# What Would Be The Worst Case Scenario For The Euro **URL:** \ **Category:** Great Debates\ **Created:** [November 27, 2011, 12:09pm UTC](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226 "2011-11-27T12:09:48Z")\ **Posts on this page:** 20\ **Page:** 3
**Author:** ![Rune](https://avatars.discourse-cdn.com/v4/letter/r/e68b1a/32.png) [@Rune](https://boards.straightdope.com/u/Rune)\ **Post date:** [November 28, 2011, 8:40pm UTC](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226/41 "2011-11-28T20:40:43Z")
Euro-bonds will spread the risk so that also the otherwise comparable healthy economies of Germany, France, the Netherlands, Finland, etc. will come under increasing pressure on the bond markets. This is already happening. Denmark, outside the Euro, has for the first time in history a lower interest rate than Germany. I think the Germans are trying to use the crises to pressure especially the PIGS to much needed reforms and fiscal discipline. The reforms, which have already been carried through, are very helpful, but far from enough. More is needed. I think we’ll come to some kind of euro-bond eventually, but only after the necessary reforms have been implemented. It’s too soon, yet. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [November 28, 2011, 8:54pm UTC](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226/42 "2011-11-28T20:54:03Z")
First off, IANAL, and definitely NAEuropeanL. I’ve read a few articles that argue even if it’s agreed upon that the ECB should act as a lender of last resort, they can’t - it’s illegal. See [here](http://hussmanfunds.com/wmc/wmc111121.htm)(point 2) and [here](http://doug-huggins.blogspot.com/2011/11/legal-issues-involving-ecb-as-sovereign.html). Those here advocating the ECB as a lender of last resort - how would you address that objection? ---
**Author:** ![Simplicio](https://avatars.discourse-cdn.com/v4/letter/s/c37758/32.png) [@Simplicio](https://boards.straightdope.com/u/Simplicio)\ **Post date:** [November 28, 2011, 9:15pm UTC](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226/43 "2011-11-28T21:15:31Z")
> [@Trom](#): > > First off, IANAL, and definitely NAEuropeanL. I’ve read a few articles that argue even if it’s agreed upon that the ECB should act as a lender of last resort, they can’t - it’s illegal. See [here](http://hussmanfunds.com/wmc/wmc111121.htm)(point 2) and [here](http://doug-huggins.blogspot.com/2011/11/legal-issues-involving-ecb-as-sovereign.html). Those here advocating the ECB as a lender of last resort - how would you address that objection? They’d probably need the European Council to repeal the regulation mentioned in your second link. Beyond that, there would need to be some semi-plausible argument about how becoming the lender of last resort is necessary to fulfill the ECB’s mandate. Which is do-able, after all, its not really clear what “price stability” even means in a scenario where the currency itself is in danger of going defunct. In short, in a case where the ECB decides to act, and the larger European countries want them to, I don’t think circumnavigating the legal barriers would be particularly difficult. ---
**Author:** ![isaiahrobinson](https://avatars.discourse-cdn.com/v4/letter/i/85e7bf/32.png) [@isaiahrobinson](https://boards.straightdope.com/u/isaiahrobinson)\ **Post date:** [November 28, 2011, 10:33pm UTC](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226/44 "2011-11-28T22:33:13Z")
> [@smiling\_bandit](#): > > First off, can the 'tude, since you’re speaking highly theoretically. Second, the ECb does not have such a mandate. It’s not theoretical, and they do have such a mandate, because they’ve [already](http://www.bloomberg.com/news/2011-11-18/asian-stocks-fall-as-oil-retreats-on-europe-debt-concern-china-bad-loans.html) been purchasing Italian and Spanish bonds on the secondary market. What they don’t have a mandate to do is purchase bonds in the _primary_ market, but no one’s suggesting they do that. The attitude was because when you confidently said Krugman’s suggestions were “not possible” I was actually hopeful, given how bold a claim that is, that you’d have some expertise on the issue that I would find enlightening, so I’ve just found these answers pretty disappointing is all. ---
**Author:** ![smiling\_bandit](https://avatars.discourse-cdn.com/v4/letter/s/e9a140/32.png) [@smiling\_bandit](https://boards.straightdope.com/u/smiling_bandit)\ **Post date:** [November 28, 2011, 10:56pm UTC](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226/45 "2011-11-28T22:56:14Z")
> [@isaiahrobinson](#): > > It’s not theoretical, and they do have such a mandate A mandate is not “we have no rules against it”. A mandate is “this is our mission.” Given that rules are explicitly laid down for them not do so, then if anything, it would seem to be that Europeans did not want the ECB doing so. > [@](#): > > The attitude was because when you confidently said Krugman’s suggestions were “not possible” I was actually hopeful, given how bold a claim that is, that you’d have some expertise on the issue that I would find enlightening, so I’ve just found these answers pretty disappointing is all. It’s very simple. As it currently stands, the ECB does not posess: 1. The legal means 2. The financial means 3. A probability of getting either within the foreseeable future 4. A probability that they would be effective in achieving their goals even with both. The fourth, of course, is the most speculative. I’m not certain how you could prove it or find citations for such it. But I find my argument vastly more compelling than Krugman’s\*, which relies on people who have never done a thing suddenly finding the power, authority, expertise, and immense means to do it. Nor does Krugman have any expertise in this area - he has exactly as much information as I do, as a mere layman. And I’ve gone to a considerable trouble to read about what more educated people do know, and they in no way see the ECB as some kind of Dark Horse riding in the save the day. Instead, they look to the leadership of Europe more generally. The common thread running through things is that (a) the technocrats, no matter how you slice is, have ballsed things up, and (b) the actual leaders of Europe will have to make some hard choices, which they are currently avoiding with all their might. The ECB _cannot_ fix the basic problems, but only suspend them for a time. The problem is not the high interest rate on bonds, but the fiscal issues which give rise to high interest rates on bonds. IMHO (and this is the part which is most speculative, which is why I didn’t mention it) it could end up making the problem much, much worse by encouragin even more unsustainable bond issues. \*I can’t always read Krugman and don’t keep him on my list for financial stuff. As I mentioned, he has expertise but isn’t a a financial economist. Nor is he, despite his self-proclaimed answers, much of a political economist. He’s more informed than most coluimnists, but this amounts to have “some knowledge whatsoever.” ---
**Author:** ![aux203](https://avatars.discourse-cdn.com/v4/letter/a/77aa72/32.png) [@aux203](https://boards.straightdope.com/u/aux203)\ **Post date:** [November 28, 2011, 11:05pm UTC](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226/46 "2011-11-28T23:05:11Z")
> [@brickbacon](#): > > Let me preface this by saying that I am no expert on economic matters, but can’t they do something closer to what Brazil did when they had economic problems. What if they introduce a sub-Euro currency that would be for the mismanaged countries. This has been proposed. The problem is all your debts are in euros. You can a) pay them in euros, which doesn’t really solve the problem or b) pay them using your new Greek-Euro, or Souther-Euro, or whatever you decide to make, which isn’t worth as much the old one. If you depreciate your currency - basically, inflate away your debt - to pay your debts, it’s pretty similar to defaulting. It might be an orderly default as opposed to pure chaos, but your creditors at the end of the day are getting less money than they are owed, and they would consider this a default, which will have ripple effects throughout Europe as previously discussed. Then there’s the question, why would you ever let them back in? Remember when they were talking about the voluntary deal to take a 50% haircut on Greek debt? The banks take a loss, the Greeks reduce their debt, and since it wasn’t technically a default, it doesn’t trigger a bunch of CDSs, and avoids (hopefully) a disorderly default. Nice! That’s not too dissimilar to your scenario, actually, minus the new currency. Now that wasn’t a bad idea, the problem is now investors in Europe are wary of buying more bonds because they can no longer hedge safely, and despite the haircut it still wasn’t enough. There have been talks of another restructuring which would result in a 75% haircut, which is nuts. And Greeks are already protesting in the streets. There is no easy way out for Greece at this point. smiling bandit seems to be arguing for dissolution of the euro currency union and he’s not the only one. But saying “that’s also hard” is sort of putting it mildly. If the euro disappears German and other northern european currency goes through the roof and the large export oriented industries that have powered their economy take a huge hit. Since their bank holdings are in euros they would also have to recapitalize their banks, which could cause a few failures and tighten credit. As they start generating liabilities in the new, strong German currency they continue to generate income on Euro denominated holdings. And let’s not forget, this basically amounts to allowing all the troubled southern economies to default on their debts! Greece and the other southern economies would face the opposite problem as we’ve already talked about: inflation, bank runs and failures, defaults, etc, etc. Everyone would deal with tremendous transition costs. Lawyers would spend years sorting it all out. And while the defaults rack up and unwind Europe faces a major credit crunch. UBS made some projections, which are a place to start at least. They projected a 20-25% GDP hit the first year, decreasing by half for every year thereafter for Germany and a whopping 40-50% GDP hit in the first year for Greece, dropping to 15% for every year after that. For comparison the Great Depression was ~25% in the US, the latest banking crisis ~5% peak to trough. That’s a huge blow and not one that would be limited to Europe. There’d be riots in the streets and political upheaval for certain. (Actually, you could argue we have that now. More upheaval? More burning cars? Hard to say) Is that preferable to having the ECB act as a LLR? I don’t feel qualified to answer but I’d guess no. Is there another solution? Don’t see an obvious one, though maybe someone will come up with something. But it’s not like they can wait forever. Bond rates are rising and there are some major bond rollovers in early 2012. Interesting times. I don’t think anyone feels the legal objections will mean squat when push comes to shove. ---
**Author:** ![smiling\_bandit](https://avatars.discourse-cdn.com/v4/letter/s/e9a140/32.png) [@smiling\_bandit](https://boards.straightdope.com/u/smiling_bandit)\ **Post date:** [November 28, 2011, 11:49pm UTC](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226/47 "2011-11-28T23:49:50Z")
> [@aux203](#): > > smiling bandit seems to be arguing for dissolution of the euro currency union and he’s not the only one. But saying “that’s also hard” is sort of putting it mildly. Part of what I was thinking was for this to occur gradually, country by country, with the intent of _avoiding_ mass panic and confusion. Greece could split off first, effectively devalue, and then be followed by Italy, Spain, and Portugal and then France in turn. Would it hurt? heck yeah. But it would start money moving again, even if it’s different money, and the tiered nature of the switch would let things happen in a more orderly fashion, while making sure banks don’t see their assets fall apart all at once. Since Euros would soon become worthless, we could hopefully avoid bank runs - no point in taking Euros since you’ll just have to trade them in later anyway. > [@](#): > > Is that preferable to having the ECB act as a LLR? I don’t feel qualified to answer but I’d guess no. Is there another solution? Don’t see an obvious one, though maybe someone will come up with something. But it’s not like they can wait forever. Bond rates are rising and there are some major bond rollovers in early 2012. Interesting times. I don’t think anyone feels the legal objections will mean squat when push comes to shove. This, of course, applies only if you think the ECB can fix the problem. As I’ve mentioned before, I don’t believe that’s the case. Currency split isn’t a good answer, but I think it’s almost the only one left short of a Euro-dictator. ANd I really, _really_ don’t want to see the latter. I sincerely hope I’m wrong. But it would take considerable evidence of effective action to persuade me at this point. ---
**Author:** ![aux203](https://avatars.discourse-cdn.com/v4/letter/a/77aa72/32.png) [@aux203](https://boards.straightdope.com/u/aux203)\ **Post date:** [November 29, 2011, 12:36am UTC](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226/48 "2011-11-29T00:36:17Z")
> [@smiling\_bandit](#): > > Part of what I was thinking was for this to occur gradually, country by country, with the intent of _avoiding_ mass panic and confusion. Greece could split off first, effectively devalue, and then be followed by Italy, Spain, and Portugal and then France in turn. Would it hurt? heck yeah. But it would start money moving again, even if it’s different money, and the tiered nature of the switch would let things happen in a more orderly fashion, while making sure banks don’t see their assets fall apart all at once. Since Euros would soon become worthless, we could hopefully avoid bank runs - no point in taking Euros since you’ll just have to trade them in later anyway. Part of the problem is as the first countries devalue and default, the other countries in Europe are holding their bad debt. As they take losses and capital flees, the entire Eurozone goes down with them. Basically, how do you keep things orderly? The worry is once Greece defaults the rest follow in short order in a general panic. How do you space them out? Does Italy keep using Euros until it’s its turn to default? If so why on earth would you keep your deposits in an Italian bank? Why isn’t Italy’s exposure to the multiple defaulting countries ahead of it in the queue forcing them to default anyway? I’m curious that your solution would be for the individual countries to essentially inflate their way out of debt, while your objection to the Eurozone solutions are that it would… cause inflation? Or is it that it would unduly burden the Northern European countries? And I don’t think anyone thinks the ECB will suddenly solve all of Europe’s problems, any more than the Fed could solve all of the US’ problems during the banking crisis. It might prevent a catastrophic meltdown in the short term however. You keep referencing hard work… do you mean austerity/budgetary reform? Or something else? I think most are suggesting that reducing bond rates and the cost of servicing long term debt would be the first step before addressing the structural problems the southern European nations have. Austerity is all well and good but its hard to run a budget surplus when your GDP is contracting by 30-50% ---
**Author:** ![Quartz](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/quartz/32/267_2.png) [@Quartz](https://boards.straightdope.com/u/Quartz)\ **Post date:** [November 29, 2011, 1:32am UTC](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226/49 "2011-11-29T01:32:33Z")
> [@Naxos](#): > > Well, read the news. Then you won’t have any difficulty providing an actual cite, will you? I don’t disagree that there’s been speculation, but you need to prove that it was the focus of the Euro. > [@Hellestal](#): > > I was thinking of [this chart](http://img.skitch.com/20090325-ek36xkmmrrf3d3dhjugtwfdagh.render.png), favored by Brad DeLong and originally from Barry Eichengreen, listing major industrial powers of the time. But I double-checked the years on that. Germany’s dated incorrectly. They dumped gold earlier, although they did not ease money as much as they could have. So it is not, in fact, perfect. Good to know. That graph is very interesting. Is there any data from countries recovering after devaluing at other times? Or perhaps inferences from antiquity? ---
**Author:** ![smiling\_bandit](https://avatars.discourse-cdn.com/v4/letter/s/e9a140/32.png) [@smiling\_bandit](https://boards.straightdope.com/u/smiling_bandit)\ **Post date:** [November 29, 2011, 2:26am UTC](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226/50 "2011-11-29T02:26:23Z")
> [@aux203](#): > > Part of the problem is as the first countries devalue and default, the other countries in Europe are holding their bad debt. As they take losses and capital flees, the entire Eurozone goes down with them. Capital is already fleeing. I propose to take steps which would make it European economies more attractive. > [@](#): > > Basically, how do you keep things orderly? The worry is once Greece defaults the rest follow in short order in a general panic. How do you space them out? Does Italy keep using Euros until it’s its turn to default? If so why on earth would you keep your deposits in an Italian bank? I recognize the difficulty. However, investors may have no choice. If they don’t have better alternatives, they can’t flee and must take the hit, be they big investors or small. I would admit that temporary capital controls might be neccessary, odious though they are. > [@](#): > > Why isn’t Italy’s exposure to the multiple defaulting countries ahead of it in the queue forcing them to default anyway? For one, hopefully things can pick up in the countries after they diverge from the currency. But if not, remember that we will, at worst, be recognizing the fundamental problems. In short, it can only make the issue plain. It won’t make things worse, but will bring any problems to bear. Yes, it’s nasty to actively plan on causing an economic problem when you can maybe keep the game going another six months. But evading the crisis is not an option. Recognizing, reorganizing, and developing an orderly solution remains an option. The EU can still act as a whole once we know who needs help the worst. > [@](#): > > I’m curious that your solution would be for the individual countries to essentially inflate their way out of debt, while your objection to the Eurozone solutions are that it would… cause inflation? Or is it that it would unduly burden the Northern European countries? My objection to the Eurozone solution is that it simply kicks the can down the road. It doesn’t solve the problem. I also object because it will harm the countries who right now are keeping the whole house of cards from collapsing. Thus, I propose to dismantle the house and make several smaller, more stable houses. > [@](#): > > And I don’t think anyone thinks the ECB will suddenly solve all of Europe’s problems, any more than the Fed could solve all of the US’ problems during the banking crisis. It might prevent a catastrophic meltdown in the short term however. You keep referencing hard work… do you mean austerity/budgetary reform? Well, yeah. That seems to be off the table, and those who push for it the hardest have basically thrown democracy out the window. I’m perfectly fine with the Greeks having a lax economy with lots of benefits. But Germany isn’t going to pay for it, more or less, and no matter how you slice it you can’t reconcile the two. I am in favor of letting the Greeks live how they want and the germans live how they want, and each should accept their own currency responsibilities. The ECB is and must be a political animal. Right now, keeping it means the Germans dictate to the Greeks, and tell them what they may or may not do. You propose that instead the Greeks should dictate to the Germans (metaphorically). I say let them alone for what they want to do alone. You can’t do right by both of them, and serving those in need means seriously hurting those supporting the system - even assuming that anyone at all benefits in the end. And even if it worked, you would on the net weaken the Eurozone. Basically, you are saying that option B is better than option A. I am saying that I don’t believe option B exists. There’s no “good” solution anymore. That ship sailed months and months ago. As I said, I do see an option C. Option C would basically be a dictator(s) with unlimited powers over the individual nations. In fact, this is roughly what the EU technocrats want and are trying to do, since they’d be acting as the dictators. I think they’re going to simply cock this one up as badly as they do with all their grand projects, but it could work. The thing is, I don’t want it to. I don’t want unelected technocrats ordering Prime Ministers and Presidents about, claiming authority because they hold the money hostage. Not to mention the money wouldn’t be hostage if it weren’t for them. I also think they overestimate their position, since it boils down to Merkel’s backing and Sarkozy’s forebearance. ---
**Author:** ![Hellestal](https://avatars.discourse-cdn.com/v4/letter/h/3ab097/32.png) [@Hellestal](https://boards.straightdope.com/u/Hellestal)\ **Post date:** [November 29, 2011, 3:16am UTC](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226/51 "2011-11-29T03:16:03Z")
> [@Hari\_Seldon](#): > > Some comments. First the real unemployment rate is much higher than the official figure because the people who are so discouraged that they have stopped looking are not counted. We gotta be consistent with this. There’s nothing wrong with using the U6 “underemployment rate” instead of the normal U3 unemployment rate, but we need to compare apples with apples. The Volcker recession of the 80s hit about 10% regular unemployment. What was the underemployment rate then? What is the typical underemployment rate when the economy is healthy? What was the underemployment rate during the Great Depression? 25% is an estimate for the standard rate at the depth of depression, but if you’re trying to measure underemployment, it would be even higher. When we pull up underemployment numbers out of context, it can be potentially misleading, because we’re tempted to compare unfairly against the standard rate. The data is totally valid, of course, we just have to be a bit careful about it. > [@smiling\_bandit](#): > > Tis is one big reason I massively disagree with **Hellestal**. Not about the potential consequences, which are bad, but about the means. The plain fact is that Europe cannot save the Euro. No, not even with massive inflation. Moderate inflation will not do; they need an influx of cheap money. But this will not solve the longer-term problems any more, and will in fact kneecap the Euro’s strongest members. We have clear evidence that eurozone aggregate demand is suffering right now: deflation and stagnation. For specific numbers, we can see that nominal spending is far below trend. We can also see that Italy has a primary budget surplus, or is fairly close to one. If they could roll-over their debt, they would be okay. If 1) the economy were better from stronger demand, thus improving government revenues, and 2) they didn’t have to pay a risk premium on their bonds because there was no significant fear of default, then there’s no obvious reason why they’d still be hosed. The bulk of the evidence suggests that the eurozone’s problem is a demand problem, and demand problems of this sort could be handled with stronger NGDP growth [to get back to the pre 2008 trend line](http://macromarketmusings.blogspot.com/2011/11/if-germans-were-serious-about.html). It is practically impossible to blame governmental irresponsibility anywhere except Greece. Spain in particular was doing just as good as Germany with its budgets before the 2008 financial mess. This is about demand, and helping demand is technically (if maybe not legally) within the ECB’s power. The problem is that their policy is implemented in a way that keeps Germany on track, while everyone else is left behind. If Germany were willing to eat some real inflation, the eurozone would have a decent shot of getting out of this hole. It’s the best plan on the table, because they’re going to eat a healthy serving of higher prices anyway if the periphery collapses. The German currency will devalue, one way or another. They can do it smart, or do it stupid. Smart is an attempt to avoid Eurogeddon. Worth a shot. > [@Quartz](#): > > That graph is very interesting. Is there any data from countries recovering after devaluing at other times? Or perhaps inferences from antiquity? For a couple notable recent examples, we can look at [Argentina](http://seekingalpha.com/article/242046-does-argentina-s-nike-effect-hold-lessons-for-europe) and Iceland. [This Argentina graph](http://static.seekingalpha.com/uploads/2010/12/15/saupload_p101211_1.png) tells the whole story. They were pegged to the dollar (same way the world was pegged to gold in the 30s.) You can tell exactly when they devalued. Here’s [Martin Wolf on Iceland and Ireland](http://blogs.ft.com/martin-wolf-exchange/2011/11/21/how-iceland-survived-the-fire/?infernooffset=21&SID=google#axzz1f3cHncOA), explaining the process in more detail, with a good eurozone comparison. This is, of course, not always the right medicine. A devaluation based on governmental irresponsibility is a recipe for hyperinflation, like Zimbabwe. But in a demand crisis? A devaluation – or for a specific target, returning to trend NGDP – is the path to recovery. (Examples from antiquity wouldn’t really count, I don’t think. Modern demand crises are related to modern banking. Though the ancients repeatedly debased their coinage, “devalued”, that was primarily due to princely extravagence, and not to benefit to the economy. They didn’t really have a modern notion of what the economy is.) ---
**Author:** ![Measure\_for\_Measure](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/measure_for_measure/32/557_2.png) [@Measure\_for\_Measure](https://boards.straightdope.com/u/Measure_for_Measure)\ **Post date:** [November 29, 2011, 8:26am UTC](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226/52 "2011-11-29T08:26:02Z")
> [@ftg](#): > > This can only work if you’re the only country doing it. The current problem is so bad that too many countries face devaluing their currencies, and the Euro itself complicates things enormously. It is far, far from a single fix situation. I actually am inclined to agree: joint and expansionary fiscal policy would certainly be welcome. But if the West devalues, that amounts to depreciation relative to the third world and _more importantly_ quantitative easing among all major currencies. I’ve wondered whether that might work. Then again, if the ECB refuses to act as a lender of last resort -one of the core functions of a central bank- then all bets are off. ---
**Author:** ![Baboonanza](https://avatars.discourse-cdn.com/v4/letter/b/f475e1/32.png) [@Baboonanza](https://boards.straightdope.com/u/Baboonanza)\ **Post date:** [November 29, 2011, 10:46am UTC](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226/53 "2011-11-29T10:46:23Z")
> [@Hellestal](#): > > There’s nothing wrong with using the U6 “underemployment rate” instead of the normal U3 unemployment rate, but we need to compare apples with apples. The Volcker recession of the 80s hit about 10% regular unemployment. What was the underemployment rate then? What is the typical underemployment rate when the economy is healthy? What was the underemployment rate during the Great Depression? 25% is an estimate for the standard rate at the depth of depression, but if you’re trying to measure underemployment, it would be even higher. > > When we pull up underemployment numbers out of context, it can be potentially misleading, because we’re tempted to compare unfairly against the standard rate. The data is totally valid, of course, we just have to be a bit careful about it. Apologies for a bit of a tangent but this is a something that always bothers me when historical unemployment figures are discussed. Surely during the Great Depression the make-up of the workforce was radically different? This is pre-women’s lib and most households would still have been composed of a single bread winner supporting a family. I doubt that many women would have been counted as unemployed. In contrast the modern workforce may have 2 bread winners, many more single people and smaller (possibly fewer?) families. IMO this makes direct comparison almost impossible, but I rarely see it mentioned. I would guess that to get the real effects of 25% unemployment during the Great Depression from a modern workforce you’d need much higher unemployment, maybe 40% (but that’s just me pulling numbers from my arse). Maybe I’m missing something? ---
**Author:** ![aux203](https://avatars.discourse-cdn.com/v4/letter/a/77aa72/32.png) [@aux203](https://boards.straightdope.com/u/aux203)\ **Post date:** [November 29, 2011, 11:52am UTC](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226/54 "2011-11-29T11:52:52Z")
> [@smiling\_bandit](#): > > My objection to the Eurozone solution is that it simply kicks the can down the road. It doesn’t solve the problem. I also object because it will harm the countries who right now are keeping the whole house of cards from collapsing. Thus, I propose to dismantle the house and make several smaller, more stable houses. > > Basically, you are saying that option B is better than option A. I am saying that I don’t believe option B exists. There’s no “good” solution anymore. That ship sailed months and months ago. As I said, I do see an option C. Oh. I’m with Hellestal 100% then. Southern Europe has problems but lumping Italy and Spain with Greece is being rather unfair to them. Spain for example dutifully decreased their balanced during good times, has a relatively small debt/GDP ratio (well government debt at least) and is still getting hurt by the Eurozone contagion. Do you think that rates won’t drop, thereby reducing the cost of long term debt if the ECB intervenes? Would that, in addition to growth/avoiding a recession do more to address Italy and Spain’s budgets than, say, the equivalent of a Euro wide Great Depression? Your position seems equivalent to letting all the banks fail in 2008. I mean, moral hazard, right? Does it strike anyone else as bizarre that we seriously considered that? Or not allowing the fed to perform their function over the last several years? Actually this seems not dissimilar to the strain in American politics that was arguing for a balanced budget and reduced spending in response to the banking crisis. For Hellestal: I can’t say I’m familiar with BASE but I presume its roughly equivalent to M1? What do you make of the argument that the increased monetary base hasn’t resulted in increased money supply yet, but that as banks start resuming their pre 2008 activity we will start seeing greater inflationary pressure? ---
**Author:** ![Rune](https://avatars.discourse-cdn.com/v4/letter/r/e68b1a/32.png) [@Rune](https://boards.straightdope.com/u/Rune)\ **Post date:** [November 29, 2011, 12:30pm UTC](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226/55 "2011-11-29T12:30:07Z")
Neither Spain nor Italy were not doing all that well pre-Crash. Even before the crash the Spanish unemployment rate was very high and the Italian growth was miserable. The Spanish governments failed to use the good times to make much needed reforms of their labour markets, public sector, pension systems, etc. And neither country seems to have taken any serious steps to prepare themselves for the coming demographic changes with a dramatic increase in the proportion of elder persons. Buying up Spanish/Italian/etc. bonds before they have implemented the necessary reforms will just give them an excuse not to make the reforms. No outside money should be poured into these countries until they have shown the will to reform themselves and show that they are on a long-term economic sustainable path with a clear and realistic plan bring down the debt level. Many beneficial steps have been taken but there’s a long way to go yet. In the USA you have saying something like: Never waste a good crisis. The same is true for Europe too. We need to use the crisis to push through reforms that will benefit us in the longer perspective. ---
**Author:** ![Hellestal](https://avatars.discourse-cdn.com/v4/letter/h/3ab097/32.png) [@Hellestal](https://boards.straightdope.com/u/Hellestal)\ **Post date:** [November 29, 2011, 1:21pm UTC](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226/56 "2011-11-29T13:21:13Z")
> [@Baboonanza](#): > > Apologies for a bit of a tangent but this is a something that always bothers me when historical unemployment figures are discussed. > > Surely during the Great Depression the make-up of the workforce was radically different? This is pre-women’s lib and most households would still have been composed of a single bread winner supporting a family. I doubt that many women would have been counted as unemployed. In contrast the modern workforce may have 2 bread winners, many more single people and smaller (possibly fewer?) families. > > IMO this makes direct comparison almost impossible, but I rarely see it mentioned. I would guess that to get the real effects of 25% unemployment during the Great Depression from a modern workforce you’d need much higher unemployment, maybe 40% (but that’s just me pulling numbers from my arse). Maybe I’m missing something? You make a fair point, and I can’t personally answer it. That’s why I was talking about “an estimate” of Depression unemployment. They didn’t make detailed surveys of Labor Force Participation until after the war, and I’m not sure about what the estimates are, how the percentage of people on farms fits in, or much anything else. Not really that knowledgeable about labor history. > [@aux203](#): > > For Hellestal: I can’t say I’m familiar with BASE but I presume its roughly equivalent to M1? What do you make of the argument that the increased monetary base hasn’t resulted in increased money supply yet, but that as banks start resuming their pre 2008 activity we will start seeing greater inflationary pressure? The base is M0, central bank money. This is total cash, the stuff owned by banks, either in their vaults or on the computer, and also cash out in circulation. The inflationary pressure complaints are (mostly) unfactual, ahistorical, empty-headed, pearl-clutching nonsense. This is sometimes called the Theory of Immaculate Inflation, as if prices go up by magic without any reference to supply and demand. For the eurozone periphery (and the US, for that matter), new money will seek out the _cheapest resources_ first, rather than strongly bidding up the prices of already existing resources. The cheap resources are the idle resources, all those unemployed who would love to be doing something productive. They are what the investment dollars will target. People out of work can be a buffer against a huge inflationary spiral. Yes, there will still be some inflation, but if we had a strong spike in NGDP – returning to trend or at least getting closer to trend – the majority of that NGDP increase would be in real production, not price increases. (In econo-speak: we’ve got an elastic aggregate supply right now.) We wouldn’t be looking at anything like 1970s inflation with this, just a relatively mild increase. That doesn’t make the process painless everywhere. There is Germany (and possibly some other northern European countries). German NGDP is already on trend: their demand is already where it should be. Any further boost of extra money is going to help the periphery bunches, but Germany can’t be helped any more in this fashion, which means it would start heating up. Saving the eurozone means Germany eats some inflation. It wouldn’t be terribly high, since they’d have the opportunity to buy from other places in the eurozone, speeding periphery recovery, but that just means that the German manufacturing sector would howl. It could last a while, too. German manufacturing is destined to take a long grinding hit. But that’ll happen anyway, if the euro collapses. > [@Rune](#): > > In the USA you have saying something like: Never waste a good crisis. The same is true for Europe too. We need to use the crisis to push through reforms that will benefit us in the longer perspective. Ah yes, the [“we have them by the balls”](http://finance.fortune.cnn.com/2011/11/15/the-real-reason-for-germanys-optimism/) school of economic policy. > [@](#): > > Now the [[German]] consultant perked up, speaking what he too believes to be the unvarnished truth. They have to, he said, because “to be blunt about it, we have them [both the Greeks and the Italians] by the balls.” Dangerous game of chicken there. The whole thing will unravel, in the not-too-distant future, if the focus continues to be opportunistic ball-squeezing to the exclusion of actual crisis prevention. _What profit it a Euro-man if he gain worldly concessions from swarthy southern types, yet it cost him his currency?_ Lotsa luck with that. Hope it works out. ---
**Author:** ![Rune](https://avatars.discourse-cdn.com/v4/letter/r/e68b1a/32.png) [@Rune](https://boards.straightdope.com/u/Rune)\ **Post date:** [November 29, 2011, 1:48pm UTC](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226/57 "2011-11-29T13:48:23Z")
If you solve the long term problems the short term problems will solve themselves. Perhaps with a bit of help for a shorter period. However if you merely patch over the problems short term without addressing the long term problems you’re merely setting yourself up for an even bigger crisis a little while downstream. What profit it a Deutch-man if he saves the Euro but loses his economy? What profit it the swarthy southern types that superior blonde Arians join them in their misery to a common economic bankruptcy? ---
**Author:** ![smiling\_bandit](https://avatars.discourse-cdn.com/v4/letter/s/e9a140/32.png) [@smiling\_bandit](https://boards.straightdope.com/u/smiling_bandit)\ **Post date:** [November 29, 2011, 2:08pm UTC](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226/58 "2011-11-29T14:08:24Z")
> [@aux203](#): > > Your position seems equivalent to letting all the banks fail in 2008. I mean, moral hazard, right? Does it strike anyone else as bizarre that we seriously considered that? I don’t believe they will all fail, nor am I arguing against cushioning the blow. I am suggesting that what you’re proposing does not happen. Neither Spain nor Italy was doing that well. Both have dangerous instabilities. And then there’s quiet Portgual, which may end up tipping the balance point. Basically, my point boils down to this. _If_ the EU had the cash to guarrantee some loans _and_ that’s all it took, they could have done it already. While I consider them more cunning than than smart, I don’t assume they’re complete imbeciles. I do assume that they don’t believe the have the resources for a straight bailout, and that they’re leery of ponying up even more before reforms are in place, and that they themselves don’t believe the ECB can do the job. I’m sure there must be somebody in Europe who thinks the ECB should handle things, but I’m har- pressed to think of even one major figure who supports it. You can theorize all you want, but I don’t see such a call going out among them, and I do presume they know the situation better. Now, in resposne to **Hellestal** , I should also point out that while talking about stimulating Agg Demand is nice, nobody actually has a way to do it. You can dump money into the market to basically give it a good poke, yes. But _nobody_ has a track record of successfully “kick-starting” Agg Demand. **Rune** , that’s basically my argument for why they need to break up the currency Union. Europe needs more than one currency, and if you go with two you may as well go with more. Greece was happy enough being Greece. ---
**Author:** ![Quartz](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/quartz/32/267_2.png) [@Quartz](https://boards.straightdope.com/u/Quartz)\ **Post date:** [November 29, 2011, 2:50pm UTC](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226/59 "2011-11-29T14:50:08Z")
> [@Hellestal](#): > > For a couple notable recent examples, we can look at [Argentina](http://seekingalpha.com/article/242046-does-argentina-s-nike-effect-hold-lessons-for-europe) and Iceland. [This Argentina graph](http://static.seekingalpha.com/uploads/2010/12/15/saupload_p101211_1.png) tells the whole story. They were pegged to the dollar (same way the world was pegged to gold in the 30s.) You can tell exactly when they devalued. Here’s [Martin Wolf on Iceland and Ireland](http://blogs.ft.com/martin-wolf-exchange/2011/11/21/how-iceland-survived-the-fire/?infernooffset=21&SID=google#axzz1f3cHncOA), explaining the process in more detail, with a good eurozone comparison. Very good, thank you. But didn’t Argentina save their currency and economy earlier on by pegging themselves to the US dollar? So it would be a case of different strategies at different times. ---
**Author:** ![Measure\_for\_Measure](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/measure_for_measure/32/557_2.png) [@Measure\_for\_Measure](https://boards.straightdope.com/u/Measure_for_Measure)\ **Post date:** [November 30, 2011, 4:22am UTC](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226/60 "2011-11-30T04:22:22Z")
> [@smiling\_bandit](#): > > Now, in resposne to **Hellestal** , I should also point out that while talking about stimulating Agg Demand is nice, nobody actually has a way to do it. You can dump money into the market to basically give it a good poke, yes. But _nobody_ has a track record of successfully “kick-starting” Agg Demand. Well there is WWII. That ended the depression. There was going off the gold standard. That started the recoveries. There is the history of US recessions 1945-2007. They all ended via fiscal and monetary policy. (Now we have a liquidity trap though, which limits the effectiveness of monetary policy.) Please grant me a little 'tude: there are an abundance of examples of effective demand management.\* > [@Rune](#): > > If you solve the long term problems the short term problems will solve themselves. Perhaps with a bit of help for a shorter period. If the house is burning, hiring painters and plumbers won’t help. And if the economy isn’t growing, the long run problems become tougher. You’ve got it reversed. **Hellestal** : Back near the beginning of this crisis I stated in no uncertain terms that we weren’t going to have another freaking Great Depression, which I’ll define here as unemployment north of 18%. I retract: while I don’t find that scenario probable, it is plausible. Bernanke will bail out the banking system, but he has balked at the possibility of NGDP targeting, which suggests pretty strong institutional constraints at the Fed. I mean jeez, there’s a built-in cap on inflation under such a plan: it’s not especially radical. Meanwhile we have both a liquidity trap and contracting federal, state and local spending. Now Germany has actually shown a fair amount of fiscal flexibility at least for itself, but the ECB is nuts. > [@Hellestal](#): > > This could only happen if the US decided to mimic Europe by being so afraid of inflation that it would allow its own system to buckle in the same way. That’s not credible with Bernanke as chair. In the midst of a liquidity trap QE11 may not be sufficient. Now Bernanke might get creative if unemployment hits 15%. But he might not. And the other branches might not be able to deliver bank or money fund bailouts a 2nd time around, never mind an adequate stimulus package. Applying textbook economics is politically more difficult than I imagined 4 years ago. I thought that politicians _liked_ to slash taxes and boost spending. It turns out that this is the case only up to a point, oddly. - …and if you’re concerned about exogeneity, see Romer and Romer (199\_?). [Previous page](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226.md?page=2) [Next page](https://boards.straightdope.com/t/what-would-be-the-worst-case-scenario-for-the-euro/604226.md?page=4)