Jack Worthington's Social & Investment Commentaries

Eurozone implosion; TPP insanity; or, the Emperor wears no clothes

Posted in Investment & Social Commentaries by Jack Worthington on August 10, 2016

Today’s news revealed that Nobel prize-winning economist Joseph Stiglitz declares in his upcoming book that the Eurozone was flawed at birth and is destined to collapse unless huge changes are made.

 

Joseph Stiglitz is one of the world’s pre-eminent economists and a professor of economics at Columbia University since 2001.  Robert Mundell is another Nobel prize-winner and Columbia University economics professor since 1974.  Per Wikipedia, “Mundell is known as the “father” of the Euro, as he laid the groundwork for its introduction through his work…”.  Did Stiglitz voice his concerns to Mundell while they worked together at Columbia?  Somehow I doubt it…it would have been bold for a peer to risk career and criticize a Nobel prize-winner.  Conversely, as a Columbia MBA student with relatively little to lose, I did voice my concerns regarding the viability of a Eurozone in light of Mundell’s work on “optimal currency areas”…rather aggressively…and my Europhile Irish econ professor hammered me on my final exam essay for it.  24 years later, after major economic and societal damage is done and the non-viability of the Eurozone is plain for most everyone to see, with little career risk for stating the obvious and an economic implosion in sight, Joseph Stiglitz enters the scene with his “earth-shattering” pronouncement that the emperor wears no clothes.

 

What we can learn?

 

  1. Hans Christian Andersen’s fairy tale and its message are a timeless insight into the true, non-idealized nature of human beings. It didn’t take intellectual brilliance for the little boy to state “The emperor wears no clothes!”, just naïve honesty…which few humans are capable of.  Beware groupthink.  Question authority often.  Put ego on the line and ask more questions.  To assume makes an ASS out of U and ME.  Few people like the details…which is where outstanding opportunities are often found, and calamities avoided.  Courage is much rarer that any of us care to admit.
  2. I’m old enough to have lived through countless iterations of the above scenario in business and life in general. Obamacare?  No telling what the TPP is really about or actually does in its fine print and details…I doubt there is one human being on planet earth who actually does…yet, like disastrous Obamacare, proponents aggressively try to shove it down our throats prior to even their own full understanding.  Time to stand athwart TPP and yell, Stop!!…until politicians, academics, media, and the broad public fully understand what’s in it and debates.

 

JW

NY, NY

10 Aug 2016

Time for Germany to Pay the Piper

Posted in Uncategorized by Jack Worthington on July 9, 2015

Time for Germany to Pay the Piper

As I’ve been unsuccessfully arguing since 1992, as a grad student at Columbia University when professor Robert Mundell, the “father of the Euro”, was conducting his work on “optimal currency areas”…the Eurozone is NOT an optimal currency area and never has been!  I remember being blasted for my position on an Econ final by an Irish professor blinded by Europhoria.

Finally, after 23 years of ignoring reality, the Greek crisis has brought the issue front and center, like a festering, now life-threatening wound.

This is not about Greece…it’s about the fundamentally flawed Eurozone experiment.  Greece is not the only “lesser-developed” Eurozone country hamstrung by the currency union.

I won’t go through the economics again…if you want to see that, refer to earlier commentaries.

The Eurozone was created primarily to benefit German exporters, and Germany has benefitted greatly from the system.  It’s now time for Germany to pay the piper.  Either bailout Greece and keep your captive PIIGS export market intact, or allow a North/South Euro split…the more natural state of affairs.

SUSTAINABLE GREECE / EUROZONE SOLUTION:

Option A)

PIIGS, not just Greece, should exit the Euro asap and create a Southern Euro currency union, w/ France as anchor member of the Southern Eurozone and Germany anchoring the Northern Euro.

Expect a quick economic explosion in Southern Europe, as a devalued currency attracts global investment and tourism.  France especially, would reap an economic windfall previously dominated by the Germans.

Option B)

PIIGS sovereignty, self-determination, and higher economic growth potential.  Back to the drachma, peseta, lira, franc, etc…

Let’s see if the French wake up…

JW

NY, NY

9 Jul 2015

Eurozone’s Fundamental Problems and EU Politics

Posted in Investment & Social Commentaries by Jack Worthington on June 10, 2014

Eurozone’s Fundamental Problems and EU Politics

 

More on this issue because in my view, fundamental problems in the Eurozone are a key reason for the nationalist Euroskeptic victories in the recent EU elections and pose an existential threat to the Eurozone project…and rightfully so.

 

This is written in the hope that the average non-financial person in Ukraine and other potential EU entrants can better understand the Eurozone and make informed decisions.

 

Currency Union:

By combining the relative strength of the Deutsche Mark with the relative weakness of Southern European currencies, the resulting Euro is weaker than the previous Deutsche Mark, and stronger than the previous Lira, Franc, Peseta, et al.

 

The Result:

  1. The fundamental strength of the Deutsche Mark is watered down, and German exports are more price competitive on world markets, and Southern European exports are less so.
  2. Albeit not a Debt Union…implied but not assured:  The stronger national balance sheet of Germany is weakened to a lesser degree, and the weaker national balance sheets of S Europe are strengthened more significantly.  I.e. the main effect is that relatively weaker borrowers in S Europe have been able to borrow money at artificially lower interest rates and in larger volumes.

 

The Obvious Inherent Problems:

  1. Artificially low unemployment in Germany and high unemployment in S Europe.  I.e. as currently structured, the Eurozone is a powder keg of social instability waiting for a match.
  2. Fundamentally weak borrowers in S Europe were encouraged to borrow too much…asset bubbles were created…and bang…here we are…the Eurozone crisis.
  3. Due to the widely divergent economic growth vs. stability needs of Eurozone members, the Eurozone isn’t an “optimal currency area”, and is fundamentally incapable of supporting a single currency to meet its various members needs efficiently; i.e. Germany and Greece are profoundly different countries.  The same problem exists between states within the US, but to a lesser extent.
  4. The Eurozone is an economic bonanza for Germany, and a catastrophe for lesser-developed members, who take the candy of cheap money, only to get a mouthful of cavities later.

 

More “Ukraine’s” in Germany’s captive Eurozone market?  Bitte!  As long as I don’t have to co-sign on your debt!  I.e. as currently structured, it’s a one way street baby…or a roach motel: you can check-in but can’t check out.

 

The recent EU election results show that a growing number of Europeans are demanding a Eurozone check out.

 

Proposed Solution:

Currency zones have potential to work well for the benefit of all when the member states are more closely aligned in their culture, economic development cycles, and national debt is underwritten by the zone; i.e. 1+1 can equal 3.  Otherwise, it’s like an out-of-balance wheel that will eventually destroy the machine.

 

  1. Split the existing Eurozone into at least 2-3 new currencies.  Northern Euro anchored by Germany.  Southern Euro anchored by France.  Germany has the most to lose, and France has the most to gain.
  2. An entry-level / preparatory Euro for a group of new entrants at same level of econ development? 20-50 year integration project?

 

Currency union in Europe can work, but needs to be restructured to defuse the dangerous, built-in social instability.  Of course, Germany will vehemently oppose this proposal and defend the Eurozone to the bitter end; i.e. when members demand a check out…they enjoy this free ride like Americans enjoy the free ride of world reserve currency.

 

JW

NY, NY

10 June 2014