sarkozy

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The European Union is Destroying European Unity

So we know that the pro-bailout parties in Greece have failed to form a coalition, and that this will either mean an anti-bailout, anti-austerity government, or new elections, and that this will probably mean that the Greek default is about to become extremely messy (because let’s face it the chances of the Greek people electing a pro-austerity, pro-bailout government is about as likely as Hillary Clinton quitting her job at the State Department and seeking a job shaking her booty at Spearmint Rhino).

It was said that the E.U.’s existence was justified in the name of preventing the return of nationalism and fascism to European politics.

Well, as a result of the austerity terms imposed upon Greece by their European cousins in Brussels and Frankfurt, Greeks just put a fully-blown fascist party into Parliament.

From the Telegraph:

The ultra nationalist far right party Golden Dawn supporters celebrated on Sunday after exit polls showed them winning between 5 to 7 per cent of the vote, enough for them to gain representation in parliament for the first time in Greek history. Golden Dawn Leader, Nikolaos Michaloliakos shouted “The Europe of the nations returns, Greece is only the beginning” as he walked towards party headquaters and pledged to deal with illegal immigrants first.

For doubters of their intellectual lineage, here’s their logo:

I (among many others) have argued since at least last year that increased nationalism would be a result of the status quo, which is of course deeply ironic.

Winston Churchill famously noted that a new European unity was the path to the people of Europe forgetting the “rivers of blood that have flowed for thousands of years”.

Well it looks like some of the memories of those rivers of blood are about to be unleashed. How was it possible that a regime set up ostensibly to create more and deeper European unity seems to have sown the seeds for division and nationalism? Quite easily, really.

By designing a system that allowed for governments to spend freely in a fiat currency they could not print more of, Brussels effectively set up member states for fiscal crises. But the fiscal crisis hit at the worst possible time, one of global economic contraction. And by enforcing contractionary policies on states that were already in a depression, economies in Europe are getting to Great Depression levels:

The key here is that the Euro system is not giving the public the idea that all peoples are in the same boat. It is giving the impression that some nations are benefiting at the expense of others.

For there can be no doubting the perception on the ground in Europe that Germany (the first nation, lest we forget, to violate the Stability and Growth Pact) is sado-masochistically brutalising the periphery in the name of its own prosperity. And the facts back that up:

Certainly, the steep austerity policies have in Portugal, Spain and Greece only produced bigger deficits as tax revenues have fallen. But what really matters is that Europeans more and more are coming to see the E.U. and the policies it enforces as counter to their interests and harmful.

While Britons have long resented the E.U. and its micro-managerial regulatory regime, it is becoming clear that much of Europe is coming to distrust the E.U. and its institutions:

In the wake of WW2 there was deep and genuine grassroots concern throughout Europe for unity, and Europe should never have to go through another war. Yet the actions of this bureaucratic, centralising, technocratic institution are jeopardising that reality. This is top-down fragility transmitted throughout Europe by the actions of misguided planners.

I don’t believe that many Europeans really want to go down this path again. But as the European economies continue to bleed, as millions of youths remain jobless, those deep scars that thousands of years of war and violence created, culminating in the rise of Nazism and WW2, are rising again to the surface.

Voters become radical when they are denied economic opportunity. That’s the reality I think we should all take from Hitler’s rise to power, and that’s the reality of Europe today.

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Indecent Exposure

Paul Krugman believes that American exposures to Europe is not bad enough to make a ballyhoo:

With American exports to Europe forming a small component of GDP, a European collapse would not necessarily mean a collapse in American demand:

The map above — taken from here — tells us that overall, exports to Europe are just 2 percent of GDP. Some states, notably South Carolina, are more exposed (presumably because of those European-owned auto plants). But Obama isn’t going to win South Carolina in any case. And more broadly, even a sharp fall in exports to Europe would be only a small direct hit to demand.

OK, caveats: this only measures goods exports, and we should mark the numbers up maybe 25 percent to take account of services. Also, exports aren’t the only channel: if European events cause a Lehman-type event, disrupting financial markets world-wide, all bets are off.

Um, that’s a pretty ginormous caveat. As far as I am aware, the case regarding America’s exposure to Europe has never been an issue of a collapse of demand in exports and has always been an issue of precipitating financial collapse.

As I wrote in September:

The global financial system is an absurd interconnected house of cards. One falling card (like a Greek default) or ten falling cards (like the European banks who were foolish enough to purchase Greek debt) might just bring down the entire banking system, and its multi-quadrillion-dollar evil twin, the derivatives system.

And that’s not fear mongering. American banks have huge exposure to the European financial system.

From Zero Hedge:

Morgan Stanley’s exposure to French banks is 60% greater than its market cap and more than half its book value

The one thing we will highlight is that $39 billion is about 60% more than the bank’s market cap and a whopping 65% (as in more than half) of its entire book (less non-controlling interests) equity value.

I feel rather sorry for Krugman. He’s analysing a factor that traditionally is very significant in international macro. And in this case it’s almost totally negligible: the real problem isn’t the economy; it’s the monstrous beast of a financial system we find ourselves encumbered with.

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Catastrophe or Liberation?

Kevin O’Rourke contributes an intriguing article on the shape of the new fiscal union emerging in Europe:

The most obvious point about the recent summit is that the “fiscal stability union” that it proposed is nothing of the sort. Rather than creating an inter-regional insurance mechanism involving counter-cyclical transfers, the version on offer would constitutionalize pro-cyclical adjustment in recession-hit countries, with no countervailing measures to boost demand elsewhere in the eurozone. Describing this as a “fiscal union,” as some have done, constitutes a near-Orwellian abuse of language.

Many will argue that such arrangements are needed to save the eurozone, but what is needed to save the eurozone in the immediate future is a European Central Bank that acts like a proper monetary authority. True, Germany is insisting on a “fiscal stability union” as a condition of allowing the ECB to do even the minimum needed to keep the euro afloat; but this is a political argument, not an economic one. Economically, the proposal would make an already terrible institutional design worse.

This is essentially a variation on the idea that while pro-cyclical measures might have solved the problems from being created (a la Keynes’ idea that austerity should be undertaken during booms, not busts), it won’t do anything to fix the problem now that the horse is out of the stable.

Of course, while I cannot see why anyone buys the pro-austerity view, the pro-printing view is merely a means of kicking the can down to the end of the pier. Boosting demand, creating inflation, and re-expanding bubbles does not really address any of the underlying structural problems, most significantly systemic fragility, and high residual debt. At very best O’Rourke’s “solution” buys more time to address those problems. As we have seen (and as I keep pointing out) policy makers and markets believe that bouncing back in a fluster of newly printed money is recovery, and then continue to ignore the problems, which means broken systems just continue to be broken, and old problems jump back out of the swamp to rear their ugly heads.

This brings me to the most intriguing aspect of O’Rourke’s view:

A eurozone collapse in the immediate future would be widely perceived as a catastrophe, which should at least serve as a source of hope for the future. But if it collapses after several years of perverse macroeconomic policies required by countries’ treaty obligations, the end, when it comes, will be regarded not as a calamity, but as a liberation.

When viewed from my perspective — that boosting demand is essentially just another perverse macro policy that will kick the can for a few more years — this really shines a light. The choice for European countries is a painful unwinding now, or years of crushing teutonic austerity (or Japanese-style zombification) unwinding in something far, far worse: riots, revolutions, international breakdown, perhaps even war.

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Did Cameron Just Kill the Euro?

I find it hard these days to praise any establishment political figure. Too often their actions are devoid of principle, too often their words are hollow, and too often their demeanour smacks of a rank ignorance on matters of economics and liberty.

And undoubtedly, Cameron’s austerity policies are not sound. As I have noted in the past, the time for austerity at the treasury is the boom, not the slump.

But today David Cameron seems to have bucked that trend.

From the BBC:

David Cameron has refused to join an EU financial crisis accord after 10 hours of negotiations in Brussels.

Mr Cameron said it was not in Britain’s interest “so I didn’t sign up to it”.

But France’s President Sarkozy said his “unacceptable” demands for exemptions over financial services blocked the chance of a full treaty.

Britain and Hungary look set to stay outside the accord, with Sweden and the Czech Republic having to consult their parliaments on it.

A full accord of all 27 EU members “wasn’t possible, given the position of our British friends,” President Sarkozy said.

There is an obvious fact here: scrabbling to reach an agreement in the interests of political and economic stability — which is exactly the path Japan has taken for the past 20 years, and America for the past 3 — allows broken systems to continue to be broken. All this achieves is more time to address the underlying issues, which as we are discovering is something that does not happen, because markets and policy makers fool themselves into believing that the problems have been “solved”, and that there is “recovery”.

Cameron’s intransigence could well be the spark that Europe — and perhaps even the globe — needs to degenerate to the point where the necessary action — specifically, some kind of debt jubilee — can occur.

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Old Hatreds Flare Up…

It looks like I’m not the only political commentator to evoke the spirits of the past on Europe’s current breakdown (or breakdowns).

From the Daily Mail:

Greeks angry at the fate of the euro are comparing the German government with the Nazis who occupied the country in the Second World War.

Newspaper cartoons have presented modern-day German officials dressed in Nazi uniform, and a street poster depicts Chancellor Angela Merkel dressed as an officer in Hitler’s regime accompanied with the words: ‘Public nuisance.’

She wears a swastika armband bearing the EU stars logo on the outside.

Attack: A street poster in Greece has depicted Angela Merkel in a Nazi uniform with a swastika surrounded by the EU stars. The accompanying words describe her as a 'public nuisance'
The backlash has been provoked by Germany’s role in driving through painful measures to stop Greece’s debt crisis from spiralling out of control.

From a Greek perspective, it seems shatteringly obvious. For them, the Euro has become a battering ram for a kind of fiscal austerity that is set to benefit Germans (price stability) and penalise Greeks (austerity).

As advantageous as the Euro once seemed, it is becoming ever clearer that the union is suffering from deep political fracture. It is a union built without a common language (other than perhaps the belief in bureaucracy — and an unwillingness to give bankers haircuts), without a political head (or even a coherent political structure) without a common culture of work, and without an integrated economy.

That’s why decisive action is proving impossible, in spite of all the rhetoric.

Worse (because it shows contagion at work), it looks like Portugal is about to sink into the mud.

From Ambrose Evans-Pritchard at the Telegraph:

Cashflow problems (making it much, much harder to pay down debt) — that’s what you get when spend-as-much-as-we-want-and-then-print-money mediterranean nations entrust their nation’s monetary to stern-looking austerity-minded German central bankers.

Most startlingly, it looks like Paul Krugman finally got something right:

European leaders reach an agreement; markets are enthusiastic. Then reality sets in. The agreement is at best inadequate, and possibly makes no sense at all. Spreads stay high, and maybe even start widening again.

Another day in the life.

Of course, his solution — much, much deeper integration, with a good dose of money printing — is politically impossible, so whether or not it would work (clue: it won’t) is irrelevant.

Meanwhile Americans smoke their hopium (“GDP is up! Stocks are up! The recovery is here!“) hoping that the whirling Euro conflagration will just go away.

It won’t just go away. The global financial systems is an interconnected house of cards — a full Euro breakdown will bring down American banks with European exposure, like Morgan Stanley. Hank Paulson was telling the truth — either the thing is bailed out (again and again and again) or it will collapse under its own weight.

Creditors — starting with China (who are acquiring gold and Western industrials at a rapid rate) — will be hoping that the system can hold on for a few more years while they try to cash out with their pound of flesh.

Debt-ridden Americans and European would be forgiven for accelerating its collapse…

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Germany Pours Cold Water Over Europe

Just as I predicted Germany is getting restless at the idea of bailing out the bulk of Europe.

From the Telegraph:

Andreas Vosskuhle, head of the German constitutional court, said politicians do not have the legal authority to sign away the birthright of the German people without their explicit consent.”The sovereignty of the German state is inviolate and anchored in perpetuity by basic law. It may not be abandoned by the legislature (even with its powers to amend the constitution),” he said.”There is little leeway left for giving up core powers to the EU. If one wants to go beyond this limit – which might be politically legitimate and desirable – then Germany must give itself a new constitution. A referendum would be necessary. This cannot be done without the people,” he told newspaper Frankfurter Allgemeine.

Turns out that listening to Germans in the German government, and on the German street might have more bearing on reality than listening to globe-trotting, world-saving, hopium-pedling, six-pac-abs, tax-evading Timothy Geithner. For example, German finance minister Wolfgang Schauble. He might be in a position to comment (or a better one than Geithner, in any case).

From Zero Hedge:

*SCHAEUBLE SAYS `WILL NOT SPEND OUR WAY’ OUT OF CRISIS

*SCHAEUBLE SAYS `SOLIDARITY HAS LIMITS,’ REQUIRES RETURN EFFORTS

*SCHAEUBLE SAYS `IMMEDIATE FISCAL REFORMS ARE OF THE ESSENCE’

So if Germany won’t bail out Europe (until things get much worse) and China and the BRICS won’t (until things get much, much worse) then who will?

America, apparently.

From Bloomberg:

China and the U.S. finally found something to agree on: Europe is doomed and might take the world’s two biggest economies down with it.

Neither officials in Beijing nor Washington are actually using the “D word.” They don’t need to, not with Zhou Xiaochuan, China’s central bank governor, talking matter-of- factly about emerging nations bailing out the euro region and U.S. Treasury Secretary Timothy Geithner warning of “cascading default, bank runs and catastrophic risk” there.

The price tag for keeping the Greek-led turmoil from killing the euro is rising fast. Asians are so anxious about it that they’re querying Americans — like me. In my travels around the region this month, I’ve faced a harrowing question: Would U.S. President Barack Obama chip in for a giant European bailout?

It’s hard to decide what’s more disturbing: the obvious answer — over Republicans’ dead bodies — or the fact it’s being asked at all, and by whom. Among those posing it were the finance minister of one Asia’s biggest economies, the central bank governor of another and a number of major executives.

After all, the closest thing to concerted action on Europe so far has come from Bernanke.

It’s the same absurd predicament — Americans pay for global stability, everyone else benefits.

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The Greek Endgame

I preface this chart with one comment:

The European financial system is financially unsustainable, for reasons I have explained before, and reasons which were enunciated at the very start of the Euro project. Without deep, palpable reforms, all “victories” (or partial victories) are just another kick of the can down the road. The route to bedlam is interesting (and contrary to this chart, pock-marked with black swans) but the destination is the key: Europe must choose between meltdown and full fiscal integration. Neither choice is particularly appetising.

From Zero Hedge:

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The Emperor is Wearing No Clothes

As I’ve covered in pretty excruciating depth these past few weeks, the Euro in its current form is sliding unrelentingly into the grave.

Some traders seem pretty excited about that eventuality.

Why? There’s plenty of money to be made killing the Euro, (just like there was plenty of money to be made in naked-shorting Lehman brothers to death):

Markets are ruled right now by fear. Investors: the big money, the smart money, the big funds, the hedge funds, the institutions, they don’t buy this rescue plan. They know the market is toast. They know the stock market is finished, the euro, as far as the Euro is concerned they don’t really care. They’re moving their money away to safer assets like Treasury bonds, 30-year bonds and the US dollar.

I would say this to everybody who’s watching this. This economic crisis is like a cancer. If you just wait and wait thinking this is going to go away, just like a cancer it’s going to grow and it’s going to be too late.

This is not a time to wishfully think the governments are going to sort this out. The governments don’t rule the world. Goldman Sachs rules the world. Goldman Sachs does not care about this rescue package, neither do the big funds.

A few points:

“They’re moving their money to safer assets like Treasury bonds, 30-year bonds and the US dollar.”

Safer assets like the US dollar? Sure, that’s what the textbooks tell you has been the safest asset in the post-war era. But are they really safe assets? On dollars, interest rates are next to zero. This means that any inflation results in negative real rates, killing purchasing power. Let’s have a look at the yields on those “super-safe” 30-year bonds:

At 2.87%, and with inflation sitting above 3.5% these are experiencing a net loss in purchasing power, too. Yes, it’s better than losing (at least) half your purchasing power on Greek sovereign debt, or watching as equities tank. But with the virtual guarantee that stagnant stock markets will usher in a new tsunami of QE cash (or better still, excess reserves) expect inflation, further crushing purchasing power.” 

“The governments don’t rule the world. Goldman Sachs rules the world. Goldman Sachs does not care about this rescue package, neither do the big funds.” 

Well Goldman Sachs are the ones who convinced half the market to price in QE3. And they’re also making big noise demanding action in the Eurozone. I’m not denying Goldman don’t have massive power — or that they are ready and willing to book massive profits on Eurozone collapse. But — like everything in this crooked and corrupt system — they are vulnerable to liquidity crises triggered by the cascade of defaults that both myself and Tim Geithner (of all people) have talked about over the past week.

Of course, we all know that as soon as that tidal wave of defaults start, global “financial stabilisation” packages will flood the market to save Goldman and J.P. Morgan, and anything else deemed to be “infrastructurally important”, and survivors will take their pick of M&A from the collateral damage.

And kicking the can down the road using the same policy tools that Bernanke has been using for the past three years (i.e., forcing rates lower and-or forcing inflation higher) will result in harsher negative real rates — making treasuries into an even worse investment. Eventually (i.e., soon) the institutional investors — and more importantly (because their holdings are larger) the sovereign investors — will realise that their capital is rotting and panic. In fact, there is a great deal of evidence that China in particular is quietly panicking now. The only weapon Bernanke has is devaluation (in its many forms) — which is why he has been so vocal in asking for stimulus from the fiscal side.  

And — in spite of the last week’s gold liquidation, as China realised long ago — the last haven standing will be gold. Why? Because unlike treasuries and cash it maintains its purchasing power in the long run.

The Emperor is wearing no clothes.

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Big Change For Europe?

I am sure the Euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created.

— Romano Prodi, EU Commission President, December 2001

So the intent for Europe was always that a future crisis would bring about the justification for a resolution to European financial disharmony — namely, that while countries in the Euro control their own budgets, they don’t control their own currency. This mismatch means that with countries pulling in different directions, the European Central Bank is posed with an unmanageable task — create one policy to fit a group of very different economies. At the time of the Euro’s creation, Europe adopted a cross-that-bridge-when-we-come-to-it approach: a crisis would produce the circumstances required to justify unifying fiscal policy, a policy that at the time of the Euro’s introduction seemed unnecessary (and now is deeply unpopular).

But what if disharmony — both in terms of the forces producing the crisis, and disagreement over how to handle the problems — has created such a huge turmoil that instead of crossing the bridge, Europe falls into the water beneath?

Continue reading →

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German Constitutional Court Approves Greek Bailouts

…or does it? From The Wall Street Journal:

KARLSRUHE, Germany (Dow Jones)–Germany’s Federal Constitutional Court Wednesday ruled that the euro-zone’s 2010 bailout for Greece and subsequent aid granted through the currency bloc’s rescue fund is legal, eliminating a major hurdle to the sovereign debt crisis response that’s been closely watched by financial markets.

The constitutional court in Karlsruhe also ruled that Germany’s Parliament should have more say in major future euro-zone bailouts, but these would only need approval from the parliament’s budget committee. This requirement is less strict than some proposals circulated by key government lawmakers that call for the plenary’s approval, a move that could stall the pace of future bailout efforts by giving more lawmakers influence to sway the decision process.

Continue reading →