Tuesday, May 29, 2012

Chicken Little And The Eurozone

Whither Europa?

The Baseline Scenario (a financial blog you should be aware of) recently posted an article (The End of The Euro: A Survivor's Guide) by Peter Boone and Simon Johnson, describing as inevitable the implosion of the Euro.
The ... European Commission (EC), European Central Bank (ECB), and International Monetary Fund (IMF) has proved unable to restore the prospect of recovery in Greece, and any new lending program would run into the same difficulties....

... the Greek failure mostly demonstrates how wrong a single currency is for Europe. The Greek backlash reflects the enormous pain and difficulty that comes with trying to arrange “internal devaluations” (a euphemism for big wage and spending cuts) in order to restore competitiveness and repay an excessive debt level.
This is the result of the principle of Austerity, of forcing huge budget cuts on 'profligate' EU member nations through their governments, as a precondition to qualify for loans to (first) prop up their banks, and then, their governments' sovereign debt.

Through it all, the 'Greek Problem' was advertised as Europe's worst. Europe and the rest of the world watched as one Greek financial crisis was temporarily stemmed by band-aids made from hastily-patched-together ECB- and IMF-brokered loans. But no matter what was done, there was always another crisis, another loan, and even more draconian demands by the Austerians to cut more civil service workers and sell even more national assets to the Oligarch class of investors.

And, Austerity was the inviolable principle upon which the future of the European Union (through the Euro) rested. There would be balanced budgets and, after a period of 'pain' suffered by its citizens, Europe would find a sustainable prosperity while the US and Asia continued generating deficits and increasing national debts.

The Greeks were stunned by how much of their quality of life at least two Greek coalition governments were prepared to negotiate away. Eventually, state-owned monopoly businesses were being sold off to Oligarchs; it was suggested even the nation's ancient cultural artifacts might be sold. Ultimately, we were treated to the spectacle of Greeks rioting in the streets of Athens -- several times -- while elections (under immense pressure from outside the country) voted in new Greek parliaments whose representatives who would vote to accept the ECB-IMF terms -- the Austerity cuts -- to receive bailout loans, which would reduce the quality of life for Greek citizens even further.

And this scenario has played out twice in the past five years. It's about to occur again. But now, after years of financial reporting since the 2008 Crash, it has become clear that Austerity is a failure, a plague which kills economic growth. And finally over the past few weeks, the Greeks and the French spoke loudly at the ballot box: Enough.

EU leaders and financiers have begun to try and make Greece's leaving the Eurozone sound like it's an inevitability with a silver lining. The Greeks simply will not bring their spending under control, even after all the assistance good, frugal Europeans have given them -- so, let them go! It's for the best; and after that the EU can go about the business of rebuilding itself... under the banner of Austerity, or course.
Faced with five years of recession, more than 20 percent unemployment, further cuts to come, and a stream of failed promises from politicians inside and outside the country, a political backlash seems only natural. With IMF leaders, EC officials, and financial journalists floating the idea of a “Greek exit” from the euro, who can now invest in or sign long-term contracts in Greece? Greece’s economy can only get worse.

Some European politicians are now telling us that an orderly exit for Greece is feasible under current conditions, and Greece will be the only nation that leaves. They are wrong. Greece’s exit is simply another step in a chain of events that leads towards a chaotic dissolution of the euro zone.
The European Central Bank has claimed that the financial deals it has created to support the problems of Greece, Spain, Italy, Portugal and Ireland, are sound. But according to Boone and Johnson,
...the euro system claims on troubled periphery countries are now approximately 1.1 trillion euros (this is our estimate based on available official data). This amounts to over 200 percent of the ... capital of the euro system. No responsible bank would claim these sums are minor risks to its capital or to taxpayers.

These claims also amount to 43 percent of German Gross Domestic Product, which is now around 2.57 trillion euros. With Greece proving that all this financing is deeply risky, the euro system will appear far more fragile and dangerous to taxpayers and investors...

We agree: Once it dawns on people that the ECB already has a large amount of credit risk on its books, it seems very unlikely that the ECB would start providing limitless funds to all other governments...
The financial crisis in the Eurozone for the past five years has followed this pattern: An economy in crisis in the Republic of [Fill In The Blank], followed by their promises to "adhere to the principles of Austerity", followed by loans organized by the EU. Then, an identical crisis somewhere else or in the same place, and more promises of austerity followed by another loan.

But while it's interesting to understand some of the nuances in the labyrinth of international finance, let me skip the boring details and go right for the meat, as Dogs tend to do:
  • This pattern of crisis isn't sustainable. At some point, through a combination of human error, regime change at the ballot box (a la France and Greece), malice or Acts Of God, the ECB and IMF will not be able to arrange financing necessary to keep the Eurozone whole.

  • Given enough time, the international banking and investment structure would like to "unwind" all the debt that was created before (and after) the Fall of 2008. Unfortunately, their method -- there, as over here -- is to slowly and carefully shift that debt burden from private corporations to The People. Only, there isn't enough time; there is far too much debt to be hidden or passed along.
Too many Europeans understand that they are paying for the greed and sin of the Banksters, and they will at some point say Basta!! This is almost an inevitability -- and what, exactly, it will do to the world economy depends on how willing European politicians and Banksters are to deal with the reality that the Euro's days are numbered.

If human nature is constant (and sadly, it is), you can see the coming months as a large number of EU politicos, American and international corporate financiers all fight a long, bloody rearguard action to stave off the collapse of the Euro system salvage as long as possible. It doesn't have to be this way -- but blindness and bloody-mindedness seem to be the order of the day.
For the last three years Europe’s politicians have promised to “do whatever it takes” to save the euro. It is now clear that this promise is beyond their capacity to keep – because it requires steps that are unacceptable to their electorates. No one knows for sure how long they can delay the complete collapse of the euro, perhaps months or even several more years, but we are moving steadily to an ugly end.

Whenever nations fail in a crisis, the blame game starts. Some in Europe and the IMF’s leadership are already covering their tracks, implying that corruption and those “Greeks not paying taxes” caused it all to fail. This is wrong... We cannot blame corrupt Greek politicians for all that.

It is time for European and IMF officials, with support from the US and others, to work on how to dismantle the euro area. While no dissolution will be truly orderly, there are means to reduce the chaos... Most importantly, Europe needs to salvage its great achievements, including free trade and labor mobility across the continent, while extricating itself from this colossal error of a single currency.



MEHR: ... So, don't believe a Dog when he tells you the Eurozone is goin' down! How about the chief executive of the EU's version of the Fed, the European Central Bank?
FRANKFURT — The president of the European Central Bank, Mario Draghi, warned Thursday that the structure of the euro currency union had become “unsustainable” and criticized political leaders who he said had been slow to respond to a regional debt crisis now well into its third year...

Greece, progenitor of the debt debacle, is in political turmoil once again, and this time it is in danger of dropping out of the euro zone altogether. Spain, with one of the region’s largest economies, is in the grip of a banking crisis, and there is a growing sense that the danger to Spanish banks is of an entirely different order of magnitude from that in suffering but small Greece.

The clearest danger signal may be the euro currency itself. It is at a two-year low against the dollar, as investors who can do so are pulling money out of the euro region.

U.S. officials are also displaying increasing concern. President Barack Obama spoke with European leaders by video conference this week and the U.S. Treasury Department dispatched a senior official, the under secretary for international affairs, Lael Brainard, to Berlin and other European capitals to get the message across.
Any questions?