tag:blogger.com,1999:blog-3448927642739850334.post5914515029038698406..comments2023-10-29T08:06:00.610+00:00Comments on The Political Economist: “Why a collapse of the Eurozone must be avoided”Vuk Vukovichttp://www.blogger.com/profile/01878567452492217960noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-3448927642739850334.post-73452685394950674442012-09-05T14:15:07.306+01:002012-09-05T14:15:07.306+01:00Something like that, yes, here's the excerpt f...Something like that, yes, here's the excerpt form the Bloomberg article I linked to in the post (it offers a pretty good description of how the system works): <br /><br />"The Target2 system, named for the Trans-European Automated Real-Time Gross Settlement System, is part of the common currency’s plumbing system to settle transactions.<br />A Greek importer, for example, might place an order with a German company. Payments to and from the accounts of the buyer and seller are channeled via central banks, so the German exporter’s bank gets a credit with the Bundesbank, which in turn has a claim on the ECB. The Greek importer’s bank owes its local central bank, leaving the Bank of Greece with a debit at the ECB.<br />Transactions across the 17-member euro region produce a net surplus or deficit between countries at the ECB, and the system depends on each country being able to meet its obligations. The less willing commercial banks are to deal with each other, the more lopsided the balances between central banks become. The Dutch central bank has claims on its peers of 153 billion euros, while Luxembourg is owed 110 billion euros, according to Whittaker."<br /><br />They also say:<br />"The Target2 liabilities are just as risky and just as real as holding the government bonds of Greece and other peripherals" <br />So you're right on that point, it is a risky liability for Germany to hold. <br />Vuk Vukovichttps://www.blogger.com/profile/01878567452492217960noreply@blogger.comtag:blogger.com,1999:blog-3448927642739850334.post-4981908384759790212012-09-04T21:19:25.583+01:002012-09-04T21:19:25.583+01:00I think they're right about the Target2 balanc...I think they're right about the Target2 balances; if I understood it right, Germany has a net credit of 650bn or so, which was the money used to finance Italy, Spain and Greece's imports, through the central bank clearing system, or something like that? It's basically a huge liability for Germany, and a risky one as well. <br /><br />If that's the case, than I perfectly understand the German position that this can't be allowed to go on any further.Mikehttps://www.blogger.com/profile/14413273098082958690noreply@blogger.comtag:blogger.com,1999:blog-3448927642739850334.post-33818487157997952942012-09-04T18:43:18.276+01:002012-09-04T18:43:18.276+01:00That is true, but think about the institutional sy...That is true, but think about the institutional system in Greece, Portugal or Italy today? None of them were a command economy, that's true, but all of them were characterized by an unsustainable welfare state model and crony capitalism and corruption that sustained that model. <br />The comparison isn't a direct one, but it does tell us what can happen if some countries continue on the road to stabilization on their own, i.e. after experiencing a huge external shock to their economies. They are highly unlikely to become another <a href="http://im-an-economist.blogspot.co.uk/2012/06/whats-behind-icelands-rapid-recovery.html" rel="nofollow">Iceland</a>, <a href="http://im-an-economist.blogspot.co.uk/2012/06/baltic-lessons.html" rel="nofollow">Latvia or Estonia</a>, primarily due to a significantly different institutional environment. <br /><br />The socialist transition is a perfect example, as it was purely led by corruption and cronyism, which would, in my opinion, characterize the exiting countries as well. Unless of course, a dictatorship doesn't arise amid the public anger, which would be an even worse option, at least in the longer run. <br /><br />as for the more or less pain, I have argued many times before for a set of irreversible structural reforms which would liberalize the labour market, deregulate the economy, and gradually restore public finances and investor confidence in the economy (look no further than <a href="http://im-an-economist.blogspot.co.uk/2012/06/sweden-cherry-on-top.html" rel="nofollow">Sweden</a> or <a href="http://im-an-economist.blogspot.co.uk/2012/06/what-germany-wants.html" rel="nofollow">Germany</a> for good examples of how to do so)<br /><br />Vuk Vukovichttps://www.blogger.com/profile/01878567452492217960noreply@blogger.comtag:blogger.com,1999:blog-3448927642739850334.post-39500299982137127282012-09-04T13:34:09.781+01:002012-09-04T13:34:09.781+01:00Let me say I completely disagree with this. You ca...Let me say I completely disagree with this. You cannot compare a command economy with a more or less free market one. <br /><br />The Soviet Union,(and Yugoslavia) of course had a fall in output since their output was mostly of inferior, unwanted products, many produced for the state or military. <br /><br />The old empire happened long ago, and who knows what part of that economy was also state run. <br /><br />That is not to say there will not be some pain, but what will cause more pain? Continuing this impossible debt accumulation until the whole thing falls like a house of cards?KyleNhttps://www.blogger.com/profile/15766641765942339253noreply@blogger.com