Free Markets, Free People

“Kicking the can” in a cul de sac

Or maybe a better analogy is Nero and Rome.  Politicians and hard decisions just don’t seem to mix very well do they?  It is much better to be Santa Clause than the Grinch.  Especially if you want politics to be your career.

Maybe that’s the problem.  If you remember correctly, at least in the US, politics was supposed to be a part-time job.  But here as in Europe, it has developed into a full-time job that requires excessive pandering to special interest groups using taxpayer money and borrowing as the means.

And here we are.

In Europe, it has, as predicted for decades, finally reached a tipping point.  And the political elite?   They really have no idea how to handle the problem (and the same sort of problem is becoming evident here).  So they resort to the usual reaction of politicians caught in an uncomfortable situation.  Defer a decision:

Under pressure to deliver shock treatment to the ailing euro, European finance ministers failed to come up with a plan for European countries to spend within their means. Such a plan is needed before Europe’s central bank and the International Monetary Fund consider stepping in to stem an escalating threat to the global economy.

The ministers delayed action on major financial issues – such as the concept of a closer fiscal union that would guarantee more budgetary discipline – until their bosses meet next week in Brussels.

If their finance ministers can’t put together a plan of action, what in the world are the ministers going to do next week?  Megan McArdle notices the can kicking as well and also recognizes that they’re doing that in a cul de sac:

Keeping the euro together requires much more than fiscal integration–all fiscal integration does is turn the peripheral countries into something like those Algerian ghettos ringing Paris.  Actually correcting these imbalances is going to require a lot of people in the periphery to get up and move.  That’s a really tall order.  Despite the fabled European multi-lingualism, in my experience, the majority of workers speak English about like I spoke high-school French and college Spanish; well enough to go on vacation, but not well enough to enjoy living in another country.  I’m told that this is about standard.  And that’s just one of the many barriers to movement between countries.

It’s not just the Germans who have to ask themselves whether the PIIGS won’t eventually say "Enough!" and renege.  The bond buyers have to ask the same thing.  At this point, it’s not entirely clear to me that any solution is credible enough to kick the can more than a very short distance down the road.

McArdle’s question in the title of the piece is “How can Europe possibly save itself?” You could read the question two ways.  The first is wondering out loud what Europe could do to fix the problem and solve the dilemma they’re in.  The second is rhetorical and reflecting a belief that it can’t.

Given this latest deferral, I’m beginning to see the question as rhetorical and the result as catastrophic.  If you want to see a real “Domino Effect”, let Europe collapse.

Oh, and by the way, they just downgraded the third quarter GDP estimate from 3.1% to 2.3%

And that sound you hear?   The can clinking along as politicians the world over do what they do best.

MICHAEL ADDS: You could actually read the question a third way: Who will step in to save Europe from itself? Why, none other than good ole Uncle Sam (aka we the taxpayers):

The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points. In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary. Further details on the revised arrangements will be available shortly.

U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.

This is essentially a back-door bailout of the Euro. The Fed fixes the interest rate for these loans (the currency swaps) at today’s rate, sends a bunch of US dollars to European central banks (and elsewhere), which then loan out those dollars to European banks facing a “liquidity crisis” — i.e. running out of money and holding diminishing assets (one of which may have almost crashed last night). Nominally, the European central banks are on the hook for any losses suffered, but we all know how that works.

You can read more about how these swaps work here.

~McQ

Twitter: @McQandO

6 Responses to “Kicking the can” in a cul de sac

  • “And that’s just one of the many barriers to movement between countries.” Language is a big problem, much of Germany and France simply don’t like to speak English, but most Germans don’t speak French and most French don’t speak German. On the other hand some places take some pride in having reasonable English and try hard, like Sweden, but it is still hard in a work environment. But even worse is the latent hostility that still comes to bear against large movements of workers from the “periphery”. Even in good times these workers from the periphery, like Poland for example, get a very hard time when working elsewhere. They are always “stealing jobs”, even though they typically do most of the jobs that natives don’t want to bother with. Or they are in industries that shouldn’t really exist (e.g. home cleaning, quite socially frowned on in Sweden). Or they are harrassed by local unions since they are willing to accept lower wages as they are tax residents in their own countries. Funnily enough no one minds being able to go to Poland to get cheap, high quality dental work though. So yeah, the freedom of movement is good for holidays, shopping and transporting goods… but the ability to move large numbers of workers around as needed is a long way off.

  • Also this week the spread on Swedish 10 year bonds versus those of Germany, which typically are much the same, has widened to its largest amount in 25 years now that German rates are powering up. The banks are seriously pricing in the risk of Euro collapse now, even the Germans are running a deficit that under normal Euro rules would incur a penalty. Whether collapse or tighter integration of indebted deficit economies, it isn’t going to be pretty. It is a great time not to be holding or billing in Euro.

  • Liquidity crisis implies that these banks can manage along if they only had a bridging loan…but since they are holding Greek bonds, and Greece is really insolvent, not illiquid, doesn’t that imply the banks too could be insolvent?

  • Another positive sign today in relation to this… Sarkozy (with German aid presumably) wants to shakeup the Schengen agreement, which is the agreement covering freedom of travel within the EU. When in doubt, lock those poor hicks out!

  • Another positive sign today in relation to this… Sarkozy (with German aid presumably) wants to shakeup the Schengen agreement, which is the agreement covering freedom of travel within the EU. When in doubt, lock those poor hicks out!