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by Ian R Thorpe.


Germany Forces Sovereignty Concessions From Small States To Save The Euro
by Ian R Thorpe.
2011-03-14
CREATIVE COMMONS: Attribute, non commercial, no derivs.
KEYWORDS: Euro, europe, eurtozone, sovereign, debt, money, finance, federal, nation, interest, bonds, jobs, unemployment, economic, politics

The Iron Chancellor of Germany could not have been clearer. “Whoever wants credit must fulfill our conditions“.

These conditions are capitulation by three vulnerable states on core policies, and partial loss of sovereignty for the rest of the eurozone. The move represents a giant leap towards the establishment of a federal Europe or the dreaded single nation solution.

For Greece, the terms are the sale of €50bn (£43.2bn) of government assets within four years, a tenfold increase from the original €5bn that premier George Papandreou thought he signed up to a year ago. When this was first mooted by the IMF last month Mr. Papandreou told the EU bankers not to "meddle in the internal matters of the country.“

In return for easing Greece's financial problems, Chancellor Merkel agreed to reduce the penal interest rate on the EU - held portion of Greece’s €110bn loan package by 100 basis points (still penal), and stretch the maturity to 7.5 years.

This will not restore the Greek economy to solvency. The nation's debt spiral is too far advanced. The debt burden will approach 150pc of GDP this year, and debt servicing costs are 14.4pc of the government's tax revenues. The sovereign debt malaise is spreading through the economy with the jobless total having risen almost a full point to 14.8pc in January. Youth unemployment was worst affected and now stands at 39pc.

Meanwhile, austerity is biting harder in other troubled nations. For Portugal, Germany's conditions mean more stringent budget cuts amounting to a fiscal squeeze of 5.3pc in one year. Pensions, welfare, and health care will be hit with public sector wage cuts already under way. "A descent into Hell," said the Bloco de Ezquerda.

Almost 300,000 young Portuguese took to the streets of Lisbon and Oporto on Saturday in a day of wrath by the "Desperate Generation" as they style themselves. The protests invoke memories of the events of Egypt’s Tahrir Square. A wing from the ruling Socialist Party said it would not support such a "disastrous policy". They said the cabinet were not even aware of the cuts imposed by Brussels before Wednesday night's agreement.

Fiscal tightening of this magnitude in a country with public-private debt of 330pc of GDP, an over-valued currency, and reliance on fickle foreign financing, is a recipe for disaster. Yields on Portugal’s 5-year bonds hit a record 8pc on the news of cuts. The bond markets view further belt-tightening as self-defeating.

For Ireland, a condition - which has not yet ben accepted - is to abandon the 12.5pc corporate tax rate described by France’s leader Nicolas Sarkozy as "shameful". Angela Merkel was more specific in her condemnation of Ireland's fiscal recklessness: She said, "We weren't satisfied with what Ireland agreed to, so the question of lowering interest rates has only been addressed for Greece."

It looks like a baptism of fire for the new Taoiseach, Enda Kenny. The low corporate tax rate has been the foundation of Ireland’s economic strategy and the success of the Celtic Tiger economy. Low taxes on company profits were the reason Ireland was able to build a pharmaceutical, medical, and software industry so far from Europe’s geographic core. The Irish will not tolerate any loss of sovereignty and Mr. Kenny's coalition may find itself under pressure almost as soon as it has set about the business of governing.

Peter Sutherland, former EU competition tsar, said Ireland is being punished for its transparency. The real corporate tax rate in France, he said, is 8.2pc when hidden incentives are taken into account. He called the EU rescue deal a Diktat, with "exorbitant“ interest of 5.8pc. Such a rate is suffocating for an economy in the grip of core deflation, already reeling from a 22pc contraction in nominal GNP.

The condition for Spain, Italy, Belgium and other struggling nations, is intrusive surveillance of pensions, wage policies, productivity levels, as well as demands for a mandatory "debt-brake", regardless of whether or not such a reactionary policy implies a period of 1930s - style deflation.

Just as eurosceptics rightly feared, monetary union has led to a state of affairs where – in order to "save the euro" as Mrs Merkel puts it - Europe’s ancient states find a quantum leap towards fiscal and political union has been thrust upon them when they are almost powerless to resist. Germany's conditions for being the Eurozone's financial crutch is a degree of subjugation that would not have been tolerated had the smaller nations not had a gun held to their head.

The problem in the E.U. lies in the fact that there is no democratic machinery to hold this central bureaucratic dictatorship to account since the European Parliament lacks a unifying language or political philosophy and remains nothing more than a consultative committee in real terms. Real power is shifting, but to whom exactly? Right now it may seem as if Frau Merkel has somehow been acclaimed Great Mother Goddess and Mater Familiaris of Europe by by the consilium but with voters in almost all European states implacably opposed to further moves towards integration, federalisation and a single, unelected government the long term outcome of this situation could be a massive swing in elections to the nationalist parties of the extreme right.

See also: Bank's £1.6 trillion exposure to Eurozone sovereign debt by Ambrose Evans Pritchard, The Daily Telegraph
The total exposure of foreign banks to the struggling quartet of Greece, Ireland, Portugal and Spain tops $2.5 trillion (£1.6 trillion) once all forms or risk are included, according to the latest data from the Bank for International Settlements.
On an "ultimate risk" basis that includes the potential loss on derivatives and credit guarantees of different kinds, the figure rises to $2.51trillion as of September 2010, well above the headline figure of $1.76 trillion in cross-border loans. The sheer scale highlights the systemic dangers if the EU fails to stabilize the debt crisis.

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