Running Through Italian Unilateral Euro Zone Exit Scenarios

Author: Edward Harrison  ·  November 22nd, 2011  ·RGEconoMonitor

Editor’s note: this article is neither a policy recommendation or a prediction. Rather, this articles looks to outline one potential outcome of the current policy choices in the European sovereign debt crisis, building upon the discussion from three recent articles “Deflationary crisis responses”, “Predicting the future of policy making”, and “Why France will be forced out of the eurozone”.

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One week ago today, I was running through Italian default scenarios because the policychoices in the sovereign debt crisis have narrowed with most of the risk being on the downside. At the time, I asked “Could Italy unilaterally exit the euro zone and redenominated euro debts at par into a new Lira currency to forestall the default? Perhaps. That is something to consider at a later date. For now, here’s what will happen if Italy defaults.”That later date is now. So let’s get cracking on what would bring about a unilateral Italian exit and how it could be accomplished.

Nationalism and “Beggar Thy Neighbour” economic policy

What the German Bond Auction Disaster Means

Author: Edward Harrison  ·  November 23rd, 2011  RGE EconoMonitor

This morning the German government held an auction for 10-year money at just under 2 percent. The auction failed disastrously with a bid-to-cover ratio of just 1.1. The Germans wanted to issue 6 billion euros of 10-year bunds but managed to sell only 3.64 billion, with the central bank picking up 39 percent of the issue.Many media outlets are reporting the disastrous bond auction results in Germany as an ominous sign. I am of two minds on this.

Looking Ahead to See the New Shape of Europe

Author: Fabius Maximus  ·  November 23rd, 2011  RGE EconoMonitor

Summary:  The slow fire in Europe slowly moves to a conclusion.  From America we cannot foresee what will happen because the news media paints it as a morality play, obscuring the dynamics at work.  While we cannot predict which path the peoples of Europe will choose, we can at least understand the causes of the crisis (it’s not a morality play) and the two alternatives. European elites still hope the current crisis drives Europe to unification.  The slow-building deterioration since August might result from a conscious decision, allowing events to spiral down, so that the eventual crisis (coming soon) provides the political conditions for bold policy action.  Unification amidst mass panic.Prime Minister Merkel tours Europe advocating unification, requiring large changes to the treaties defining the Union.  It’s easy to see why German’s elites support unification.  Germany used the European Monetary Union to impose interest rates optimal for Germany — with terrible effects on Europe’s periphery.

• Germany got strong growth and low inflation — at the cost of large loans to the periphery.
• The periphery enjoyed strong consumption facilitated by low interest rates — at the cost of large debts to the core EU nations.