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Sometimes Big Ideas Die Quite Suddenly

The Euro zone crisis is moving at an astonishing rate. It is complicated enough for an individual government to arrange its response in the middle of a crisis, but when there are so many players involved – as in the Euro zone, with its coach load full of finance ministers, national leaders, the ECB and the EU – it is even more difficult. Add in the speed of the modern news cycle and it is clearly intensely difficult.

In my piece for the paper on Wednesday I looked at how fast the crisis is moving, and suggested that more than a currency is at stake. Here’s an extract:

“It is not just individual economies and a currency that are under pressure. Several big ideas are being stress tested here.
First, the bailing out and unlimited guaranteeing of banks—a major factor in the Irish end of the crisis. The orthodoxy that established itself after the collapse of Lehman Brothers stipulated that the inter-connectedness of financial institutions made it unthinkable that major players should be allowed to fail. That was the logic of the panic of late 2008 and early 2009.

Angela Merkel, the German Chancellor, says that this has gone too far, and that eventually bond holders and institutions must take a share of the pain. But the result of her comments on the matter was an acceleration of the crisis in Ireland and eventually a giant loan to bail out the Irish banks.

It seems that once you start bailing out banks it is difficult to stop, and if you accept the theory of inter-connectedness then is there anything large and financial you won’t rescue to buy a bit of stability, even if it is for half a day?

Then there is the late 20th century idea of closer European integration itself, or more specifically the Mitterrand-Kohl idea of Europe that emerged from the rubble of the Cold War. The European political class has invested heavily in what started out as a co-operative exercise in the 1950s but in time has become something else: a great cause to unite a continent say its supporters, a political grand project that was always going to collide with market realities say its critics.

Sometimes big ideas fail. And history suggests that right up until the moment that they do, very large numbers of people will maintain that failure is unthinkable.

Perhaps that is not about to happen in terms of European togetherness, and the crisis will slow down with order restored. But what is holding together the euro zone today? It is now no longer the dreams of an elite determined to construct a rival to the U.S. that could parley on equal terms with the emerging powers. Today it is being held together by simple fear of the alternative.”

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    • Mortgage refinancing means re-funding the mortgage loan with better terms as well as conditions, most likely from a different lender. It is one way to save money. Search online for "123 Mortgage Refinance" they found me 3.1% refinance rate and also gave free analysis of my mortgage.

    • There is a specter haunting the world, and it is the disappearance of economic growth.

      No economic growth = no upward mobility = no improving standard of living = no hope for those without wealth

      Currently, the developed world is fighting very hard to keep the idea of economic growth alive. Hence, the European bailout fund and the USA's TARP and quantitative easing.

      But what happens when the "people" finally realize there is no hope of economic growth?

      I leave to people's imaginations to answer that question.

    • As a follow up....the same financial mechanisms associated with companies, groups, and individuals today haven't been fully extended to sovereign countries....primarily because of the false belief that countries don't go bankrupt. Argentina can tell you otherwise, and it is sad that the world relegated Argentina's problems to 'mismanagement of the economy'. For example.....why can't a country issue preferred shares that offer an adjustable dividend for as long as they are owned. No ownership but ability to share in profits. The risks are greater, but so are the potential profits. Such a mechanism would allow for negotiations with bond holders to do debt for equity swaps. While this doesn't solve the debt gives us flexibility and starts to turn the debt panic into more of a debt negotiation with livable consequences. As many of you may comments hint at a fundamental change in the nature of what a country 'is'. Capitalism, since WW2, has won in the markets. It's now time for it to sweep our governments as well.

    • FF makes some good points. The real disaster scenario: Germany pulls out of the Euro. That's the end. In many ways. But, Germany along with the rest of the world would lose substantially from such a rash move. The most likely and best outcome is for some of these countries to go bankrupt. The fear in the market is this; there are no hard and fast rules for a sovereign country going bankrupt....No chapter 11, no court appointed trustee, etc. So, no one knows what would happen to their money. Just setting some rules and mapping out a strategy for EU sovereign bankruptcy and what it means to bond holders would go miles to restoring some confidence in the markets. In my opinion.

    • Failure is certainly thinkable. But is it likely? While the Euro is definitely being stressed at the moment there are good reasons for thinking it will be safe:

      1. The markets have confidence in the currency. It's been behaving normally against the US dollar.
      2. While weaker economies have lost out to some extent, the stronger economies such as that of Germany have actually benefited.
      3. The stronger economies such as Germany's are more important to the success of the Euro than the weaker ones such as Greece and Portugal.
      4. Ireland's problems in particular have little to do with the Euro.
      5. Politically, the mean leaders are committed to the Euro. This shouldn't be underestimated.
      6. The alternative is horrible, as you point out.

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