Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

European Debt Crisis Bailout Fund Proposal … Just Another Bad Idea

Economics / Global Debt Crisis Mar 11, 2010 - 06:21 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleMartin Hutchinson writes: Has bailout mania finally reached Europe?

The 16 nations that make up the Eurozone are seriously exploring the creation of a "European Monetary Fund," a bailout fund that would help euro-member countries that can't pay their debts.

This has the potential to be a pretty good idea. If structured correctly, the EMF could provide the discipline and stability that the euro needs.

However, I'm not holding my breath: Given the EU's track record, the EMF bailout plan will most likely evolve into yet another slush fund for politicians - as well as a drag on the European economy.

Even when the euro was founded in 1999, it was obvious that its central weakness was the lack of control over budget deficits. As the following chart demonstrates, the so-called "Maastricht Criteria" had established theoretical limits of 3% of gross domestic product (GDP) for such deficits. But there were no proper mechanisms for enforcing those limits, or for preventing the bankruptcy of a country that fell into such difficulties.

Since the birth of the euro 11 years ago, an additional problem has appeared. Well-run, highly disciplined economies such as the one in Germany keep their inflation rates low, their productivity growth high and their wage costs under control. The upshot: These economies gradually become more internationally competitive, and run balance-of-payments surpluses.

This tendency was hidden in the euro's early years by Germany's struggles to integrate the former East Germany, whose much lower productivity was a drag on the economy. However from about 2005 the costs of integrating East Germany began to diminish and Germany's true economic superiority became more obvious.

At the other end of EU's economic spectrum, Europe's Mediterranean countries - now delightfully referred to as the "PIGS" (Portugal, Italy, Greece and Spain) - turned out to have much less discipline. Even before they joined the Eurozone, these countries had relatively high interest-and-inflation rates. The advent of the euro gave them low real interest rates, particularly as their domestic inflation continued and productivity growth remained low.

The result in Spain, for example, was a gigantic housing bubble. Italy had the poorest productivity performance, falling behind Germany at a rate of almost 3% a year and so becoming hopelessly uncompetitive. On the other hand, Italy's budget discipline was fairly good - far better than that of Greece, a country whose current woes underscore the inability of the EU to adequately police the finances of its member countries.

Since it joined the EU in 1981, Greece has been much poorer than other member countries, and so has treated the EU as a never-ending source of free handouts.

That brings us back to the EMF proposal. It would be possible to design a fund that solves this problem. If you staffed it entirely with Scrooge-like bankers - the type that likes throwing foreclosed widows out in the snow on Christmas Eve - then it could achieve two things.

First, it could force Greece and any other country that needs money from the fund to reform their economies properly. This would involve cutting back the public sector, making everybody retire at ages closer to 70 than 60. It would also force down wage rates in the parts of the economy that were heavily unionized, and that had been extracting rents from their fellow citizens (or in Greece's case, from German taxpayers). Because it won't actually be a political body, an EMF of this kind would be invulnerable to the strikes, demonstrations, whining, squawking and Europe-wide lobbying which this process would undoubtedly cause.

The second achievement of such an EMF would be the creation of a bailout process that is so unpleasant and onerous that other countries end up being "scared straight" - to the point that they actually take aggressive steps to reform their own systems so as not to be subjected to the fund's sado-banking.

The precedent for such an institution would be the Bank of England of 1931, an institution led by the BOE's greatest-ever governor, Montagu Norman (in office 1920-1944).

Britain had a sloppy minority Labour government in 1929-31 that permitted public spending bloat; it was also on the "gold standard," a very deflationary monetary system at a point when the Great Depression was beginning to bite. Norman took Britain off the gold standard - but only after the Labour government had been replaced by a fiscally responsible National Government, with the flinty Neville Chamberlain as Chancellor of the Exchequer.

Sidney Webb, Lord Passfield - a Labour cabinet minister and author of "Soviet Communism: a New Civilization" - bleated: "They never told us we could do that."

Quite right, they didn't.  Norman had deliberately not given the Labour government the option of devaluing and wasting the benefit of devaluation through sloppy Keynesian spending. The result of Norman's duplicity and Chamberlain's firmness was an end to the Great Depression that involved far less pain than was experienced here in the United States - followed by an astonishing economic recovery: During the period from 1932-37, Britain enjoyed the highest economic growth rate in its history.

Alas, lost joys. An EMF with, say, Otmar Issing - the hard-money former European Central Bank (ECB) chief economist who's now advising German Chancellor Angela Merkel not to bail out Greece - might repeat Norman's success.

In the real world, however, if a European Monetary Fund does come into existence, it will be the typical sloppily statist international institution, leeching yet more money from productive taxpayers and lending it to Europe's worst-run countries, without any proper controls.

Clearly, Europe would be best served to not create it at all.


Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules