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Monday, June 04, 2012 10:58 AM


"Multi-Stage" Nannycrat Proposals; Devaluation - The Last Option? Note to Wolfgang Münchau, Martin Wolf, Jeremy Siegel at the Financial Times: Focus on the Obtanium not the Unobtanium


The stubbornness of economic writers, nannycrats, and eurocrats is nothing short of amazing.

No matter how many times Merkel rejects eurobonds and other transfer mechanisms, the vast preponderance of economic writers, nannycrats, and eurocrats keep proposing the same futile actions, over and over, and over again.

For example, Financial Times columnist Wolfgang Münchau writes How to build a fiscal union to save the eurozone.

One does not even have to read the article to know his proposal will never fly. Nonetheless, I did suffer through it. My conclusion is "it will never fly".

The reason it will not fly is that it requires both legislative changes and treaty changes, something rather obvious from the title I might add.

Would the German supreme court allow it? Of course not. Would all the Northern states vote for it in this economic malaise? Of course not. Would German citizens vote for it? Of course not.

Even if the answer to all those questions was different, here is one more key question:

Will the market wait for it? Of course not.

Impossible to Keep a Nannycrat Down

Nonetheless, it is impossible to keep a nannycrat down.

Münchau concludes with "I am, however, mildly encouraged by the sheer number of people in Brussels, Frankfurt, Paris and in Rome, who are now openly advocating a multi-stage fiscal union. There really is no alternative."

No doubt Münchau will be even more encouraged by the June 3 Wall Street journal headline Germany Signals Crisis Shift However, inside the article, the details are the same collection of fluff promises found elsewhere.

The issues on the table fall broadly into two categories. There are ideas such as creating joint European bonds, a European-wide deposit insurance and more broadly a "banking union," which fall into the category of mutual liability for sovereign debt and European banks. These are ideas French President François Hollande backs, but have been anathema to Ms. Merkel unless power to enforce budget discipline is shifted to Europe, which would mean a sacrifice of sovereignty.

Germany is pushing again for far-reaching European control of national budgets, a fiscal-policy union, which would require member states to cede control of national budgets to some future European fiscal authority, an idea France staunchly opposes. There is little chance of a breakthrough in June, but German officials said a process is beginning.

"There will be no big bang at the June summit," said a German official. "But it would be a big step for Europe if we succeed in creating a structure for the discussion, establishing a method, asking the right questions and putting it all into a certain timetable hat would be significant for Europe."

Speaking to reporters at a summit of Baltic Sea Coast leaders last week, Ms. Merkel suggested she is willing to engage in discussion about any idea on the table.

"Of course, it is possible to consider how we are going to develop over the next five to 10 years," she said. "But if we are constantly censuring our ideas it won't work."
Got that?

Merkel wants control over national budgets (something she actually cannot promise without a referendum), and France does not.

Meanwhile France wants eurobonds. Yet on June 3, for the 1000nth time Merkel Rejects Debt Sharing as Obama Urges Europe Action

Secret Plans? 

Virtually nothing has changed. And that is why I am sticking with what I said on June 3 in Another Meaningless Nannycrat Rumor: Europe Mulls "Secret Plan for New Europe"
More Holes Than Swiss Cheese

One look at the nannycrat participants led by Van Rompuy and Jean-Claude "lie when it's serious" Juncker, is all you need to do to know the plan has far more holes than Swiss Lorraine cheese.

I would have thought that no one could possibly take this seriously, even if such a meeting were agreed to.
There is no plan. There is not even a plan for a plan. The secret plan is to develop a secret plan at the already scheduled June summit with "meat on the bones" coming later.

For some inexplicable reason Münchau is mildly encouraged by all this hot air from nannycrats. I propose the only way to be encouraged by useless talk by nannycrats is to be a nannnycrat.

What Hollande Must Tell Germany

Financial Times columnist Martin Wolf writes What Hollande must tell Germany.

What can Hollande possibly tell Germany that has not been said by economic writers, nannycrats, and eurocrats 10,000 times or more?

The answer of course is "nothing".

Devaluation: The Last Option?

Finally, Financial Times columnist Jeremy Siegel proposes Devaluation – last option to save the euro
The least disruptive route Europe can take is to sharply lower the value of the euro. This will help improve the trade deficit in the peripheral countries and bring some relief to their downward spiralling economies. Euro depreciation would push the German trade surplus even higher and cause some inflationary pressures in those few European countries that are still near full employment. Given the strong German labour market, a lower euro would be likely to raise German wages and help close the gap between German and other European labour costs. The mild inflationary effect of a euro closer to dollar parity would be far less painful for all concerned than forcing austerity or internal devaluation on the peripheral countries.
Obvious Problems

There are two obvious problems with Siegel's proposals.

  1. Germany will not go along with higher inflation 
  2. It would not help if Germany did 

A devaluation of the euro while leaving the eurozone intact would do very little if anything for the  relative competitiveness of Spain, Greece, or Italy vs. Germany.

Reportedly, Greece needs a 60% devaluation of the Drachma. Spain may need a 30% or 40% devaluation of the peseta. What does Italy need?

See the problem? Even IF Germany were to agree to higher inflation, it cannot agree to differing rates simultaneously. The practical side says Germany would not agree to higher inflation in the first place and even if it would, certainly 30% is not in the ballpark.

How long would it take Spain to be competitive to Germany if inflation in Germany was 6% and inflation in Spain 0%?  My answer is forever.

The notion that inflation in and of itself cures anything is fundamentally flawed, and especially flawed between countries on the same currency.

 Obama's Imaginary "Crisis Cloud"

President Obama got into the act, warning Europe to end the "Crisis Cloud".

For a discussion of Obama's imaginary cloud as well as my first take on "nannycrats", please see Obama Seeks End to "Crisis Cloud"; Cloud? What Cloud?

Also see my original post on the "nannyzone" written June 2, 2011, nearly one year ago today: Trichet Calls for Creation of European "Nanny-State" and Fiscal "Nanny-Zone"

No Cloud, Only Clouded Judgements

There is no cloud, only clouded judgements by economic writers, nannycrats, eurocrats, prime ministers, and presidents.

The euro project is a failure. It was ill-conceived in the beginning, poorly executed throughout, and together with fractional reserve lending helped destroy Ireland, Spain, Portugal, and Greece.

With such a dismal track record it is somewhat a mystery why anyone would want the damn thing.

No alternative? Really?

Wolfgang Münchau says "There really is no alternative."

Of course there is an alternative. How about a serious discussion of how best to breakup the eurozone?

Focus on the Obtanium not the Unobtanium

It is time to focus on reality instead of the impossible. The reality is the eurozone is going to bust up and nannycrats better get used to the idea or the markets will impose that break-up in their own messy way.

The "obtanium" is a eurozone breakup.

The "unobtanium" is a fiscal nannyzone. And without a fiscal nannyzone and common bonds, the eurozone cannot stay intact.

Eurozone Breakup is Destiny

A breakup is destiny. The important question is "how?"

I discussed this last week on Capital Account with Lauren Lyster.



The main topics were US GDP, hyperinflation, Ireland, and a eurozone breakup.

Slow-and-Painful or Over-and-Done?

The slow, painful, and highly disruptive breakup is for Greece to exit, followed by Spain, followed by Portugal, followed by Ireland, and ultimately Italy.

The least painful way is for Germany to exit now.

Why?

Germany would immediately have a credible currency. Greece and Spain would not. Greece is highly likely to experience hyperinflation if it exits.

If Germany and the Northern countries exit, then the ECB can print at will. It can do what Spain and Greece wants.

Hollande can then have his fiscal union. However, would he still want that union if France instead of Germany is the main country backstopping the euro?

The "Real Alternative"

The choice is not between pain and no pain, but on how soon to get it over with. Bear in mind, Spain, Italy, and Greece have much to do whether the choice is slow-and-painful or over-and-done.

The PIIGS in general need to address work rules and pension reform. So does France.

The immediate irony is Spain's prime minister Rajoy says he wants this "Nannyzone", but would he actually obey the dictates of the Nannycrats if they ordered Spain to live within it's means and change union work rules as well?

Clearly the answer is no, yet Rajoy argues forcefully for a "central nanny" enforcer.

Germany is Going to Suffer

No one should think Germany will get off Scot-Free. It's export machine is going to break down either way. Debts owed to Germany will be paid back in depreciated euros not Deutschmarks.

German banks can somewhat prepare for this scenario by dumping all external debt immediately.

There are hundreds of other details to work out.

However, there are thousands of very disruptive details to work out case-by-case if the nannycrats succeed in throwing billions or trillions more euros down the drain hoping to save the unsavable.

Enough is enough. It's time for economic writers to end these silly nannyzone proposals and instead concentrate on an intelligent discussion on how best to break apart the eurozone. The market is certainly moving in that direction even if the current crop of politicians is not.


Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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