously. This is not kindergarten or whatever. The author ought to learn a bit about stuff before he is allowed to contribute again.
the IMF is warning of a meltdown. The IMF has long been an instrument whereby poor countries have been enslaved by debt. Watch closely.
You're assuming that the FEDs actions would help the US. In actuality, it will probably harm the US dollar because of the inflation it creates and the malinvestment it triggers (by setting some interest rates), in the long-term.
That said, the EU is under central banking as well (similar problem).