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The Imminent Failure Of The Eurozone
This article originally appeared on the Daily Capitalist.
You know those movies with the bomb set to a timer ticking down to øø.øø where the sweaty hero nervously cuts one wire at a time while holding his breath and then at øø.ø1 he stops the bomb? Well Europe is like that except that the bomb goes off and kills everyone.
Our planet has a problem. Its leading economies, the U.S., Japan, and the E.U. are declining. That is, about one-sixth of the world's population is losing ground. These big economies are the ones that lead the rest of the world, including China. Countries like China, India, and Brazil, depend on the health of the big economies to keep buying their products and commodities so they can grow and generate wealth for their citizens.
What is especially concerning is the blow-up that is about to happen in Europe. It is not something that is happening "over there." In a world that is so interconnected financially and by trade, a sinking Europe is everyone's concern.
Their problems are much the same as ours with a twist. Their governments and central banks have also pursued reckless monetary and fiscal policies and now, effect is following cause. They have more or less followed the same policies as has the U.S., much to the same end. They spent large, engaged in Keynesian fiscal stimulus in a bailout attempt, ran up huge debts and deficits, and their economies are in decline.
The twist is the European Monetary Union (EMU), known as the eurozone. It is as if here in the U.S. there was no federal government and each state was truly sovereign, but there was a Federal Reserve Bank. Some states spend more than others, funding deficits by borrowing huge sums to support programs their citizens wanted. The profligate states want the Fed to buy their debt and float them loans created out of thin air, or otherwise they will go belly up and they will take down many states' banks. The responsible states know they will be stuck with the bill.
The EMU started on the idea that it would bind the EU closer. In essence it was a political decision rather than an economic decision. They passed a stern rule that said no state could run of deficits of more than 3% of their GDP. Except for Estonia, Finland, and Luxembourg, all countries, including Germany, now exceed the limit. Thus their politicians sacrificed fiscal probity for political gains.
They have hit the wall: Greece will soon default on their sovereign debt. On Tuesday, yields on one year Greek bills reached 60%. It is a sign that investors have no faith in the Greek government's ability to repay their debt.
The EU, ECB, and the IMF are trying to establish a European Financial Stability Facility (EFSB) in order to further bail Greece out. They have already pledged €110 billion and they are trying to put another package together of €109 billion. But Finland insists that Greece puts up additional collateral, which is not possible. Since the collateral would be part of the bailout money, it would be, in essence, Germany and France guaranteeing Finland's contribution.
Greece has missed every fiscal target it or its saviors has had. They are trying to get their deficit down to 7.6% of GDP through more austerity measures, but it looks like they will miss again (est. 8.5+%). Basically they are asking the Greeks to do something they don't want to do, and they will no doubt take to the streets again in protest.
If they default, then that opens a can of worms. European banks, other than Greek banks, hold €46 billion of Greek sovereign debt. Belgium's Dexia hold Greek sovereign debt equal to 39% of its equity; for Germany's Commerzbank, it's about 27%. On top of that, EU banks are into private Greek companies for about €94B (France, €40B; Germany €24B). According to the Wall Street Journal, the total market cap of all EU banks was just €240. The same article also points out additional unknown liabilities to insurers and investment banks.
The International Accounting Standards Board (IASB) has warned banks they need to write down, or mark-to-market, the Greek debt they hold. Whether they do or don't doesn't matter. The fact is that these banks are undercapitalized and in trouble. Their "stress tests" are a fiction. Liquidity is starting to shrink in their banking system because of these jitters. Rabobank, for example, said it is growing cautious about interbank lending – now limited to overnight loans. More banks are stepping up to the ECB window for funds. Overall, credit is starting to tighten. Nervous Greek depositors are withdrawing funds from their banks. Rich Greeks never trusted their banks.
In other words the Europeans have created a problem that they can't solve, easily at least.
Here are their alternatives:
1. Keep bailing out Greece, with the specter of Italy and Spain being the next target of market forces as EU economies cool off. This is not appealing to Germany and France who know their taxpayers will have to put up most of the money.
2. Have the ECB buy as much Greek debt as necessary to keep Greece afloat. The problem with that is inflation and the prospect that they may be setting a bad precedent for other countries.
3. Have the EU issue bonds guaranteed by individual countries, which again is mainly Germany and France. Same problem as No. 1. As Sarkozy said they don't wish to guarantee debt they don't control – the spenders have no incentive to curtail spending.
4. Opt for a fiscal union whereby Brussels controls spending and taxation. Or, at least, as Sarkozy and Merkel propose, coordinate their fiscal and tax policies and pass a balanced budget amendment in each country. Good luck with that. Chances: zero.
Which one of those policies will best satisfy these three necessary goals required to ameliorate the worst damage:
- Remove the need for the ECB to buy bonds continually on secondary markets;
- Ensure that troubled countries have access to financing;
- Prevent the strong countries from being dragged down by the weak.
Which one of the above policies will prevent Greece from defaulting, will let the rich countries off the hook, will create enormous liquidity in the eurozone, and will bail out the banks?
The answer is the obvious one, the one that won't hit the taxpayers of the EU's powerful economies, that reduces the net effect of debt to sovereigns, that bolsters the reserves of nearly insolvent banks (at least on paper), and puts the problem off for another day. That would be solution No. 2— quantitative easing, or monetization of Greek debt.
It also lets the taxpayers of Germany, France, and Belgium, whose banks hold lots of Greek public and private debt, off the hook because Greece will be able to repay their obligations in devalued euros. That is, the taxpayers in those countries won't have to pay the tab to refloat their banks. Or, at least as big of a tab as if Greece defaulted.
This plan solves nothing except in the very short-term. The day after tomorrow, inflation will melt away much of the eurozone's sovereign debt as well as private debt, and savers will be robbed of their capital. Capital will be destroyed and consumed by price inflation. Their economies will continue to stagnate, unemployment will remain high, tax revenues will eventually decline in real terms, and they will again be facing the same problems they face today. There is no way to avoid it.
The EU faces an insolvable problem, but it is one they created. You can't have a monetary union without a fiscal union. At least when no nation is obligated to play fair. They either terminate the EMU or paper it over. There is no other practical fix, at least when economies of member states are declining. They are the poster child for the failure of Keynesian-Monetarist economics.
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The 'Debt to GDP' ratio is very misleading look instead at 'External Debt' which sums up all the Government+Private Households+Corporate debt owed to foreign creditors. Western European countries and their citizens are the most indebted countries on planet earth. Even USA is 'only' at 99% of GDP.
External debt to GDP, Western Europe:
UK 386%
France 208%
Germany 163%
Ireland 1106%
Italy 132%
Portugal 240%
Spain 170%
Not a very meaningul comparison to the US, as there is naturally a lot more cross-border indebtedness within multinational Europe.
Better compare total indebtedness, private and public sector, domestic and international.
So please provide me with those numbers then.
I went into the shower, in the morning, about a year ago. I looked at the sink, and suddenly it became all clear to me - the ECB will monetize everything. Then I took my shower and went all in on precious metals (and a little bit of CHF notes just in case banks get locked for a few days).
It's funny how in the morning, after waking up, many people have the clearest, strongest thoughts.
Great article by the way.
I have yet to make my reservations at the All Inn.
I'm currently booked in the 50% Inn - the suite is quite comfortable, I just don't have the balls for the All Inn. Yet.
E5S: I sure hope that u b "Turkey Sausage" ;-)
But, well, next margin-hike/skoshi' drawdown, approaching the end of the line for FRNz.
Just sayin'
- Ned
While I tend to agree with Econophile here, I think he is ommitting the effect of Swift capital flight once Euro-flation becomes apparent.
I suspect we may get what no one expected going in: A Euro crippled by inflation, and a $US that has been strengthened by capital flight Far more than its managers find convenient.
Wouldn't that be ironic?
But I suspect the German electorate will ultimately be almost as enraged at inflation on PIIGS behalf as taxation on PIIGS behalf, and will end the scenario, And the Euro, fairly quickly.
The German electorate will take everything on the chin as always... "Ordnung muss sein"
Plus as the dealer in this card game they will get the most out of it- a fourth reich so to say- when the dust settles. When poland folds (in my mind this is unavoidable) and our plutocratic government asks for help they will get Breslau and Poznen back :D... and more...
I am currently looking for German and Russian pen/skype palls to learn the languages as Im not sure witch of Your countries will govern this wretched patch of central europe in the future.
as my friend said tooday: "save the forests, You might have to fight a guerilla war one day!"
BUMMER!
Because "Polska jest najlepsza!" That's what my grandmother used to say...
Polska jest najlepsza- maybe, but our political class is one of the worst. They're in the pocket of the bankster cartel, as for the population, it is up to the eyeballs in Swiss Frank mortgages and sound asleep- believing any crap that comes from the MSM... Its not the same nation that Your Grandmother was a part of.
Jasper, you b hitting my view (me not smart enough to analyze all of the factors).
But, yes, in the last gasp, capital flight to the "Reserve Currency" looks to be the penultimate phase.
Au contraire, mon ami. Too much emphasis on Dollar-bad (so far), not enough emphasis on "Dollar-sucks-less-than-the-others."
'course, I don't have a dog in that fig... ...er... race. That's the word!
- Ned
aren't european vacations over with now? where's that chevy chase dude?
time to put those hard hats on and kiss the eurozone goodbye
European disintegration, bitchez!
So its all smooth sailing in the dollar zone ?
At least the Eurozone is a net creditor with no trade deficit with 10,000 tons of gold
Without Germany, there is no eurozone. The EU is much more fragile than the US. They are made of dozens of different nations with different customs and languages and have historically been enemies for over a thousand years. The people of Europe had to be dragged into the EU and euro.
Smooth sailing for the dollar? No. That doesn't mean the euro will have smooth sailing either. It's a race to the bottom.
As if the queers in Caifornia get along with the rednecks in Texas. Has nothing to do with it anyway
The US had some the shallowest recessions and the biggest gains when it had an independent treasury from 1847 and on(before the Fed). That is what the Euro system is.
Let me enlighten you: there are LOTS of rednecks in California, and and LOTS of queers in Texas. And sometimes they're the same people....
http://www.youtube.com/watch?v=vyFSdj1J5Vw
Full Metal Jacket
"The EU is much more fragile than the US." -> Exactly. This is what the engineers call "predetermined breaking points". It's a sound principle. And history can teach a lesson or two - war in Europe because of debt? No, I don't buy it. Civil wars somewhere else? More likely, IMO, than any European War.
I agree, the race to the bottom is on and the losers are not out yet...
The answer about what will happen to Europe is pretty simple.
You know the saying: A chain is only as strong as the weakest link.
Well, when those break, you only get pieces of chain and again those are only as strong as....
So we'll first break up in parts: North, South, West and South Europe. We'll try that concept for a while untill those weakest links will also break.
We'll spinter back up into small pieces. You'll see.
"We'll spinter back up into small pieces. You'll see."
That's fine, as long as you all behave! And don't make us get visas to come and visit...
There are plenty of Fed primary dealer banks in Europe. Eurpean banks are the dollar systems problem, not the Euro currecies problem.
Spitzer, this is the one problem I have with FOFOA's main analyses. Yes, I know about their nice pile of gold and the way they have untied the Euro to gold. Cut the link, other than mark to market their gold holdings as reserve assets (a good thing).
But, the Eurozone DOES have all these problems... I have been unable to square the circle re the Euro being a better place than the US$ because of its (Euro's) admittedly good design vs. the many problems they have.
Maybe if freegold arrives THERE first, then they can use their new wealth to restructure their economies before we can...
GREEN for bringing FOFOA's take on the difficult to understand the Euro's plight.
Remember...if it comes to ...the Euro calls it quits (in its support of the $IMF$) bids up gold to fix its balance sheet. It kills the dollar and who knows what to the price of everything...but the Euro survives. This is not going to end well anyway. We all understand that. It is not as though there is an answer that leaves the Eurozone with 5% inflation for 5 years and then ...back to normal.
DCRB:
"Lysdexics of the World! Untie"
(couldn't resist ;-)
And, well, on-topic: Friedman analysis of Euro is well known, start here (Cato, so usual warnings, but with Friedman, we'd expect that):
http://www.cato.org/pubs/journal/cj28n2/cj28n2-10.pdf
- Ned
Actually untied IS what I meant... The Euro purportedly as cut its link with gold, not united with it!
I thought so, but, well, I couldn't resist. ;-) - Ned
Meat
"Lysdexics of the World! Untie"
still laughing....would not want it known I was 'less' 'dexis' though...
@ Dochenrollingbearing
The Fed and the Treasury are basically one entitly. So essentially, the Fed/treasury is not only the biggest debtor in the world, it is also the biggest money printer in the world.
The ECB is not a debtor connected to any nation state.
New_Meat, Spitzer and Shameful,
Thanks for your replies! And just when I thought I was getting the hang of things, LOL...
Ned, so Milton himself had problems with the formation of the Euro.
Shameful, I find it very hard to puncture virtually anything you say. Law school, right?
Spitzer, correct me if I am wrong, but I believe that I did read at FOFOA that each nation joining the Eurozone had to put up some (15%) of their gold to get in.
It is going to take more study and work for me to advance through the thickets here. Thanks for sharing your ideas.
No I was always an argumentative know it all :)
But in this case I see what in my mind is cult like behavior. Everyone wants to believe in a fable that promises them riches in this world (Freegold). And cool believe in it, I'll just call bullshit when I see it. And again not bashing gold, just saying a lot of FOFOA's leaps are flat out wrong, and I could go into depth about it because I read a lot of his writings to be sure he was wrong and not me. Now owning gold will serve people well, but people will be right for the wrong reasons. And I would avoid the Euro the same way as Dollars. Both are total disasters waiting to happen. The ECB is so independent it has taken to bailing out the periphery and now Italy to save the EU experiment, sounds impartial and independent to me... just like the Fed is right?
"Everyone wants to believe in a fable that promises them riches"
No no shameful, people want something that makes sense.
What do you think will happen ? Some yuan gold standard will be thrown together in 3 months ?
some SDR standard will be thrown togesther in 3 months ?
a "basket " of fiat will be thrown togesther why pretending gold doesnt exist ?
Ah but a Euro system will work because they will hyper inflate the currency but then mark the gold to market? And it won't work in the US because people wouldn't trust it. Huh seems to me massive deprecation is massive deprecation. Will the average German saver go "Well the purchasing power of the Euro got decimated when the ECB bailed everyone out and printed a pile of money to cover all the debts...but hey the gold is marked to market, I love it!"?
This will be wild and chaotic, the only "plan" is how to loot more and keep the ball in the air. Even FOFOA says all debts will be papered over, and that is what is happening in the EU. So by papering over the debts in the EU a new golden age will be brought in, but it will damn the dollar...all because of mark to market gold?
This system is supposed to provide savers with a hard money and debtors with soft money...well how will those debtors get access to fresh capital form those savers? The system as is only works because savers get to be skinned by the specular. Now as the speculators are in charge I cannot fathom them creating a system where they cannot operate.
Oh and you never addressed the treaty question I had for you. Or the fact the EU gold is in NYC. Surely you have answers for me, as you are clearly an expert. Please enlighten the masses. Or continue to spout off about a golden Yuan which is totally off topic, whichever best supports your argument. Oh and because I never got this answered form the Freegold crew, is India the next super power? Lot of gold in India, seems like the EU creators really intend India to be a super power...or was that just a happy coincidence for India that they will be able to buy up Europe?
Just like I expected, you wrote 4 big paragraphs yet you had no answers. Anyone with some basic mathematic skills can see that the current system is 40 years old and it cannot possibly live 10 more years in its current form.
Freegold in some form, is the most likely outcome. Its that simple. Don't sit here and point out little issues you have with freegold, just give me a more likely outcome and I will listen.
No, like the Fed, it is the whipping boy of the banks. Actually, it is central banks that are the vampire squids with their money funnels stuck in the biggest source of easy money on the planet: compliant tax payers. And all the money goes to their banking buddies.
Actually a central bank makes it possible for a government to fund its operations with debt instead of taxes, which are notoriously unpopular. So governments are happy to let the their central bank do its nasty work in exchange for unlimited borrowing.
Not only is the EU full of structural issues that vaunted 10k tons gold is not in Europe. We KNOW a lot of it is in the Federal Reserve Bank: New York. So with the nature of the US government, how likely is it that we just dole out gold that is owed? I would place the odds at infinity approaching 0, particularly if it was to create an non dollar centric system. It's akin to arming a man who has boldly stated he will shoot you in the face when armed.
There very well may be a gold reference or gold returning as the way of things but FOFOA's analysis has many flaws. I'm all for holding gold (but also silver), but I highly doubt things will break as he expects. It's stretches credulity that the Euro can in effect hyper inflate and it's "cool" because there is gold market to the hyper inflated market. Wouldn't anyone who isn't brain dead dump the Euro for gold?
You do not believe the BIS has significant gold?
Why would it matter if they did or didn't? I haven't seen on official declaration of them backing a "winner" in the race to debase. Isn't Zimbabwe Ben a member? And seems to me the BIS has a lot invested in making sure the dollar reserve system trundles along. Unless you are talking about a BIS currency, which I don't think anyone is talking about.
we know the dollar system will exponentially fail possibly in months. What is your answer ?
lol so asking a young man from the US to solve the worlds problems? How about this, cleanse the system? Now Freegold does his in the way that is being done now, printing the debt away...so how is this a revolutionary act? Seems pretty damn common in the history of fat to me...but this time is different. Because this time gold's price will rise..hell correct me if I'm wrong but I think the price of gold increased in the local currency where there has been inflation ala Wiemar. Gee didn't work then either did it.
There doesn't need to be more money printing to have hyperinflation. All there needs to be is a reallocation if the inflation that already happened. A loss of confidence in the biggest inflation that already happened. A loss of confidence in treasuries.
After that, people will come to realize how stupid it was to use government debt as a store of value. People will look back on these times and wonder how people could be so stupid as to lend their capital to a government that wastes it, and use that as a store of value. At least when you bought a tulip, you had something. Now when a government consumes your money, you have nothinng.
Plus, as I've tried to tell Spitzer before, the 10k tons of gold does not belong to "Europe", it belongs to The Netherlands, Portugal, Italy, France, Germany, INDIVIDUALLY!!! There is no rosy sense of community here. Greeks were saying last year to the Germans, "You stole our gold! [in WWII]" How is this going to play out when things actually get bad, because we've not seen anything yet.
The gold is on the ECB balance sheet. You must forfeit your gold to join the Euro.
The ECB is a separate entity with no debt. None of you seem to realize how much the US govt/Treasury/Fed system is an exact duplicate of every basket case debt induced hyperinflation.
The ECB is totally difffrent. They have no treasury, no connection to any sepecific nation state.
"You must forfeit your gold to join the Euro"
Just like the did when they established the Federal Reserve System.
Huh so are the officials calling for the gold backed euro bond just ignorant fools? Because clearly no Euro zone nation has gold. So why does Germany still claim to have gold? Now could you do me a favor and cite that part of the treaty where all Euro zone members give all their gold to the ECB? I won't claim to be a expert on the treaty, but I'm sure you are, so help us all out.
Gold including gold deposits and gold swapped
Pick a month of choice first
http://www.ecb.int/stats/external/reserves/html/assets_8.812.E.en.html
See I go in there and look and for some reason the ECB is listed as different from Euro area and individual euro nations. So again not seeing evidence to say that Germany had to forfeit gold for the privilege of using the Euro. In fact the ECB document is telling me the ECB lists German and ECB gold as separate. Sure it has a total for Euro area, but all nations and the ECB itself are listed in that.
so you learned how to green yourself...
anyway, do you think the ECB just hired some Enron employees to run the show or do you think the gold is counted once ?
The Gold is not in Brussels, Spitzer. Our Austrian gold is in Austria, etc. Observe the difference between the "Euro Area" and ECB in this chart:
http://www.ecb.int/stats/external/reserves/html/assets_8.812.E.en.html
ECB doesn't control much of anything. It is a sham and will be thrown off as soon as German and French national interests surpass the "dream" of integration.