Mervyn King, former head of the Bank of England, has written a book that explains why the Eurozone will collapse. His logic is nearly the same as I have stated many times: There’s simply too much debt in the system coupled with no political will by Germany to get involved in a transfer union.
Please consider Former BoE chief King predicts collapse of the eurozone.
Mervyn King, the former governor of the Bank of England, predicts the collapse of the eurozone in a book published this week, going further than his well-known private scepticism for the European single currency.
In extracts from The end of alchemy: banking, the global economy and the future of money, he says the burden of debts between nations in the eurozone “may become too great to remain consistent with political stability”.
Highlighting the need for the eurozone to integrate more fully, including significant debt write-offs, he says the process will probably exceed the willingness of the European people to bailout other countries.
“Monetary union has created a conflict between a centralised elite on the one hand, and the forces of democracy at the national level on the other. This is extraordinarily dangerous,” the former governor says.
Lord King has expressed similar views before and frequently railed against the requirement only for debtor nations to adjust policies while in office. In 2013 he told the FT that the requirements on Greece and other eurozone periphery countries were best described as hell. “It’s real hell. Instead of mere hell, it’s real hell,” he said.
The book primarily concerns the future of banking and imbalances in the global economy. He says the world will inevitably face financial crises because it has not sufficiently resolved the issues that caused the problems of 2007-08.
Lord King is by no means sanguine about breaking up the eurozone. Predicting that southern European countries will tire of the efforts needed to stay in, he adds that “the counterargument — that exit from the euro area would lead to chaos, falls in living standards and continuing uncertainty about the survival of the currency union — has real weight”.
“But if the alternative is crushing austerity, continuing mass unemployment, and no end in sight to the burden of debt, then leaving the euro area may be the only way to plot a route back to economic growth and full employment. The long-term benefits outweigh the short-term costs,” he writes.
Fundamental Flaws
Here’s a question I have posed and answered before “Is the euro so fundamentally flawed, and tensions so high that the euro cannot possibly be saved at all?”
The short answer is yes.
The Eurozone is a failed experiment. A breakup is inevitable just as it has been from the beginning. Structural flaws were too great, built up over the years. No currency union in history has ever survived unless there was also a fiscal union.
On November 9, 2011 in Breakup Inevitable, but How? I offered the following comments.
Eurozone Breakup Inevitable, But How?The Eurozone is a failed experiment. A breakup is inevitable just as it has been from the beginning. Structural flaws were too great, built up over the years. No currency union in history has ever survived unless there was also a fiscal union.
It would be best for all involved if Germany left the Eurozone and went back to the Deutschmark. Germany would have an immediately credible currency. Should Greece or Spain leave first, those countries might experience hyperinflation or massive inflation.
It’s important to remember that Germany suffers regardless. As long as the Eurozone stays intact (it can’t and won’t over the long haul) German taxpayers have to keep acting bailing out foreign countries, foreign banks, and their own banks.
On the other hand, were Germany to leave, the debts to German banks will not be paid back in Deutschmarks but rather deflated Euros.
On the whole, Germany exiting the Eurozone would be less disruptive, than massive inflation scenarios in Greece, Portugal, and Spain.
Three Alternative Paths
- Enough debt writeoffs to allow Europe to grow
- High unemployment and slow growth in Speece, with stagnation elsewhere in Europe
- Breakup of the eurozone
There are no other realistic choices.
Note: “Speece” is my coined word meaning Spain, Portugal, Greece, peripheral Europe in general.
For further discussion also see From ZIRP to NIRP: Virtues of Germany vs. the Vices of Greece; What About “Speece” and Gold?
In his book, King stated “The attempt to find a middle course is not working. One day, German voters may rebel against the losses imposed on them by the need to support their weaker brethren, and undoubtedly the easiest way to divide the euro area would be for Germany itself to exit.”
Bingo. I said the same thing many years ago. And as noted above, Germany will pay a price one way or another. Unfortunately, the sad state of politics is that a destructive breakup is the most likely outcome.
Mike “Mish” Shedlock
You are somewhat incorrect in that there are NO alternate paths.
The European Central Bank is not like other central banks. It’s capitalized much like a commercial bank, with capital guaranties from member countries. Any debt write off that creates a capital deficit requires member countries to recapitalize it. The newest scheme, I believe, allows the ECB to seize banks deposits, rather than hope politicians vote for an appropriation. Any such seizure would crater the European economic landscape. Yet, ECB QE is doing nothing except dig a deeper hole with more and more QE monthly. No magic economic expansion has or will occur. Therefore, the end of the Eurozone is inevitable and it will not be pretty.
Breaking up the Eurozone yields the same outcome.
Expecting economic expansion sufficient to no longer require deficit financing is dreaming.
The ECB is going to monetize substantial debt until it can’t in order to help Europe meet daily expenses and in order to manage sovereign interest rates to levels far below the market rates they would otherwise be. It will explain the need to do this by using distractions, such as fear of deflation, the need for inflation, and whatever current pop economic theory is going around at the moment.
Negative rates are already kind of like seizing bank deposits.
The euro was created for political reasons, not economic. The French would not agree to German reunification without it.
True. The whole Euro-concept is the end product of Utopian nincompoops mated with Machiavellian dreamers. It might have succeeded if it ended as a comprehensive trade agreement, rather than a plot to conqueror Europe over the long term by bureaucrats..
Why did the French need to agree to German unification? Germany was never supposed to be divided in the first place. This had nothing to do with it. The EU was created to challenge the United States that completely dominated the 1990s.
http://www.spiegel.de/international/germany/the-price-of-unity-was-the-deutsche-mark-sacrificed-for-reunification-a-719940.html
It doesn’t matter if Germany was “supposed” to be divided – it was. Better check your history.
First of all the Der Spiegel has about as much sense as the New York Times. It’s mainly a leftist propaganda machine.
Second, there was nothing to stop German unification. What, the French would have sent in the Foreign Legion to prevent it?
Stupidity is always a more probable explanation than conspiracy. West Germany didn’t benefit from unification or the euro. The populations’ living standard is way beyond what it was in the 1980s. You have no idea how rich Germans were considered back then compared to the rest of the world. Now whenever I meet Germans who work here in Australia they rave about how much more they can earn here.
ANOTHER example of a “former” govt official whose IQ skyrockets once leaving office.
When I first looked at the problem years ago … took all of 15 minutes to realize unworkable in the long run. The game playing just makes the Mushroom Cloud that much bigger when it finally appears.
“Lord King”. Good grief. What if you had to go through life with a moniker like that? I’d probably stab myself in disgust.
The EU is like the US with no federal govt. Just the govenors getting together to decide policy. With states like Illinois begging for more money from other fiscally responsible states. Sounds stupid when you put it in those terms.
Yes, but you need to add the Fed buying Illinois debt at below market rates while Illinois slaps an A rating on it and says the Fed can rob community banks if the debt goes bad. This describes the Eurozone.
None of the peripheral countries have A ratings. And the EU has a lot less power and impact of locals than the Federal Government. Besides any country can leave the EU if they vote for it. We know what happened in the US last time someone tried to leave. Besides there may be a lot of regulation in the EU but they are not enforced, especially not in Southern Europe. The governments there are impotent but also not as oppressive as in the US.
You are right there to a degree – you cannot compare the US with EU . However there is a lot of discontent and stress in southern EU that could quite easily turn into confrontations and stricter authoritarian attitudes . If you look at how the police have become in some countries since the GFC at local level you would understand what I am saying …. a new wave of presence and social control emerged and was imposed before / in preparation for / to dissuade social unrest . It is oppressive and people know it, for now tolerate it .
Germany needs the Eurozone and the single market since it exports half of its GDP. Without the single market Germany would collapse. Other nations in the single market cannot compete with Germany and when they collapse, then Germany spreads the bill to all member nations in the Eurozone. Its a nice deal for Germany.
It is possible to have a free trade zone without a common currency.
They would collapse because of all the debt the German banks would have to write off not because of losing markets. West Germany was doing fine before the Euro. Greece never competed with Germany on anything as they never made anything. But in the past Germans could go there for a holiday really cheap. It’s a terrible deal for Germany as now they are stuck with Greece etc forever.
Its a bad deal for the average German , but not those who have high ambitions , they are risking Germany to achieve something that may not work out at all .
Its a nice deal for German bankers and financiers while they can keep it together . Southern EU is in debt to Germany , whichever form of accounting used , as southern countries bust they get bought out at cents . In a single market unbalanced trade / financing north to south would have appeared in the exchange rates and made northern produce unfeasible , or to put it better , northern producers would have had to either drop their prices to reach poorer markets or risked financing dud economies to spur consumption of northern produce . Now the risk is mitigated politically and via the Euro and ECB. So in effect the Euro financial equation has allowed a bubble in consumption and northern earnings all balanced at a European political level , as opposed to national banking failures or natural market based international price adjustments . Of course Germany (its banks and politique) don’t want to let go , they are tigers playing with mice and they wish to extract every drop of worth which southern Europe balanced in exchange for the credit it was given . Now there is a line that has been crossed where national political management is corrupted to EU and finance , where monetary management by the ECB is outside of the initial agreements , and the population are offered a distant carrot to believe in and the stick to keep them in the desired shape and moving. Various leaders should be impeached , national sovereignty has become a farcical show dipped in Draghis and Merkels and a blue flag with a few embossed stars on it . At some point enough people are going to feel very stupid , but it is as likely they will seek salvation from the vanquishers , go full technical Marxists and submit to their own redistribution as handled by Mr. Power Broker of cohesion to equality , as step back and demand their own show . There is no simple return , there is no other plan , it would likely take physical conflict to reinstate a new order , and it is as likely to occur for the wrong reasons and without a clear aim , as compared to a decisive reinstatement of national sovereignty.
The PIIGS untermenchen have no concept of ethics, rule of law, debt repayment, nor stable currency. Such are strictly North country behaviors.
This debt write off is easier said than done. If it happens pretty much all the western banks are bankrupt and with them all the pension funds. A lot of people are about to retire in the West and they don’t want to hear about not having a pension and all their assets lose 70% of value. The debt write offs would mainly benefit the young and savers who are the minority. Any debt write off will be fought against as long as possible. Greece is the perfect example.
It is not something that is said without first being done . When it is spoken of in any way it is either to open a discussion to renegotiate or because it has come into effect already by law or by actions.
The fabric of EU is one of debt , financial obligation , legal obligations , and force , where every now and again a small % get to vote on which seems least worse at that moment to them . People want to get rid of their own debt , they want money first . Creditors want to be repaid , they also want money first . There is a bank that issues money , some politicians who want to be elected by coming up with how to spend that , businesses that want cheaper money to cover their debt by restructuring it . There are poor people who want government money , middle class who want jobs , investors who want higher share prices … in short , they all want money , easy money .
Then there is reality – easy money comes from loose technocrats who wield big sticks and like to be worshipped , who want the world at their command . Easy money is created by more debt and so they devour one set of debtors for the next , knowing that they are gradually structuring absolute leverage over society as a whole .
But people , pensioners , savers , they just want it all to be ‘normal’ , they find that at each turn they have to sell just a little of their freedom , of their rights , of their identity , so as to keep up that appearance of all being in order , of everything being taken care of , just as they were used to , just as they imagined they are due.
Fiat is credit and debt , if you take part in that game , you will find that it is also dictate , and those who dictate like to do so , and they like to do so for themselves in the name of others . There is a narrow line , one that is crossed frequently , between monetary dictate and political /social /legal dictate . In the past some of mankind’s worse atrocities took place when, once monetary dictate was empowered of or absorbed by a select few , and once a means to justify that act was publicly accepted , the next step taken was political dictate, one that already had its reasoning and excuses presented and accepted from the previous step .
The central bank of Europe , as well as the Maastricht government ,which is the treaty to which various European countries are bound , have openly crossed the line of monetary dictate and are now searching for their political dictate .
Do citizens of European countries know this ?
Do they care ?
“No currency union in history has ever survived unless there was also a fiscal union.”
It would be possible if the currency were backed 100% by gold. Some countries might not be able to maintain it politically but it wouldn’t matter to the rest if they failed.
There have been unnoficial currency unions throughout history, mostly based on gold. International trade in antiquity and pre-modern was based on the mint being no more than a stamp of purity and weight of the coin. Administrative, or artificial currencies of low grade, whose value was set by decree in relation to gold, were generally rejected outside of the country of issuance.
The latin monetary union was the last bi-metallic standard that I know of, and apparently it failed due to some member countries issuing more paper claims than gold available, forcing others to react to the devaluation. So when we think of currency union we are really talking of fiscal union in a sense, because there already exists a natural union of accountability in gold, and it is a very simple one. When countries create a currency union they are agreeing to do their accounting and finance to a certain standard, whether gold or ECB or EU. The unit they use may be untarnishable as is gold, or it may be flexible, as is fiat under fractional banking. However the strength of this currency union will only be that of official adherence to the concept. In other words, once fiscal constraints appear ( they always do and should), the temptation is to overide them by weaker monetary issuance – that would be debt that is not covered by the base unit but carrying its weight due to fraudulent official sanction.
Why didn’t he do something when he was in office?
How many currency unions have there been that have failed?
Because he would have been fired immediately.
All pegs can be viewed as currency unions. And they all failed. Gold is the only real money out there.
And now?