Catarina's World

European Union leaders are now advocating “More Europe” as a solution to the Euro Crisis. Watch Harvard professor Niall Ferguson explain to The World Economic Forum what a more integrated Europe would entail:

Those pro “More Europe” fail to acknowledge that any federal system implies a transfer of resources from the more efficient and productive core to the periphery.

For well performing countries like Germany a federal Europe would be expensive. According to Ferguson, it would cost the Germans up to 8% of GDP per annum for the foreseeable future. And with the very real possibility of a full-blown European banking crises as a result of a trigger, say a Greek default, is a federal Europe really a good idea?

Seems to me it’s time to start having a fresh look at the problems facing Europe. What’s been done so far isn’t working and it’s highly unlikely that giving more powers to Brussels would do the trick. Contrary to Ferguson’s belief however, there is massive discontent with the EU in Western Europe. Doubt that governments in that part of Europe will be re-elected if they cede more power to Brussels.

The unpredictablility of economics

In 2008 Queen Elizabeth asked top economists at the London School of Economics what caused the economic crisis. And they could not give her an answer. With hindsight we can patch together what happened and the domino effect that ensued. But until events unfolded nobody was certain what would happen. Six month later the British Monarch received a reply from British economist Thomas Palley stating that economists have become increasingly arrogant, narrow minded and unable to innovate.

We can now also conclude that it would probably have been better for the world if Hank Paulson had saved Lehman Brothers, like Warren Buffett suggested. But Paulson, presumably, didn’t understand what Lehman’s bankruptcy would cause and hence refused to do so. Or, as some believe, deliberately exported a US problem to the rest of the world.

The unpredictability of economics is a major problem because most available tools take time to come into effect. By the time they do, the economic landscape may have changed. Even if everybody agrees that solution x is the best way forward they could all turn out to be wrong.

Testing if a crisis can be solved by austerity

At the moment European politicians are for the first time in modern history testing if austerity can fix an economic crisis. It was tried, for instance, in the 1840s and failed. And it looks as if it will fail again. Austerity is unfortunately having a negative impact on growth and development in Europe. People and governments are not spending, which is fatal and goes against the economic health desired.

How about parallel currencies?

Professor Dirk Meyer, an economist based in Germany, has come up with an innovative solution to the financial problems facing Europe.

He rightly states that despite the fact that the Euro is presently causing huge economic problems, it is politically and economically a good idea. Consequently Meyer believes the way forward is to keep the Euro and, at the same time, bring back national currencies.

It’s the best solution to Europe’s problems I have so far come across. And it is my hope that EU leaders are seriously evaluating that option. You may beat them to it by having a look at his ideas in “Bring back Deutsche Marks! (Euros can stay)”. It could enable Europe to have the cake and eat it. Why does it have to be either or? With economies as diverse as say, Germany and Greece, having parallel currencies could very well be the way forward.

Do you believe a federal Europe is a good idea? Will it solve Europe’s current economic problems? Would having parallet currencies work? Is it likely there will be another Lehman trigger in the future? If so, would a federal Europe be more vulnerable or protected? Or maybe you are of the opinion that  the current austerity programs will sort out Europe’s problems? Wen Jiabao said to EU leaders recently: “China will continue to invest in European government bonds and bonds issued by the European Financial Stability Facility”. So if the EU proceed with current policies Europe will, like the United States, end up heavily indebted to the Chinese government. 

Video: WorldEconomicForum – You Tube

European voters are getting rid of austerity and there is civil unrest from Madrid to Athens. England and Spain are in double-dip recession. Austerity seems to be coming to and end, but is the idea of no more nation states coming to an end as well? Watch a really interesting video looking at how the idea of one world living in peace with no borders has been tried – and failed – throughout history:

Sarkozy, as we know, lost the election in France and Greece is in turmoil with the winners being the far left as well as neo Nazis. And it looks likely that Greece will leave the Euro.

Is the one world concept just a dream?

The Roman Empire, the Catholic Church, Napoleon, The British Empire, the Soviets and Americans during the Cold War and the European Union are good examples of attempts to unite the world under "one ruler".  

People have dreamed about a united world for thousands of years. Probably since the beginning of time, actually. But so far, the concept has failed. Again, and again, the world has reverted to nation states. 

Western idealists breathed new life into the European Union when the Berlin Wall fell. We were all pro uniting Eastern and Western Europe under one entity. To European free trade was added open borders and a single currency. Simultaneously the Americans got rid of a lot of protectionism. It all looked set for finally achieving a one world free trade market area. Free movement of labour was considered essential since the market would regulate everything.  But it didn't quite work out that way, did it?

Do you believe libertarianism with the whole world united under one ruler, be it Napoleon, Hitler, the Pope or multinationals is now dead as a concept? Do we need to start dismantling everything that has been built up during the last 30 years in the name of libertarianism and go back to the way it used to be? Or do you believe we will be able to finally create a world in peace without borders? Maybe another option is that uniting the world has failed again but someone, somewhere will again in the future have a go at succeeding? Most likely, since conquering the world and be its ruler is probably the most intoxicating ego trip there is. But is it a realistic concept? It's all very well when things are working according to plan. But are people of different nationalities interested in showing solidarity with other countries in trouble? Doesn't seem to be the case in Europe at the moment. 

Video: TheBigPictureRT – You Tube

If so, you personify the findings of Edelman's 2012 Trust Barometer. Watch Chrystia Freeland talk to Richard Edelman about the current erosion of confidence in the workplace and governments:

Respondents in 25 countries indicate trust in government have declined with nine percent and that Brazil is the country where confidence in elected officials have fallen most.

Not surprisingly the debt ceiling debacle in the US, bailouts in the European Union, corruption in Brazil and India as well as the nuclear disaster in Japan are the main reasons behind the mistrust. And it's interesting to note that Westerners have lower faith in their governments than citizens of the developing world. 

Half the public distrust companies

Businesses need to be regulated according to half the participants in the survery. And they are of the opinion that governments are not doing enough to rein in immoral companies. A high number of people would also like their authorities to increase consumer protection and ensure ethical corporate behaviour. It comes as no surprise that banks and financial institutions are least trusted. 

Trust in social media on the rise

Traditional media and online search engines are still the most trusted sources of news and information but social media including blogs, networking sites and content sharing sites showed the biggest increase in trust this year. Surprising, considering the amount of incorrect information circulating on such forums. 

Do you agree with the findings of the 2012 Trust Barometer and what Richard Edelman had to say? Have we lost confidence in authority figures? How can they build trust again and manage their reputations?There is now an opportunity for governments and businesses to lead in ways that earn trust. How would you like to see that done? Can they convince the citizens of the world that they are not about self interest but taking their responsibilities in society? Do you agree with Richard Eberman that confidence in governments and businesses will start rising again this year?

Video: ReutersTV

The recent inability of US politicians to compromise have lead to US credit rating being downgraded. Add to that European politicians’ inadequate response to the debt crisis in the euro zone and it’s understandable markets are in turmoil.

Hopefully politicians all over the world will now get their act together and coordinate efforts to start dealing constructively with the world economy. There is no avoiding sorting out the main problem of excessive sovereign debt. Until that’s done, any relief will be short lived.

Politicians all over the world really need to step up to the plate and do something drastic to reduce the risks to the global economy.

Is another time bomb ticking somewhere in the world?

The global system is now faced with having to adjust to the many implications and uncertainties of the once unthinkable loss of America’s AAA. US treasury bonds are actually rated lower than bonds issued by countries such as Britain, Germany and France.

China, the world’s largest holder of US debt, has condemned the “short-sighted” political wrangling in the US and are of the opinion the world needs a new and stable global reserve currency. Understandable considering the circumstances.

And I can’t help wondering if there is another time bomb waiting to explode somewhere in the world?

Politicians postponing the problems

There are economic solutions to economic problems, but so far politicians have just postponed dealing with the problems. Presumably hoping they will go away? Which, as we all know is unlikely. If anything they will, just like the US debt problem just did, get worse.

Hopefully politicians all over the world will now get their act together and coordinate efforts to start dealing constructively with the world economy. There is no avoiding sorting out the main problem of excessive sovereign debt. Until that’s done, any relief will be short lived.

S&P considering US politicians not able to govern properly

It’s interesting to note that credit rating agencies are still regarded as capable of judging credit worthiness despite their role in the sub prime crisis. Seems a bit like having drunk drivers policing the roads. Not least since their initial calculations were wrong by 2 trillion. But for some reason they are, and Moody’s will review US credit rating end of this month.

S&P are of the opinion that US policy making and political institutions have weakened and that it will have a negative impact of America’s sovereign debt and budget. They are for instance worried that the Bush tax cut will not expire end of 2012 because of Republican opposition to raise revenues.

Americans & Europeans tired of political games

Voters in both the US and Europe are unhappy with their elected leaders’ failures. But voters are part of the problem too. On both sides of the Atlantic voters want debt levels reduced but no raised taxes or cuts in government programs such as pensions and health care.

Understandable since it’s the fault of bankers and politicians rather than voters. But unfortunately all belts now have to be tightened. Otherwise the huge sovereign debts will not be reduced.

Personally I used to think the main reason for the US debt was the wars in Iraq and Afghanistan. But according to The New York Times the main reason is loss of revenue due to the Bush tax cut, followed by the costs of those wars.

Unfortunately US voters will most likely be affected by S&P’s cut of US credit rating since borrowing costs will increase not only for the American government but US companies and consumers as well.

Could the EU rescue both Spain & Italy?

“Germany is going to smell like roses but (the rest of) Europe is going to be pushed into a downward spiral, stagnation lasting many years and possibly worse than that,” George Soros said already a year ago. And what he predicted is now taking place.

Flaws built into the euro from the start have become acute, Soros told a seminar, warning that the euro crisis could destroy the 27-nation European Union.

Flaws built into the euro from the start have become acute, Soros told a seminar, warning that the euro crisis could destroy the 27-nation European Union.

“The euro’s lack of a correction mechanism or of a provision for countries to leave it could be a fatal weakness”, he said. Germany has now imposed its ideas on how a 750 billion Euro zone rescue mechanism should be used. In other words the rest of the Euro member states have to follow in Germany’s footsteps and have a trade surplus as well as a high savings rate.

“That’s the real danger of the present situation — that by imposing fiscal discipline at a time of insufficient demand and a weak banking system, by wanting to have a balanced budget you are actually … setting in motion a downward spiral,” he said.

“If there is no exit, (it) is liable to give rise to social unrest and, if you follow the line, social unrest can give rise to demand for law and order and (sow the) seeds of what happened in the inter-war period,” Soros said.

His conclusion is that “Political will to forge a common fiscal policy in Europe is absent and since Europe is liable to move backwards if it did not advance, the crisis of the euro could then actually have the potential of destroying the European Union,”.

His analysis based on the flaws of the Euro from the start is correct and I agree with him that it will almost certainly lead to another recession in Europe. It is my hope though that it will not lead to social unrest, but he may very well be right. Europeans have throughout their lives paid for their pensions, health care and all kinds of other services. Governments turning around and telling the electorate that they can not get what they have paid for isn’t gingo down very well. Add to that the power of the trade unions, the strikes we are already witnessing  and you have a reciepe for social unrest.

What I’m not sure about though is if George Soros is right that the Euro crisis coupled with the current state of the world could eventually destroy the entire European Union? That it could destroy the Euro I believe, but the whole European Union? What do you think? Will the European Union survive the turmoil that will most likely take place during the next few years?

Excessive need of safety and a need to control all possible dangers has made some Europeans, especially the young and old, increasingly frightened. Sometimes so afraid they are unable to lead a worthwhile life.

Do we really need the authorities to treat us like children? If we don’t want a future society filled of people that have to be taken care of it’s time for governments and the European Union to step back and let people use their judgement about what’s safe and what’s not.

It’s a result of governments cushioning their citizens from conception to death in order to control the people. But the irony is that these governments have become scared as well and are hence forbidding anything that could possibly pose a remote danger for a small fraction of the population. As a result both the public and the authorities are increasingly unable to handle a crisis and get paralyzed when “danger” strikes.

Protected from conception to death

Many Europeanse live in a padded world and expect perfect safety. Anything that could possibly pose a danger is swiftly outlawed. It’s illegal for children under 15 to cycle without a helmet and many of the toys we played with as children are forbidden since they may be dangerous.

When it comes to old age life should be saved at all costs in the safe world. Sincerely what’s the point of keeping a 90 year old who had a severe heart attack that ruined half the brain alive? Maybe the chance is one in a million that he will suddenly wake up from his coma to find all his loved ones dead and gone. It’s crazy to keep life away from danger, no matter what. And what kind of life? But to let someone like that pass away would, from the authorities point of view, be dangerous. To whom?

When it comes to safety on the roads the Swedish governmental authority in charge is aiming for no deaths in traffic. I’m sorry but the only way of achieving that is to stop traffic on the streets completely. Not only cars but cycles, pedestrians and anything else as well.

Off course we all want the world to be safe. But it can go too far as it seems to me it has done in some European countries, notably Sweden. The European Union and governments are forbidding one thing after another and if they don’t stop we will not be able to do anything because it could, after all, be dangerous, even though there are no evidence supporting such claims.

Do we really need to ban everything that could possibly be dangerous?

Zillions of chemicals have been banned by the European Union without any evidence proving they are dangerous. Usually it’s a case of they may have been harmful to some animal and chances of them posing a threat to human beings are one in 10,000 or 1,000,000. Naturally dangerous substances should be banned. But do we really have to ban things that have not so far posed any danger to mankind, just because some scientist have showed that they may, possibly have a harmful effect on, say, mice?

How many workplaces in Western Europe are not safe?

Same goes for working environment. How many workplaces in Western Europe are currently not safe? However, to justify their existence government authorities in charge of such issues are now targeting small and irrelevant issues. Companies and hospitals are suddenly told that they will be fined unless they inform employees in writing about what safety precautions to take. Even though they have all been told and are taking the necessary precautions. The only thing this achieves is making companies and hospitals, spend a lot of time dealing with bureaucracy in order to avoid being penalized. Time that could be better spent.

People start relying on the state to take take care of everything

Many times this is due to well meaning efforts but it has over the years also become a tool for governments to control the population. The side effect is that people believe the government will protect them against everything and stop thinking for themselves. Whenever something goes wrong in their lives they hence expect the authorities to sort it out. So addicted to safety are, above all Swedes, that depression and other psychic ailments have increased tremendously. In particular for people born after the 70s.

How did we survive childhood?

Do we really want to live in nanny states that tell us in detail what we can or cannot do? Can’t help wondering how we survived childhood playing with dangerous toys and cycling without helmets? And we were outside doing things all the time without getting into danger. And so were older people.

Now with the environment being so sanitized and nothing dangerous around Swedes should presumably be healthier? But no, severe allergies such as asthma has increased 35-40%. Higher than in Southern Poland with all their pollution.

People have stopped thinking for themselves

But what scares me most is that people have stopped thinking for themselves and just rely on the state to tell them what to do. Teenagers get panic attacks because of their girlfriend leaving them is common. They then get depressed, can’t work/go to school and expect the state to provide counselling and cradle them back to safety.

There is no such thing as safety. The only thing that’s certain in life is that everything is uncertain. Understand completely that it’s in the interest of politicians to get power and control the people by making them dependant on them. But the result is people that cannot judge what’s dangerous, handle a problem and move on. If we don’t want a future society filled of people that have to be taken care of it’s time for governments and the European Union to step back and let people use their judgement about what’s safe and what’s not. Let children fall when they are cycling and play with whatever toys they want. We could handle it, why should today’s children be different?

Photo: PhotoXpress – Waldemar Boniecki

It’s make or break for the embattled eurozone. So many of us were surprised to hear that Estonia will join the single currency in January 2011. A minute later a top UK forecasting group announced that the eurozone needs to break up for the sake of the future economic health and success of the European Union.

Does the eurozone need to break up for the sake of the future economic health and success of the European Union?

Capital Economics’ conclusion is contrary to accepted wisdom that such a move would be a disaster. They are instead convinced a break up would lead to faster growth and spare weaker members of the single currency decades of depression and deflation.

Makes you wonder if the world has gone mad doesn’t it? Why does Estonia still want to join the euro? That they wanted to in the past makes perfect sense. But considering the flaws of the euro mechanism, I can’t help wondering if Estonia’s economy would be in as good a shape today as it is if they had already joined the euro?

Adding new member states to the eurozone is contrary to what Capital Economics ordains. It believes that the return of national currencies, far from being a potential disaster that would result in economic chaos, would enable Europe to break out of a prolonged period of weak expansion.

Christopher Smallwood, author of the report, believes the problem is Germany’s refusal to expand its demand to help countries such as Greece and Portugal grow their way out of difficulty.

He added, however, that a break up would still leave a problem for other core members of the euro area, such as France, which would continue to suffer from the “deflationary bias” in German economic policy unless Berlin agreed to restore the Deutschmark.

Smallwood is convinced that the result of such a move would be a rising currency (the Deutschmark) that would wipe out Germany’s trade surplus, forcing the country to boost domestic demand and hence preventing the country sliding into deflation. “Restoring the mark would lead to the rebalancing of the German economy which cannot occur as long as it remains in the eurozone. “This is the best option for Europe”.

Contrary to that belief, Estonians hope joining the single currency will encourage foreign investment in their economy, with growth falling by 14 per cent last year. It is forecast to grow by 4 per cent next year.

What do you think is the best way forward for Europe? A break-up of the eurozone or for the project to proceed and Estonia joining in 2011? Will more countries joining actually worsen the current problems of the eurozone? Is it worth taking the pain of going through depression and deflation to save the euro? Would reverting to national currencies put Europe on track for growth?

(photo: Flickr – erikasmussen)

Published below article more than a year ago that is actually even more relevant today.

Martin Feldstein, Harvard professor of economics thinks it will. If it wasn’t for the Euro the current situation would have been easier for Greece to handle, he says.

Could Greece have the domino effect Lehman Brothers had?

Will it really go that far? Not overnight, but nobody would have believed that Lehman Brothers would go bankrupt. Or Russia defaulting a decade earlier for that matter.

Have always wondered how the Euro zone could have one central bank for numerous countries whose economies are so different. Seems to me like a recipe for disaster. As we know, the Euro was Chancellor Kohl’s baby and it is doubtful if it would ever have become reality without his dedicated work to celebrate the unification of Germany with a common currency. But something is very wrong when the economies of EU countries that stayed out of the common currency are doing better than the ones who joined.

Greece can neither grow out of trouble, because of fiscal retrenchment and its lack of export prowess, nor devalue, because it is in the euro zone. And yet its people seem unwilling to endure the cuts in wages and services needed to make the economy competitive. And we can’t blame them? A previous government had, with the help of Wall Street, falsified the national accounts. But nevertheless, Greece looks bust and unfortunately for the people someone has to pay.

If Greece still had the drachma they would have been able to do quite a few things such as devalue and increase exports as well as revenues. To make a long story short the drachma would have made it much easier, and less painful, for Greece to tighten up its policies and get its act together.

What can be done then? The escalating crisis—and the fact that Greece will almost certainly not be able to pay everybody on time—will renew calls to abandon it. That would spell trouble for Greece, European banks as well as other European countries. Almost makes me think of the domino effect Lehman Brothers had.

Do you agree with Professor Feldstein that Greece will ultimately have to go bankrupt? If so, how do you believe it will affect the Euro?

Photo: Flickr – alles-schlumpf