The Euro Crash Refuses To Go On Vacation

Wolf Richter's picture

Wolf Richter

Finnish Finance Minister Jutta Urpilainen set the scene for the long European summer break when she declared that Finland was a dedicated member of the Eurozone, eager to solve the crisis, but “not at any price”; it wouldn’t agree to take on “collective responsibility for debts and risks of other countries” via a banking union. And if push came to shove: “We are prepared for all scenarios, including abandoning the Euro.”

A spokesperson had to do some furious backpedalling: Finland wasn’t planning to abandon the euro; such assertions were “simply wrong,” her words had been misinterpreted. Nevertheless, this was the first time ever that a government official of a triple-A rated Eurozone country publically admitted that they were making contingency plans for ditching the euro—and worse, that there was a desire to do so under certain conditions.

The road to hell, I mean the road to the euro, was paved with good intentions—and signposted with lots of warnings that at the time were ignored, downplayed, or ridiculed. But one by one, they turned out to be correct. The warnings continue, along with efforts to sweep them under the rug which is more difficult now as the dimensions of the debacle have become apparent for all to see.

And so, in an open letter, 172 economists of “German-speaking countries,” including Ifo President Hans-Werner Sinn, warned citizens and politicians about the decisions of last week’s EU summit—though there’s still no agreement as to what has actually been decided. They were worried about a Eurozone banking union that would collectivize bank debts, which are “almost three times as large as sovereign debts,” and in the five bailed-out countries alone amounted “to several trillion euros.” Taxpayers, retirees, and savers of “still solid countries” must not be held responsible for them. “There is only one group that should and can carry that burden: the creditors themselves.” In other words: banks must be allowed to fail; bank creditors must take the losses; let the market economy do its job.

Politicians hope that they could limit exposure and abuse by instituting a common banking regulator, “but they will not succeed as long as debtor countries possess a structural majority in the Eurozone.” Once solid countries agree to collectivize bank debts, they will again and again be pressured to enlarge the sums they’re liable for. “Fights and disagreements with neighboring countries” would be preprogrammed. “Neither the euro nor the idea of Europe as such would be saved.” Instead it would benefit “Wall Street, the City of London—even some investors in Germany—and a series of ramshackle domestic and foreign banks” that would continue doing business “at the expense of citizens in other countries who have little to do with this.” And all “under the mantel of solidarity.”

Instant brouhaha. Just as the German parliament was wrapping up its work, and as everyone was looking forward to heading out for their long vacations with illusions of calm appearing at the horizon. That top economists would directly, publically, and en masse attack the government is unusual in Germany.

Chancellor Angela Merkel was furious. She had to explain once again what the agreement’s “small print,” that apparently no one has read yet, really contained. The EU Summit “changed nothing” in Germany, she said. “Everyone should take a good look at the decisions.” The banking union agreement deals with better supervision, and “not at all with additional liabilities.” And collectivizing bank debt continues to be “verboten,” she said.

Finance Minister Wolfgang Schäuble was “outraged.” Other economists shot back at Sinn’s group. “The letter damages the public respect for economics,” said Peter Bofinger, one of the Economic Wise Men. If banks were allowed to fail, he said, contagion effects would hit “banks in France and Germany, and therefore German savers and German taxpayers.” Some economists called the letter “irresponsible” and designed to stir up “emotions” and “fears.”

But the letter accomplished one thing: it tangled up political lines. The idea of letting banks fail rather than grouping them together in a banking union—whether or not that was one of the decisions of the EU summit—resonated not only with Social Democrats, the Left, and Communists, but also with the conservative CSU, while the sharpest opposition to the letter came mostly from Merkel’s own CDU.

Germans, who were watching the spectacle while loading up their cars with cans of food for their six weeks in Spain, bumped Merkel’s approval rating after the EU summit by 8 points to 66%; and 58% believed that she “acted correctly and decisively” in dealing with the debt crisis, which so far has been something that happened somewhere else, despite its ever growing price tag.

Rather than resolving the debt crisis once and for all, the summit gummed up the bailout process with controversy in the very country that everyone is counting on to save the Eurozone, Germany—but also elsewhere—and nothing was resolved. Read.... “The European Monster State.”

And to sprinkle some humor into that dogged Eurozone drama, here is “Merkel at Wimbledon 2012,” a funny video by down-under comedians Clarke & Dawe.

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lakecity55's picture

Not just abandoning the Euro... TPTB squirreled all the money they stole into a secret space program. Their next move is to abandon Earth and steal all the money on Mars.

Zero Govt's picture

" an open letter, 172 economists.."

That's about 172 more free-thinking economists than i thought existed in Europe! The quality of debate in Europe and Britain is so rammed with ingrained systemic crones the words 'free market' and thought of letting the Banks go bankrupt almost never gets a mention. What a breath of fresh air

"..collectivize bank debts.."

So our bankers in dipers cannot resolve their own issues so they pass the buck up to national Govt (whose job discription in society is 'know-it-all' or 'God' for short) who also shits their nappies and passes the buck further up the chain to international Govt

Pass the buck back down the chain.. if the bankers can't solve their own problems sack 'em

world_debt_slave's picture

Greece, great vacation spot, dollar strong.

The Phu's picture

I just stumbled across this music video on YouTube after hearing the song in a movie soundtrack (admittedly, as a 29-year old white male, I'm in Kanye West's target demographic).  The actions depicted are either pathetic (idealizing these actions/ "new pop culture") or prophetic.  My money (Au and Ag) is on prophetic.



Peter Pan's picture

You have to feel for the Germans' predicament. Like a ship wreck survivor they are faced with cannibals if they make their way to the beach and sharks if they decide to go back into the water.

The Fins and their conditional support based on collateral is a wise one. The less skin in the game the more scams we can expect from the PIIGS.

If they cannot even agree to a joint retirement age how the hell can they agree to anything else as a union?


Mad Mad Woman's picture

Oh come on! Let it crash already. The longer we wait till it does the worse it will be for the people. Bring it on!!

bankruptcylawyer's picture

so , germany goes to the deuschemark---and then France gets destroyed. so what. none of this resolves the bigger issue. 

world war. it's coming. either before or after the collapse of europe.

Unique Snowflake's picture

WW3? Unlikely. For what possible reason? And who would the combatants be? The other points are fair.

HungrySeagull's picture

We are prepared to sit on death watch until the Euro finally dies.

Gonna be a LONG HOT summer and a damn longer freezing winter without Soviet Gas.

In the meantime, stack it you bulls. That Gold and Silver aint gonna be this cheap again.

Bicycle Repairman's picture

The bureaucrats are leaving for vacation in August, so this will all have to be over by 7/31.

q99x2's picture

I wish something would happen. Aren't we there yet. The fireworks in San Diego didn't even work. I'm going back into meditation. Hell with it.

falak pema's picture

How about the anglo financial community financial derivatives dysfunctionment? Asymmetric financial world and asymmetric reasoning. And its all tied to the same string. A string of fixed oligarchy interconnected dystopian rings that brings people's demise. Why pretend that its different in each continental ring; when its the same thing. To get the whole picture its necessary to read RM. 


Hulk's picture

So many big words...HULK SMASH !!!

steve from virginia's picture



Taxpayers, retirees, and savers of “still solid countries” must not be held responsible for them (bad loans). “There is only one group that should and can carry that burden: the creditors themselves.” In other words: banks must be allowed to fail; bank creditors must take the losses; let the market economy do its job.


Going to happen anyway, sooner or later. What is taking place is putting off going to the dentist ...

When banks finally fail the associated wealth will vanish at the same time as the debts.

Funny how that works ...

aleph0's picture

"Other economists shot back at Sinn’s group."

.... should read :

 "6 economists shot back at Sinn’s group of 172 economists , of which a few used to be called 'the wise-men'. " 


"Merkel’s approval rating ... 66%"

From the comment sections I have read on all the major German Online Newspapers, it's more like 6% !


Nachdenken's picture

The weak Euro should be a boon to the European exporters of olive oil, wine, cheese and 2-5Y 6+% Bonds.  Bank liabilities are now taxpayer burdens, the problem is insolvent nations instead of insolvent banks. 

Who will admit that....Who will bell the cat.

Hedgetard55's picture

From the beginning there have only been two pertinent questions.


1. Who will get stuck with the bad debts?


2. Do they have the juice to handle them?


Answers: the taxpayers/holders of fiat currencies. And NO.

Snakeeyes's picture

It IS going to be a long, hot summer in Europe ... and the US. The bailout of Spanish banks rather than just letting them go into bankruptcy was a major mistake. But it is crony Communism at its worst.

DeadFred's picture

Always the comic,

“The letter damages the public respect for economics,”

Riotous Wolfgang.

dearth vader's picture

As it is said: It's well we have economists, or the respect for astrologists would've been in the dumpster already.

foxmuldar's picture

Its going to be a long hot summer in Europe. I doubt it will be long till the euro and dollar are at parity with each other. Then both will drop like a rock. Both Europe and the US economies are living on borrowed time. 

Meremortal's picture

 "I doubt it will be long till the euro and dollar are at parity with each other."

You may be right or close to right about that.


"Then both will drop like a rock."

I see no evidence for that. A drop of around 25% in the Euro would already constitute dropping like a rock. The dollar isn't likely to shoot up 25% against the Euro and then drop like a rock against other currencies in this situation. It is more likely to meander about in place at worst given the weakness that permeates the entire fiscal world.  


LeBalance's picture

Au, I might beg to differ as to what they would collectively drop like a rock [Ag]ainst.