Deflation, particularly the dreaded debt deflation that Central Banks fear, is fast spreading throughout the financial system as the European banking system collapses.
Indeed, the EU, in its current form, is most certainly in its final chapter as both the political environment and market conditions have rendered all proposed “solutions” to the crisis moot.
To wit, the most recent proposals from EU leaders are:
1) To draft new budgetary requirements for EU members.
2) To move the launch of the Emergency Stability Mechanism (ESM) one year ahead of its original launch date to July 2012.
3) To send the IMF 200 billion Euros to use as aid in dealing with the EU Crisis
The media hailed these proposals as a bold step towards solving the current EU Crisis. However political and market realities show all of these proposals to be absurd, if not impossible.
Regarding #1, the EU already had budgetary constraints via the 1991 ratification of the Maastricht Treaty (all members were to maintain Deficit to GDP ratios lower than 3% and Debt to GDP ratios lower than 60%) which NO ONE has followed (not even Germany). So how does a new set of budgetary requirements change anything?
Secondly, in order to enact these new budgetary requirements, there needs to be unanimous consent from all EU members. Even if there was unanimous consent here (there isn’t nor will there be), basic math shows these new budgetary requirements to be pointless: how on earth does anyone expect a country like Greece, which is still bankrupt after two bailouts and quite a bit of debt forgiveness,
to get its budget under control (hint: it would have to wipe out at a minimum 50% of ALL of its outstanding debt).
As for the proposal to the move the launch of the ESM a year earlier... the EU has already failed to fund ONE bailout fund (the EFSF hasn’t been able to raise even ten billion Euros in capital). So the idea that launching a second bailout fund earlier than originally intended is pointless.
The final and most absurd proposal concerns EU nations sending 200 billion Euros
to the IMF for use in combating the EU Crisis. Setting aside the fact that this is completely insane (bankrupt EU countries are going to give money to the IMF to bail out other bankrupt countries?!?!), the political environment in Europe won’t permit this to happen.
Case in point, Germany’s Bundesbank (its central bank) which is the real de facto monetary backstop for the EU today, has said it will send additional funds to the IMF
ONLY IF:
1) The German parliament agrees to the move (it won’t)
2) Other EU members do the same (who has the funds?!)
3) Other, non?EU members do the same (how could this work? No one in the
G20 let alone the EU wanted to send money to the EFSF!!!)
In simple terms, the Bundesbank is willing to give more money to bailout Europe if everyone else in the developed world does the same. This is a strong signal from
Germany that the money tap is being closed off and additional funds are not forthcoming: the Germans know there demands are impossible to meet.
We get confirmation of this from recent developments in the German legislature:
German parliament wants more say over EU deals: report
German lawmakers from Angela Merkel's coalition want more say in
agreements made with European partners, a paper to be presented to MPs
says, firing a warning shot to the chancellor that all major deals to save
the euro zone must go past them first.
The paper, approved by parliamentary floor leaders from Merkel's Christian
Democrats (CDU), the Christian Social Union (CSU) and Free Democrats
(FDP), calls on the government to inform and consult parliament when
they deal with EU issues or involve the use of EU institutions.
http://www.reuters.com/article/2011/12/12/us?eurozone?germanyparliament?idUSTRE7BB1RV20111212 [10]
So while German leader Angela Merkel talks about moving forward to maintain the
Euro, the German political landscape is rapidly becoming less concerned with the EU and more concerned with domestic issues.
Folks, the bailout funds aren't coming. Germany is just buying for time. The reality is that the Powers That Be can't even fix the Greek issue... and there's absolutely no way they can manage Italy or Spain. As soon as the market begins to realize this we're going down down DOWN.
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