BIS blames Europe's creditors for eternal euro crisis

Europe's creditor powers bear as much blame as debtors for the eurozone's eternal crisis and are blocking recovery by failing to play a full part in righting the ship, according to the Bank for International Settlements.

The Switzerland-based watchdog said unprecedented imbalances have built up in the global system and these are failing to self-correct because the mechanism is jammed. The worst distortions are within Europe where monetary union drama is really a "balance-of-payments crisis" in disguise, caused by misaligned exchange rates. "The creation of a common currency removed the nominal exchange rate as an adjustment mechanism," said the report, "Caveat creditor".

oldgit13: A friend of mine running a business kept giving more and more credit to a customer who got increasingly far behind on payments.  His idea was that he was giving the customer room to dig himself out of a hole and all would be well, and in the meantime it was all extra business.  The customer eventually went bust and the debt, by now quite large, was irrecoverable. Simple moral, any amount of turnover is no use to you unless you actually get paid.  Germany's Target 2 debt grows ever larger, €500bn+.  Their turnover looks great but they're never likely to see the money at the end of it.  Just bad debts written off.  Sooner or later the pfennig might drop.

sein_schatten:  "TARGET2, the ring through the nose of the cash cow in order to lead it around" (found that somewhere in a blog and I think it's perfectly phrased)

drjonathanwilson: To  save the Euro, Germany must accept open ended wealth transfers  to the South in perpetuity and the South must accept German  power over all their affairs in perpetuity. Conclusion? The Euro is doomed. Jonathan

sein_schatten: True. The systemic EMU design flaws are unsolvable unless one of the "players" accepts permanent financial/economic collapse.   And quite understandably NOBODY volunteers for that.

Foxall: This flaw in the Euro was either a grave error or a deliberate tactic to ensnare debtors into eventual fiscal union. Any thoughts ?

sein_schatten: Well not only debtors, creditors of course as well.   During the discussions in Germany, prior to the EMU founding, there were 2 theories stated on how to operate a possible common currency. One was the "catalyst" theory and the other the "crowning" theory.   Crowning meant that a common currency only can be the LAST step, the crowning piece of a fiscal & federal union. Only when a true fully fledged federation with all proper checks and balances has been created, we have a sound foundation that could carry the weight of a common currency.  That was the reasonable theory and had put the horse in front of the cart. Nobody in charge listened to it's advocates.   The "catalyst" theory stated, that establishing a federation firs would take way too long and "Europe can't wait" that long. So a premature installation of the common currency would then function as a kind of catalyst and sort of "enforce" the federation later. This was the equivalent of putting the cart in front of the horse and it's supporters seemed to accept that "catalysing or enforcing" deeper union and federation ONLY could come via a crisis or maybe even many of them ("never waste a good crisis").   But everybody in favour of the catalytic theory seemed to have underestimated a) the grave consequences of a crisis of that (necessary) proportions and b) that maybe the European people don't want to be forced into a union at "financial gunpoint" by the threat of losing all their assets, savings, jobs, pensions,… and that the Euro construct therefore would sooner or later get a really really ugly image.

drjonathanwilson:  Good comment! Of course the crises route is the one favoured by Marxists / Maoists Jonathan

kin2010: Why? For me, this is far from clear. First, let us recall that these permanent transfers *did not* happen yet, not even a cent. What several nations received were bailout packages configured as loans -- of which Germany contributed to <30%, being other contributors not only several Club Med countries (Italy, Spain, etc) but also the UK and US, and others through the IMF participation. Yes, it's quite possible that these loans will not be fully repaid -- I would say more, it's inevitable. This will configure the first "transfer" you mention. But why should that become recurrent in the future? What caused all this mess was the over-indebtment of certain countries, which was associated to a chronic current account deficit. This problem is now solved or almost solved. For example, Portuguese current account deficit nearly closed. This happened through the severe recession induced by the Troika austerity program. If the current account deficits close, there is no reason for the debt to increase further. So the debts of the countries under intervention may stabilize. The point at which they stabilize is very high, rendering default/debt restructuring inevitable; however, I fail to see why this needs to repeat in the future, if the countries are no longer consuming more than they produce.

wilfulsprite: Why? Because that's what happens in a Union - as it does in the UK and the UK. The rich regions subsidise the poor, mostly without question. What we have in the EU is a group of nations which wants a Union, but a conditional one. We want to be in a union with you but the price to pay is that you become like us. That's fair if that condition was laid out at the start - but it wasn't, was it?

sein_schatten:  "That's fair if that condition was laid out at the start - but it wasn't, was it?" YES, it was laid out, precisely in neat and clear paragraphs of Maastricht/Lisbon treaties:   - NO bail outs between EMU members - NO debt pooling between EMU members - NO extra transfers between EMU members - NO monetization of debt by the ECB - ECBs main (only) focus is prize stability - Bottom line: every nation is solely responsible for it's own financial and economic affairs.   This was expressively acknowledged by all participants. Period.  

wilfulsprite: Then they are being done over by loan sharks.

Rozen9: Will the German courts really get in the way of "the project?" I wonder whether Merkels re-election will involve her being able to keep the German courts at bay in future.

drjonathanwilson:  Rozen9 The German Constitutional court will not get in the way of further transfers of German wealth to the South or prevent centralization of fiscal powers. The German saver can expect no help from that quarter. Jonathan

antoncheckout: Poor Angie is struggling to grasp the concept of a Constitutional Court. She didn't grow up with one, in East Germany. There it was all 'Shut up and get on.'  The GDR government only had to proclaim that black was white, and lo! it was made so. There wasn't any court of appeal.But the Federal Republic is a bit different: their Constitution was very carefully formulated, and it is adamant about the limits of the government to transfer tax-money.The Court is trying hard to accommodate the idea that the parliamentary government of a sovereign German state would freely vote to rob its own citizens and hand over their money to a foreign power. And of course the German legal profession has had the same deliberate mass leftwing entryism as every other European judiciary - including, and in particular, our own. But even they have reached their limit of tolerance. I expect a verdict that tells Angie to withdraw entirely from the ECB. It will come as a complete shock to the German government. But then most things do.

paulw: So, I lend money to someone - then to stop that someone going bankrupt, I write off the loan and loan him some more? Though in this case - it means pensioners in solvent states writing off their retirement plans so that the € can be saved a bit more and the PIIGS don't go bust? The € is just doomed - how this crippled currency union continues on is as miraculous as turning water to wine.

jctrichet5: Doomed? Since the introduction of the single currency in 2002 the Euro has appreciated 30% vs Sterling! You meant sterling is doomed?

trampledunderfoot: JCT Please do tell us why it is that the great pretender to the new reserve currency (the Eurozone) has unemployment at 12%; a mere 18million people and your bete noir the United States, with a similar population has 7.5% and falling. Pray also tell us why the US is growing at 2.6% per annum and the Eurozone…well it's not. Perhaps it may have something to do with the US putting it's own economic house in order, recapitalizing its banks and letting many fail, a truly single market, with one language and a common culture , oh and let's not forget that for a large proportion of the United States, the all powerful Federal State is anathema

jctrichet5: What job recovery?

trampledunderfoot: JCT. Very common for Americans to have more than one job. It happens all the time…but they work hard and expect very little from the state. Tough for you big state 'entitlement' culturists to comprehend I know. It's called 'self reliance'; try it sometime I don't deny that corporations are nervous of offering full time jobs because of the cost of Obamacare. It just shows what happens when you leave a socialist to medal in commerce. The same thing is happening in the UK is it not with zero hours. Far better to allow the market to work rather than dictate and mandate to something that doesn't work as well

TimeToPanic:  trampled, You appear to be confusing the Euro (a currency) with the Eurozone of member countries. The Euro is a well-managed currency, the best in the world, and has been set free from political meddling, and especially from the threat and actuality of devaluation to rescue debtor governments. The Eurozone is currently living through economic reality, as governments are forced to live within their means. Tough for Euro folk, but at least their currency is stable, and inflation under control. The US only appears to be growing because the Fed is QEing, in reality there is no growth, in fact they are laready beieved by many to be in recession. Watch with awe and wonder in the next 3-5 years as currencies around the globe tumble (Yen, Sterling, Dollar), and yet the Euro remains strong. And eventually the Eurozone will emerge stronger and leaner and ready to grow, as it won't have its capital base destroyed by a currency collapse.

oldgit13: You really have swallowed it, hook, line and sinker.  Do you really believe what you wrote?  In the next 3-5 years a sizeable part of Europe is likely to descend into civil disorder, I'd say.

TimeToPanic:  I have done a lot of reading and a lot of thinking. I'd rather have the ECB approach than the BoE any day. And just wait til Labour get back in next time…shall we give them a year to crash sterling? Then you'll see what civil disorder looks like. Don't believe what you read about the Euro, watch what they do.

kin2010: More likely, in the next few years, there will not be many changes in the global exchange rates, because all currencies are informally pegged to the USD, including the euro.

Wuffo the Wonder Dog: Paul, you've got it but please don't tell anyone.

Hal Horvath: "… it means pensioners in solvent states writing off their retirement plans so that the € can be saved a bit more and the PIIGS don't go bust?" Guess what.  Yes, it is already too late.  In fact, it was too late long ago, when most people wanted to save for "retirement" as if the ratio to younger workers wouldn't be an overwhelming factor. When the bust happens (it has), then all the savers lose no matter what. There is no scenario, of any kind whatsoever, where the savers don't pay those costs. Regardless of choice or method or option or different path. Just math.