Wednesday, September 28, 2011

Who control the Euro?

With all this talk about the Euro breaking up, it’s interesting to think about who exactly control the Euro, and which countries control the decision making process?

The question of trying to analyze voting patterns in the European Central Bank has some interesting literature, such as this paper, which suggests that the ECB basically has two possible voting patterns: a very stable homogeneous pattern, which a “European-centric” approach dominates country agendas, and possible dramatic shift to a heterogeneous pattern (each country for itself). In the “European-centric” pattern, the ECB president has quite a bit of power due to the ability to set the agenda. In a each-country-for-itself scenario, the president has relatively little power.

Looking at the voting patterns, it’s clear that if push came to shove, the periphery countries have more power than the core countries once a non-Euro centric voting philosophy emerges. At that point, the only option countries like Germany would have is to take their ball and go home.

Due to the unanimous decision making process required for the most important decisions in the EU, the idea of “kicking out” a misbehaving country, or sending UN troops to occupy Greece will remain a fantasy of German politicians.

Sunday, September 25, 2011

Savings = Debt

One thing I find frustrating about the discussions about economics (debt is bad, we should save more) is that saving and debt are two sides of the same coin.

Suppose we lived in a simple world where for example, I could mow your lawn and in exchange you would take my dog for a walk. Suppose I said, well, my dog broke his leg today, can I “save” this dog walk for another day since I’ve already mowed your lawn? The only way this would work is if you would agree to “owe” me a dog walk.

In this way, debt has to exist in order to allow for saving, since by not consuming now, you are instead allowing the rest of society to “owe you one later”. Whether this takes the form cash or dog walking certificates, the bottom line is that debt generally needs to exist in order for any kind of saving to happen.