Guest Post: The Growing Pressures Likely To Blow The Eurozone Apart

Tyler Durden's picture

Submitted by Chris Martenson of Peak Prosperity,

There was yet another European Union summit at the end of June, which (like all the others) was little more than bluff. Read the official communiqué and you will discover that there were some fine words and intentions, but not a lot actually happened. However, there are some differences when compared with past meetings that need explaining:

  1. The European Council is being asked to consider permitting the European Central Bank to have a regulatory role alongside national central banks “as a matter of urgency by the end of 2012.” When this new super-regulator is eventually established, perhaps the ECB might be able to recapitalize banks directly. This was needed three years ago; the Eurozone will be lucky not to have a new banking crisis in the next few months, let alone by the year-end.
  2. A bail-out for Spain’s banks is agreed in principle, but it is to be funded by the European Financial Stability Facility (EFSF) until the European Stability Mechanism (ESM) is up and running. The EFSF has no money and relies on drawing down funds from all member states including Greece, Spain, Italy, Ireland, and Portugal, and the chances of the ESM being ratified by the individual Eurozone parliaments is very slim. We are told that Spain’s banks need about €100bn, but how much they really need is not known.
  3. The ESM will not rank as a prior creditor to the disadvantage of bond holders. This is a positive step, but makes it more difficult for national parliaments to authorize the ESM.

The big news in this is the implication the ECB will, in time, be able to stand behind the Eurozone banks because it will accept responsibility for them. This is probably why the markets rallied on the announcement, but it turned out to be another dead cat lacking the elastic potential energy necessary to bounce.

It was, however, the first Eurozone summit for France’s new President, Hollande. He was elected on a far-left socialist ticket, which has job protection as its top priority. Hollande and Chancellor Merkel disagree about this, with Merkel looking to eventually get some of her electors’ money back.

Hollande has already implemented some economically destructive policies for France, but this is because politics in a planned economy are always more important than economics -- until reality intervenes. On this basis, reducing the retirement age from 62 to 60 is justified, as are taxes (on property inheritance and income) that could not have been better planned to drive out the rich. The proposal to introduce a Tobin tax on bank transactions -- which was also his predecessor Sarkozy’s objective -- becomes the right thing to do, in spite of the fact that all transactions will simply be enacted elsewhere, costing jobs in Paris’ banking community. Hollande’s call for the issuance of Eurozone bonds backed by every government in the Eurozone is merely politicking, because the reality is that few outside the Eurozone will buy them. It is not just Hollande; the refusal of politicians around the Eurozone to really cut government spending has its roots in a common destructive policy of intervention that has led the Eurozone into such misery. Politicians are now helpless in the face of the crisis for which they are responsible, and they can only fall back on policies of yet more spending and economic destruction. Instead of seeking to understand market reactions through the application of economic logic based on reality, they blame markets for not buying into their crackpot schemes. And every Eurozone summit succeeds in exposing this truism to an increasingly skeptical world.

Meanwhile, Germany, meant to be the back-stop for this lunacy, is losing patience. It has become clear that the agreements that arose out of the June summit were not agreements at all. Chancellor Merkel only agreed to things she knew would not be ratified by the German political establishment. Even the German President, Joachim Gauck, in a TV interview on July 7th, took the extreme step of calling for Merkel to justify staying in the euro and to explain why it is vital for Germany to save it at great and increasing expense to taxpayers.

At the same time, nothing is being done to stem the capital flows into Germany from Greece, Italy, Portugal, Spain, Cyprus, and Ireland -- capital flows that starve the banks of deposits and increase the likelihood of banking failures in those countries.

The short-term solution to this and other pressing problems has been for the ECB to ease monetary policy further.  It reduced interest rates on July 5th. You might as well play tennis with a feather duster, because a notional reduction of borrowing costs by 25 basis points for banks in the stricken countries solves nothing.

Meanwhile capital flight, as people try to find some protection, still accumulates in the stronger countries, particularly Germany. This is reflected in TARGET 2 balances, which, for the Bundesbank, is shown in the chart above. TARGET 2 is the cross-border Eurozone settlement system for larger transactions, and reflects the net difference between cross-border imports, exports, and capital flows. In normal circumstances, capital flows can be expected to balance trade flows, and this was true until July 2007; since then, there has been an acceleration of capital leaving the periphery countries. The balance at the Bundesbank as of end-June was €729bn, which is going for a trillion dollars and does not include the accumulation of savings in Germany from other Eurozone residents.

Current State of Bail-Outs

Just to recap, there are now five countries that have sought bail-outs. They are Ireland, Greece, Portugal, Spain, and Cyprus. To this must be added Italy and Slovenia, both of which are in difficulty. The problem is made more acute because they have all committed themselves to guaranteeing the funding of the EFSF (the ESM does not yet exist but is expected to do so eventually on a similar basis), meaning that they have to contribute to their own bailouts or request a suspension of their commitments from the other guarantors. Ireland, for instance, decided to raid state pension funds to meet her contribution in her own bail-out.

The EFSF guarantees are shown in the following table.

The countries that have been given bailouts are Ireland, Portugal, and Greece, for totals of €17.7bn, €26bn and €179.6bn respectively, including pending disbursements. Think of the effect on other countries in trouble having to raise funds in the bond markets: Spain has had to contribute or commit €26.5bn, which it currently has to fund at 7% and lend to these three countries at about 3.5%. This is over one quarter of the bail-out Spain is seeking for her own banks.

This is obviously crazy.

If we look at the guarantees of all those who are receiving bail-outs, requesting one, or are likely to need one, they total 41% of the fund. This eventually has to be covered by the other guarantors, principally Germany, France, and the Netherlands. While it would be a mistake to underestimate the political tensions this causes in these states, these countries are at least committed to the European cause, and we can assume their politicians will continue to fight to support the Eurozone’s objectives and institutions for as long as possible. A rebellion is more likely to come from elsewhere.

There is less drive behind paying for the status quo in the smaller nations, such as Slovakia, who are relatively new to the European Ideal. While Slovakia is unlikely to make too much fuss, the same cannot be said of Finland, who offers the greatest danger of an exit altogether. She has been sufficiently worried about previous bail-outs to independently seek preferential terms from the recipients. In her alliances, Finland regards herself as Scandinavian first and European second. The other Scandinavians are not in the currency union, and the richest state, Norway, is not even in the EU. Denmark manages its currency to maintain an approximate rate against the euro, so why cannot Finland do the same, without all the liabilities?

Increasingly, public opinion in Finland is that membership of the Eurozone is becoming an unjustifiable burden. The country lacks the historical imperative to pursue European integration and is far more likely to be the first to leave the Eurozone than other candidates frequently mentioned, particularly Germany.

The questions arises:  How can the Eurozone stay together, and if not, how quickly is it likely to start disintegrating? And where does the exchange rate for the euro fit in all this?

We address these and other related topics in Part II: The Consequences of a Eurozone Breakup.

Click here to access Part II of this report (free executive summary; paid enrollment required for full access).

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Debtonation's picture

I am strongly opposed to a one world government and a one world currency!

giovanni_f's picture

many think like you do. That is why more and more countries abandon the US-dollar.

The Monkey's picture

Good try, but traders have Apple and the Fed in their sights. Money is coming off the sidelines to again chase high beta and high yield.

Risk on!!!

TruthInSunshine's picture

It's very hard to predict, because price action often literally defies all logic, what is to be. As just one example, I give all the shining beacon of monster currency moves among developed nation, to wit, Japan.

Japan is likely the most indebted developed nation state on earth, occassionally swapping places with Britain, and it has spent more money on infrastructure and other 'fiscal' as well as monetary stimulus than any other nation on earth for the last 20+ years, and yet its currency has dramatically inflated in value versus both the euro and USD during that period.

Some will explain this by delving into the demographics and captured buying pool that Japan has for its debt, but I'm not so sure that these factors can rationally explain away the seeming irrationality of the currency behavior.

That said, I expect to see the euro depreciate rapidly over the next year & I think we'll see USD/EUR parity shortly. It's only by this method  that they'll be able to keep the EU cobbled together, in whatever form it remains, period. The PIIGS all need a massive dose of comparative/competitive advantage to boost their exports if they ever have a snowball's chance in hell of servicing their minimum debt payments.

1000pips's picture

Be ready for a complete 180 by Germany. The power of the Rothchild's are about to bail out the EU. If Merkel has to be sacrificed, she won't be the first. The Rothchild's Own Europe-especially Germany. The EURO is much stronger than the USD because of them.

TruthInSunshine's picture

If the EU is "bailed out," they're planning on tripling The Bernank's efforts over the last three years, and then some, which doesn't bode well for euro strength.

But I guess I could be missing something........

Raymond K Hessel's picture

It's raining balls here in NYC.  I junk myself for being off topic.  But, it's getting ready to go full tornado soon.

HD's picture

God is short S&P and he's pissed...

Al Huxley's picture

At least he can do something about it.

The Monkey's picture

It occurred to me tonight, after reviewing the auctions, that the S&P could easily blow through the top (1422). While not a game changer, the reduction in rates is going to put a positive tone in markets for some time. Add some stimulus, esp from China, and we're off to new highs.

I think we have seen all the correction we are going to get for some time. This may have a surprisingly strong risk leg ahead.


Timmay's picture

Will Germany side with Putin or Obamney when the bullets start flying?

giovanni_f's picture

chances are that they will side with the puppet on duty of the U.S. of Sheeplestan

The They's picture



That's always been the question hasn't it! The first and second war were always about dividing the germans from the russians/east in favor of the anglo-american alliance.  This war is no different.  but this time... the results may be revolutionary....

CrashisOptimistic's picture

With all Germany's nuclear power plants shut down and winters being cold, they will side with their source of natural gas, and that's east, not west.

cynicalskeptic's picture

Simply by 'sitting out' the next conflict (the smart move) means Germany sides NOT with the US trying to avoid entanglement in the US efforts to prolong world domination - long term probably Europe's best move.  The US will try WWIII against the 'Islamic' (OIL) world but it's not going to work out well - look at the clusterfook Iraq was.

The real 'end game' is China and the growing nations of Asia and South Asia vs. the old western powers - the US/Britain.  

Ultimately, Russia is rich in resources but otherwise out of the game.   They don't have the manpower, military or finances to be the world player they once were (a role which bankrupted them). They can use some muscle in the Middle East and elsewhere but in the long run Siberia (officially or defacto - like Australia) willl be a Chinese source of raw materials.

LawsofPhysics's picture

There are no "guarantees" in life, get the fuck over it and hedge accordingly.  Especially in the current lawless economy we have now.  Possession is the fucking law now. At the end of the day, every choice you make is a hedge of some sort anyway.  Soon, consequences will return for everyone, as opposed to just "the little people".  Fucking bring it.

graneros's picture

Yea a +1 for common sense. But I'll tell ya you say "Possession is the fucking law now." well I say it always has been.  I disagree with the "Fucking bring it" statement though.  I don't care how prepared you are the changes that are going to hit us will be devastating.

LawsofPhysics's picture

You are correct.  No one will make it alone (potential for propaganda to justify a one-world government, beware).  Like-minded, well-prepared, trustworthy, and well-armed neighbors my friend.  Give me liberty (everyone suffers real consequences for their actions) or give me death.  The "bring it" statement relates more to those who have not had to suffer real consequences.  FYI-having your bonus cut from 50 million to 25 million is not a real fucking consequence.

graneros's picture

Yea you can definetly be my neighbor.

sdmjake's picture

Amen. (agree and disagree accordingly as well) While I relish a 'societal reset' and a return to common sense, I dread the process.

"The pain of war cannot exceed the woe of aftermath" ~Battle of Evermore/LedZep

graneros's picture

I started typing something like that to LoP but it got too long and convaluted so I nixed it.  You put it far more succintly. Well said.

nobusiness's picture

They should have put their money in SPY, they would be out of debt by now.

Bastiat009's picture

Last summer, it was the end of the US$ because of the debt ceiling thing in the US.

This summer, it is the end of the euro.

Well, if you bought US$ last summer, you made a good move.

Ineverslice's picture


This guy's batting average is well below the broken clock's. 

Spitzer's picture

The government net borrowing of the Eurozone as a whole amounts to only 11% of total government expenditures.

Its over 20% in the dollar zone.

Euro bottom is in, dollar is gonna get smoked

LawsofPhysics's picture

time to buy anything, except the dollar.

silverserfer's picture

we are at LEAST 46 more vague articles with simple exponental curve charts away from any real significant financial colapse.

LawsofPhysics's picture

especially once you realize that the "wealth" isn't real or even there to begin with.

bank guy in Brussels's picture

One does wonder whether the new French President Hollande is a Trojan horse enacting extremist policies to blow everything up on purpose, to sabotage the French and European 'social model', dynamiting the economy and then saying well we have to terminate many social benefits.

Could be that Hollande and Merkel, for all their 'opposition', are really working for the same 'blow up Europe' team ...

It has been paradise here for many years and it does not need to end ... but the EU leaders seem hell-bent on doing it

Whiner's picture

Hail Citizen! We have here in Amerika an elected President who is definitely moving us to the edge of the cliff. It is a race to see which implodes first: your beloved EU or our once mighty USA aka IOU. The odds Here are it's you, but I am taking them on---- in Euros.

Anusocracy's picture

Hollande is a true believer.

His actions reflect how his brain is wired.

1eyedman's picture

only through great stress or disturbance can signigicant change occur.  once the great stress occurs then the 'leaders' can come in and 'save' us....but only if there is fiscal unity, a euro president, euro wide taxation and the ecb in control of all of euroland's banks....or it might take a civil war like the US

BigJim's picture

 ...It has been paradise here for many years and it does not need to end

LOL, yes, we can all keep living beyond your means forever.

graneros's picture

"how quickly is it likely to start disintegrating?"

Well I'm surely not the sharpest tack in the box but I can answer that one:  IT'S ALREADY BEGUN.

RobotTrader's picture

Futures are surging on this news, thanks to earnings misses from:





The Monkey's picture

Now the bad news is priced in. With the miss and lower expectations, prices are spring loaded.

Darth Hayek's picture

Heh.  At this point I half expect the Germans will walk on the Euro before the Greeks will.

It's all about what your interests are...and sooner or later, the Germans will figure out they aren't bankrolling a continent that hates and fears you.

Piranhanoia's picture

fier mark/euro,   3.75,  shiesse,  3.50,  3.25,  2.75,   shiesse,  2.5,  shiesse, merde,  mierda.

New_Meat's picture

"Hollande has already implemented some economically destructive policies for France, but this is because politics in a planned economy are always more important than economics -- until reality intervenes."

After following ZH for a while and commenting to the lad, Young_Meat has taken it to heart that economics are economics, and the marketing+political representation of reality are fubar'd.

one _Meat at a time.

- Ned

BurningFuld's picture

The question is: "Why do we need one currency?" Now that we have these funny things called computers that are quite capable of doing exchange rates and everyone Banks on line and pays with plastic. Oh ya because Banks want like 2 to 3% to change your money. WTF? is that? Why not let every country have their own currency and enact a law that you can only charge a 0.01% fee to change currency. I mean come on computers do it all anyhow. There is no way you can convince me it costs any more than nothing to do it right now. Is that not a slightly cheaper idea than all this joint united currency Bull Shit?

q99x2's picture

If they need money they have all that flight money to use now so what's the problem? The banksters still have the money. Real flight money doesn't go to Bundesbanks it goes into gold and silver and sometimes nickels and art.

kito's picture

Euro is going nowhere. It will be here for the long haul. Europe is merely a distraction from real issues like japan and u.s.......

GlomarHabu's picture

The EU concept defied centuries of European history and basic soverign interests; to survive. It was doomed from the beginning, worthy of  Terence, the Roman playwrites' first effort, Andria , a comedy. In it a character,Simo declares, "veritas odium parit" ... truth breeds hatred.

Today the EU remains a comedy and it's true condition is breeding hatred.