http://blogs.reuters...ave-off-a-crisis/

It was said of European monarchs of a century ago that they learned nothing and forgot nothing. For three years, as a Greek debt problem has morphed into a full blown euro area crisis, European leaders have been behind the curve, consistently repeating the same mistake of doing too little too late. But when they meet on Sunday, the time for small measures is over. As the G20 found when it met in London at the height of the 2009 crisis, only a demonstration of policy intent that shows irresistible force will persuade the markets that leaders will do what it takes. An announcement on a new Greek package will not be enough. Nor will it be sufficient to recapitalize the banks. European leaders will have to announce a comprehensive–around 2 trillion euro–finance facility; set out a plan to fundamentally reform the euro; and work with the G20 to agree on a coordinated plan for growth.

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A good read.

Cheers,
Scott.

The UK has already effectively done a devaluation relative to the Euro and it's helped their economy from being much worse than it could have been (Hi Peter! :-).

http://krugman.blogs...evaluing-history/

And more. The truth is that every recovery from financial crisis I know of since World War II was driven by currency depreciation. In fact, that’s the biggest reason for pessimism now: because of the global scope of this crisis, the usual exit is blocked.

Now, I’m sure that the goldbugs will come up with ways to explain away all of these events. But at that point we’re not learning from history; on the face of it, history seems to suggest many cases of countries prospering through devaluation.

Currency is a medium of exchange. It's not some metric of holiness or virtue. The Germans, and the Greenspan-ists, need to recognize this. :-(

The big problem with a financial crash is that value as measured by currency falls dramatically and very quickly. Someone has to eventually eat those losses over time. The eating can happen quickly (e.g. Argentina's default) or slowly (e.g. Japan's Lost Decade(s)). There are heavy costs in each approach. And the costs and risks are larger the greater the fraction of the world economy involved. But it has to happen.

Simply devaluing the Euro won't help Greece relative to Germany - there's an imbalance there that needs to be fixed inside the Eurozone. And if all the big Western economies devalue, then it's effectively asking China to pay (in reduced exports and higher inflation). China's not big enough to take on that responsibility at this point. And, of course, if everyone devalues then there's no change in relative advantage so it's a wash ("exit is blocked", above).

What needs to happen is that Germany needs to effectively bring back the Deutschmark inside the Euro, let it appreciate substantially, aim for a higher inflation target (e.g. 3-5%) for a few years, and the PIIGS need to effectively bring back their currencies as well and devalue relative to the Euro-Mark by some substantial fraction. They can't really do that with with a single currency, but there must be some way to get the same effect. Unfortunately, Merkel, the ECB, and the German government hasn't been willing to do that.

http://www.nytimes.c...e-up-in-time.html

Just devaluing won't help, though. All of the PIIGS can't export their way out of their mess. Demand needs to increase in the Eurozone, and that means spending a lot of money right now. And the banks have to be protected while they close out their losses and repair their capital, which will also take a lot of money (public and private) over the short term.

It's a huge, very dangerous, mess. It's hard to see the politicians and bank regulators over there do much more than kick the can down the road because they're afraid of doing what they know needs to be done. So I expect months more of muddling-though, with even more civil unrest (Hi Mike!), in the months ahead. It'll be bad. I hope that it doesn't turn into an actual full-blooded Crisis, something that could happen very quickly, though that's looking increasingly likely to me... :-(

I would like to think that Bernanke and Geithner and the IMF and the Chinese central bank (whatever it is) would ultimately step in in a coordinated way to prevent the Euro (and countries inside it) from collapsing if the European politicians and bank regulators won't. Maybe that's what Merkel is waiting for. Maybe it's all an elaborate game of chicken. (Supposedly the AIG rescue was driven by the fact that European banks would have taken a huge hit if it went under - http://blogs.reuters...all-about-europe/ .) Maybe they figure Uncle Sam can save the economy and their political skins again. I dunno. :-(

FWIW.

Cheers,
Scott.