Finland prepares for Euro-zone breakup
This is not good news by any stretch. But it is a prudent step. My guess, however, is it isn’t being well received in Brussels.
The Nordic state is battening down the hatches for a full-blown currency crisis as tensions in the eurozone mount and has said it will not tolerate further bail-out creep or fiscal union by stealth.
“We have to face openly the possibility of a euro-break up,” said Erkki Tuomioja, the country’s veteran foreign minister and a member of the Social Democratic Party, one of six that make up the country’s coalition government.
“It is not something that anybody — even the True Finns [eurosceptic party] — are advocating in Finland, let alone the government. But we have to be prepared,” he told The Daily Telegraph.
“Our officials, like everybody else and like every general staff, have some sort of operational plan for any eventuality.”
We’ve talked about the cascade effect many times before. What normally causes that effect is some sort of tipping point. So far, it seems, Europe has avoided that tipping point. One has to wonder if it might be Finland that tips the scales. To this point, the subject of the Euro-zone breakup has been pretty much tip-toed around.
Now you have a country that is actively preparing for it and making those preparations public. Note too what they’re saying – Finland has said it “will not tolerate further bail-out creep or fiscal union by stealth.”
That’s pretty final.
Additionally, if such a plan should be put forward:
Like other member states, Finland has a veto that could be used to block any new bail-out measures. However, unlike some states, its parliament would have to approve each future measure of the eurozone rescue, including a full bail-out of Spain.
And, as you read the article, you’ll see that’s not very likely to happen.
So … hold on. My guess is the ride in Europe is about to encounter severe turbulence.
~McQ
Twitter: @McQandO
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Fantasy vs. Reality
Greece’s long vacation from reality is very nearly over. Not that you’d believe it from listening to the country’s politicians. In the aftermath of Greece’s last elections, voters rejected further austerity, and instead sought refuge in fantasy. That fantasy is perhaps best exemplified by Alexis Tsipras, who emerged from the election with the power to block approval of any further austerity by blocking the formation of a government.
Indeed, I now have some doubt as to whether Mr. Tsipras is actually sane:
Leftist Alexis Tsipras, 37, emerged with the power to block them. Greece, he said, could ditch its spending cuts and renounce its debts to EU partners, yet enlist their help in keeping the euro currency some 80 percent of Greeks cherish.
Not. Gonna. Happen.
And everybody with a lick of sense knows it’s not gonna happen. Not in Greece. Nor, apparently, anywhere else on the Euro Zone’s periphery, as money is fleeing it with alacrity.
Foreign bank deposits have fallen 64% in Greece, 55% in Ireland and 37% in Portugal; in Italy, the fall is 34% and Spain 13%. Foreign government bond holdings have dropped 56% in Greece, 18% in Ireland and 25% in Portugal; in Italy the fall is 12% and Spain 18%. So if Italy and Spain were to move to the average for the other three, a further 200 billion euros would flow out.
The Greeks are not being punished by rich Germans. They aren’t the victims of speculators or criminals. They are merely being forced to pay the price that reality is about to impose for decades of enthusiastic socialism, and the attendant corruption, debt, and malfeasance it has encouraged. Their problem isn’t "austerity"; it’s the unsustainable political and economic fantasies that have sustained the county’s political culture.
Greece is a failed state. Spain is about to become a failed state. No doubt a list of "enemies" will be promulgated to try and paper over whose fault all this actually is. The sacrifice of scapegoats in times of crisis is, after all, a venerated European tradition.
But, that won’t help, or stop what is coming. Reality is relentless. And the really scary thing about that is that there are lessons in all this for us, which I am not entirely sure our own political class will heed—or is even capable of recognizing.
~
Dale Franks
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Saving the Euro
There is, according to the New York Times, a tentative plan afoot put together by European leaders, to save the Euro and end the crisis there. Here’s how Stephan Erlanger describes it:
In the process, European leaders will begin to change the fundamental structure of the union, creating a form of centralized oversight of national budgets, with sanctions for the profligate, to reassure investors that this kind of sovereign-debt crisis is finally being managed and should not happen again.
The immediate focus of worry is on Italy and Spain, which have been buffeted by market speculation even as they move to fix their economies. That process took an important step on Sunday, as Italy’s cabinet agreed to a package of austerity measures to put the country in line for aid that would improve its financial stability.
The new euro package, as European and American officials describe it, is being negotiated along four main lines. It combines new promises of fiscal discipline that will be embedded in amendments to European treaties; a leveraging of the current bailout fund, the European Financial Stability Facility, to perhaps two or even three times its current balance; a tranche of money from the International Monetary Fund to augment the bailout fund; and quiet political cover for the European Central Bank to keep buying Italian and Spanish bonds aggressively in the interim, to ensure that those two countries — the third- and fourth-largest economies in the euro zone — are not driven into default by ruinous interest rates on their debt.
Emphasis mine. In other words these disparate countries linked only by a common currency are now going to give up their national sovereignty (i.e. their budgets) to ensure its stability? Really?
Well someone believes that’s going to do the trick because after the outline was announced, Italian bond yields “collapsed”. From a high of 7.4% before Thanksgiving, they’re now down to around 6.15%. While that’s a huge move, it still spells a country in trouble. Now, of course, they’re going to give up having the final say on their budgets?
I wonder how that’s going to play in Greece.
The problem, of course, is the usual one:
So Mr. Sarkozy and other European leaders are working on a less elegant and more phased way to create a pool of bailout money that is large enough to convince the markets there is little chance of a default on Italian and Spanish bonds, which should drive down rates to sustainable levels, European and American officials say.
Mrs. Merkel says it is time to get the euro’s fundamentals right. She is insisting on treaty changes to promote more fiscal discipline, including a limit on budget deficits, with outside supervision and surveillance of national budgets before they become dangerous, and clear sanctions for countries that fail to adhere to the firmer rules. Berlin wants the new standards backed up by the European Court of Justice or perhaps the European Commission, with the power to reject budgets that break the rules and return them for revision.
She would like the treaty changes to be accepted by all 27 members of the European Union, but failing that, she said she would accept treaty changes within the euro zone, with other countries who want to join in the future, like Poland, free to commit to the tougher rules now. Many countries, and not only Britain, are opposed to institutionalizing a two- or even three-tier European Union, fearing that their interests will be sacrificed and their voices diminished.
Mr. Sarkozy, as the political inheritor of Gaullism, disagrees about the reach and nature of European supervision of national budgets and about the role of European institutions in overseeing the fiscal affairs of sovereign states. The French are more jealous of their sovereignty and more skeptical of European courts, not wishing to give them — let alone the bureaucratic European Commission — more sway over national budgets and policies.
“Europe must be refounded and rethought,” Mr. Sarkozy said last week. “But the reform of Europe is not a march toward supranationality.”
But in reality, “supranationality”, while possibly the needed solution, is very unlikely to come about. And then there is enforcement of sanctions by some entity outside of a national one. National politicians would only have a preliminary say in national budgets.
We’ve seen how the Greeks react to their own government attempting to enforce austerity measures. Imagine an outside body like the European Commission forcing the Greek government to revise its budget. Its also very clear the French want no part of it either. The emphasized sentence is how it has always been, i.e. distrust and fear about being sacrificed and diminished. That’s no way to hold a “union” together and it speaks volumes about the less than latent nationalism still in existence in all those disparate countries (and cultures). It all comes down to trust and it appears they really don’t trust each other.
So while the tentative deal may seem to be workable there have to be serious doubts about whether, even if finally agreed too, it can work. It just doesn’t factor in the national paranoia among most members about being subsumed by a “supranational” entity. Their identity, which most have guarded jealously, has always been a problem and, given the financial mess in the south, likely to intensify vs. lessening.
Is there a solution to save the Euro? Perhaps. But is giving up national sovereignty on budgets and allowing a “supranational” entity to overrule them and enforce sanctions going to actually come to pass? And if it does, will those who agree in a time of crisis actually do what they promise now if the crisis lessens?
I’m betting “no”.
~McQ
Twitter: @McQandO
Social Welfare states, democracy and political will
Megan McArdle hits some points that pretty much doom Europe and, if it is not already too late, the US. They are contradictions and conditions that make recovery from all this fiscal irresponsibility almost impossible. It involves social welfare, democracies and why that combination simply can’t find the necessary ability heal itself.
When I was a young and naive economics writer, I used to write about developing countries a fair amount. Time and again they would make these bizarre and pointless moves, like suddenly and for no apparent reason defaulting on a bunch of debt. They would engage in obviously, stupidly unsustainable fiscal practices that caused recurring crises. They would divert critical investment funds into social spending which was going to become unsustainable when underinvestment reduced government revenue. And the other journalists and I would cluck our tongues and say "Why can’t they do the right thing when it’s so . . . bleeding . . . obvious?"
Then we had our own financial crisis and it became suddenly, vividly clear: democratic governments cannot do even obvious right things if the public will not tolerate it. Even dictators have interest groups whose support they must buy.
This has come home to me forcefully several times over the last few years, but never more than now. The leaders of the eurozone have a dual mandate to keep the euro intact, and to not do the things which could keep the euro intact. They cannot fiscally integrate to the extent necessary because, as I wrote for the Daily the other day, the Greeks do not want to act like Germans, and the Germans do not want to share their credit rating with anyone who won’t.
It is a bit like the Ohio vote on unions. In a heavily union state, those who benefit the most vote to continue the situation where they benefit. In democracies like Europe where people’s property are up for re-distribution, those who benefit from such redistribution are always going to vote to continue the status quo. And, of course, politicians who benefit from the vote of that constituency are going to try to find every way they can to accommodate that constituency.
So even when it is “so … bleeding … obvious”, to most economic observers as to what action must be taken, nothing happens or, in some cases, it gets worse.
At some point, though, the bill comes due. We’ve talked about the laws of economics and how unyielding they are. Oh you can screw around and play some games that allow you to defy them for a while, but like gravity, it all will finally come tumbling down.
We’re there. We’re at the falling down stage if things don’t change drastically.
But there is seemingly no stomach for drastic change.
And that leaves us to try to figure out what the world will look like after the collapse of the Western social welfare system is complete. Because it is seeming like its not a matter of “if”, but “when”.
~McQ
Twitter: @McQandO
The Greek tragedy (or socialism runs out of other people’s money)
And, of course, Greece isn’t the only country going through this at the moment, it is only the worst off of the bunch. In fact, it is a case study in the end result of socialist programs (although you’d think, given its fairly recent collapse, that much could have been learned from the Soviet Union). Greece has, for decades, piled up more and more debt than the other European socialist countries and, with the global economic downturn, was the first of the Euro zone to hit the shoals of bankruptcy – although Europe is doing everything it can to forestall that.
The problem is that socialism and its benefits (whether they’re affordable or not) are like being hooked on heroin. Even if you know you have too, you just can’t seem to get off the stuff. Addicts deny reality, fight the cure because it is horribly painful and thus somehow come to believe they can continue to survive on the drug as they have before. And it slowly and inexorably kills them.
Greece, if it isn’t able to kick the habit, is on its economic death bed. Europe understands this and also sees the possibility that Greece’s inability to break this habit, i.e. pass and impose austerity measure – draconian austerity measures – might also mean the death of Europe’s currency, the Euro and conceivably the break up of the European union.
That’s how serious it is.
But the addict continues to fight the cure. Led by the two major unions, Greece has been shut down for 2 days as protesters vent their spleen about the unacceptability of these austerity measures. The irony, of course, is the measures are being imposed by a socialist government which has been given no choice but to impose such measures.
However, that government is seen as week and socialist members who supported the measures at first are now opposing them.
But the austerity program has met with resistance from within the ranks of Mr. Papandreou’s own party, especially over the privatization of state companies whose workers have traditionally been at the heart of the Socialists’ constituency.
As many as four Socialists in Parliament have said they will consider opposing the measures, including one who opposes the planned privatization of the water utility of Thessaloniki, in her district.
Another Socialist, Alexandros Athanasiadis, said he would vote against the plan to reduce the state’s stake in the Public Power Company to 34 percent from 51 percent. Some of the company’s coal-burning plants are in his district in northeastern Greece.
Naturally the socialists oppose privatization because, you know, the government has done such a bang up job to this point of running businesses it has no business being involved in. Why? Because the government, and therefore the parliamentary members, control the jobs, pay and pensions. More heroin. As government gets more involved in areas it has no business and it (those who run it) begin to understand the power such intrusion brings them, they’re loathe to give it up, even when they’re doing a horrible, inefficient and costly job that could be better and more cheaply done by private industry.
The symbiotic relationship between the unions and the MPs is mutually beneficial and ensures an incumbent who properly plays the game (support union demands) remains in power (see public sector unions and Democrats here). That, of course, has led to unaffordable pensions, wages which aren’t competitive and a public stuck with the ever increasing bill.
Well, the bill has come due.
On Monday, Mr. Venizelos, a Socialist veteran known for his ability to rally his troops, told lawmakers that the measures might be “tough and even unfair” but that they were unavoidable. “We have to finally come to our senses and get serious,” he said.
With 2 days of protests, one has to wonder whether indeed the Greeks are going to actually come to their senses and get serious”, because if they don’t the repercussions could be devastating.
And knowing all of that, and looking at our debt problems, one also has to wonder why we seem bent on creating an addiction of our own, given the real world examples of where that must eventually lead.
It makes absolutely no sense, does it?
~McQ
Twitter: @McQandO
Observations: The QandO Podcast for 23 May 10
In this podcast, Bruce, Michael, and Dale discuss Rand Paul, this week’s elections, and the stock market.
The direct link to the podcast can be found here.
The intro and outro music is Vena Cava by 50 Foot Wave, and is available for free download here.
As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2009, they can be accessed through the RSS Archive Feed.
Observations: The Qando Podcast for 16 May 10
In this podcast, Bruce, Michael, and Dale discuss DADT, The Euro, and the spiraling cost of ObamaCare…even before we’ve gotten any of it.
The direct link to the podcast can be found here.
The intro and outro music is Vena Cava by 50 Foot Wave, and is available for free download here.
As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2009, they can be accessed through the RSS Archive Feed.
Observations: The Qando Podcast for 09 May 10
In this podcast, Bruce, Michael, and Dale discuss unemployment, Greece, and the BP offshore drilling leak.
The direct link to the podcast can be found here.
The intro and outro music is Vena Cava by 50 Foot Wave, and is available for free download here.
As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2009, they can be accessed through the RSS Archive Feed.
Welfare State In Crisis
The bailout of Greece may not work. Spain is teetering on the edge of serious financial doom. The Euro is taking a beating. And the banks of Europe are not looking too healthy overall. Meanwhile, here in the States, unfunded government debt, already expanding at an unprecedented rate, is set to explode. What do all of these things have in common? They are the direct result of expanding the welfare state without any means of actually paying for all of it.
In truth, there is never a way to pay for expanding the welfare state because, while wealth creation isn’t a zero-sum game, the population of wealth-creators is; after all, not just anyone can create electricity, telephones, heart medications, MicroSoft, Wal-Mart, or even pencils without some know-how, sweat and inspiration. If that were possible, then wealth creation could never be retarded, regardless of the impediments. Some wise, noble, and completely selfless individual would always emerge to drive the economy forward. Alas, self-interest trumps all, without which wealth-creation is for the horses.
No matter how ingenious the plan, or divine the motives, the only way for governments to fund the welfare state is to tax the wealth-creators. As even the most Marxist of intellectuals knows, if you want less of something, then tax it. This is why cigarettes are levied against in ridiculous proportions, and why carbon taxes are considered (by some) to be the savior of our planet. Well, taxing wealth-creation works exactly the same way: tax it more, and you will get less of it. Which leads to the inexorable conclusion that, as the governments of the world sink deeper into fiscal crisis, the looters will be coming en masse.
Does that mean that we are in for another Great Depression? Not necessarily. In fact, I predict that no such thing will occur. For starters, we have many institutions in place today that didn’t exist in the 1930′s such as the FDIC, Social Security, Medicare, the IMF, and the World Bank. Some of these things are arguably beneficial in that they smooth out the rough patches that economies inevitably encounter. The U.S. economy, for example, may not have realized the devastation it did if old people, like McQ, could have survived without taxing their families’ resources so much, or the FDIC had been in place to quell bank runs. Maybe. But more importantly, in this day and age our politics and law-making bodies (and those of every democratic society) are dominated by those whose own self-interest is firmly grounded in the ability to buy votes. That ability is highly dependent upon feeding the welfare state, since the vast majority of votes are bought from those who don’t create electricity or heart medications. This is why politicians of all stripes won’t take steps that would decrease the welfare state, because to do so will cost them votes — to the politician who promises more largesse at the expense of whatever hated rival is being villainized at the time. Accordingly, the odds are rather stacked against wealth-creators continuing to employ their skills in service of the very state that punishes them.
Instead of the Great Depression, Part Deux, I would predict that the elites (those, and their friends, who hold the power to dole out goodies for votes) will shuffle the deck just enough to ensure that they stay in favor, while allowing the overall health of the economy to softly fade into oblivion. They are like Dr. Kevorkian administering to capitalism. The ability to create wealth will slowly continue to be arrogated to the governors and “experts,” while the welfare state expands in decrescendo. Eventually, we will be left with something akin to the Ottoman Empire: all power and glory in name only, inside a rotting shell, harkening back to a time so dissimilar as to be unworthy of the title. What’s left will be hopeless, farcical and cruel, and will not have the slightest ability to nurture the welfare state that started it all. Perhaps the “Long Morose” would be a better title.
Irrespective of my gloomy predictions, there simply isn’t any question that, at some point, the beneficiaries of the great welfare state will have to take a bath. Most likely, that day will come when everyone jumps in the tub together. Until that time, prepare for the politically powerful to loot the wealth-creators out of existence in order to pay off the welfare beneficiaries. Eventually the only ones left to take that bath will be the filthy and the unwashed.
More debt pressure on Europe…and US business
Following yesterday’s announcement that Greek debt was downgraded to junk status, today Spain’s debt was downgraded as well. Spain is, in many ways the bellwether for Europe’s debt crisis. Spain has a much larger economy than Greece. So large, in fact, that it may be too big to bail out.
Fortunately, Spain’s debt is still less than 60% of GDP; however, the country is on a reckless fiscal path and the government shows no signs of doing anything about it.
As a result of the growing crisis, the Euro is getting hammered in the FOREX market, while the dollar is soaring. This is, in effect, an interest rate hike for US businesses that export to the Euro zone.
Naturally, this places downward pressure on US export sales at a time where the overall business climate is still weak. So, none of this is good news for the American economy, either.