[Nesster]

EconoMonitor : Nouriel Roubini's Global EconoMonitor

Talk of Finland leaving the EZ sooner rather than later has increased, with many in influential positions now reconsidering the costs and benefits of EZ membership and coming to the conclusion that a “Fixit” may be the country’s best option.

Consider the following factors. First, the other Nordic countries are outside the EZ and/or the EU and are doing fine economically and otherwise. Norway and Iceland have never joined the EU: The former has remained a success story as a resource-based economy; the latter suffered a severe financial crisis driven by the popping of a massive real estate bubble, but so did members of the EZ such as Ireland and Spain. Denmark opted out of EZ membership and is semi-pegging its currency—the Danish krona—to the euro. Sweden was supposed to join the EZ, but it never did and isn’t likely to join any time soon. Since none of the other Nordic economies are part of EMU, what are the benefits of Finland remaining a member?

Second, if Finland were to exit the EZ it might also be forced to exit the EU; however, it could keep most of the benefits of EZ and EU membership without any of the costs. Like Denmark, it could semi-peg its own new national currency to the euro (or to the deutschemark if the EZ were to eventually fall apart completely), thus benefiting from low exchange rate volatility, while keeping open the option of moving its currency up or down, if needed. It could even keep most of the benefits of free trade with the EU by establishing a free-trade agreement with the EU and/or with Germany, while not being subject to many of the other legislative and regulatory constraints that EU membership entails (even if access to EU markets requires being subject to many regulatory constraints). Or, it could try to negotiate remaining a member of the EU while quitting the EZ, as the EZ is now considering allowing member states to leave the EZ without surrendering their EU membership.

Third, by exiting, Finland could avoid the losses and costs that continued membership of the EZ would entail:

a) Finland would no longer need to contribute to the European Financial Stability Mechanism (EFSF) and European Stability Mechanism (ESM); after all, EU members that are not EZ members do not contribute to the two EZ rescue programs;

b) In the event of exit, Finland would also avoid potential losses deriving from the build-up of Target 2 balances in the core of the EZ, including Finland. Indeed, Finland’s Target 2 balances would be phased out upon exit;

c) Trade losses in the event of an EZ break up and the core sticking with the euro (which would sharply appreciate relative to the new currencies of exiting periphery countries) could also be reduced;

d) Since the EZ’s survival requires the core to take on even greater credit risk—via debt mutualization (i.e. Eurobonds), via a fiscal union (that may in part be a transfer union to poorer EZ members) and via an EZ-wide deposit insurance scheme—Finland could avoid these additional implicit liabilities by exiting before such risks are undertaken or materialize;

e) Finland’s potential GDP losses in the event of the EZ breaking up could also be lowered via the extra degree of currency and monetary policy flexibility implied by a return to a national currency; and

f) Some private unofficial estimates put the potential losses of Finland with continued EZ membership at between 10 and 15% of Finnish GDP.

Fourth, many social, business and political forces in Finland are skeptical of the euro and/or supportive of an exit. The most fervent euro-skeptic group is The Finns Party (formerly the “True Finns”). But even the broadly pro-euro National Coalition, the party of the current prime minister, contains opponents to the common currency, one of which is Finland’s President, Sauli Niinistö, who bemoans the fact that Finland bails out richer EZ members, yet is still pro-euro. Another party leader, Ben Zyskowicz, last week pointed out the EZ’s fundamental design flaws. For the time being, the forces formally supporting a “Fixit” are in the minority, but there is now significant internal debate on the pros and cons of membership. If Greece moves closer to exit and Italy and Spain end up on the verge of losing market access and requiring even more risky financial support from the EZ core, Finland may decide that the additional credit risk is not worth the benefit. Indeed, the country has already been the most vocal so far—in debates about the EFSF, the ESM and other aspects of the periphery bailouts—in requesting formal collateral or seniority for its contributions to the EZ periphery rescues.

For now, the ruling coalition is still firmly in support of EZ membership, but there are plenty in favor of an exit in the political opposition; even within the coalition, many are grumbling in private about the costs of EZ membership. A trigger to increase the chances of Fixit would be a decision by the EZ to increase the potential losses and credit risk of the core members—including Finland’s—via a fiscal and transfer union, debt mutualization and EZ-wide deposit insurance. At that point, the forces pushing for Fixit may get the upper hand.

[Winder]

There have been several article recently on this subject. The Nordic countries, Germany, and one or two smaller countries could leave the EU and still have very strong currencies. The problems with Greece, Spain, Italy, & Portugal is that if they leave their new currencies would be next to worthless. Maybe we see the EU divide into a norther block and a southern block.

Maybe Professor Philip Zimbardo is correct.

Youtu.be

Youtu.be

[Tom S.]

My first thought when they started the concept of the Euro was that it would be a good thing to do away with all the various currencies and exchange rates. Then when I thought about, I could see where it would lead to disaster. Time has proven me right. No one wants to bail out their wayward neighbor when the shit hits the fan, nor do they wish to share in their spoils when things go their way. The Euro was/is a disaster waiting to happen.

[Winder]

The EU is having the same problem we have here in the USA when it comes to scale and diversity.

The Nordic countries are very homogeneous (they have practically no diversity) and relative to the USA or the rest of the EU they are very small.

To use the textbook example:
If I want to order pizza for just me it is quick, easy, and I get exactly what I want. If I have to order a pizza for 5,000,000 (the size of Finland) "me"s then it gets to be more time consuming and costly, and not all of the "me"s get pizza exactly when they want it because it is just not possible to deliver them all at exactly the same time. It is not the ideal, but most people are still happy. But what happens when those 5,000,000 people are diverse? Some are vegetarians, some are on a diet, some don't eat pork for religious reasons, and some don't even like pizza at all. The more diverse a population is the harder it is to implement policies that make everyone happy. The more expensive it is to implement policies because it cost much more to be diverse. This effects every aspect of society from education to healthcare.

A homogeneous country that is small in scale can have a much more efficient government that delivers better services for less money than a very large, very diverse country. You have a higher level of satisfaction among the population and a lower cost to deliver services.

The EU is now facing the problems that the USA has dealt with for years. They now have a very diverse group of counties with very different wants and needs, and they are now working on a much larger scale. The Nordic countries would probably be better off if they left and formed their own block.

There are a lot of things that the Nordic countries do right that the rest of Europe and the USA could learn from, but anyone who thinks the rest of the EU or the USA can implement the same system as the Nordic counties and achieve the same level of cost/benefit/satisfaction is totally ignorant of the challenges of scale and diversity on public policy.

[Tom S.]

The EU is having the same problem we have here in the USA when it comes to scale and diversity.

The Nordic countries are very homogeneous (they have practically no diversity) and relative to the USA or the rest of the EU they are very small.

To use the textbook example:
If I want to order pizza for just me it is quick, easy, and I get exactly what I want. If I have to order a pizza for 5,000,000 (the size of Finland) "me"s then it gets to be more time consuming and costly, and not all of the "me"s get pizza exactly when they want it because it is just not possible to deliver them all at exactly the same time. It is not the ideal, but most people are still happy. But what happens when those 5,000,000 people are diverse? Some are vegetarians, some are on a diet, some don't eat pork for religious reasons, and some don't even like pizza at all. The more diverse a population is the harder it is to implement policies that make everyone happy. The more expensive it is to implement policies because it cost much more to be diverse. This effects every aspect of society from education to healthcare.

A homogeneous country that is small in scale can have a much more efficient government that delivers better services for less money than a very large, very diverse country. You have a higher level of satisfaction among the population and a lower cost to deliver services.

The EU is now facing the problems that the USA has dealt with for years. They now have a very diverse group of counties with very different wants and needs, and they are now working on a much larger scale. The Nordic countries would probably be better off if they left and formed their own block.

There are a lot of things that the Nordic countries do right that the rest of Europe and the USA could learn from, but anyone who thinks the rest of the EU or the USA can implement the same system as the Nordic counties and achieve the same level of cost/benefit/satisfaction is totally ignorant of the challenges of scale and diversity on public policy.

The US and the EU are entirely different animals. The US is made up of separate states, which are all part of the same country, with none of them responsible for the national economy or currency. The EU on the other hand has member nations that do not have a federal government over them, so each one could tell the EU to go pound sand tomorrow and go back on their own currency. We had some states try that about 150 years ago and it didn't go well. When you add in that most nations in Europe have been at war with one another many times over the course of their history, and it's easy to see why getting a consensus and keeping it on something as important as currency and and a nation's welfare is very difficult.

[Winder]

The US and the EU are entirely different animals. The US is made up of separate states, which are all part of the same country, with none of them responsible for the national economy or currency. The EU on the other hand has member nations that do not have a federal government over them, so each one could tell the EU to go pound sand tomorrow and go back on their own currency. We had some states try that about 150 years ago and it didn't go well. When you add in that most nations in Europe have been at war with one another many times over the course of their history, and it's easy to see why getting a consensus and keeping it on something as important as currency and and a nation's welfare is very difficult.

It does not matter if different countries can tell the EU to go pound sand tomorrow. That does not change the issues of scale or diversity that is currently facing the ECB and the policies they are trying to implement to salvage the EU. The differences (diversity) are a major reason for the current fighting over ECB policy. The history of war does not seem to be a problem between countries with similar views of monetary and fiscal policy. Germany and Italy were allies in the last big European war, now they are polar opposites and France and Italy (who were enemies) are working pretty closely together.

The idea of the Nordic counties leaving (probably with Germany) would solve most of the problems of diversity and the southern Mediterranean countries have much more in common with each other than they do the northern block. If Greece, Spain, Italy, or Portugal tells the EU to go pound sand and revert back to their own currency it will be very painful, as their individual currencies would be next to worthless for several years and wages would fall significantly. Spain and Italy are big enough that if they default France would be hung out to dry. Nobody has more exposure to the toxic debt of the southern countries than France (who has its own problems and is headed in the wrong direction).

[Tom S.]

It does not matter if different countries can tell the EU to go pound sand tomorrow. That does not change the issues of scale or diversity that is currently facing the ECB and the policies they are trying to implement to salvage the EU.

Apparently is does matter - because when the possibility of Greece withdrawing from the Euro was brought up, it was feared that others may follow suit, eventually leading to the Euro's demise. At least that is how it was reported here.

[Winder]

Apparently is does matter - because when the possibility of Greece withdrawing from the Euro was brought up, it was feared that others may follow suit, eventually leading to the Euro's demise. At least that is how it was reported here.

If Greece leave, then the EU will become smaller in scale, and less diverse. It will become easier to manage. The fact that a country can leave does not change how diversity and scale work. It simply changes the variables in the equation, not the equation itself.

Greece is toast anyway you look at it. They can't repay the debt they already have, and even if times were really good they would not be able to repay. They just own way too much with too small of an industrial base.

Spain has been lying about how bad it really is for months (that's what government does). Now they say they need 300 billion more Euro and the new bailout fund (which still has not passed the German supreme court) only has 250 billion. That leaves nothing for Italy or anyone else. 6% sovereign bonds is insanely high and will bankrupt Spain and Italy over the long run. They can't afford to borrow more money at those rate to finance their government. Spain and Italy alone need over 400 billion in charity. France can't support itself much less help, which only leaves Germany and the Nordic Block with any credit left, because ultimately they have to borrow the money to loan it to Spain & Italy and pay the interest for Spain and Italy.

Germany and the Nordic block are heavy savers. Their citizens save much more than the rest of the EU. If France and the Southern Block get to crank up the printing presses to monetarize their debt, then the inflation will destroy the private savings of the German and Nordic citizens. You end up punishing the fiscally responsible (savers) and rewarding the fiscally irresponsible (those in debt). You also lower the standard of living and increase the burden of income tax on the population. This is why the bailouts are so unpopular with the German and Nordic citizens. It is not simply a matter of asking the citizens to loan money to the Southern Block, it is asking them to loan money, pay the interest, and lower their own standard of living.

[Nesster]

Nordic block

The countries currently using the euro are:
1) Andorra
2) Austria
3) Belgium
4) Cyprus
5) Estonia
6) Finland
7) France
8) Germany
9) Greece
10) Ireland
11) Italy
12) Kosovo
13) Luxembourg
14) Malta
15) Monaco
16) Montenegro
17) Netherlands
18) Portugal
19) San Marino
20) Slovakia
21) Slovenia
22) Spain
23) Vatican City

Unless you lump Estonia in with the Nordic block, there isn't one. Denmark, Sweden, Norway and Iceland never joined.

[Winder]

The countries currently using the euro are:
1) Andorra
2) Austria
3) Belgium
4) Cyprus
5) Estonia
6) Finland
7) France
8) Germany
9) Greece
10) Ireland
11) Italy
12) Kosovo
13) Luxembourg
14) Malta
15) Monaco
16) Montenegro
17) Netherlands
18) Portugal
19) San Marino
20) Slovakia
21) Slovenia
22) Spain
23) Vatican City

Unless you lump Estonia in with the Nordic block, there isn't one. Denmark, Sweden, Norway and Iceland never joined.

I was including Estonia who is a pending member, and I thought Norway was a member. If it is just Finland, then yeah they should get the hell out ASAP.

[jeffkrol]

If Greece leave, then the EU will become smaller in scale, and less diverse. It will become easier to manage.

Bankers could care less about Greece, on any level.. they just don't want any more to follow suit... self interest.

[Tom S.]

Bankers could care less about Greece, on any level.. they just don't want any more to follow suit... self interest.

Exactly! Bankers feared a domino effect if Greece left.

[Winder]

Germans 'better off without euro' - poll - Telegraph

71% of Germans polled want Greece out.
51% of Germans think Germany should get out.

I think the northern countries would be much better off if they were not tied to the dead weight of the Club Med. countries.

[GeneV]

Germans 'better off without euro' - poll - Telegraph

71% of Germans polled want Greece out.
51% of Germans think Germany should get out.

I think the northern countries would be much better off if they were not tied to the dead weight of the Club Med. countries.

Not necessarily. If Germany pulled out and the DM went through the roof, their exports are sunk. By being in the EZ with the "club Med," they get the benefit of something like what China does with its currency. Germany is as out of sync with the rest of the EZ as Greece is, and there might very well be some pain involved there as well. However, it is possible that Germany's exit from the EZ would do more to restore health and harmony than Greece's. http://www.cnn.com/2012/05/30/opinion/prestowitz-prout-germany-eurozone/index.html

[Winder]

Not necessarily. If Germany pulled out and the DM went through the roof, their exports are sunk. By being in the EZ with the "club Med," they get the benefit of something like what China does with its currency. Germany is as out of sync with the rest of the EZ as Greece is, and there might very well be some pain involved there as well. However, it is possible that Germany's exit from the EZ would do more to restore health and harmony than Greece's. Could Germany save eurozone by leaving it? - CNN.com

This is true. Germany's manufacturing would suffer from the higher value of its currency relative to other EZ countries. Does it cost Germany more to stay or more to go over the long run? Short term it is more expensive to leave, but long term it is not an easy question. The question with Greece is whether or not the rest of the EZ wants to lose 50 billion more Euros to keep Greece in the EZ or 50 billion to kick Greece out. Greece is a money pit either way. Right now Spain and Italy represent bigger long term threats. Greece is less then 3% of the EZ if I am not mistaken.

Can the rest of the EZ afford to buy Germany out? Germany would want its money back and other EZ countries would have to purchase all of the debt that Germany has bought in an effort to support the EZ to this point. In many ways the EZ is structured like a private company, when one partner leaves the others have to buy the shares. Germany currently has over 500 billion euros of exposure to toxic debt by the Club Med Countries. Is that risk greater than the cost of leaving the EZ? Billions of Euros have been transferred from Spain/Italy/Greece into German banks for safety. If Germany pulls out it be have swap all of those funds for new deutschmarks. Just as the Greek people don't want their Euros in Greek banks when Greece leaves (they don't want to get stuck with worthless drachma), people would rush to get their Euros deposited into German banks if an exit was probable. This would actually force Germany to print billions more in deutschmarks that it would want to.

Over 10 Italian big cities are on the verge of financial collapse. Debts, derivatives and mistakes: the Italian municipalities are in crisis. After the default of Alessandria, a big city in Piedmont (North-Western Italy), there are several risks for Turin, Milan, Napoli, Palermo, Reggio Calabria and other cities with over 50,000 inhabitants. "Too much debts, over 10 metropolitan cities should ask to Corte dei Conti (the Italian Court of Auditors) for an orderly default," Graziano Del Rio, chairman of Italian Association of Commons, said to La Stampa. In last week the Sicily has asked for a financial support and has claimed over €1bn of credits to Italian government.

Support for the EURO is also falling faster in Italy than Spain. The Anti-EURO political party has gone from 3% to 20% of the population in only a few years. Social media trackers are showing a big increase in anti-EURO sentiment posts/tweets/blogs. Italians actually have a more negative view of the Euro than Greeks. Only 30% of Italians think the Euro is good for Italy compared to 46% of Greeks. The vast majority of Italians think they would be better off to abandon the currency (PEW Research).