Tag Archives: european economic and monetary union

Looking ahead to see the new shape of Europe

Summary:  The slow fire in Europe slowly moves to a conclusion.  From America we cannot foresee what will happen because the news media paints it as a morality play, obscuring the dynamics at work.  While we cannot predict which path the peoples of Europe will choose, we can at least understand the causes of the crisis (it’s not a morality play) and the two alternatives.  See the comments for updates.

European elites still hope the current crisis drives Europe to unification.  The slow-building deterioration since August might result from a conscious decision, allowing events to spiral down, so that the eventual crisis (coming soon) provides the political conditions for bold policy action.  Unification amidst mass panic.

Prime Minister Merkel tours Europe advocating unification, requiring large changes to the treaties defining the Union.  It’s easy to see why German’s elites support unification.  Germany used the European Monetary Union to impose interest rates optimal for Germany — with terrible effects on Europe’s periphery.

  • Germany got strong growth and low inflation — at the cost of large loans to the periphery.
  • The periphery enjoyed strong consumption facilitated by low interest rates — at the cost of large debts to the core EU nations.

That regime crashed, forcing either fragmentation or unification.  Unification looks easier for the periphery, with fewer uncertainties compared to the leap into the darkness outside the EU.  Plus Germany and France (desperate to save its banks) exert fierce pressure.  The combination of bullying and fear might produce some form of unification.

The next step:  a fiscal union

The news media acts as a mouthpiece for the financial industry, so we hear little but the wonderfullness of unification.  Understandably so, since the banks see unification as another bailout of their potentially lethal loans to the periphery.  Sometimes they explain the perspective of anti-unification German, and of the “technocrats” in the periphery who do the bidding of Germany.

The banks want immediate monetization by the EMU of sovereign debts.  That’s not going to happen.  A limited monetary union before political union was a bold gamble (now failed).   A full central bank — able to directly finance national spending — without central fiscal control would be deranged.

The next step towards unification means central control (in effect, German control) of individual nations’ fiscal affairs.  Since Germany used the EMU to rape the periphery (albeit with their ignorant consent), they should expect Germany to do it to them again in a fiscal union.  As the AA teaches, insanity is repeating ones actions but expecting a different outcome.

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Will Italy stay in the Euro-zone?

Summary:  The strong often believe that the weak have no choice but to stay in the game (however rigged) and accept whatever cards they’re dealt.  While logical, the weak often have the ability to turn the tables.  So it is with creditor nations, who often confuse the power of loans with that of tanks — and confuse the morality of the Beatitudes with the claims of a promissory note.

Trouble rather the Tiger in his Lair than the sage among his books. For to you Kingdoms and their armies are things mighty and enduring, but to him they are but the things of the Moment, to be overturned with the turning of a page.
— Ancient wisdom, source unknown — it applies even more to loans than armies

Creditors often assume that they have both worldly power and moral superiority over their debtors.  Only God can judge the latter, but history suggests that the former is wrong.  Nations that accumulate large debts are locked in a system of trade imbalances which make them as or more vulnerable than their debtors.

  • The US was a large creditor in 1929, and fell harder than most during the Great Depression.
  • Japan was the world’s top creditor in 1989, and still has not recovered from the following bust.

Now it’s Germany’s turn.  They prospered from exports to the PIIGS which it financed with loans.  Now they expect the PIIGS to suffer depressions in order to repay the loans, threatening expulsion from the euro-zone to any who default.  The consequences of that are unknowable, but certainly traumatic.

But fear of the unknown might not deter one or more of the PIIGS, as default and devaluation may provide a new start — and be the best path to the future.  Here we look at Italy.  We cannot predict what they will do; we cannot see beyond choices the people of Italy have not yet made.

Contents

  1. Italy is bust
  2. A more detailed analysis, same conclusion
  3. Barclay’s runs the numbers, gets the same answer
  4. Roubini asks if Italy wants to stay with the Euro?
  5. For more information

(1)  Italy is bust

Italy  is bust; it’s just a question of when“, Matthew Lynn, MarketWatch, 8  November 2011 — “Italy has a lot of debt and a lifeless economy … and faces three big problems.”

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Europe begins its endgame. Watch and learn, for Europe’s problems are the world’s.

Summary:  The endgame for Europe (in its current form) probably has started.  Like birth, nobody what comes next.  Will the process be easy or difficult?  Fast or slow?  Produce an angel or monster?  Here we make some guesses.  Pay attention, as Europe’s travails mirror those to come for the world.

Contents

  1. The present:  rising stress
  2. What comes next?
  3. The lesson Europe offers to the world
  4. For more information

(1)  The present:  rising stress

In a troubled marriage the first mention of divorce can spark its dissolution, as the partners protect themselves by grabbing assets and consulting attorneys.  Something similar afflicts the Eurozone.  The G-20 conference was advertised as the last chance to save the Eurozone.  After it passed with no strong action, Greece’s PM proposed a referendum — in response to which Germany’s PM threatened to eject Greece from the EMU.

Now they have taken the next step, making contingency plans.  “French and Germans explore idea of smaller euro zone” (Reuters).  “Merkel’s Party May Adopt Euro-Exit Clause in Platform, CDU’s Barthle Says” (Bloomberg).  Italian bond yields have spiked up in response to the increased risk of default.  Next will come capital flight from the PIIGS to safer lands.  Such things will destabilize Europe.  If continued the current structure will collapse, forcing either unification or fragmentation.  Most experts bet on the latter, although anything is possible.

(2)  What comes next?

The news media describe the European crisis — like they do almost everything — as a morality tale.  Strong northern Europeans sell their fine manufactured goods to their swarthy southern neighbors (loaning them the money to do so).  We consume these tales like children.  In fact all these nations did well until they joined the EMU.  Only after 2000 did the debt for goods trade develop, the inevitable result of a monetary regime designed for Germany wrecking the competitiveness of the southern members of the EMU.

The outcome might disappoint those in the audience hoping for a victory of goodies over baddies.  The likely fragmentation of Europe might mean devaluation and default by some of the PIIGS.  Freed of their excessive debt burdens and mad German-imposed austerity programs, competitiveness restored by their new (and devalued vs. the Euro) currencies, their economies might recover.  That assumes that they manage the process well, using the turmoil as an opportunity to make vital reforms.

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Status report on Europe’s slow re-birth (first, the current system must die)

Summary of another status report on the crisis of Europe.  Its leaders repeat their mistakes during the 1930s (raising taxes & cutting expenditures in response to economic weakness) while attempting to save the structurally flawed EMU.  Their mistakes only accelerate Europe’s dive towards a political singularity, when the current structure collapses — beyond which lies a new shape for Europe.  They will scream at the transition, as a baby does at birth.  Nobody knows what shape the new Europe will take; most mainstream analysts forecast an easy transition to a unified Europe.

Note:  Today the endgame for Europe (in its current form) may have started.  More on this tomorrow.

Contents

  1. The positive feedback between economic stress and political instability
  2. Germany’s impossible hopes drive the crisis
  3. Slowly people lose hope, each one’s despair bringing the endgame closer
  4. Other posts about the crisis of Europe

(1)  The positive feedback between economic stress and political instability

The Euro-crisis consists of equal parts economic and political dynamics.  Now politics take center stage in Greece and Italy, as the foreign-imposed austerity programs crush their economies — without the promised gains.  Slowly their governments lose legitimacy.  Loss of legitimacy manifests itself in two important ways.

(a)  People lose respect for the nation’s laws.  Most importantly, with the tax code — as taxes are increased.  Less compliance, more evasion, even larger deficits.

(b)  Politicians become weak.  Changes in government create hope — but in fact reflect growing political instability.

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Europe’s leaders explain: “We don’t want elections. We want to govern.”

Summary:  Recent events in Europe reveal much about the nature of democracy in the West, showing our leaders’ contempt for us.  Europe is just America as seen in a mirror.  See the links at the end for more information.

Europe is stunned.  The Greek prime minister wants to allow the people to vote on the euro rescue plan for their country. … he has made the right decision. … The Greeks will, for a change, decide for themselves how they and their country will move forward … every Greek gets to decide, and can no longer complain about their government bowing to international demands.  They have had no real opportunity to do so for quite some time.
— Sven Böll, op-ed in Der Spiegel, 1 November 2011

“We don’t want elections. We want to govern.”
— Premier Silvio Berlusconi, taken our of context but symbolically true (source: AP)

Papandreou, Prime Minister of Greece, astonished Europe’s leaders by calling for a referendum on the austerity package they’ve imposed on his nation.  Their horror — and subsequent events — revealed much about the political foundation of the project to unify Europe.

(1)  The project relies on support of Europe’s elites, not its people.  For example, defeat of the Irish referendum on the Lisbon Treaty in June 2008 meant nothing; only approval was definitive.  They tried again, successfully, in October 2009.  So Papandreou’s call for a public vote struck at the project’s great weakness.  Fortunately it was only a manuever, quickly abandoned.

I trust the wisdom and the maturity of the Greek people and I trust them … I’m not saying this romantically, I deeply believe in democracy. … We would never choose to hold a referendum on whether we leave or stay in the euro. It’s not something you can ask the Greek people about. It is self-evident (that they want to stay).
Greek Prime Minister George Papandreou to the Socialist Party’s members of parliament, Reuters, 3 November 2011

Conservative leader Antonis Samaras said “the new loan agreement is unavoidable. And it must be secured.” Until now Samaras has consistently opposed the austerity policies demanded in the bailouts, including the latest deal which euro zone leaders agreed only last week.  (Source:  Reuters)

(2)  Despite the certainty with which US conservatives label it a left-wing project, both Left and Right support unification (driven by Europe’s wealthy elites).  This gives Europe’s voters no real choice.

  • Prime Minister Merkel’s coalition of right-wing parties allegedly opposes unification — especially the Free Democratic Party (FDP) — yet has strongly championed the highly unpopular programs to rescue the PIIGS (the left favors unification).
  • Governments have fallen during the crisis in Ireland and Portugal, but the opposition parties in turn were equally or more supportive of unification.
  • Greece’s conservative parties, let by the New Democracy party’s Antonis Samaras, opposed unification until Papandreou’s move put the project at risk — then they showed their true colors and supported the extreme measures being imposed on Greece.

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Europe’s rescue plan meets reality. Which will win?

Summary: The dream of the latest Euro-rescue plan lasted for one week. Already painful reality emerges to confront the bold but baseless claims of Europe’s leaders. Only with exceptional skill and determination can they make this work.

Contents

  1. Greece introduces democracy into the rescue process
  2. Red lights on the dashboard
  3. The BRIC rescuers sound wary about their assigned role
  4. Market-based solutions fail if investors refuse to play
  5. Deductions and guesses

(1)  “Papandreou saya new Greek plan must be put to referendum”. The creditor nations of Europe have put severe stress on Their debtor neighbors. So far the people have accepted these measures with remarkably little fuss. For example, Spain has an unemployment rate of 20%+ and rising.

But there are limits to what external pressure can accomplish, and the recent strikes and riots suggest that limit may be near. Asking the people for their consent is a logical and bold step. They may approve — large majorities favor staying with the Euro. They might not (Iceland’s voters rejected assuming their bankers’ debts). It introduces yet another uncertain element to a process in which time is the scarcest element.

(2)  What is best market-price indicator of stress in the euro-zone?
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Today Europe’s leaders took another step towards the edge of the cliff

Summary:  The conference of Europe’s leaders concluded with little results, a failure judged by the expectations they had set.  They don’t have time for many more such failures as conditions worsen, the financial contagion spreads across Europe, and their credibility diminishes.  Here we conduct a post-mortem on the Summit.

Today the leaders of Europe concluded their 14th meeting during the 21-month-long crisis, their last opportunity to produce specific proposals for the G-20 meeting at Cannes on November 3-5.  They failed to agree upon specific and substantial measures to contain the growing economic stress — now reaching Italy (which has the world’s 3rd largest government debt) — and treat Greece’s problems (now the most afflicted sick man of Europe).  The few measures they did agree upon are of dubious effect, much like the austerity programs they have prescribed for the PIIGS (now pushing most of them into long-term contractions).

Does anyone give much weight to their expressions of resolve and large promises for future action?  While they talk, the rot spreads.

Update:  To measure in real-time the results of the euro-plan, watch the yield of Italy’s ten-year government bond to measure the effect of Europe’s latest rescue plan.  A rising yield means the plan is failing; falling means success.  Over 6% is bad.  Whenn the total cost of Italy’s sovereign debt (mostly financed with shorter, cheaper bonds) reaches 6% (the tipping point into insolvency) then the end game has began.  See Bloomberg for this data.

Contents

  1. The announcements from the Summit
  2. The effect of these agreements
  3. China to the rescue!
  4. What about those lazy profligate Greeks?
  5. Updates: For more information
  6. Other articles on the FM website about Europe’s crisis

(1)  The announcements from the Summit

The European  Council has resolved to do great things in the future, but today made few or no actual  decisions.  Details for future actions to come in November.

Reuters provided additional information on the pitifully meager accomplishments of the meeting (red emphasis added):

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