This page has been archived and commenting is disabled.
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.
»
- Econophile's blog
- 20663 reads
- Printer-friendly version
- Send to friend
- advertisements -
Your right...clearly no Eurocrat is corrupt or ever has been! The mountain of evidence must all be a fabrication...liek how all those nations cheated on the books to get into the Euro in the first place...but that didn't happen because? Maybe it was all a plant by evil Americans, because Europeans have never done anything to break the rules or commit finical fraud...though ZH and the Tylers might disagree there.
And I'm still waiting for my treaty link giving the ECB control of that gold. If you have it why make us all wait? Surely you want to show me and everyone that you are right, so go ahead and do it. Surely you wouldn't make statements without evidence...would you?
So either show your evidence or admit you made it up. Making snipes at me is not evidence of the ECB holding gold either, though feel free if that is all you have. But really doesn't ZH deserve a better argument out of you?
Given that capitalism's growth mechanism morphed after WWII from being based on the productivity and ingenuity of the world's citizens to basically stealing from future generations to fund today's poor growth returning activities (think road repaving and Medicaid as examples) it is amazing that no one saw this coming Also, every actuary in the world could have whipped you up a quick chart of the greying populations and told you how that was going to pressure current spending...those 60% and 3% requirements should have triggered automatic action to stop the ridiculous spending in the problem countries. Really is amazing that this was set up with no ability to tax and create a viable "Fed model" but simply getting all these countries to participate was the coup...UK even though they don't have the euro will get hurt very badly and the Finns have to be thinking about building fences.
Tyler, it would be a blessing if you could cull the thousands of posts and retain the very best, most accurate, and wise ones that truly impart what has really happened, and is happening.
Who could ever argue against it? Yet, it gets one thumb up and repititious mundane ones get double digits.
This is a keeper and should be put in the "5 stars thread", a new one which could be commenced as another, separate one.
the spending brakes go on, the tax tap opens wide and then...print, print, print and hope for the best...in four years time will the storm clouds have gone away or got worse...?
Of course you can't take them too seriously, but the Greeks are at least pretending for the sake of negotiations that they've reached their limit. Another round of is-this-the-default brinksmanship, about two months after the last one. I'm seeing more havoc next week in Europe.
http://blogs.wsj.com/source/2011/09/02/greece-has-its-fill-of-austerity/...
“It’s killing us,” says one Greek cabinet minister.
Athens can’t force through another round cuts to pay pensions and social services: “An angry population will take matters into its own hands, the government will collapse and we may end up with political crisis in a near-bankrupt euro-zone country which nobody will know how to control.”
They'll use the same solution they always have throughout history, war. A lot of people need to die, this is their tried and tested solution.
Not exactly. Not a lot of people have to die, there will die a lot of people no question about it but a lot has to be destroyed that can be rebuilded to get everything going again. Capitalisme... what a nice system he :)
That's why when there would be some form of conflict starting, I'd get my ass on a plane out of here to somewhere peacefull and come back only when the rebuilding would start.
Crap at the rate they rebuild the world trade center the US would be in shambles for over a decade.
Ultimately, there is no way out for Europe - even if they do manage to get past this (by simply defaulting or inflating away the debt) Europe's populaiton is declining and there simply are not and will not be enough Europeans to keep the European economies afloat. Terminal decline is built in to the European system now that Europe is on the 3rd and 4th generation of the Welfare State...a system which has coddled the Europeans and robbed them, it would seem, of their will to live (though, of course, the reason Europeans opted for the Welfare State be because what was best in Europe was massacred 1914-1918 and 1939-1945...the milksop survivors might have so vastly outweighed the brave remnant that there was really no other course...).
>the reason Europeans opted for the Welfare State be because what was best in Europe was massacred 1914-1918 and 1939-1945...
What was massacred?
I don't remember 1939-1945, but I do feel as though I remember 1914-1917 or so.
Hope was massacred. Belief in the fundamental decency of our species was massacred.
There had always been wars in the past, and terrible things like plagues. But we always believed that we humans were fundamentally OK.
We didn't believe that anymore after the Great War. In 1914 Hell came to Earth, and we invited it in.
Two generations of young, healthy, strong, and brave European men
This poem by the war poet Wilfred Owen sums it up.
The Parable of the Old man and the Young.
So Abram rose, and clave the wood, and went,
And took the fire with him, and a knife.
And as they sojourned both of them together,
Isaac the first-born spake and said, My Father,
Behold the preparations, fire and iron,
But where the lamb for this burnt-offering?
Then Abram bound the youth with belts and straps,
And builded parapets and trenches there,
And stretchèd forth the knife to slay his son.
When lo! an Angel called him out of heaven,
Saying, Lay not thy hand upon the lad,
Neither do anything to him, thy son.
Behold! Caught in a thicket by its horns,
A Ram. Offer the Ram of Pride instead.
But the old man would not so, but slew his son,
And half the seed of Europe, one by one.
Ya, German, Austrian, Checkz, ... Russia just continued with the Kulaks etc.
My great aunts (5 of them, all "marrying-age" in 1915-1924 or so) were "spinsters" and lived with each other. The '18-19 'flu didn't do much to help the situation.
With today's mores, that would be a "target rich environment". ;-)
- Ned
Doc, "Who was massacred?" is the correct question. Answer: Poiluz, u can start here.
http://www.historyofwar.org/bookpage/sumner_poilu.html
It is the reason that the current "French Man" [sic] is so, well, cosmopolitan. They didn't have enough men for the women, then did it again.
N'est ce pas?
- Ned
It might instead mean that Europeans will, dragging and kicking, learn that they have to produce something, in service or product, for whatever the market will bear.
And with a declining population, labor will gradually become 'in demand'. The notion that ever more people will provide ever more income to transfer to the slackers, will disappear, but not without some blood shed.
Imagine that.
anony. The problem is not that 'europeans' need to be dragged and kicked, it is that 'we' are hamstrung by socialism and barriers to job creation and the implementation of wealth discrimination by marxists.
The elite within the EU clearly do not wish for individuals and business to succeed.
So you're saying Europe lost WW II, or was it WWII.1?
If you think things are any better in ObamaLand then you are clueless. Blame the stupid fvxkks who watch TV and enable the propagandists. All the media, hollywood and all TV are in on it including Fox.
My guess is you probably watch.
After QE1,2,3 and Twister is taken...how will the ECB call their trick?
Open your eyes. The situation is totally diffrent.
The ECB does not pool all the issued debt of the countries together and then become the biggest holder of the debt. They all have seperate bond markets FFS.