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Fiscal Federalism Or Bust! Morgan Stanley Sees Dec 9th As Real European D-Day
We have often discussed the temporary and tenuous nature of any and all government-suggested solutions so far to the European crisis on the basis that the 'model' is broken. Following the decision to go for PSI, and the possibility of a sovereign leaving the Euro-zone (Greek referendum ultimatum), money is no longer fungible in and across European banks (deposits) and sovereigns as it seeks the stability of a narrower and narrower core. Arnaud Mares, of Morgan Stanley, who wrote the initial and definitive Greek story long before most others, brings up this very point; questioning the fungibility of Greek Euro deposits with French Euro deposits, for example, and interpreting the situation as a 'run on banks and governments'. His view that without a clear path to a fiscal lender of last resort - or a true fiscal federalism across a united Europe - which ensures solvent governments will never go illiquid, then the December 9th decisions mark a bifurcation point of critical import.
If governments choose to engage on the route to fiscal federalism, we believe that this does not mark the end of the crisis. It could, however, mark the beginning of the end of the crisis, as it would be a decisive first step towards stabilisation and a European federation. The alternative could well be the beginning of the end for the European confederation.
Europe has to choose between debt assumption (enhanced federal control of national budgets accompanied by centralised funding of governments) and a debt jubilee (wide-scale debt repudiation), with all the social, economic and political consequences this entails. Mares' framework for considering the words and deeds of December 9th is critical, though complex, reading to comprehend the tipping point we are at.
On Europe's Hamiltonian Moment:
One year ago, we wrote that Europe was heading fast towards a crossroads where it would have to choose between a debt jubilee (wide-scale debt repudiation) and debt assumption (a form of fiscal federalism with enhanced control over national budgets accompanied by centralised funding of governments). We think this bifurcation point has now been reached.
By December 9, heads of state and government ought to outline how they intend to amend the constitutional arrangements under which Europe – or at the very least the euro area – operates. Should they set out a clear, consistent and workable policy orientation, which includes both fiscal control and a mechanism to keep compliant governments fully funded, this can in our view constitute a decisive first step towards stabilisation. Should they fail to deliver a credible framework encompassing both these dimensions, we would expect that the ongoing ‘run’ on governments and banks will accelerate, and it is seriously to be feared that it can no longer be stopped. The economic, social and political consequences could be unfathomable. The next few weeks are therefore a critical moment in European history, in our view.
On the growing cracks in the fungibility of money:
Money in a fiat money system is a liability of a bank: of the central bank for banknotes and other forms of central bank money; of a commercial bank for commercial money (deposits).
If one or more countries can leave the euro, or at the extreme if the euro can break up altogether, this raises questions as to whether these different forms of money are fully fungible. Is one euro of deposit in a Greek bank still fully fungible with one euro in banknote form? Is one euro of deposit in a Greek bank still fully fungible with one euro of deposit in an Italian bank, and is the latter still fungible with one euro of deposit in a French bank, or a German bank, etc.?
Pursuing this reasoning leads to the inescapable conclusion that the more plausible it is that a country can leave the euro, the greater the incentives for depositors to move their deposits from the banks of almost all countries towards those of the country that remains the safe haven by convention if for no better reason: Germany. We believe that such behaviour, in turn, would (and judging by anecdotal information received from our clients, does) increase funding pressure on all banks, intensify incentives to accelerate the de-leveraging of the banking system and raise further the spectre of a credit crunch.
And on a topic we have repeatedly discussed - that even if the ECB were to print print print, this would not solve the problem:
The limitations to ECB intervention are not technical, they are political: The problem with the ECB acting as a lender of last resort in this context is that it has no control over the fiscal stance of European countries, and that the constraints that were embedded in the Maastricht Treaty and the Stability and Growth Pact have proved neither binding nor permanent. If the ECB were to provide unlimited funding backstop to governments in the absence of any strengthened control on fiscal policy, it could not therefore credibly dispel the notion that it is funding the potentially runaway debt of potentially insolvent governments. Doing so would lead eventually to backdoor and unsanctioned fiscal transfers through either: i) mutualising sovereign credit risk on the balance sheet of the central bank; or ii) inflating debt away (which would affect different countries asymmetrically).
What is needed is utlimately Fiscal Federalism:
What we have described here has obviously little to do with expanding the size of EFSF, leveraging its action or augmenting it by drawing on the resources of the IMF or any other sources of funds. What we have described in one sentence is fiscal federalism, meaning:
- Full and permanent control from the union of governments – the federal level – over the fiscal stance of each member state, combined with;
- A permanent mechanism to ensure that all governments that submit to this federal control are fully funded on fair and equal terms.
The critical issue is to balance fiscal control with funding. Control without funding is fundamentally unstable or require systematic and arguably infinite ECB intervention and that could lead to the same path as no balance at all.
And finally, how do we judge the December 9th statements? Here are four questions that need to be answered affirmatively:
A sequential decision tree for roadmap: If the argument presented here is correct, then it provides an interpretation grid to assess the conclusions of the ongoing discussions between European governments. This interpretation grid can be thought of as a sequential decision tree, based on the following questions:
1. Can fiscal federalism defined as above be achieved in a sufficiently simple and practical way (in particular as regards the constitutional changes it requires, both at the federal and national level) as to be a credible outcome at all?
2. If so, will governments commit Europe clearly enough to this objective by December 9?
3. If so, will their choice be ratified by their own people, according to whichever ratification procedure is applicable?
4. If so, how long will the ratification and implementation process take? This, in turn, informs the question of whether there exist transitional support mechanisms that are sufficient to keep governments and banks funded throughout the ratification and implementation process.
Evidently, a negative answer to any of these questions ought to lead to the conclusion that the run will resume, accelerate and cannot be stopped, with all the consequences this entails.
Mares' full article below:
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Finally a date on the doom!
This is getting interesting!
www.SouthGaRealEstateReport.com
Dooms day is not Dec 9, it will be December 20-23.
Sheriff of Nottingham: Wait a minute. Robin Hood steals money from my pocket, forcing me to hurt the public, and they love him for it?
[Scribe nods]
Sheriff of Nottingham: That's it then. Cancel the kitchen scraps for lepers and orphans, no more merciful beheadings, and call off Christmas.
Isn't this about the 18th drop-dead date for the Euro though?
Why the 9th?
Was December 7th aleady taken?
Does anyone know who has what coming due on that day? Or is it just arbitrary?
It's a date the heads of states and governments in EMU already have on calender for meeting. Otherwise, putting them all together in one room is not easily accomplished. All of them have to weigh in on this.
Plus, it is a Friday and nothing will be expected before the European and Americas markets close, allowing a weekend to pull off things like a bank holiday, nationalization, or what not by various governments that either don't go along or anticipate a run in a region.
If they do agree on Fiscal Federalism, it will still be some can kicking, because actual ratification by peoples in respective countries and implementation will take additional time. Months at least. So risk of something going wrong will persist and markets will remain jumpy.
Let me amend that. Not so much a risk of something going wrong as risk that EVERYTHING MUST GO RIGHT. And that's the bet. Not a very good one.
Which island should I go to?
Cue the war drums and bugles.
Hold your fire boys until you see the white's of their eyes.
I didn't copy you. But you sure hit it.
54-40 or FIGHT!
As in...54 more bailouts or 40 more depending on if the PIGS leave the Euro, or there will be WW3
It's not impossible. I used to bullseye womp rats in my T-16 back home, they're not much bigger than two meters.
Red leader standing by
please tell me just 8 more days
First ex-Goldman director guest post, then UBS now Morgan "dead man walking" Stanley? has ZH gone mainstream?
kidding.
There is a middle ground: Bernanke prints and buys european bonds.
there is no middle ground.. they print.. high inflation in the WEst, and greater income/social inequialites. hyperinflation in China > destabilizing.. They don't print.. Europe collapse > great income/social inequalities.
My fearless prediction de jour:
On December 9th they announce they are working on a 'plan'.
Market rallies 5%.
Wash. Rinse. Repeat.
Are they working on a "plan" to make a plan?
I love how the half life of all this is dropping fast. 10days from nowyour going to have another FED injection and that will only last 5 days, then 2, then 1, then game over man!
their plans all are about ripping-off us
I agree. IMHO fiscal federalism will never be achieved in the end, but the idea will be used for weeks, possibly months to support the markets and especially the banks. Do not short anything for more than a day trade. All of the financial power in the world is being used to keep this alive.
Village Smithy: Agree. But hasn't Merkel been playing her cards like an old riverboat hand? Vague, apparently well-disposed to save the euro, then five months later hardening her position? Germany can't afford to go joint-and-several. The periphery are unwilling to accept their actual position...at least so far. If that continues the zone breaks. Not really any fancy options. And if Bernanke starts taking on more sub-AAA euro credits, all hell will break out in the US Congress.
"all hell will break out in the U.S. congress" You aren't talking about the same folks who just cancelled Habeaus Corpus for all americans are you? I doubt they give a rat's ass what americans think so they'll just do as they are told by the bankers.
Hitler is laughing in hell right now. What he couldn't accomplish with tanks, TPTB will accomplish with banks. not one shot fired and they will assume unelected dictatorial control of all major eurozone countries. and the sheeple are too busy watching kim kardashian-type reality tv shows to care
they are scared
TPTB were Hitler's enemies. So maybe he is not that lucky.
Just sayin'
take a look at who financed Hitler's war/holocaust machine
Not to mention gave him his ideology. British Eugenics. Of course much of Wall Street is America's arm of Britain (imperial monetarism ideology, benefactors, and supporters), and thus people like Grand daddy Bush was in on the funding.
The funny thing overall is that the author is pretty much pushing for the worst option. The hell is going to break loose either way in his situation, with the bankster in control, fully, it will only be worse.
That said, a Glass-Steagall implementation, and a credit system cannot be achieved in Europe, until we in America break the ice. Europe's only chance is that we here in America, actually return to America's roots.
Which means it all starts here at home. That should be the focus. Impeach Obama, and do the above.
Of course nuclear war could break out in the meantime. Even another front appears to be opening up in Pakistan as well. Besides everything else. Oh and it'll be tough for the idiots to continue the Afghanistan war without supply routes, which are being axed coming out of multiple countries. Syria, Iran, Pakistan...with Russia and China as the big boys. Three nuclear armed states. Yet some people still believe such an imperial war against said nations will be convential.
Economic Armageddon and Thermonuclear Armageddon, and with both highly likely to occur unless the banksters are cut off at the knees with Glass-Steagall immediately.
The author somehow believes the end of all of this crap can begin with a takeover of Europe by the oligarchy? Wow, simply wow. No it's them that created and pushed us here. Taking their next step won't stop anything, it'll just ensure they have the power to thrust more bullshit on everybody.
He's just trying to convince everybody that things are worse than they appear, yet give up more power to them, and things might start to get better. Wrong. Do the opposite. Grab more power back, and go outside the bankster loop to fund it. Let the oligarchy drown in their bullshit alone, it's THEM who are trying to convince us we'll all hang together. Nope, only if we let them fool us into walking up to the gallows with them.
IBM sponsored the holocaust, don't forget that, the Bush family laundered the Nazi money... TPTB were totally behind Hitler
Dec 9. V Day for the banker elite: The day Europe was conquered.
Core meltdown cometh.
Aside from launching into what should by now be a redundant fiat monetary lesson, he demonstrates a clear understanding of the social implications this will have on Europe. Merkozy will fail. Europe needs an absolute miracle.
If you only knew what was in the core. This core is fill wiith such shit that the core can't or shouldn't be protected.
A bunch of asshole bankers getting stoned and telling us to look at the turd they left in the toilet.
I wish, I wish I had the means to dig that turd out of the shitter and throw in their mouth, where it belongs.
Although your rant is quite welcome, I meant the Eurozone core(Germany, France, Belgium & Holland). After all, that is the big fear. Then it'll get extremely interesting.
So lose your sovereignty or lose your banking system? Neat. Either way it's gonna be hell in the streets.
false choice
neither is ours
A fascist manifesto. The millions of people in Europe and all over the world are given one sentence.
"will their (the government's) choice be ratified by their own people"
The revolution has begun, as we can see the whites of their eyes.
Is the United States of America fascist? how about confederated Canada?
Europe (union) certainly fits with the former in land, population, resources.
Stick: relinquish your sovereignty to fiscal federalism
Carrot: Mario prints for you.
Seems simple to me.
Nein, Nee, Non and No
Can someone tell me when we are officially doomed. Im debating whether to buy christmas gifts for the wife and inlaws. If i be dead, Theres no need. Correct?
You won't be dead. Big world changing events need time to happen but when they happens, it really hits the fan.
Thanks. I just hit submit for my wifes Nook tablet. Happy holidays my friend
OT: For the first of the month, this is a lame continuation rally. We used to get real equity "rocket rallies" (to use CNBC language) on the first of the month. Now it seems fund managers have no money to buy anything anymore.
Poppycock. Dec. 9 will come and go with nothing more than hype to ramp the markets.
If you liked the October Pre EU crisis rally,
And the let's save the hedge fund managers on the last day of November rally,
You are just going to adore the end of the year everything's better rally.
You forgot the Sept Greece is alright rally.
August Greece is a great place rally and ignore Italy.
So ZHers are taking to naming rallies now eh?
Obama, fuck yeah!
http://hosted.ap.org/dynamic/stories/U/US_TARGETED_KILLING?SITE=AP&SECTI...
Obama lawyers: Citizens targeted if at war with USThe government lawyers, CIA counsel Stephen Preston and Pentagon counsel Jeh Johnson, did not directly address the al-Awlaki case. But they said U.S. citizens don't have immunity when they're at war with the United States.
"Obama lawyers: Citizens targeted if at war with US"
In truth, the US government is at war (being in open rebellion) against we the people.
What is our recourse?????????
What is our recourse?????????
Alliance of WE the people against the US government.
December 9 will come and go with no solution and the markets will rally. MS is ridiculous. The answer to question 1 is "No." Recap what banks are salvagable, let the rest go, and let's move on. Kick out the laggards or disband the entire euroland project, I don't care, and ultimately it won' matter much. The world will in fact go on. People will adjust to the simple, justifiable solution. The way you get revolution/war is by forcing the citizenry into debt slavery and perceived forfeiture of their state sovereignty.
yup
if only the EU could find a lender of last resort, everything would be fiiine!
politically, the EU must now ask itself: what would old baron rothschild do, here?
then they will all live happily ever after and so will humpty dumpty, too!
and the easter bunny!
Germans, Italians, French, and Greeks unite as one and bow down and kiss the ring of the banker elite that is the ECB. It is amazing how much freedom the elite will take from you in the exchange for their banks debt with the guise that this is the only right choice to make. Unbelievable.
Everybody's All.. beautifully phrased.
A true ruling oligarchy that will be honed down to a final (yet another) European anti-Christ.
The US fought the bloodiest civil war over the sovereignty of its states... Club Med nations will not even be able to muster any resistance. Poor bastards.
hey oBLAHma and cohorts! do you really think all your families will be safe? NOT!!!
Please, Santa, let S&P downgrade France today. I have been a good person this year. I just want justice served.
To hell with the ECB, Germans, Italians this will not happen. You 2 lost WORLD WAR 2 and 3/4 of the French rolled over.
The people of Eoupre will go to war over this.
Beginning of the end of the crisis if Fiscal Federalism is achieved?
Hardly
It would once again bypass the critical reset that the global economy needs. The debt level reached will never, can never be repaid. So if the debt is not defaulted on outright as in a reset, the alternative is that it has to be taken out of the hide of the economy. Either through inflating away the debt (with the associated economic destruction) or through such austerity measures (aka decreased standard of living) as increasing taxes, decreasing services and forcing multiple generations to pay.
So bottom line the crisis will worsen under fiscal federalism, not get better. It will morph into a long, drawn out political crisis culminaitng in class warfare, political battles for pwoer and perhaps other types of war. If you doubt the effects of serious austerity, look back to the 1930s before the New Deal programs took the country back from the brink, or look at what happened in Europe where other solutions were sought
I'd have to differ with your opinion that the price fixing, wage controls, and partisan government spending of The New Deal had net positive effects, but you are spot on in your assertion that fiscal federalism will do anything at all but impoverish generations of Europeans. They are way past the point where cuts and austerity will do the job. Mutual defaults are the only way out.
Edit: and that junk is not mine. As always, you earned a green for your insights.
"Europe has to choose between debt assumption (enhanced federal control of national budgets accompanied by centralised funding of governments) and a debt jubilee"
Or they can do nothing. Or they can continue with half-measures. Or they can dissolve the currency and go back to national currencies. Or Ben can bail them out. There are many possiblities.
Personally, I think the jubilee is the least likely of all solutions. Probably the best choice, but near-zero chance of being implemented.
While they may still have options, a debt jubilee is likely to be followed closely thereafter by rioting the likes of which Greece has yet to produce.
I mean, c'mon, the banks forgive each others debts, but shaft the populace (who get squat). Given the level of leverage, everyone would have to forgive everyone hundreds of times over and that would shed light on the darkness that has caused this problem in the first place. The last thing the cockroaches want, is someone turning the light on. Then everyone can see the bug problem firsthand.
Agree half measures will be the vision out of Europe, nobody wants Germany calling the shots which federalism de fact becomes. MS wants federalism so there will be less politicians to bribe, can send cheque to one address.
EXISTENTALISM BABY: do nothing and let someone make the choice.
Lachsman Achuthan of ECRI will be interviewed on Bloomberg on Dec 8 and he will say we are definitely entering into a world wide recession. Of course the pop markets have never heard of ECRI and will go up based on anticipation of EU bailout.
ES 1245: Ben proclaimed it, and it was done. ES will not move 5 points in either direction until Dec 9th--so sayeth Brian Sack. And not a dissenting word from S&P or Moody's shall be heard--so sayeth the Buffet. All will be good.
http://illuminati.org/
Countdown ends on December 7....
where has merkel indicated that her concept of fiscal union includes germany's funding of any other member state? centralized governance, si; centralized funding, nein!
so true
Europe: The Final Countdown: http://www.youtube.com/watch?v=9jK-NcRmVcw&ob=av3e
Bullshit words about enslaving people. That is what they want. More control over them. Push all the debt up to a bigger entity and everyone plays by the bigger entities new rules. That should work out well.
it's called
above my pay grade, or
the buck stops up there somewhere
The issue is simple:
Will Germans be dumb enough to pay other people's debt? or
Will Greeks, etc, be cowardly/stupidity/whatever/ enough to give up sovereigh rights of self-governing?
MS spinmasters et al, all garbage in and garbage out, equals bull shit. Dec 7,9 or 10 will be just another day to fuck you over.
More precisely, Dec. 9 will be another day to screw over the bears who think that December is the end of the line. Anyone stupid enough to believe TPTB won't be ramp the end the year for better numbers just like they did to ramp the November numbers deserves to get wiped out. You can bet your life on it. December will make October look anemic.
"Fiscal Federalism Or Bust!"
It's bust then 'cause that's NOT gonna' happen. If it did, each very different country in the EU would effectively be giving up its sovereignty. If a government doesn't control its own budget, it's not a sovereign. So, it just ain't gonna' happen. And IF unelected EU officials tried to pull that off, you're going to have riots in the streets like you've never seen before.
Something has to happen. Otherwise, we will be on the hook for Europe.
US Yield Curve Rises, Italy/France/Belgium Yields Fall – Simple Swap Cost Lowering or Perceived Bigger Bailout?http://confoundedinterest.wordpress.com
Articulate. here's Mr Mares predicting doom on leaving Moody's in 2010:
http://blogs.wsj.com/marketbeat/2010/08/25/ex-moodys-analyst-beware-fina...
rightful restructure. basically,