Friday, May 25, 2012

The 60% Solution

There's an intriguing idea making the rounds in the Eurozone: issue Eurobonds backed by all the nations participating in the currency union, but only up to the amount stipulated by the Maastricht Treaty cut-off, i.e. 60% of GDP.

In rough numbers, this amounts to a range of 3.8 - 4.8 trillion euro, depending on what is included in the definition of government debt (e.g. bonds, loans, guarantees, etc.).  Obviously, this will not be new debt;  it will merely replace existing debt with new securities backed by the group of nations, as opposed to each nation individually.  According to this proposal, a prerequisite will be that each country will implement constitutional reforms for its economy and fiscal policy.

I like this idea.  It is a major step towards fiscal integration (for the n-th time: there can be no currency union without fiscal union) and a credible solution to the EU's debt crisis - a crisis that seriously threatens to split the entire EU apart.  Assuming, of course, that it is implemented rationally and does not end up being just another way to ramp up debt.

Something is finally shifting in the EU: the freaky Greek politics and - more importantly - the election of Francois Hollande in France, plus the dismal showing of Frau Merkel in local German elections is maybe, just maybe, forcing hardcore European deflationists to yield a bit on their dogmatic stance.

In any case, I hope so...


  1. The 60% Solution!


    As a citizen of France, may I say that I second the idea. But only when we have decent asset pricing in Europe. I-e after a full-blown crash for the hyper-inflated real estate.

    Why should a home in Spain or Portugal cost more than one in Northern Europe?

    I see no logic.

    Why should life in Germany be significantly cheaper than in France?

    No more logic there. Except that one part of the Euro-zone is living on credit. With a highly inflated national product relative to Germany.

    Is Germany so cheap? No. Southern Europe is. And some parts of my country as well.

    Why do I say that. Check the relative pricing of home vs work in Southern Europe? Come and check it up!

    Once the crisis will have produce its full effects on relative prices - should happen during the second part of this year - it will be time for your proposal.

    Not before that time!

  2. I confirm that everything is cheaper in Germany (I am French but my mother is German). French products (eg L'Oreal cosmetics) are cheaper in Germany than in France. Up to now I found only one thing more expensive in Germany than France: coffee. I can't explain that.

  3. There is no doubt that there has been credit driven asset inflation, as the world-wide interest rates have dropped over the last 15 or so years.

    There has to be an unwind of these low rates at some stage. If it is fast it will create economic havoc. If the unwind is moderate there will be widespread pain, and if it happens over a long period, say 15+ years, it may be barely felt at all - particularly if countered by an increase in business activity & stock prices. This must be what the suits are praying for.

    Much as I agree that Spanish property is ridiculously overvalued (I lived in Barcelona 00-'06), I pray that the unwind happens over 15+ years, because otherwise we will have an economic shock that will take us all many, many years to recover from.

    Ultimately, this rotten situation (silly asset prices, welfare to not-work, depressing taxation etc) has been caused by poor management and oversight - weak political system and a media telling people what they want to hear.

    I believe that the constant tinkering with the 'system' by Governments only benefits the accountants and lawyers and knocks who knows how much off growth each year. Knowing where the goal posts are, without paying a slew of lawyers to tell us, would make things much more certain and efficient.

    BTW I am a big fan of this blog. More so when there is something new to read.

    C - UK

  4. The 60% solution might sound good in theory, but in reality it seems there is increasingly no way out. Zero Hedge just had a pretty scary post on the topic:

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  6. The first step to find a solution is to think of a theory. It all starts from theories, and if proven effective it is then called a solution.

    Anyways, I am a novice journalist, and I am trying to gather your opinions about Greece leaving the Euro Zone. Why would Greece actually think about this? Do not they know that business bankruptcies will rise in their side?