Sunday, December 4, 2011

Two Minutes To Midnight

Investing In Canned Goods Might Be Prudent

Map Of Eurozone By Andrew Rae (New York Times, November 30, 2011)

It's difficult to say this without appearing to overstate, but the next week is a critical juncture in world history. The future of the European Union and its official currency, the Euro, is what's at stake. How the dice fall will affect the Western world.

The EU and its constituent leadership have tried coming together twice this year already and failed to find any agreement on how to resolve what has become a crisis not only in bank debt, but sovereign debt. Most of the EU's members have national debts far above their GDP's (the U.S., by comparison, is 'only' at 80-plus per cent).

For America, a failure by Europe's leaders to resolve that crisis will mean very serious consequences for our own fragile economy. I strongly recommend paying attention to what happens.

In as few words as possible: Sixteen years ago, to become a politically united force and reap the benefits of interdependence, Europe (with few holdouts, such as Great Britain) accepted a common currency. This allowed economic and trade cooperation, but maintained the sovereignty of each EU member nation's governments -- and their central banks, each tied to private banks that do business in each country.

Before the crash, some EU member governments had national debts in excess of 100% of their GDP. The EU has seventeen economies and seventeen central banks, each having a loose association with the European Central Bank (ECB), which acts primarily as a clearinghouse for issues related to the Euro. The ECB also had the ability to put together loan packages from banks in the Eurozone if necessary.

When the Made In USA™ 2007 real estate-backed securities / derivative crisis affected those private banks, governments worldwide were advised either protect your banks or face a worldwide financial Armageddon. Like us, their finance ministers and advisors believed they had no other choice but to bail out the institutions which had helped create the crisis.

What were private debts became public. Before the crisis, governments in Greece, Spain, Ireland and Portugal, Slovakia and Italy had been overextended; taking on billions in bank debts made them even shakier. It wasn't long before loan packages from the ECB became necessary -- to shore up the banks, prevent the contagion from spreading.

In the three years since the 2008 collapse of Lehman Brothers, Bear-Stearns and Countrywide Financial, the EU lurched from one crisis to another as Europe's banks (who always seemed to have understated how much debt they really held; surprise!) needed even more "assistance". Then, the ECB began putting loan packages together to shore up the European governments themselves -- Spain, Ireland and Portugal, and (several times) Greece.

These were always intended to be band-aids -- because to qualify for ECB loans (backed primarily by healthier German and French banks), the EU members had to promise to reduce their government debt. The only way to do this was through voluntary Austerity programs: Cutting government programs, civil service wages and pensions, and selling or 'privatizing' government assets.

That would mean a drastic fall in the standard of living and the quality of life for millions of Europeans -- but worst of all, it would mean the economies of Europe would be caught in a vicious spiral of cost-cutting, leading to more businesses closing and jobs lost, leading to more economic contraction. This couldn't be clearer; events and data have already proven it in England and Greece.

Even so, this Austerity has been an unshakable demand of both Germany's Angela Merkel and French President Nicholas Sarkozy, whose nations are not as overextended as the rest of the EU.

Now, all the possible fixes and band-aids that could be applied to the situation through the ECB, and EFSF rescue fund have been done, and it clearly isn't enough. There is a summit of EU leaders taking place in Brussels beginning today, and lasting through December 9th. As David Gow for the UK Guardian reports,
Europe has five days to find a solution to the sovereign debt crisis or else the EU itself will collapse, political leaders warned on Sunday at the start of a week of high-stakes summitry.

Torn between the need for stability and the desire for solidarity, EU leaders have to find an immediate fix for the broken eurozone and embrace a longer-term plan for fiscal union by Friday night...

Senior opposition politicians put severe pressure on French President Nicolas Sarkozy and German Chancellor Angela Merkel ahead of their pre-summit talks in Paris on Monday to approve a "grand bargain" or, at least, workable plan that will gain the support of partners such as the US.

Timothy Geithner, Treasury secretary, will be in Europe for talks all week.

Sarkozy's main opponent in next spring's presidential election, socialist leader François Hollande, accused him of caving into German demands for a new EU treaty on budgets that was bound to fail, exacerbating French weakness in an unbalanced relationship with Berlin and ignoring the need for immediate solutions.

So far, Merkel's notion of what's needed is a rewriting of sections in the European Union Treaty itself -- making economic policy a permanent part of the political association. For Europeans who still remember a Europe dominated by a resurgent (nazi) Germany, the idea that the EU will be redefined and effectively led by Die Deutschen is uncomfortable.

Merkel has resisted the possibility that the next level of 'fix' for the crisis lies through the issuing of 'Eurobonds' -- treasuries which could be traded on the international market, bought by the world's financial community and other non-EU governments (like the U.S., say, or Saudi Arabia, or China).

That wouldn't require a rewriting of the EU Treaty, but might demand that EU member governments would give up some amount of control over their own economies -- to the ECB, or some special EU commission -- and again, there are many in Europe who don't (as they see it) want to give the Germans, with the French as their handmaidens, that much power over their sovereign states.

Another aspect of issuing Eurobonds is, would anyone buy them? The most recent auction of German treasury bonds was almost a failure; Italian treasuries sold, a little, but with higher interest rates. 'The Market', which EU ministers want to calm and give assurances to, seems not to trust the ability of EU governments to make good on their issuance of debt.

And underneath every plan to save the day, Austerity is the only hope.
Philipp Rössler, economy minister, rejected eurobonds outright but Günter Oettinger, an EU commissioner and member of Merkel's CDU, said they could not be excluded categorically.

Mark Rutte, Dutch premier, said: "It is really important that the markets see that Europe is prepared to help the countries in trouble, so long as those countries commit to very tough reforms and austerity programmes."
And there are no shortage of shills for Austerity as a morality play here at home. Jonathan Chait in the NYT ("Godzilla vs. Bambi, Op-Ed Edition", December 2nd) compared the bullshit views of Little Davey "Bucky The BoBo Beaver" Brooks with that of Nobel-winning economist Paul Krugman:
David Brooks today devotes his column on Europe to the familiar conservative morality tale, in which the European countries in trouble are paying the price for their slothful, profligate ways:
Over the past few decades, several European nations, like Germany and the Netherlands, have played by the rules and practiced good governance. They have lived within their means, undertaken painful reforms, enhanced their competitiveness and reinforced good values. Now they are being brutally browbeaten for not wanting to bail out nations like Greece, Italy and Spain, which did not do these things, which instead borrowed huge amounts of money that they are choosing not to repay.
Does anybody else on the Times op-ed page care to rebut this? Perhaps somebody who has glanced at the relevant data? Yes, you there, the bearded man with the Nobel Prize in economics:
How did things go so wrong? The answer you hear all the time is that the euro crisis was caused by fiscal irresponsibility. Turn on your TV and you’re very likely to find some pundit declaring that if America doesn’t slash spending we’ll end up like Greece. Greeeeeece!

But the truth is nearly the opposite. …

Only Greece ran large budget deficits during the good years; Spain actually had a surplus on the eve of the crisis.
On his blog, Krugman also has a chart showing that Italy and Spain both had shrinking debts as a percentage of GDP in the dozen years before the crisis.
The global financial system is so deeply interwoven by counterparty obligations, derivatives, and the Great Overnight Tides Of Financing which allow so many institutions to appear solvent (MFGlobal, no?). The amount of debt which banks and governments are attempting to deleverage themselves from is so vast (and among governments, growing by month, quarter and year) that all the best-laid plans seem nothing more than misdirection, a kick-the-can-down-the-road, Three-Card Monte scheme to buy a few more months or weeks.

So, too, Europe. I just don't have any confidence the current situation can end well. Issuing Eurobonds may temporarily increase 'market confidence' (expect 'big gains' in the Dow and SPX if it happens) and might work as a foundation for a more permanent solution, if there were wise men and women at the helm.

But there aren't. Merkel and Sarkozy, and supporters (such as England's Conservatives, busy running Britain into the ground), demand Austerity from the simple folk -- that the EU's citizens pay for the failure of their governments to protect them from the very financial institutions which participated in a global ponzi scheme, and are now being defended by those same governments -- and only governments who "commit to very tough reforms and austerity programmes" will be taken seriously. Get with the programme, you Keynesian heretics.

(Otherwise, they may have to fall -- as they did in Greece, and Slovakia, and Italy. Now, Papandrou's government was politically unpopular; and Corrupt Clown Prince Berlusconi was a self-perpetuating joke. And, Sarkozy did say that 'regime change' was not the intention of EU economic policy. Even so...)

To be fair, Merkel and Sarkozy, et Cie, are trying to maintain a political European Union, and at the same time address the reality of seventeen nations, independent, but financially interdependent through use of the Euro.

The single currency bound Europe in better times, and holds its members hostage in crisis -- in the same way seventeen people, trying to escape a burning building, are hobbled by being tied at the ankle to a single chest full of Euros. It will take all seventeen to pull the Eurochest out of the building before it collapses; they'll be burned but alive, though financially damaged. But if one or more of them untie themselves from the Euro and run for it, they may all may die.

As EU member states hand over some control of their sovereign finances to the EU in exchange for a promised security, the resulting loss of growth -- precisely what's happened in England -- will strangle Europe's overall economy. The only security will be for the financial houses or Europe, and America. And a very small percentage of the world's population; the Owner Class.

Again -- as in our own country -- citizens of the EU will pay, for generations, for the sins of a relatively small group of greedy, rapacious, financial oligarchs.