Mon commentaire sur : http://www.irisheconomy.ie/index.php/2010/12/07/uberfordert-in-der-ecke/

Exchange rate flexibility is *not* a good thing, and has never been. Guess what, all European countries had it and exchanged it against the Euro with enthusiasm.

Lets detail that :

– devaluation *is* an hair cut on debt, and long term investors *hate* it. Who here keeps forgetting many major European economies, France, Italy, have been borrowing at more than 10% rates in the early 90s ?

– devaluation sounds like an easy way out of many problems.
Great, you just won’t have to take those unpopular, harsh measures to restore your countries competitiveness and make your industry more efficient. But that doesn’t work.
You devaluate, have a short boost of competitiveness, get all sorts of bad effects in exchange, and two years later you’re back at the exact same point. It doesn’t help you more than cocaine does, a short positive boost, but all sorts of permanent bad effects.
So 2 years later, either you devaluate again, and get even worth of a reputation as a borrower and even worth deals when you need to borrow, or you take the harsh measure you wanted to avoid two years ago.

People obviously need a history lesson, so let’s give it.

France has gone this devaluation cycle all over the XXth century, with the period between two devaluation getting shorter and shorter in the early 80, the effect less and less convincing, the difference with Germany more and more obvious.
It ended up looking with envy at Germany that had always avoided devaluation after WWII and was the living demonstration not devaluating just worked better. That wasn’t just France; Italy, etc. had similar feelings.

So it ended with all European countries taking real harsh measure, accepting recession induced by the spending cuts instead of trying to avoid it with devaluation, actually making the industry more competitive instead of trying to cheat with devaluation, and then getting better rates on borrowings, but *not* the rates Germany was getting. They were being even better pupils than Germany, but the markets were still wary.

Then the Euro came, everybody got almost the same rate as Germany and everybody was greatly happy ever after … not !

So the story went bad again. Most European countries, getting great deals on debt with the euro, just stopped making the efforts they had in the 90s. And there apparently was no consequence. The rates were still almost just as good as Germany, even for Greece who everybody knew was not just making less effort, but was cheating on it’s published debt level.

There was no problem because there was no stress in the market, so investors were not too careful. Also the level of borrowing wasn’t high WRT what investors could provide. But then the real estate crisis, and all it’s various consequences, came, stress has been back on the market, governement have had to borrow huge amount, and the situation has gone critical, at once.

What is the solution ? Go back at step 1 with separate currencies and devaluation ? It doesn’t work. The only solution is to go back at the steps of the 90s, and cut spendings, take harsh measure, even if yes it’s the worst possible moment and will hurt the economy.

——–

There’s a second part of the story that better explained separately.

I talked about European countries falling back in their old fallacies, letting public debt go up, making no effort since the rates were low and financing that debt was easy.

Ireland didn’t do any of that. Ireland had a perfectly sane public debt, one of the best in the world, definitively better than Germany.
So what went wrong ?

Well Irish banks had a huge level of investments that were junk. But we know it was junk in retrospect. They were denying it was junk all the time, and were is the *objective* factor that allows to say that was junk ?

The thing is, the huge investments of banks actually materialized in huge private and enterprise debt. And there lies the problem. The level of private and enterprise debt was insane. At one point, it just stopped being redeemable. So that private debt suddenly became a huge financing problem for bank. Next step is the state guarantying that debt, so it becomes public debt. And suddenly good pupil Ireland has a huge public debt. One could think the government could have stopped the spiral by not accepting that debt, that’s not true since we see that Island’s government ended up in the same situation, it didn’t want at all to guarantee it’s private national bank debt, but had no choice at the end, whatever the price.

That’s the new lesson. For decades, all we cared about was public debt, and private, enterprise debt was on nobody’s screen. But the recent events demonstrate that huge private debt results in just the same situation as if you had let public debt go up. It’s time for a change of paradigm. You can not just ignore that private debt, pretend the debtor are rational, pretend it won’t become a huge public problem. Private debt of 300% is just as bad a situation as is a public debt of 100%.

And that’s how Ireland finds itself in almost the same situation as Greece, even though it appeared as the complete opposite initially, very low public debt, very honest public accounts.

—–

En anglais, le point de vue de André Orléan, des économiste atterrés :
http://www.mediapart.fr/journal/economie/071210/euro-bail-outs-heading-wall-warns-top-french-economist