Euro, not Brexit, is the EU's biggest threat

[joepistole]

There's nothing about the Euro itself that requires foolish and damaging policy from central bankers. The Euro is not the problem. The bankers are the problem - and they will continue to be, whether or not the Euro fails.

No, politicians are the problem. You are correct in this sense, the problem isn't the Euro itself it is with EU fiscal policies. To understand them, you have to look at the organizational structure. And if you do, I think you will find that the EU central bank has been unduly influenced by politicians and more specifically the Germans.

 

[joepistole]

That depends on what the EU is to be. The GB vision was always of a huge economic free trade area, with common standards and political cooperation between nation states. The federal model - which is what you describe - is one that many of the Continental founders of the EU had in mind (though not all: de Gaulle being an example of one who didn't). But that is a lot more ambitious and fraught with difficulties, some of which are being exposed by the problems of the Euro.

Churchill called for a United States of Europe.

I'm sure the UK vision is of a huge free market in which to sell its goods, with common standards and political cooperation. But you cannot have that without political integration. That was the lesson learned by Americans. After our revolution we formed a lose confederation for economic and security benefit. Each state was almost autonomous. They raised their own militias, they created their own currencies. The EU is far more integrated than the early American state was.

In order so solve their economic problems American founding fathers reconstructed their government to form a more economically and politically integrated nation. Their solution worked, but it wasn't easy and political integration remains an issue in American politics to this day. We fought a very bloody civil war over political integration. This isn't easy. But you cannot have economic integration without political integration. Brits appear to like and want the economic integration but without political integration. And the reality is they can't have one without the other.

If Brits continue down this path and if they still want economic integration and the benefits thereof, they will have to accept some degree of political integration. Inside or out, that will be the price the UK will pay for access to the common market.

 

[joepistole]

No. I'm afraid the Euro definitely IS the problem. This is well understood by most economists. If you have the same interest rate for countries whose economic cycles are out of phase or have different dynamics, you make things worse and do not have the tools to improve the position. That is true, whatever the central bankers do or don't do.

It's not all about interest rates. But you point out a problem. Policy makers are treating each national entity separately. When these nations signed on the the Euro they surrendered some of their sovereignty. The EU needs to begin acting like a single unit or get off the pot. You can't have it both ways as is the case today and expect it to work.

Germany likes tight fiscal and monetary policy, whereas loser economic policy would be more appropriate for slower growing economies. The problem is with fiscal and monetary policy, not the Euro. There are ways to stimulate slower growing countries. Some EU member states just don't want to do them so they don't get done. The Eu needs better leadership. That's what is needed.

 

[Sarkus]

Brits appear to like and want the economic integration but without political integration. And the reality is they can't have one without the other.

What do you mean by economic integration? We don't want economic integration as far as I can tell, at least not to the extent of a single currency, or even standard policies, but rather the ability to carry out whatever policies we need to make our economy work for us.
We would ideally like access to the European single-market, of course, but that is not the same as economic integration.

If Brits continue down this path and if they still want economic integration and the benefits thereof, they will have to accept some degree of political integration. Inside or out, that will be the price the UK will pay for access to the common market.

I'm still unsure what you mean by integration. Once we are outside the EU there is no political integration. There will simply be trade agreements - e.g. access to the single-market with the condition of free movement of people. I do not see this as political integration. This would simply be a condition of access to the market.
Do you see the US being "politically integrated" or "economically integrated" with all countries it has trade deals with?

 

[iceaura]

No. I'm afraid the Euro definitely IS the problem. This is well understood by most economists. If you have the same interest rate for countries whose economic cycles are out of phase or have different dynamics, you make things worse and do not have the tools to improve the position. That is true, whatever the central bankers do or don't do.

That is no more true of the Euro than it is of the dollar, or the renmimbi, or any other currency in widespread geographic use.

The regional economic cycles involved are linked, under the Euro - the bankers have been behaving badly, is the problem, by discarding Keynesian economics and acting in allegiance to long-defunct economic theory / political ideology combined with ethnic bigotry.

 

[joepistole]

What do you mean by economic integration? We don't want economic integration as far as I can tell, at least not to the extent of a single currency, or even standard policies, but rather the ability to carry out whatever policies we need to make our economy work for us.

I mean just what I wrote, integration. It means creating and participating in a common market. Like it or not, that's what it means to have access to the EU common market. Norway has as such access and it isn't a EU member state. But the price of that access is standard policies. That's what those 40,000 pages are all about, defining those standard policies and processes.

The UK has some legitimate concerns with dumping the pound sterling in favor of the Euro. But common currency is part of the economic integration. I know the British don't want to dump the pound sterling, and EU member states have been accommodating in that regard.

We would ideally like access to the European single-market, of course, but that is not the same as economic integration.
I'm still unsure what you mean by integration. Once we are outside the EU there is no political integration. There will simply be trade agreements - e.g. access to the single-market with the condition of free movement of people. I do not see this as political integration. This would simply be a condition of access to the market.
Do you see the US being "politically integrated" or "economically integrated" with all countries it has trade deals with?

You want to have your cake and eat it too. I understand that. Once you are outside and if you want to continue trading with the EU, you are going to have to swallow some degree of political and economic integration. That's the price for doing business with the EU, ask Norway. You will replace a membership document with a trade agreement and you won't be able to participate in EU governance.

Yes, I do. That's kind of how it works. The American economy is very integrated with the economies of its trading partners. The degree of economic and political integration varies by country. Economic and political integration was one of the rationalizations and benefits used in the opening of trade relations with China. The thinking goes like this, in trading with China, China would become more democratic, more open, and a responsible member of the world community.

Additionally, the US has its own version of the Maastricht Treaty. It's called the North American Free Trade Agreement, and it's not very popular either. But that's the way things are, and more and more of these agreements are popping up. The US is now working on the Trans-Pacific Trade Agreement. That's politically difficult now in the US, but in needs to happen. Eventually, many, many years from now, there will be one world market if all goes well and if we survive in spite of foibles.

There was even talk of a common North American currency. It's not popular and we aren't even close to getting there. But the foundations have been laid. So maybe 50 years or so down the road, the US will replace the dollar with a new common currency similar to the Euro. You are not alone in this. I understand it's difficult. It's difficult for people in the UK and its difficult for Americans as well. It cuts against the grain and how we like to view ourselves. It's unfamiliar and scary.

The age of mercantilism is gone. It died long ago. This is just one of the many challenges nations and economies will face in the not too distant future. The future, brought about by new technologies, is coming at us like a speeding freight train. Our economies will need to transform from labor based to ownership based. That's huge, and I'm not sure how we survive it.

 

[Confused2]

Can someone explain please... here's coffee from Nasdaq...
http://www.nasdaq.com/markets/coffee.aspx
Do you have to do any kind of hula dance to get the coffee or can you just pay the money in (say) dollars and get your coffee? I'm guessing this isn't American grown coffee (America not known for coffee). So can anyone from Australia to Abyssinia buy this coffee? Like a free trade? Or is there something else going on here?

 

[iceaura]

Can someone explain please... here's coffee from Nasdaq...

Those are coffee futures, not coffee. If you don't sell the contract, the physical coffee in the form you chose will be delivered to a destination selected by you, at your expense, in that future - you can refuse delivery, but you are out the money anyway.

Anyone with the money can buy and sell futures on any futures market.

 

[Sarkus]

I mean just what I wrote, integration. It means creating and participating in a common market. Like it or not, that's what it means to have access to the EU common market.

Thanks for the response, and I think we had a slight difference in understanding of what integration means in this context, as I was distinguishing between simple conditions of trade agreements with what i see as integration. But to the extent that we would/might/probably will have to adopt EU rules and policies to gain access to the single market, then if this is what you consider to be integration then okay, no disagreement here.

 

[exchemist]

That is no more true of the Euro than it is of the dollar, or the renmimbi, or any other currency in widespread geographic use.

The regional economic cycles involved are linked, under the Euro - the bankers have been behaving badly, is the problem, by discarding Keynesian economics and acting in allegiance to long-defunct economic theory / political ideology combined with ethnic bigotry.

I don't think that is right. The rates at which most loans are made in a country are largely related to the base rate set by the central bank in that country. This is what enables central banks to affect the economic activity of their country by using interest rates. This is standard stuff, surely?

 

[joepistole]

I don't think that is right. The rates at which most loans are made in a country are largely related to the base rate set by the central bank in that country. This is what enables central banks to affect the economic activity of their country by using interest rates. This is standard stuff, surely?

You are correct, interest rates are powerful monetary tool. But it isn't the only tool or even the most powerful tool. The European central bank has been trying to rescue Europe with one hand tied behind its back. I think Europeans have been overly dependent upon monetary policy at a time when they should have used fiscal policy. Sometimes it appears European monetary and fiscal policies have been a war with each other.

There are two parts to this, monetary policy, and fiscal policy. Fiscal policies can be at least as powerful if not more powerful than monetary policies. Monetary policy is normally set by the central bank and fiscal polices are created by the central government. You need both monetary and fiscal policy, and the EU hasn't always had both, neither has the US for that matter. Since Republicans took over congress almost 6 years ago, US policy makers have only been able to use monetary policy to stimulate its economy and fight contractionary forces. Fortunately for the US, the US didn't face a significant contractionary event during those years. If it had, it would have been woefully unprepared.

In my view, you states like Spain who are desperately in need of fiscal stimulus, but they aren't getting it. And that needs to change.

 

[iceaura]

Can someone explain please... here's coffee from Nasdaq...
http://www.nasdaq.com/markets/coffee.aspx
Do you have to do any kind of hula dance to get the coffee or can you just pay the money in (say) dollars and get your coffee? I'm guessing this isn't American grown coffee (America not known for coffee). So can anyone from Australia to Abyssinia buy this coffee? Like a free trade? Or is there something else going on here?

Anyone with the money can buy and sell futures on any futures market.

Whoops. Very bad, my bad.

I meant the kind of futures market specified in that prompting post.

Commodity futures markets are often much more tightly regulated than that, especially in essentials such as food crops or basic metals produced and consumed within an economic region. Often - and this is a good idea that the US partly abandoned a few years ago, with unfortunate consequences - a futures market will be mostly restricted to actual producers of the commodity and consumers of a certain scale or bigger, with speculation and "investor" money confined to a percentage of the total in play (15%, say).

So basically anyone with money can "play" a commodity futures market, but often only a part of it or only on a limited scale.

 

[Michael]

 

[exchemist]

You are correct, interest rates are powerful monetary tool. But it isn't the only tool or even the most powerful tool. The European central bank has been trying to rescue Europe with one hand tied behind its back. I think Europeans have been overly dependent upon monetary policy at a time when they should have used fiscal policy. Sometimes it appears European monetary and fiscal policies have been a war with each other.

There are two parts to this, monetary policy, and fiscal policy. Fiscal policies can be at least as powerful if not more powerful than monetary policies. Monetary policy is normally set by the central bank and fiscal polices are created by the central government. You need both monetary and fiscal policy, and the EU hasn't always had both, neither has the US for that matter. Since Republicans took over congress almost 6 years ago, US policy makers have only been able to use monetary policy to stimulate its economy and fight contractionary forces. Fortunately for the US, the US didn't face a significant contractionary event during those years. If it had, it would have been woefully unprepared.

In my view, you states like Spain who are desperately in need of fiscal stimulus, but they aren't getting it. And that needs to change.

Agreed. And lack of common fiscal policy is one of the things that prevents the economies converging and this makes it hopeless having a common currency with a single interest rate. But common fiscal policy requires political convergence, which does not appear possible in the current EU.

Later footnote: Then again, if one looks at your example of Spain, applying a common fiscal policy to them and to Germany would be pretty disastrous. These two economies are not nowhere near in the same place.

 

[kmguru]

No. I'm afraid the Euro definitely IS the problem. This is well understood by most economists. If you have the same interest rate for countries whose economic cycles are out of phase or have different dynamics, you make things worse and do not have the tools to improve the position. That is true, whatever the central bankers do or don't do.

I think the same. That is because, except Germany, everyone went to sleep in Industrial activities...

But UK may not go very far too. Because now they are the regional Bank...rather than improve in Technology and Services...

 

[iceaura]

I don't think that is right. The rates at which most loans are made in a country are largely related to the base rate set by the central bank in that country. This is what enables central banks to affect the economic activity of their country by using interest rates. This is standard stuff, surely?

I thought your comment was that the Euro was being centrally and uniformly managed over economies in different phases and with different needs, creating problems by the mismatch. I pointed out that such would be true of any currency centrally managed over a wide and disparate geographic area - the economy of New Orleans would be expected to vary from that of Seattle, or New York, for example. In the US, the Constitution even forbids the Central Bank from treating States differently in that respect - setting Federal bank loan rates differently in different parts of the country would violate the Constitution.

So that does not appear to be the core problem.

 

[exchemist]

I thought your comment was that the Euro was being centrally and uniformly managed over economies in different phases and with different needs, creating problems by the mismatch. I pointed out that such would be true of any currency centrally managed over a wide and disparate geographic area - the economy of New Orleans would be expected to vary from that of Seattle, or New York, for example. In the US, the Constitution even forbids the Central Bank from treating States differently in that respect - setting Federal bank loan rates differently in different parts of the country would violate the Constitution.

So that does not appear to be the core problem.

The comparison with the USA is indeed instructive and a lot of people in Europe have thought about what makes it different from the Eurozone. The crucial difference is that the USA (a) does have common federal fiscal policy, i.e. the way taxes are raised and government spending is determined, and b) the USA is a "transfer union", which means the population accepts that states in deficit are permanently subsidised by those in surplus. (In the UK, England subsidies Scotland in a similar manner.)

In Europe, neither of those is the case. That is why the Euro does not work. If, for example, the Germans were prepared to subsidise the Greeks, and common taxation and government spending policies were adopted in both countries - and the same were true for all other Eurozone states - then it would work fine. But that is not acceptable to the German electorate. So they are stymied.

As I say, this is the core problem. It is nothing to do with evil bankers at all. It is a flaw in the whole Euro concept that can only be remedied by adopting many of the features of a federal superstate - which is something the populations of those states are not ready for.

 

[iceaura]

As I say, this is the core problem. It is nothing to do with evil bankers at all.

It seems a bit of an underestimate of the differences in taxation and government spending between different States of the Union, and a pass handed to the bankers of Europe who imposed the austerity programs and similar Keynesian denial policies. They did not have to do that.

The US Federal bankers are forbidden to do that by law. Otherwise, they probably would have - same generation, same school of thought, same convenient excuses available.

 

[exchemist]

It seems a bit of an underestimate of the differences in taxation and government spending between different States of the Union, and a pass handed to the bankers of Europe who imposed the austerity programs and similar Keynesian denial policies. They did not have to do that.

The US Federal bankers are forbidden to do that by law. Otherwise, they probably would have - same generation, same school of thought, same convenient excuses available.

You need to understand a bit about European politics here. It is the German electorate that demands Greece and other profligate states impose austerity and live within their means, not just "bankers". Germany has had a deep-seated fear of printing money and not balancing the books, ever since Weimar Republic days. The policies of their central bank derive from this.

 

[iceaura]

The policies of their central bank derive from this.

That's a blunder, it doesn't have to happen, and bankers should know better. One expects bankers to know better.