Kill the Euro now?

It's an ugly thing to say, especially since the end of the Euro will be an ugly thing. But it needs to be said.

Back in June, Canada came under pressure to help the Eurozone survive, and came under criticism for failing to help (or failing to help enough). Canada's position was defensible on many levels. At its simplest, the Eurozone needs more Euros, not more Loonies; and the Eurozone can print Euros, while Canada can only print Loonies. "Print 'em yourselves" makes sense as a Canadian response, both technically and morally.

But ought we try to help the Euro survive, even if we could, and the Eurozoners (I refuse to say "Europeans") themselves couldn't?

The Economist's Greg Ip (HT Mark Thoma) relays the most optimistic scenario for the Euro, from Montreal's Bank Credit Analyst. Short version: Greece leaves, and the rest are so scared they form a fiscal and banking union.

This scenario is what I called a "shotgun wedding". If the people of Europe want an ever closer union, or if an ever closer union evolves naturally out of a sense of common identity, that's OK. But being duped and forced into marriage because the PIIGS are all pregnant and Germany is the father, though all of them thought they were just holding hands and nobody told them that sharing a common currency was quite such an intimate relationship -- is another thing entirely. The EU's legitimacy and governability, already shaky, would suffer.

If that's the most optimistic scenario for the survival of the Euro, do we want the Euro to survive?

An alternative "Mr Micawber" scenario is for the Eurozone to struggle along, slowly getting worse, with the ECB taking just enough action (like again today, Mish tells me) when things look really bad to preserve its own existence, but not enough to create a recovery, and everyone hoping that something will turn up. That's what's happening now, though I don't know how long it can last. I'm surprised it has lasted this long, but Paul Krugman says that Rudi Dornbusch said that crises are always like this:

"The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought, and that’s sort of exactly the Mexican story. It took forever and then it took a night."

If it's going to happen some night, wouldn't it be better if it happened tonight? Then we could all start rebuilding now. And by "all" I don't just mean the Eurozone "periphery". Rebecca Wilder tells me that the Eurozone core is hurting too. And my guess is that there is an ongoing spillover into non-Euro countries as well. Yes, we non-Euro countries have our own central banks and monetary policies, and are responsible for our own Aggregate Demand. But if you don't know whether and when one of your major trading partners in goods and financial markets is going to go belly-up, there will be Aggregate Supply side effects too. AD matters a lot, but it isn't everything.

So, do we really want the Euro to survive another night? Even though its death will be ugly, and hurt a lot of people.

Or have I gone Leninist?

Comments

[foosion]

Best outcome - ECB does the right thing, guaranteeing sovereign debt and increasing inflation (or targeting NGDP) to the degree that countries in the Eurozone can grow out of their problems. Throw in a good measure of stimulus spending until the economies recover.

Otherwise, just kill it quickly.

[Mandos]

I've mentioned this before: at a personal level, people in the so-called "core" countries are utterly complacent about it, simply because they believe that the problem can be solved whenever the profligate Southerners get around to doing their long-postponed Hausaufgabe. If the "core" starts hurting, that's just an additional effect of the not-done homework...

The idea that printing money can be a good and necessary thing simply leads to an enormous "does not compute", especially in Germany, even if they can see the reality right in front of their own eyes and have their noses rubbed directly in it. It's just completely outside the biases of the culture. Wealth is generated magically from work, and money is a direct representation of wealth. If you are generating money that is not a direct emanation of work, and this solves the problem, then the problem should not have been solved, because the purity of True Value has been besmirched.

To save the Euro, France et al. need to start printing Euros on their own. Then Germany (etc) can decide whether or not it wants to stay. When the tables are turned, the costs of leaving may suddenly seem too high.

[W. Peden]

Mandos,

"at a personal level, people in the so-called "core" countries are utterly complacent about it, simply because they believe that the problem can be solved whenever the profligate Southerners get around to doing their long-postponed Hausaufgabe. If the "core" starts hurting, that's just an additional effect of the not-done homework..."

Which makes me dubious about the prospects of any fiscal union. If pressure from the core is too much to prevent a stimulative monetary policy from a notionally independent central bank, then what hope would fiscal policymakers have? We only have to think of the Common Agricultural Policy to see that there isn't sufficient European solidarity to pull off a fiscal union, even if all the necessary institutions were put in place and even if there was not a crisis.

[Ryan]

Yes, I say kill it. You don't need a monetary union in order to enjoy free trade. The Euro was Europe's attempt at eliminating the use of currency manipulation to affect trade policy. It didn't work. All that happened is that some countries lost monetary sovreignty in exchange for large debt run-up. That's pretty much lose-lose.

[Mandos]

The other problem is that in the "Pleiteländer" (how the countries in trouble are sometimes referred to in German media---also see "Nehmerländer"/taker-countries vs. Geberländer/extremely-generous-giver-countries), inflation policy was playing a social/political role that is not apparent to people who live in countries like Germany, the Netherlands, and so on. In these countries, one way or another, there had been a period where the elite and the working class had succeeded in harmonizing their interests/reaching an accomodation, which was never reached in Spain, Greece, etc. In Germany, this was accomplished by the leadership getting wiped out (the right wiped out the left and got wiped out by the rest of the world).

Spain, Greece, Portugal all have different symptoms, but the underlying intrinsic cause (there are extrinsic causes too, of course) is that the introduction of the Euro did not automatically mean that this political accommodation between labour and capital had been reached either. Capital was massively favoured---it was free to take its money out---but labour, as we see, is not.

After this, the deluge.

[Nick Rowe]

foosion: in one sense that's the best outcome that is conceivable. But in another sense it isn't. Did anybody ask the Germans whether they want to be permanently backstopping some corrupt low-trust country like Greece? Did anybody ask the Greeks if they want their country to be subject to a veto by some anally retentive bossy Germans? (Neither Greeks nor Germans should take offence by my saying that; I am sure they could think of worse things to say about Canadians if they were permanently backstopping us or if we were permanently vetoing them.)

[Nick Rowe]

Mandos: "...inflation policy was playing a social/political role..."

Are you thinking of the conflicting claims theory of inflation?

[Determinant]

Aside from what has been ably said by Mandos and Ryan, with whom I agree completely, the other thing is "what price patriotism?"

Canada is another federation that started as a dream, a political fantasy. We were created and held together by the force of "Not Wanting to be Americans", from the Fenians to preserving British North America to keeping Quebec away from the less-tender mercies of the Americans to sheer stubborness. The patriotism and love came later.

Few people really loved Canada in 1867. It took a century, a few economic crises, two world wars, a couple of near-death political experiences (Conscription and the Quebec Referendums) to bring us together. But now we think as a nation and have national politics. Every province has received a less-than-ideal bargain on one subject at one time and extra-generous treatment at another. We accept this compromise as the price of being a country.

The EU doesn't have that. Who speaks for Europe? Who advocates in Europe that every country compromise a bit to let the whole survive? Nobody, it seems. That really is a problem because the necessary conversations and compromises just can't happen.

Nick:

I think Mandos was saying that inflation functioned as a wealth tax in certain countries. The "Haves" had their wealth taxed by inflation and the "have-nots" got wage increases in line with inflation. It also eroded the nominal debts of the have-nots, keeping them manageable. It was jerry-rigged transfer mechanism in lieu of proper transfer programs by government.

[rsj]

"eurozoners" -- brilliant! Hear, hear!

[Sergei]

" But being duped and forced into marriage because the PIIGS are all pregnant and Germany is the father, though all of them thought they were just holding hands and nobody told them that sharing a common currency was quite such an intimate relationship -- is another thing entirely"

+1

"eurozoners"

+2

[dwb]

please, please, shoot it in the head, three times. "three in the head, you know their dead" (Morgan Freeman line in Nurse Betty http://www.imdb.com/title/tt0171580/quotes).

i dont think that there was any "duping" or deception - the Germans maybe were only deceiving themselves. Greece was corrupt and there was lots of tax evasion in 2000 when they joined, I mean did they really think things would change?? Soros made billions betting against the 90s EU crawling peg... so did they REALLY think this would work.

Its up to the Europeans to decide if they want a political union (and therefore a fiscal union) and have 1 army (instead of 27), etc. and give up sovereignty. But that process needed to start years ago, not now under enormous pressure.

[Determinant]

ISTM that the Euro was a sort of vain attempt to recreate the Gold Standard, to force Europe back to the pre-1914 age. Currency wouldn't matter.

[Andy Harless]

If I could choose the exact time for the euro to die, I'd prefer that it be after the US fiscal cliff has been resolved (and, if the resolution is an unpleasant one, after enough time has passed to adjust, at least partially, to the new fiscal reality). But if the choice is between now and next year, I'd rather have the euro die now. Unfortunately, one doesn't get to choose such things, and there is reason to be very worried that the euro will die a natural but sudden death at the worst possible time. If the euro were to die this very day, I would consider that to be better than the most likely alternatives.

[Ashwin]

Nick - I agree. The Euro is fundamentally flawed on a structural level - the sooner it collapses the better.

Every "solution" for the crisis involves some undemocratic component - externally imposed austerity ignores the will of the periphery and fiscal union ignores the will of the core. I wrote this post a year ago on the dangers of ignoring the democratic deficit within the European project [edited to embed link here NR] - mess this up and all the real political benefits of post-WW2 Europe can be undone in a hurry.

[Kosta]

I think everyone agrees that the optimal outcome for the Eurozone is some sort of a fiscal and banking union with or without Greece (and possibly some other peripheral members). There really are two questions. First, does the Eurozone try to keep Greece? Second, if not, when does Greece exit? One assumes that Greece's exit will lead to the fiscal and banking union.

The Eurozone is in a crisis, so the natural inclination is to say 'no' to the first question about saving Greece, and look for a convenient time to force a Grexit.

Nick argues that the time for Greece's exit is now, but is this ideal? Martin Lueck at UBS argues in his latest note that the ideal time for the Grexit was when Greece's CDS's triggered this past March. Now he claims that the threat of contagion is too high; that is a Greek exit will force a Spanish exit, and the cost of rescuing Spain under these conditions will be exorbitantly high.

The only way to keep the costs of a Grexit low is to push Greece out when Greece and the Eurozone is not in a crisis (like last March). But it is during those times when things are going well, and the economy looks like it will recover that the answer to the first question about whether the Eurozone should save Greece is 'yes'.

The solution to Europe's problems isn't a Grexit, the solution is to stabilize Spain and Italy so that the next time Greece thinks about exiting, the rest of the Eurozone is strong enough to survive Greece's exit.

[Frances Woolley]

Nick - interesting post, I enjoyed it.

"Or have I gone Leninist?" As in "The surest way to destroy a nation is to debauch its currency."? But wouldn't you figure that there's been so much fiscal debauchery that currency debauchery is inevitable?

[Nick Rowe]

Kosta: "Nick argues that the time for Greece's exit is now, but is this ideal?"

I want them all to exit now. Not just Greece. Actually, if I could choose the order (I can't, but lets pretend) I would want Germany to exit first, and Greece last. Germany could exit and revalue. Then the second strongest (maybe Finland?), which could also revalue. And so on, until Greece exits at par with the New Drachma, because the Euro has depreciated so much by then that Greece doesn't need to devalue. The Euro will fall to the value of the New Drachma. Then go to the same place as the Zim dollar.

[Nick Rowe]

Thanks Frances! No, I was thinking along the lines of "lets make things worse, to bring on the revolution". Was that Lenin?

[babar / q]

why can't the canada central bank (or the fed) print euros?

[Nick Rowe]

Well, I did a blog post on it once, suggesting it might be a good idea. But I thinks it's against the Geneva Convention.

[primedprimate]

Nick, you have probably written a post on this (if so, please just respond with a link) - would it be an act of philanthropy if someone started counterfeiting Euros (to perhaps buy periphery bonds)? What makes a central bank special other than legal authority? In some societies when the legal authority fails, vigilantes step in - and sometimes with the people's tacit approval.

Or is the expectations mechanism the only big gun (one that counterfeiters lack due to their inability to make public announcements)?

[Kosta]

Nick: "I want them all to exit now. Not just Greece. Actually, if I could choose the order (I can't, but lets pretend) I would want Germany to exit first, and Greece last..."

Ah, my apologies for misunderstanding you in the first place.

Given your desire, the first question that needs to be addressed is whether some semblance of the Eurozone should be salvaged? You economist background argues that it shouldn't, but let us not forget that the Euro project has the political purpose in uniting European nations. This is something that non-Europeans tend to not appreciate. European nations in general, and German in particular, are willing to put up with considerable cost to make the Euro project work.

Given the political desire for a successful Euro project it doesn't make sense to speculate on the complete dissolution of the Eurozone, not when other viable alternatives exist. One such alternative is a Grexit while keeping Spain and Italy in the fold. I am sure there are other alternatives as well.

[rsj]

but let us not forget that the Euro project has the political purpose in uniting European nations

And look how well that's turned out.

[dwb]

"why cant the bank of canada (or the fed) print euros"

see thats a great idea. fed buys Spanish bonds, reunite Florida and Spain. Canada can have France. imperialism through monetarism.

[importance of taxes]

Hi DWB, Well basically it is illegal to print monetary note from other country.

[Kosta]

rsj: "And look how well that's turned out."

I thought about including a similar line parenthetically in my original post :)

But still, if you look carefully at what is going on, Greece is the problem. When citizens of the core talk about not wanting to fund profligate southerners, it's Greece they are talking about. When periphery members chafe at Germany overlooking their finances, it's Greece. Remove the Greek-generated brouhaha the Eurozone project and the level of conflict will drop significantly.

Another way of looking at the appeal of the Eurozone project is the behaviour of Eastern Europe these past 5 years. Slovenia joined the Euro a few years ago, while you have the rest of Eastern Europe do their best to stay their course to also join the club. Look at the Baltic countries whose citizens accepted absolutely draconian cuts (worse than Greece's) so that they could remain on course to join the Euro. This suggests that the Eurozone project still has quite a bit of appeal.

[Jon]

Rather than tilting at windmills, best we focus on an achievable push--getting the ECB to change its inflation index. That will go a lot more good and require a lot less thuggery to manage.

Btw, the herd mentality here on the euro's badness is nearly as bad as the herd mentality that was giving the euro a pass in early 2008 even as it was abundantly clear that most of the supposedly US subprime debacle was actually sitting on the books of European banks.

[Zorblog]

An alternative to Eurozoners: Eurozonards

In French, a zonard is some mix of hippie, loser & bum, someone who lives in the "zone" (lower income suburbs).

[Mandos]

Rather than tilting at windmills, best we focus on an achievable push--getting the ECB to change its inflation index. That will go a lot more good and require a lot less thuggery to manage.

Unfortunately, this has been the windmill against which everyone has been tilting for quite some time. Draghi's mere suggestion that he would ever act to save the Eurozone in any meaningful way has led to this reaction in Germany:

http://www.handelsblatt.com/politik/deutschland/euro-rettung-bundesbank-warnt-vor-draghis-krisenkurs/6929788.html (Google translate

Basically, the Bundesbank is kind of a super Chuck Norris. Not only is it not interfered with by the political arm, it intervenes in politics to discourage any action that does not fit within its crypto-Austrian Internet-gold-bug-troll worldview. Jens Weidmann appears on TV occasionally to reassure and educate German voters that this crisis is a good thing for the periphery because it is helping them discover True Worth, something they have been able to alas avoid up to this point. Well, not in those words...well, almost in those words.

German politicians have also reacted furiously to Draghi's pronouncement, because to them it amounts to a threat to steal German savings.

That those savings shouldn't have existed in the first place does not occur.

[Mandos]

Sorry, meant to say that Google translate does an OK-ish job, some funny mistranslations but otherwise the gist is preserved.

[Zorblog]

This is Europe, and you can count on Europeans for not doing what needs to be done.
Too little, too late, like in Munich in 1938 (this said with no intention of comparing the German policy of today with that of the time!).

There can't be a collective decision, only an individual one. So either, Mario Draghi makes the first move, or it is up to one individual country to break the austerity-common-currency consensus.
I would say that Spain could be a good candidate, since it is one of the countries that suffers the most and has the best potential.

Now, what can Spain do? I believe it can print IOUs in order to increase its domestic spending. Dual-currency systems don't work in normal times, but they may deliver some relief in hard times.

[Nick Rowe]

Mandos: "That those savings shouldn't have existed in the first place does not occur."

By that, I take it you mean they were imprudent to have lent that money in the first place.

Not so much to disagree, but to suggest a different way of looking at it: those German savings might be worth more if the ECB did loosen monetary policy. In my opinion, the slightly higher inflation would be more than offset by lower default risk if PIIGS real incomes increased. And it was (mostly, though not totally) the bad monetary system that made those loans imprudent. And you can't really blame Germans (or PIIGS) for thinking that the Euro wasn't supposed to be such a mess.

[Nick Rowe]

primed: "Nick, you have probably written a post on this (if so, please just respond with a link) - would it be an act of philanthropy if someone started counterfeiting Euros (to perhaps buy periphery bonds)?"

Possibly, yes. Understood in simplest terms, almost certainly yes. But it's probably not correct to think in those simplest terms in this case. God only knows what would happen if counterfeiting started breaking out all over. Who knows how expectations, and rules, would adjust to that.

[Mandos]

"By that, I take it you mean they were imprudent to have lent that money in the first place."

Well, not just that. They were also busy discouraging consumption, notwithstanding that our friend genauer (why hasn't he shown up yet?) can get strawberries at midnight in Dresden.

[Mandos]

Here's another German reaction: they're trying to starve grandma!

http://www.spiegel.de/wirtschaft/service/politik-der-ezb-niedrige-zinsen-belasten-die-sparer-a-846833.html

Nick, the idea that a little inflation-tolerance might actually have had an ultimately positive influence on German savings is completely lost in the German debate. "Kämpfen Schulden mit Schulden?" asks the German forum regular incredulously. ("Fighting debt with debt?")

[ACEMAXX ANALYTICS]

“The PIIGS are all pregnant and Germany is the father”.
Just hilarious!

[Peter N]

Try a conflicting claims theory of assets

The owner of an asset is trying to exchange consumption now for consumption in the future. The owner expects to receive a payment at the time of sale at least equal to the real value of the consumption sacrificed.

However the actual consumption received has to share with the claims to consumption of the workers at the time. It obviously matters how the relative claims are valued. Goods inflation would increase the workers' relative share. Asset inflation would favor the owners (as long as they weren't all trying to cash out at once). Debtors, of course are helped by goods inflation even more than workers, but they can be helped by asset inflation to the extent that they are also owners (that was the idea of the housing bubble).

When the demographics threaten to raise the volume of cashing out to the point of depressing long term aggregate demand, expectations become negative, and you get a positive feedback loop of people wanting to preserve the real value of their assets and a shortage of vehicles with which to do it.

That's Europe. Creditors and asset holders want the real value of their assets, while the workers don't want to reduce their consumption to accommodate them. Their weapons are default and inflation. Since accommodation is politically impossible, some combination of these is inevitable, but, of course, the owners and creditors don't see it that way. It isn't necessary for the whole scenario to play out. The expectation of it and a triggering shock are enough.

During the good times everybody pretended that there would be enough for both sides through economic growth. It didn't happen. It's moral hazard in action on a society wide scale.

[Min]

Determinant: "ISTM that the Euro was a sort of vain attempt to recreate the Gold Standard, to force Europe back to the pre-1914 age. Currency wouldn't matter."

What do you mean, vain attempt? The Euro as virtual Gold Standard is working as planned. See http://www.gregpalast.com/the-euro-is-a-big-success-no-kidding/

Nick Rowe: "But being duped and forced into marriage because the PIIGS are all pregnant and Germany is the father, though all of them thought they were just holding hands and nobody told them that sharing a common currency was quite such an intimate relationship -- is another thing entirely."

:) :) :)

[Determinant]

My other comparison is to the Austro-HUngarian Empire. Which did OK economically and it was a large internal free-trade zone. But it was held together by the will of the Habsburgs and little else. It was a political freak show ready to take a tumble at any time. And it did in WWI.

Single Currency + Free Market in Goods and Labour = Neo-Austro-Hungarian Empire.

Party like its 1913!

[Wonks Anonymous]

The communist phrase you're searching for is "worse is better". Although hackers will recognize it as the title of an essay (or to be pedantic, the most famous portion of a larger essay) on why C/Unix came to dominate over the obviously superior LISP machines.

[Lorenzo from Oz]

Remove the Greek-generated brouhaha the Eurozone project and the level of conflict will drop significantly. If Greece did not exist, the ECB would have to invent it. (Or nominate some other country to fill its role.) That role being to provide the delinquent weakest link so that the ECB avoids accountability for its policy failures.

[Kosta]

Lorenzo: If Greece did not exist, the ECB would have to invent it. (Or nominate some other country to fill its role.) That role being to provide the delinquent weakest link so that the ECB avoids accountability for its policy failures.

I see it very differently. The rest of the PIIGS were adhering, or mostly adhering, to the Stability and Growth pact, with Ireland and Spain both having low debt and annual fiscal surpluses, while Italy had high debt but was running nearly continuous annual surpluses from 1995. Portugal was on the fence with its debt/GDP moving from 50% to 70% over the 2000-2007 span, but Portugal was not blatantly outside the Maastrich criteria.

Greece on the other hand cheated to get into the Euro and continued to cheat on the numbers it reported to the European Commission. Then when the bailouts came Greece continued to cheat making little effort to implement the required reforms.

It is very difficult to provide aid to, to bail out, to promote supportive policy for a cheater, particularly one that is not reformed. Greece's existence is a major impediment to the ECB, the EU, or the Eurozone to making significant steps to solve the crisis, as all of these steps will cost the core, but benefit Greece, a nation which cheated.

If Greece did not exist, the calculus for the periphery becomes much different. The PIIS could point out that they had followed the rules leading up to the crisis in 2008. Having kept their fiscal house within the bounds of the Stability and Growth pact, post crisis they were struggling and needed help. The PIIS could point to the earlier precedent in the early to mid 2000s where France and Germany struggled, running deficits which exceeded the Maastrich criteria. During that period the ECB provided extra assistance to the core, holding rates low, inappropriately low for the periphery, to help the German economy to recover. The PIIS, with good reason, could ask for similar assistance in the 2009-2012 period, had Greece not been present.

Last year about this time, the ECB raised rates to 1.5% in spite of the fact that the periphery was still struggling. Almost immediately after the rate hikes the periphery started to struggle (and in particular, bond yields started to rise). Had Greece not been part of the Eurozone, the case to hold rates flat to help the PIIS would have been much stronger. This is just one example of where policy might have been different if Greece had not been part of the Euro.

[Jacques René Giguère]

If there was any logical thinking going on,Greece may have prevented the ECB from raising rates even higher even faster. Trichet barely needed any excuses to act like the friggin !"/ he proved to be.

[Lorenzo from Oz]

Kosta: the debt crisis is a result of the ECB's failures and Greece simply does not matter enough to drive ECB policy, especially not in the actions which caused the crisis in the first place.

[Nick Rowe]

Wonks Anonymous: "The communist phrase you're searching for is "worse is better"."

Google tells me you are right! Once I added "communism" to the query, to get rid of all the software links you mentioned, it's Lenin's phrase. Make things worse, to bring forward the revolution, which is the only way to make things better.

Strange that I had heard of the concept, and associated it with Lenin, but not those particular words.

[ThaomasH]

While most American economist thought the Euro was a bad idea -- not enough labor mobility and no need of currency union to have free trade -- no one thought that the private sector would forget that different countries have different sovereign risks and that having a common currency increases, not decreases sovereign risk. That error turned out to be the Achilles heel of the Euro. Cross border capital flows did not take account of the growing price wage mis-alignments.

[Kosta]

Lorenzo, would you agree that Greece's existence strengthened the resolve of the hawks in the ECB (and in the core) to minimize whatever costs the core must bear (be that inflation, transfers or loans)?

I guess what we disagree on is the degree to which this additional resolve has mattered in the policy choice to date.

[123]

Nick:"while Canada can only print Loonies".
No, no, no. Canadian Euros would be even more desirable than the regular Euros. Look at Denmark. The Danish central bank is paying less on the euros it creates than the ECB.
Printing euros with minus 40bps IOR could be a profitable side business for the Canadian central bank.
And it is a very bad thing the Fed did not print euros to save MF Global last year.

[Nick Rowe]

123: tell me more! But if the BoC creates Euros, wouldn't it just be doing so in the same way that a commercial bank creates Euros? Asymmetric redeemability and all that? The BoC can't really change Euro monetary policy, in the same way that the Bank of Montreal can't change Canadian monetary policy?

[Simon van Norden]

Correct me if I'm wrong, but I think issuing another country's money is not simply a violation of some obscure international treaty; it is technically considered an act of war (sort of like mining another country's harbours.)

[Nick Rowe]

Simon: I thought that was right too. But I think it only refers to counterfeit paper.

[123]

Nick, ECB is targeting a target path of some nominal variable, but it does not completely determine the variance of this nominal variable. So the other banks could help to reduce variance of this targeted variable. Commercial banks can create euros too, but their capital is too small and they cannot credibly promise to create a lot of euros in the off-equilibrium tail scenarios. BoC has a large capital and its euro-printing program could be helpful.

ECB has the swap agreement with the Fed that makes it even easier to create dollars. ECB liabilities denominated in dollars have peaked in December 2008 when they reached 293 billions.

[ciaran]

The Danish CB creates euros?? Obviously im missing something here.

@Kosta
I find your reading of the politics of the euro idiosyncratic. Im Irish, my girlfriend is Spanish I have Italian friends. Nobody but nobody wants to be, as nick puts it " duped and forced into marriage because the PIIGS are all pregnant and Germany is the father". If you read Der spegiel its always full of horror stories about Italian and Spanish inefficiency and corruptness. i think your seriously mistaken if you think that the average German will acquiesce to the (open ended??) transfer of 100s of billions of euro to Madrid and Italian(or worse allow the ECB to backstop them via the printing press). The whole situation is an unworkable farrago, the reason it hasnt been resolved is that solutions are unacceptable to all involved. Greece is just a sideshow to this.

[123]

@ciaran

Danish krone euro peg is completely credible, with an added bonus of a small probability of appreciation against euro if there is an euro collapse. So Danish CB is issuing better euros than the ECB does, and as a result Danish interest rates are lower than euro interest rates.