Monday, August 22, 2011


OK, yet another Midday Euro Special . . . .

Firstly, here's AEP being less bearish than even he would suspect. Although he continues to lash out at the dunces in various cities, he hasn't given up hope that the EU (or really the ECB) will eventually come round to QE. Or spraying the continent with cash, known technically as Quantitative Easing. Or Printing Money That Will Inevitably Reduce In Value.

As AEP says:-

The eurozone obviously needs looser money. M3 broad money is stagnant and real M1 deposits have turned negative, even in Germany and Holland. Real M1 is contracting at an alarming pace in Italy. EMU growth has wilted, five countries are spinning towards default, and the banking system is seizing up. This cries out for a change of course, yet the European Central Bank is still tightening. The ECB’s Jean-Claude Trichet said “we do not do QE”. Indeed, Germany forbids it. Not only has the Bundesbank forgotten that the Bruning deflation of 1931 destroyed Weimar - not the hyperinflation of 1923 - it is imposing its policy blunder on the whole currency bloc. The visible result of piling monetary contraction on top of fiscal contraction is to push the Club Med over the edge. The lesson of 2008-2010 is that further QE by the Fed alone risks a dollar slide and a further global crisis. A successful monetary blitz - if required - would need joint action by all major central banks in concert, including the ECB with no 'ifs’, 'buts’, and hostile body language. Some $6 trillion would suffice, or 10pc of global GDP.

Now we move to the specific (basket) case of Greece, entitled "It’s the corruption, stupid!". Extracts:-

Jason Manolopoulos, author of "Greece’s 'Odious’ Debt", says the state has become a hydra with seven heads: cronyism, statism, nepotism, clientelism, corruption, closed shops and waste. Kleptocrats have been running the show and their predilection for thieving and bribery has poisoned the nation. . . It’s difficult to tell if the IMF-EU calculations were naively optimistic or coldly cynical [I'm going with cynical], but they are already way off target. Greece’s minister of finance admits that the economy will probably shrink by up to 5 per cent this year, and Citigroup expects an additional contraction of 2.7 per cent in 2012. If that proves correct, Greece will have endured four consecutive years in recession. . . . Greece’s roof has fallen in. It faces what economic historian Niall Ferguson calls the “metrics of doom”. . . Left to its own devices, Greece will be forced to borrow ever greater amounts of money to service existing debts, which it could not afford in the first place. On current form, by 2040 Athens will be burning 20 per cent of GDP on interest payments. This is not going to happen; the stitching will split long before then. . . In the absence of a new eurozone bond, debt issued jointly by all member countries, to which Germany is implacably opposed, the conclusion is  unavoidable: Greece is heading for a pyrotechnic default and an ignominious exit from a currency union that it should never have joined. I suspect that Petros Themelis knew that all along.

The eurozone's rescue can only come, of course, from Germany. Or, more correctly, her taxpayers. These, it seems, may not be very prepared to play ball, being fed up with the crock of shit they were sold by arrogant, elitist and downright ignorant politicos decades ago. Here are extracts from a Times article I can't cite because of the paywall:-

Since the 1970s, the value of the deutschmark had doubled and tripled against dollar, franc and lira. So [the plan was that] the euro would diffuse the pressure and keep Europe’s internal exchange rates stable by abolishing them. The deal was implicit: Europe would get its hand on the mighty mark, and Germany would get a Bundesbank writ large. Everybody else would go German: rein in spending and worship the god of monetary probity. . . As always, the best-laid plans went awry. Monetary union without fiscal union will not work, screamed the economists back then, and they were right. Indeed, the euro is the main culprit in the current calamity. It allowed the profligates to live like the Germans and to borrow like Italy, Greece and the others. For suddenly their debt was no longer denominated in melting liras and drachmas, but in cosy and reliable euros. And down went interest rates for the big spenders. . . The poisoned fruits of the euro now smell to high heaven. Portugal, Ireland, Italy, Greece and Spain all face insolvency, and the rest of euroland is paying with yet another rescue package or a towering credit-cum-guarantee shelter. These are known by such opaque acronyms as EFSF or ESM, with the E standing for “Europe” and the S for “stability”. The biggest bill goes to Berlin, naturally, because Germany is the largest and richest member, with the largest stake in the survival of the euro. Thus, the chickens of a misbegotten monetary union have come home to roost, not ten years after the euro went into circulation. . . Naturally, everybody else now looks to the German cavalry to save the day by leading a coalition of the willing and stable that would guarantee debts and shore up banks. The problem is that Angela Merkel is no John Wayne while her wary electorate is none too eager to saddle up. Trust in the euro was never high, but distrust is rising: from 46 per cent three years ago to 71 per cent this summer. . . But even another recession does not change the basic logic of the German stance, which is to save the euro at all costs, or at least until the ammunition runs out. The question is: how much ammo are Ms Merkel and Mr Sarkozy willing to buy? . . This is a political question. Theoretically, they could triple the €440 billion the EFSF is supposed to administer. Theoretically, they could replace national bonds with eurobonds that would drive down those interest rates killing Italy, Spain and Greece. Thus, the PIIGS would gain time for domestic reforms — austerity plus anti-corruption plus deregulation. But Angie isn’t Maggie, and Sarkozy is no De Gaulle. The Franco-German duo has led the pack from behind, always reacting, never driving. . . Their latest gambit, unveiled last week, is an “economic government” for euroland. But the proposal is a triple joke. First, it would be convened only twice a year, and then by that feisty president of the EU, Herman Van Rompuy, who was chosen by the duo precisely because he was as faceless as he was deferential. .. Second, the solution is actually a restatement of the problem. The last thing that euroland’s parliaments will give away is the power of the purse. We may be able to force virtue on the Greeks, who have consistently overspent and cooked the books. But can anyone imagine Germany deferring to France, and both of them to the default countries? Third, the strong must douse the fire first, then they can start to rebuild Europe’s financial house. 

And to think that we eurosceptics had to tolerate the triumphalist hubris of the europhiles only a few years ago when the euro has been initiated and, in defiance of the underlying realities, quickly rose 40% against the dollar.

But all may not be lost. As the writer of the last article stressed . . . As Dr Johnson put it: “When a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.”


Maybe.

Vamos a ver.


4 comments:

kalebeul said...

The faithful are deserting - http://www.nytimes.com/2011/08/23/world/europe/23iht-letter23.html - but I guess the prospect of the loss of all that power and privilege will keep the bunker occupied for a while yet.

It might not work out in the long run, but direct rule from Berlin - preferably with a Spanish figurehead, a latterday Charles V - might be the best thing that could happen to Spain at the moment.

Colin said...

Who for the figurehead? The Duquesa de Alba? Except we wouldn't want to frighten the horses.

Not to mention the rest of us . . .

kalebeul said...

450 years is a long time, but I think the Duchy of Alba may still have image problems in the Low Countries.

Candide said...

I disagree, Trev. A country that names something as valuable as the dukdalf after them, still sings "den Koning van Hispanje/heb ik altijd geëerd" and has copied that horrible "g" will be happier about the Duquesa de Alba than the horses.

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