BLANCHFLOWER: THE EURO CRISIS IS HEADED FOR “DISASTER”

David Blanchflower, a professor at Dartmouth College and former policy maker at the Bank of England, says the Euro crisis is headed for disaster.  Blanchflower’s comments would normally seem extreme, however, he’s among the unique few who have an inside look at European monetary policy.  Blanchflower says the EMU is too far behind the curve at this point and that they have simply kicked the can.

The more time that passes without a real Euro resolution, the more it will boil and the more combustible the situation will become.  Blanchflower is exactly right.  He understands that austerity is not working and that the Euro remains fundamentally flawed.  All the while, the periphery countries are slowly realizing that they’re losing while the core benefits.  And as the political unrest increases the situation becomes increasingly risky. European leaders need to work together to get out in front of this.

Source: Bloomberg

 

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Jo

    A USSA website accusing Europe of ‘kicking the can’ is beyond funny.

  • stupid European

    There is only ONE solution. PIIGS must leave Euro and devalue.

  • steve

    The U.K.’s answer to Paul Krugman. Never an issue that can’t be solved with easy money and more gov’t spending.

  • http://www.pragcap.com Cullen Roche

    Jo,

    Your comments are always so intelligent and articulate. Thanks for that. You make us all a little bit dumber every time you comment. It’s much appreciated.

    Best,

    Cullen

  • http://www.pragcap.com Cullen Roche

    The thing is – he’s right. The Germans are gonna pay no matter what. They can either do it by forcing Greece to default (and bailing out their banks when the dominoes tumble) or they can do it by making a fiscal distribution to these countries now. The only other alternative is complete collapse of the Euro and that’s not happening.

  • BK

    My question again: If the situation for the EURO is this bad why is the EURO still worth more then the US Dollar???
    Big money should know what’s going on behind curtains.
    It’s possible that the situation for the US Dollar is even worse.

  • quark

    I don’t think you can come up with a more fitting metaphor for how the rich are treating the working class around the globe than Dominique Strauss-Kahn assaulting a union worker on the lowest end of the hotel workers pay scale as if it is his right to do so.

    As I’ve written countless times before, this crisis will restructure the governments and the current model of capitalism of not only the PIIGS but northern Europe and possibly the US.

    Citizens of the distress countries are not tolerating the current austerity measures let alone the austerity measures that would be necessary to bring their countries finances into balance. Even political leaders in the US are scared to ask their citizens to sacrifice.

    Again look at back through history and you will find the catalyst behind change in rulers, government construct and economic systems has always started with some form of economic oppression. Make no mistake, economic oppression is oppression on the individual rights and freedoms of citizens. Economic oppression has not been tolerated by citizens in the past and this is no exception.

    Why do you think European leaders are kicking the can down the road? They do not believe that the citizens of the PIIGS nations will tolerate the austerity measures being forced upon them by the money center powers of Europe. French and German citizens will not bail these countries out…well maybe the French will tolerate a bailout…it is in their nature :) but the Germans :( will not tolerate a bailout. This has the potential to ignite into war.

  • BK

    Sometimes it’s really funny how so called profis are reacting.
    Goldman says buy commodities and the whole of wall street is running in while Goldman is dumping their stuff. I think this time wall street is the herd and small investors are the smart ones.

  • ES

    > The Germans are gonna pay no matter what. They can either do it by forcing Greece to default (and bailing out their banks when the dominoes tumble) or they can do it by making a fiscal distribution to these countries now.

    Germans are sticklers for the rules. I know, it is hard for americans to understand because they are the exact opposite but germans will always do what right/ fair in their mind no matter the cost. They will force Greece to default. They will not pay for bailouts unless their more “flexible” allies such as France will exert their influence to force germans into a compromise.

  • El Viejo

    You know I saw that GS commodities thing and I thought the exact same thought.

  • B Ferro

    I feel like we’re close to the point where the sheer intractability of the math of the global economic system we’ve set up and the imbalances it breeds and has bred (China, US debt, Euro debt, entitlements, etc.), is going to force its creators into a more tenable system since they’ve chosen to refuse to take the steps themselves. There really is no other way to cure the world’s global economic ills but through more involuntary pain. It just seems so logical for it to play out that way again…

  • Mark

    He/she has a point though

  • Mark

    “European leaders need to work together to get out in front of this.”

    Clearly they are working together. From Spain, Greece to Ireland, these leaders are throwing their citizens under the bus and over a cliff for the benefit of the elites. U/E rising and economies slowing and yet the demand is for more austerity, privatization and selling of national assets. The EU wants to send international “experts” to Greece to coordinate sales of assets. Clearly these leaders are in lock step.

  • Different Chris

    How would we know? Wouldn’t have to actually make a point or argument for him to HAVE a point?

  • Mark

    Their statement was clear

  • Mark

    The ECB and the Fed are both seen as insane addicts, they will do the same thing over and over again thought they fail each time. Assumption is the Fed will continue to print and the ECB will continue to force austerity

  • Mark

    Let me add. Once relief is given or one PIIG goes over the cliff, moral hazard on a continental scale will have been erased. “We were fine until___restructured, defaulted. They made our position untenable.” It will be an avalanche.

  • Different Chris

    I disagree.

    If Jo would like to refute Mr. Roche’s excellent explanations on how the US monetary system is different from the EMU, that would require much more than one offhanded snarky remark.

    Or, if he had actually made a refute that explained how despite the differences between our montetary systems, the US is kicking the can down the road in exactly the same way the EMU is.

    Or, if he had actually made an argument or point of any kind instead of making the inferred accusation that there is no difference between the US monetary system and the EMU with a single snarky sentence.

    I specifically like the conversation about what is similar and what is different between the EMU and the US, because the subtle differences make worlds of difference.

    Respectfully,

    Chris

  • BudH

    It seems to me the leaders are trying to do the right thing, but people are marching and demonstrating against doing the right thing. The politicians get voted in by the people. The people will get what they vote for.

  • quark

    It is a process of natural selection. While you can continue to build your house on a flood plain at some point it might be of benefit to move to a higher plane..pun intended.

  • quark

    Strategic default. :)

  • quark

    Huh? Supporting a broken economic/social structure that insulates the rich from the financial fire by using the bodies of the middle class as a fire shield IS NOT doing the right thing.

    OMG…books documenting centuries of leadership repeating the same mistakes and all people can think about is eating the covers and burning the pages.

  • http://www.acting-man.com pater tenebrarum

    “European leaders need to work together to get out in front of this.”
    Yeah, right, the eurocratic chattering classes will get in ‘front of’ something. LOL
    The euro is a deeply flawed currency. It has that in common with all fiat currencies of course, it’s just that in the euro area the problem has become acute more quickly. Central economic planning doesn’t work – never has, and never will.

  • http://www.pragcap.com Cullen Roche

    Not exactly accurate. The Euro is flawed because there is no central treasury and it is effectively a single currency like the failed gold standard was. The Euro is not remotely a reflection of the flaws of fiat. It proves that the gold standard was a failure and shows exactly why.

  • http://tomroll@fuse.net troll

    The gold standard failed because it constrained the economy from doing what it is now doing – being left unconstrained. We like to talk big about how everything would be ok IF regulations were imposed (or actually upheld). The fact remains, however, that the gold standard limited what could be done. Limits are now off and no human is going to stop it.
    Next theory please….

  • Paul Hanly

    The German politicans and bankers know that a Greek default means sudden large pain, lots of bank problems, German bank bailouts by German govt. They would prefer a gradual loss over many years by kicking the can and doing just enough to avoid a greek default. Most other European bankers and policiticans will agree because of fear of contagion.

    The PIIGS politicans and bankers are at present of the same view because they fear the destabilisation of leaving the Euro, bank runs, being locked out of international debt markets (maybe only for a while.) At present they are trying to avoid default but if they inflict too much pain the electorate will vote them out and vote for a party that promises default to reduce pain on the electorate.

    Everyone is hoping that the problems can be deferred until some other major parts of the world economy are stable and secure eg the US housing market has a rising trend and clearly falling unemployment.

    Whether PIIGS electorates will endure austerity for that long remains to be seen, but Greece seems likely to restructure existing debt while promising that new debt will be given priority.

  • Noel Falconer

    The dollar works because it is the currency of the UNITED STATES of America.

    The euro can only work as the currency of the UNITED STATES of Europe.

    Which is why Eurofederalists created it in the first place.

    These guys are SMART. Don’t delude yourselves that they didn’t foresee what is happenning, or that we – and Danny with his ‘European leaders need to work together to get out in front of this’ – aren’t being led along their intended path.

  • Nick

    Gold standard or Euro standard is not the point. The PIIGS have used debt to benefits mostly their cronies, relatives and themselves ie the so called elites with misallocation of resources and now more debts will be imposed on the public to stimulate the economies properly but the ‘elites’ called upon austerity measures which only dampen the economies. Austerity measures should be imposed on the elites and new debts used to spur the economies.

    Just don’t blame the rich who were not part of the plundering bunches of elitist thieves. What books? The infernces and insights are more important. People can only react because they have been manipulated by wolves.

    Worst come to worst, why should the Germans pay for somebody else thefts. The German can just leave the Euro without kicking out PIIGS and the latter will sell things and labour cheap. Lend more to create more stolen via thefts? Trial them and sue them for compensation. It is so draconian to simply let them get away with them whereas the people never got away.

  • http://fiatcollapse.blogspot.com/ Misthos

    I often see this argument about the gold standard – it is not expansionary to fulfill the need of addressing a post credit bubble era.

    But what about the credit bubble itself? Why doesn’t that get any blame? I have seen Greece go through a massive credit bubble with extremely severe malinvestments and a massive bloated government sector that does everything it can to hinder business growth.

    But the fact that the Euro is a gold standard of sorts is the problem? To a degree, that’s true. And yes, the EU policymakers have it ass backwards. They cheapened the Euro, created a massive bubble, and now they want an expensive Euro.

    It’s easy to ignore the credit driven malinvestment era that precedes a collapse. You know why? Because people wrongfully believe those were the “good old days.” And a gold standard is stopping us from once again attaining those “good old days.” Guess what? Those good old days were so due to an expansionary money policy. What did the Federal Reserve do in the 1920s when credit ballooned? Nothing.

    Sorry. In the EU, the sin was already committed before the currency became non-expansionary.

  • http://fiatcollapse.blogspot.com/ Misthos

    As someone that lives in Greece. Let me tell you this. The narrative you believe in is very simplistic.

    German companies and Banks and Greek politicians were in bed with each other. They both were involved in bribes for government defense contracts, bullshit loans, etc…

    It takes two to tango.

  • InvestorX

    …says the narrow MMT view. But the central planning argument remains.

  • InvestorX

    “It is absurd to form an entity for public purpose and then not be able to utilize that entity when you most need it. Some people like to think of govt’s as these foreign entities that are created for their own benefit (primarily because they’ve read too much economics from people who lived in the days of communism and socialism), but that is not the case. We live in a REPRESENTATIVE REPUBLIC. If you are that pissed then stand up and do something. This is YOUR govt. It is to be used for YOUR benefit.”

    Unfortunately you do not have a representative republic in the USA or the West anymore. It is an oligarchy. Here you are right – the drones need to wake up and do something about it. Here some thoughs from Paul Craig Roberts:

    “The west prides itself that it is the standard for the world, that it is a democracy. But nowehere do you see democratic outcomes: not in Greece, not in Ireland, not in the UK, not here, the outcomes are always to punish the innocent and reward the guilty. And that’s what the Greeks are in the streets, protesting. We see this all over the west. There is no democracy, there are oligarchies, some of these smaller European countries are not even run by their own governments, they are run by Wall Street… There is probably more democracy in China than there is in the west. Revolution is the only answer… We are confronted with a curious situation. Throughout the west we think we have democracy, we hold ourselves up high, we demonize China, we talk about the mafia state of Russia, we talk about the Arabs and so on, but where is the democracy here?”

    http://www.zerohedge.com/article/co-founder-reagonomics-paul-craig-roberts-there-probably-more-democracy-china-there-west

    And another ony from him:

    http://www.counterpunch.org/roberts03242010.html

  • InvestorX

    I have been pointing this as well. Greece, Ireland, Spain achieved jumps in their prosperity over 10 years before the crisis (due to a boom). Germany is the net beneficiary now – yes? Yes but after a gut wrenching restructuring over a long period when it was the laughing stock of all Europe with 14% unemployment.

  • troll

    Thanks for agreeing with me that the gold standard was a natural constraint. I wasn’t arguing for a gold standard. With no gold standard, however, there is one less constraint on greed. The Euro only acts like a gold standard, consequently, one might say it has all the negatives of the gold standard without any of the benefits. (The benefit was that the monetary system was based on something concrete AND had a natural constraint on greed).
    Also, I would like do stand up and do something about it, but I am an economical ignoramus and wouldn’t know what to do. My observations are from an outsider looking in.

  • REN

    I’ll paraphrase Mosler, “you can only consume your own output; if you consume more then you are borrowing from another economy.” So we put our output on the grocery shelves of life, and hope that somebody trades their output for ours. In effect, we trade our outputs using money as the medium of exchange.

    This is the crux of the PIIGs problem. A true monetary system is not a straightjacket, but instead is dynamic and provides feedback. For example, if the people of Greece became lazy and unproductive, then their money system should adjust downward accordingly. Greece becomes poorer, and then the people are able to respond to the new feedback stimulus.

    Greek citizens were consuming more than their output, and Germany was going along with it because of mercantilism. Mercantile countries like China and Germany always export more than they import. They desire to have low unit costs and high unit volumes. This brings profits back home to the mercantile country at the expense of the “periphery.” Germany and France and the “core” are not unblemished in this system, and they have gamed it to their benefit.

    The Euro behaves exactly like the Gold system did, during deflations the credit money supply collapses, and the bankers and money elite want real assets sold to them at fire sale prices. Eventually, the people loose sovereignty and become debt peons in the land their fathers bequeathed them.

    Ironically, Greece has a long history of understanding money, especially with Aristotle and Solon. Solons reforms returned land back to the farmers and returned exiled debt slaves back to the country. Aristotle was probably the first person in history to realize that money was nomos, or got its authority by “law” and not some other secondary effect like scarcity of gold. It is probably fair to say that without Solon, Western enlightenment may never have occured.

    Maybe the Greeks will teach the world again.

  • http://www.pragcap.com Cullen Roche

    Excellent!

  • JWG

    Can’t the ECB purchase Greek and Irish debt in the secondary market, accept it as collateral for loans to the banks and sovereigns at par, and otherwise imitate what the Fed did in QE1 and QE2? The Fed can’t buy original issue Treasury debt, but it can turn around and buy it from the primary dealers in the secondary market, just as the ECB has done with Greek debt already. The fact that the Germans think this is inflationary doesn’t mean it is, and keystroke money isn’t really “taxpayer money”, as Congress has discovered. A Greek default is a political decision just as a US default would be and just as a California default would be. The Euro and the dollar are both fiat currencies and their central banks have the power to make both a solvency crisis and liquidity crisis go away for their sovereigns (including states in the US). What they fear is a loss of confidence and a velocity crisis if they pull the trigger.