Ongoing European Debt Crisis

Bankers should not be tortured, that's ridiculous. And I'm not saying that just because I'm studying finance.

No, my main concern is that tax shelter nations can exist in large part because nations economies have rules to allow for these things. I just wonder if the US couldn't "incentivize" these nations to play by rules that don't end up harming everyone collectively. You know, cooperation and all that jazz.

Well, the U.S. could issue laws freezing all dollar assets of those banks and blocking them from performing any financial transactions with U.S. institutions. That would certainly stir up some furor.

edited 26th Jul '12 4:07:58 PM by Fighteer

Well, the problem is whether the US could do so successfully without just driving international business away. As much as tax shelters are teh sux, I'm not a big fan of autarchy either.

One might need to make it an international effort. However, so much business is done in dollars that converting all those holdings into other currencies would involve almost as much loss as complying with the regulations.

The process is fairly simple. You announce that on X date, you will be freezing the assets of all these banks. To avoid this, they must hand over all records of transactions with U.S. citizens and companies, or anyone doing business in or earning income from the U.S. and agree to do so in the future.

You make it known that any person found to be hiding taxable income by means of these accounts will be prosecuted to the fullest extent of the law, but you provide an amnesty window where they can escape prosecution if they come forward voluntarily, submit to an audit, and pay all taxes due.

It's more or less what happened with UBS, and it worked.

edited 26th Jul '12 4:26:56 PM by Fighteer

Could you elaborate on what UBS is? I mean, that plan sounds good to me (not that it will ever happen, too many lawmakers would be affected), I just want a little more context.

Well, we could always just give a blanket exemption for lawmakers~

UBS is a Swiss Bank with major worldwide operations. It's been deeply involved in the Crisis from the beginning.

edited 27th Jul '12 12:29:08 AM by Greenmantle

Update: Eurozone economy shrinks by 0.2%

The Eurozone is going into Recession again — even in Germany — and read the Comments for the usual Conspiracy Theories...

In before Krugman saying, "I told you so," although this was eminently predictable and should hardly come as a surprise to anyone. And Krugman's on vacation, anyway.

Somehow, I knew you'd say that, and that you'd mention him.

Well, he is THE anti-austerity talking head these days. It's why his book is so popular in Europe

Well that more or less guarantees Britain is gonna be in recession again too.

The scary number is Greece. -6%? That's catastrophic. And the continuing negative numbers in Spain, Italy, and Portugal mean that those countries won't be balancing their budgets any time soon.

edited 14th Aug '12 9:35:29 AM by Fighteer

Krugman TOLD them they weren't allowed to have a catastrophic crisis until he got back from vacation, but did they listen? Nooooooooooooooo.

Why start now?

Well, when I say catastrophic, I mean for Greece's long term prospects. But it's not catastrophic in the sense of setting off a full-blown Eurozone crash, because it was predicted by everyone. We all know Greece is fucked, so evidence of it, indeed, being fucked is not going to make anyone panic.

Good point.

Hmm...

The worst issue with that debt crisis is stupidity, I think

The last word on Europe:

There's an article on The BBC about Finland — most are for the Euro, a few are against the Euro but Finland's concerns about the Euro might make things more difficult.

edited 15th Aug '12 12:04:52 AM by Greenmantle

That's the best article about Finland's point of view on this that I've seen from a foreign media yet. There's been some miscommunication before between Finnish politicians and foreign media, but this article portrays the politicians and their parties accurately.

It doesn't mention, however, that the largest party in Parliament - the party of our President, Prime minister and Minister of European Affairs - is entirely pro-Euro. The article did mention that the bulk of Finnish people and politicians supports the Euro, but the point would've been even clearer if the National Coalition Party had been mentioned.

Could someone please provide me with a summary of Krugman's proposed solutions for the debt crisis? Or with a link to one of his most recent suggestions?

edited 15th Aug '12 6:27:28 AM by Zarastro

I've posted it previously but I will give you the short version now. Going through his blogs is more time consuming than I can deal with at the moment.

Causes of the Eurozone crisis:

• The Euro was created as a monetary union in which countries sacrificed their ability to control their own currencies in exchange for the benefits of a common currency.
• The Eurozone was not a fiscal or political union, however, meaning individual countries continued to set their own economic policies and issue debt, and the European Commerce Bank (ECB) was expressly forbidden from intervening by means of issuing currency or conducting stimulus.
• When the Euro was formed, all the "peripheral" countries were suddenly the recipients of massive cash inflows as investors were encouraged to treat their debt as being just as good as, say, Germany's.
• The cash inflows (by means of borrowing in Euros) supported huge economic booms in Spain, Italy, Greece, etc. These booms created bubbles in real estate and, more to the point, caused wage increases that reduced those countries' competitiveness. Meanwhile, Germany enjoyed record trade surpluses.
• When the economic crisis of 2008 struck, all those bubbles burst, causing huge losses in government revenue. Suddenly, these nations' solvency was at stake because they couldn't devalue their currency to regain competitiveness, since their monetary sovereignty had been ceded to the ECB.
• Germany and France have been driving austerity as the solution to the crisis, despite protests that it's self-defeating. If a country already in recession cuts back on spending to lower its deficits, all that's going to do is reduce revenue, which exacerbates their deficits, meanwhile throwing even more people out of work.
• Right now, Germany's labor costs in real terms are 20% lower than the peripheral countries. This creates a huge trade imbalance, forcing those countries to slash wages (something that's extremely hard to do) to restore competitiveness. If these countries had sovereign control of their currencies, they could devalue (as Iceland did), but they can't, so they're stuck as the redheaded stepchildren of the Euro.

Krugman's solutions are fairly straightforward.

• Authorize the ECB to act as lender of last resort for EU governments and banks. This is what saved the U.S. financial system in 2008.
• Reverse austerity policies in the countries that are suffering debt crises, and instead engage in stimulus spending to get their economies back on track.
• To restore competitiveness, increase the German inflation target to around 4%. Since deflating your currency without fiscal policy is nearly impossible, instead let Germany inflate while the other countries hold at around 0%. This would bring labor costs back into sync in five years, give or take.

More generally, complete the fiscal union of the Euro as well as the monetary union. In the United States, Florida doesn't have to worry about its workers losing their health care if it suffers a revenue shortfall, because the money comes from the Federal government. The EU has no such mechanism. Each country is forced to sink or swim on its own, but it cannot manage its own currency, which is a primary economic tool.

edited 14th Jan '13 8:46:42 AM by Fighteer

What he says makes sense. And the ECB is more or less on its way of becoming a lender of last resort, since Mario Draghi took office. But the part with 4% inflation in Germany is flat out impossible. Any government even openly considering this would commit suicide. The German people might accept higher inflation for one or even two years after the next election, but certainly no longer than that.

Five years of controlled inflation for Germany versus ten or more years of bruising deflation for the other countries, all so Germany can maintain its pride of place? Yes, this dogmatic refusal to accept inflation is one of the things that Krugman cites as a reason why the Euro experiment is almost certainly doomed.

It reminds me a bit of the U.S. Republicans' insistence on No Raising Taxes Ever — when asked if they would accept 1 dollar of tax increases for every 10 dollars of spending cuts, they said no.

If the Germans are willing to throw the entire EU into fiscal chaos because they're too scared of inflation, well, then... okay. There's not much more to talk about.

edited 15th Aug '12 7:57:36 AM by Fighteer