Death Of The Eurozone
by John De Roe.
CREATIVE COMMONS: Attribute, non commercial, no derivs.
KEYWORDS:economics, economy, economists, politics, politicians, euro, currency, eurozone, bailout, spain, portugal, ireland, germany, monnet, santer, delors, brussels, bureaucrat, parliament, debt, sovereign
30 June 2010
by Ian R Thorpe
“France and Great Britain shall no longer be two nations, but one Franco-British union,” read the declaration.
“The constitution of the Union will provide for joint organs of defence, foreign, financial and economic policies. Every citizen of France will enjoy immediately citizenship of Great Britain, every British subject will become a citizen of France.”
The text was drafted by Jean Monnet, the architect of the European Union. If alive today, he would be pounding on the door of the Kanzleramt, exhorting Angela Merkel to offer a total fiscal union to all members of the eurozone before everything falls apart, and for complete fiscal and political integration to be enshrined in a revised EU treaty.
Monnet and his acolytes, Delors, Santer and the rest would not stop there however. They would be demanding that the sovereign debts and budget deficits of debts of Greece, Cyprus, Italy, Spain, Portugal, and Ireland will be fused immediately with German, French, British, Swedish, Dutch debt; that a single a single treasury be established to control the finances of all member states, and that treasury issue euro-bonds for all Europia or whatever clunky, boring name the creatively challenged Eurocrats, the unelected, unaccountable desk jockeys of the European Union decide to call the single European state they have always planned would be the outcome of their insanely bond-villainesque schemes.
Such a drastic, world changing move may now be the only thing that can save European Monetary Union and the monochrome dream of Monnet and the rest. But for such a thing to happen Germany would have to set about transforming the economic basket cases of Europia in the same way as it has transformed the former DDR, East Germany as it was known, the economic basket case of the Soviet bloc, over the last 20 years. To undertake such a task would involve a massive outflow of wealth from Germany to nations that Germany does not much care for and that in their turn despise Germany.
The alternative is for Germany to watch its strategic investment in the postwar reordering of European politics disappear in a puff of smoke. The political problem for Angela Merkel and her colleagues in the German government is their country would be blamed for the collapse of the project. This is unfair, while Britain has been distinctly cool towards Europeanisation, the French have been pro - integration when it served their purpose and Italy has staggered from crisis to crisis, Germany has consistently supported Europe with massive amounts of money and in practical ways.
It is apparent to people involved in bond trading that the debt crisis in the EMU periphery is nearing danger point, and could well spiral out of control as quickly as did the Lehman-Bear-AIG-Fannie-Freddie toxic assets crisis of 2008. Prof Willem Buiter, a senior economist at Citigroup, said last week that Portugal is likely to be first to need a rescue, possibly before the end of 2010 and that Spain will follow “soon after”.
Klaus Baader from Societe Generale published a report the same day under the title “Eurozone sovereign debt crisis: next stop Spain”. He suggests that the EU bail-out fund raises money to buy Spanish bonds pre-emptively. The German constitutional lawyers might have an opinion on that.
Therein lies the problem. To implement any workable solution to the Eurozone crisis would require EU member nations, independent, democratic nations, to surrender much of their sovereignty to an unelected body in Brussels. People might think the European Parliament is there to protect the interests of voters in member nations but the Parliament, in Strasbourg, for all its grandiose posturing is a glorified talking shop. The real power in the EU rests with the bureaucrats of Brussels and they will use whatever crisis they can to advance their agenda of creating a single European superstate.
This is why the economic problems of Spain, a much larger nation in terms of its population and economy than the other basket cases, the so called Piigs (Portugal, Ireland, Italy, Greece, Spain) are so worrying for corporate and national economic policy makers.
At Deutsche Bank, Thomas Mayer said Spain might soon need a flexible credit from the IMF. Markets are already pricing a 23pc chance of default in Spain (34pc for Portugal, and 39pc for Ireland). If the country needs a rescue, it instantly exhausts the credible financial and political firepower of the EMU system. Not long ago the experts were assuring us there was no danger of Spain needing an International Rescue but that attitude has changed in the past few weeks as the effects of Spain's catastrophic experiment with green power have been fully understood.
The EU’s €440bn (£372bn) rescue fund “looks small, very small, too small”, says Dr Buiter. Alleged plans for a double-up are circulating “en coulisses” in the Berlaymont, but Berlin squashed the idea as “completely over the top”. In any case, we are beyond the point in the Europoker game where bluffs can achieve anything.The markets makers know exactly what hand the EU is holding and are not accepting any more IOUs to fund the bets of states that cannot service their existing debt.
The chosen strategy of painful austerity and 1930s debt-deflation lame duck economies has already been tested in Ireland. There it only led to the same outcome as in the 1930s. Tax revenues have collapsed. The deficit has hardly been reduced because the economy was over - reliant on financial services, the housing market and debt funded domestic consumption. The policy is based on mathematical theories of the “fiscal multiplier”, and any fool except a mathematician (they lack experience of the real world) can see it is self-defeating.
On top of that Irish voters are still smarting over the EU's overturning their "no" vote in the 2009 referendum on ratification of the Lisbon treaty. Ireland, by democratic vote, refused to sign up to a further transfer of sovereign powers to the bureaucrats of Brussels and the Bureaucrats said, "Sorry, wrong answer, you will have to vote again and keep voting until you get it right. Many in Ireland see the current economic misery as payback from the EU for their disobedience. It does not bode well for pro - Europe parties in the next general election.
Should the EU impose the threatened 6.7pc interest charge on Ireland’s bail-out loans, the bureaucrats ought not to be surprised if the new Irish government in January says, "we're not paying, sue us", and pulls the plug on Europe’s banking system. A lot of people are hoping they do.
Ireland is a small nation however, it is Spain's economy on which the fate of EMU’s rests. Span's leader Jose Luis Zapatero said there is no chance his country would need a rescue. “Those investors shorting Spain are making a big mistake,” he told the Spanish Parliament and the media. Now where have we heard statements like that before? As Keynes once said, blaming economic crises on the markets is “not far removed, intellectually, from ascription of cattle disease to the “evil eye”.
Has Mr Zapatero bothered to read the IMF’s damning report on his country? It states that the government’s “gross financing needs” for 2011 will be €226bn, or 21pc of GDP. “Spain’s financing requirements are large and, retaining market confidence will be critical.
“The economy is highly indebted and has one of the most negative international investment positions (IIP) among advanced countries,” said the IMF. Its external accounts are under water by 80pc of GDP. Spanish banks will need to roll over €220bn in 2011 and 2012, according to Enrique Goñi, head of Banca Cívica who commented on the report “We’re in the antechamber of a new liquidity crisis. We’re living through a financial pre-collapse.”
Spain has exhausted its fiscal space. Targets should be made more credible,” the report concludes.
Madrid must attract €226bn of good money from Spanish, German, French and Japanese savers, investors, banks and insurers and China’s central bank, so an incompetent government (this one happens to be socialist, but the Greek conservatives were worse) can continue to run up budget deficits ad raise money in the bond markets to fund vanity projects such as the green energy fiasco that has left Spain's taxpayers handing over huge sums to foreign investors in sustainable energy projects even when those energy projects are not generating. Spanish savers are to familiar with their government's financial profligacy to hand over money to the state and international investors will follow Germany's lead. Why should German taxpayers lend a single pfennig, having already been told by EU leaders that they will face scalping if Spain ever needs a rescue?
This, in a nutshell, is the problem facing Angela Merkel. By the time she inherited the EMU debacle, imbalances were already chronic, and she certainly does not have popular mandate for grand gestures. In fact Frau Merkel's governing coalition is balanced on a knife edge and to commit Germany to becoming a financial crutch for most of Southern Europe would put the support of the Eurosceptic Free Democrat Party in doubt.
As the storm rages, the European Central Banks are tightening monetary policy by draining liquidity and raising interest rates and by signalling that they may soon shut the lending window that keeps Greek, Irish and Iberian banks alive. It is starting to look as if someone is pushing PIIGS into the slaughterhouse.
As for Jean Monnet's grand design, it is hard to see how such a union could ever have worked over time. It was rejected by the French cabinet at the time, though premier Paul Reynaud pleaded in favour. One Gallic patriot said that utter destruction was better than becoming a “dominion of the British Empire”. Today’s eurozone nationalists might well ask whether it is really worth giving up ancient sovereignty to keep an artificial currency.
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