Thoughts From The Frontline: The Beginning Of The Endgame [View article]
Probably a bit of both. One country that was just lucky though is Sweden. As opposed to Denmark an England which negotiated an opt-out clause when they signed the Maastricht treaty Sweden never did that. Due to general impopularity of the EU among the voters the cowardly politicians held a referendum on the Euro despite there being large majority in parliament in favor of the Euro. The people then voted no, not due to any deeper understanding of the potential problems of the common currency, but just because the EU wasn't very popular in general. Since Sweden meet all the convergence criteria they should legally have to join the Euro despite the referendum... ...except they actually don't meet one of criteria: having the SEK pegged to the Euro at a fixed rate +- 2.5% for 2 years under the ERM2 stability mechanism. Since joining the ERM2 is NOT formally mandatory under the Maastricht treaty Sweden can never be forced to join the Euro...
Thoughts From The Frontline: The Beginning Of The Endgame [View article]
I don't fully understand the advantage the euro would give Germany. On paper I guess it has looked good in the past few years with their trade surplus vis-a-vis southern Europe but in reality that has been based on "hidden subsidies". I.e. massive loans to southern Europe through Target2, LTOR, and ECB bond purchases. What is the point of selling a lot of stuff if you never really get paid in the end? I also don't see why the (hypothetical) Deutsch Mark would appreciate so much if the prediction is a massive recession in Germany if they were to leave the euro. Wouldn't a lot of the capital that's been flowing in to Germany in recent years start flowing the other way once southern Europe become more competitive cost wise?
As a European I also think a lot of Americans underestimate the political problems of suddenly "enforcing" a fiscal union on the EMU countries. In the past years every minor treaty change even hinting at any kind of "federalism" has been fiercely contested by the people in the EU countries. If the economic situation looks grim enough it might be doable in the short term but how long before the people start rebelling and voting for "anti fiscal union" parties in their countries? At the moment we say "What a folly to think a monetary union could work without a fiscal union!". In a few years we would be saying "What a folly to think a fiscal union could work without a political union!"
Disclaimer: I am for a European political union in the long run but short term I think the most merciful thing to do would be to take the Euro behind the barn and shoot it.
For Europe, Fiscal Union? Banking Union? [View article]
...and to give an example from Europe where the "Prisoners dilemma" in my opinion does apply:
Greece. If everyone pay their taxes the system will work and everyone is fairly well off. If everyone else pay their taxes but one person don't the state will still work but that one person will be much better off financially. Hence the logical choice for each individual will be not to pay their taxes. So no one pays their taxes and the system breaks down and everyone is worse off.
For Europe, Fiscal Union? Banking Union? [View article]
Sorry if I came across as nitpicking. In this case the terminology seemed very central. If the topic is EU versus EMU and one person uses the term the EZ for EMU were as another take EZ to mean the EU it doesn't work. Normally sloppy terminology doesn't bother me: For instance you might have noticed that I wrote Holland instead of the more correct The Netherlands in an earlier post. If people for example write Britain instead of the UK it doesn't matter to me if it's not central to the discussion.
So back to my original pint on the prisoners dilemma: To me the interesting thing about the prisoners dilemma is how the incentives are set up and how that affects the outcome. In the prisoners dilemma the contradiction is that no matter what the other player chooses you are always better of choosing "defect" but since both players will reason the same way they both will "defect" and so be worse off that if they both had chosen "collaborate". It is NOT enough that the players would be better off collaborating than not. The game and the incentives have to be set up so that the only logical choice would be to choose "defect". I don't think that the situation in the EMU can be correctly described in terms of the prisoners dilemma.
For Europe, Fiscal Union? Banking Union? [View article]
And to clarify regarding the countries that are in the EU but not in the EMU: they have never joined the EMU in the first place (either through negotiated opt-out or for failing to meet the convergence criteria). Joining the EMU is a "one way street". Once you have adopted the Euro there are no provisions for leaving again (neither voluntarily nor being kicked out).
For Europe, Fiscal Union? Banking Union? [View article]
There is nothing officially called the "EZ". It's usually taken to mean the Euro zone though. The euro zone is understood as the countries in the EMU. I.e. the countries that have the Euro. The UK does not have the Euro and cannot be said to be in the "EZ". They are however in the EU (and so also in the EC by definition).
For Europe, Fiscal Union? Banking Union? [View article]
To me "EZ" would stand for "Euro Zone" so I don't understand the concept of opting out of the euro while staying in the EZ. Might you really mean "EC" which would be similar (but not equal) to the EU?. A country can in theory leave the EU (and in that case also the EZ at the same time) but no country has the option of just leaving the EZ while remaining in the EU. If a country were to leave the EZ (vountarily or otherwise) that would then mean leaving the EC/EU at the same time. Said country would probably remain part of the EEA and so still enjoy the benefits of the European internal market.
Did Germany Just Take A Step Closer To Exiting The Eurozone? [View article]
I agree. I would not count on any contracts being honored in full in a melt down of the Euro. The small trade would probably be made more so I could tell the grand kids about the time me and Paulson shorted the BUND together...
For Europe, Fiscal Union? Banking Union? [View article]
I am not sure that the prisoners dilemma applies here. The . premise of that game is that in a game of one round one player benefits from "defecting" while the other player (or players) "cooperate". That might apply to a few smaller stable countries like Finland, Austria, Luxembourg and possibly Holland. The scenario would then be that Germany pays for the stabilization of the Euro-zone while one of those smaller countries leaves the Euro and so avoids massive money transfers to the PIIGS while still benefiting from a prevented meltdown of the banking system in Europe. For the bigger nations I don't see any potential benefit in "defecting".
Did Germany Just Take A Step Closer To Exiting The Eurozone? [View article]
Thankyou for your answer. After a quick course at "Google university" the legal situation seems a bit unclear really. If for instance Germany goes back to the DM at an initial rate of 1 DM=1 Euro and then the DM appreciates significantly the germans might for example have the option of using the initial conversion rate of 1=1 when the bond matures. The trade I might be looking at would be a "Bear Bund" ETF from a German bank denoted in SEK so the possible outcomes are not that straightforward to calulate... It would definitely only be a small trade after reading lots of fine print...
Did Germany Just Take A Step Closer To Exiting The Eurozone? [View article]
I also found Paulson's shorting of the BUND an interesting play when I read about it. Obviously the yield would go up in case of massive debt sharing in the EU. If the situation of the PIIGS were to improve miraculously through some other mechanism that would also reduce the appeal of the BUND as a safe haven. Sounds like a win-win bet. I am very uncertain what would happen to shorts on the BUND if Germany were to leave the EURO suddenly though. I assume it depends very much on the actual instruments used. Does anyone have information on Paulsons bet in that respect?
Thoughts From The Frontline: The Beginning Of The Endgame [View article]
Since Sweden meet all the convergence criteria they should legally have to join the Euro despite the referendum...
...except they actually don't meet one of criteria: having the SEK pegged to the Euro at a fixed rate +- 2.5% for 2 years under the ERM2 stability mechanism.
Since joining the ERM2 is NOT formally mandatory under the Maastricht treaty Sweden can never be forced to join the Euro...
Thoughts From The Frontline: The Beginning Of The Endgame [View article]
I also don't see why the (hypothetical) Deutsch Mark would appreciate so much if the prediction is a massive recession in Germany if they were to leave the euro. Wouldn't a lot of the capital that's been flowing in to Germany in recent years start flowing the other way once southern Europe become more competitive cost wise?
As a European I also think a lot of Americans underestimate the political problems of suddenly "enforcing" a fiscal union on the EMU countries. In the past years every minor treaty change even hinting at any kind of "federalism" has been fiercely contested by the people in the EU countries.
If the economic situation looks grim enough it might be doable in the short term but how long before the people start rebelling and voting for "anti fiscal union" parties in their countries? At the moment we say "What a folly to think a monetary union could work without a fiscal union!". In a few years we would be saying "What a folly to think a fiscal union could work without a political union!"
Disclaimer: I am for a European political union in the long run but short term I think the most merciful thing to do would be to take the Euro behind the barn and shoot it.
For Europe, Fiscal Union? Banking Union? [View article]
Greece. If everyone pay their taxes the system will work and everyone is fairly well off. If everyone else pay their taxes but one person don't the state will still work but that one person will be much better off financially. Hence the logical choice for each individual will be not to pay their taxes. So no one pays their taxes and the system breaks down and everyone is worse off.
For Europe, Fiscal Union? Banking Union? [View article]
Normally sloppy terminology doesn't bother me: For instance you might have noticed that I wrote Holland instead of the more correct The Netherlands in an earlier post. If people for example write Britain instead of the UK it doesn't matter to me if it's not central to the discussion.
So back to my original pint on the prisoners dilemma:
To me the interesting thing about the prisoners dilemma is how the incentives are set up and how that affects the outcome. In the prisoners dilemma the contradiction is that no matter what the other player chooses you are always better of choosing "defect" but since both players will reason the same way they both will "defect" and so be worse off that if they both had chosen "collaborate".
It is NOT enough that the players would be better off collaborating than not. The game and the incentives have to be set up so that the only logical choice would be to choose "defect".
I don't think that the situation in the EMU can be correctly described in terms of the prisoners dilemma.
For Europe, Fiscal Union? Banking Union? [View article]
Joining the EMU is a "one way street". Once you have adopted the Euro there are no provisions for leaving again (neither voluntarily nor being kicked out).
For Europe, Fiscal Union? Banking Union? [View article]
The UK does not have the Euro and cannot be said to be in the "EZ". They are however in the EU (and so also in the EC by definition).
For Europe, Fiscal Union? Banking Union? [View article]
If a country were to leave the EZ (vountarily or otherwise) that would then mean leaving the EC/EU at the same time.
Said country would probably remain part of the EEA and so still enjoy the benefits of the European internal market.
Did Germany Just Take A Step Closer To Exiting The Eurozone? [View article]
For Europe, Fiscal Union? Banking Union? [View article]
That might apply to a few smaller stable countries like Finland, Austria, Luxembourg and possibly Holland. The scenario would then be that Germany pays for the stabilization of the Euro-zone while one of those smaller countries leaves the Euro and so avoids massive money transfers to the PIIGS while still benefiting from a prevented meltdown of the banking system in Europe.
For the bigger nations I don't see any potential benefit in "defecting".
Did Germany Just Take A Step Closer To Exiting The Eurozone? [View article]
If for instance Germany goes back to the DM at an initial rate of 1 DM=1 Euro and then the DM appreciates significantly the germans might for example have the option of using the initial conversion rate of 1=1 when the bond matures.
The trade I might be looking at would be a "Bear Bund" ETF from a German bank denoted in SEK so the possible outcomes are not that straightforward to calulate...
It would definitely only be a small trade after reading lots of fine print...
Did Germany Just Take A Step Closer To Exiting The Eurozone? [View article]
Sounds like a win-win bet.
I am very uncertain what would happen to shorts on the BUND if Germany were to leave the EURO suddenly though.
I assume it depends very much on the actual instruments used. Does anyone have information on Paulsons bet in that respect?