Free Markets, Free People

European Union

Observations: The QandO Podcast for 17 Jun 12

This week, Bruce, Michael and Dale talk about Niel Munro interrupting the president, and the Greek elections.

The direct link to the podcast can be found here.

Observations

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 2010, they can be accessed through the RSS Archive Feed.

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

Observations: The QandO Podcast for 27 Nov 11

This week, Bruce Michael, and Dale record talk about the implications of Germany’s failed bond auction.

The direct link to the podcast can be found here.

Observations

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 2010, they can be accessed through the RSS Archive Feed.

The North South Divide

Fundamentally currency unions without fiscal union are flawed. Shoehorning the northern and southern countries of Europe into one (with our without fiscal union) made no sense at all (The Economist)

The economies of southern and northern Europe make strange bedfellows

SINCE bond investors began to discriminate between the euro-zone economies, pushing yields on Spanish, Irish, Greek, Italian and Portuguese government debt soaring, much of the talk in northern Europe has been of profligate governments in the south. As these indicators show, the euro zone’s problems go rather deeper than that. A large chunk of the single-currency area has a chronic competitiveness problem, with a horrible mixture of high unemployment, low productivity and low investment. One unsolved mystery is why all this ought to have some correlation with latitude. Answers to the Bundesbank, please.

Will Eurobonds Work?

(Originally posted at Risk and Return)

I have been skeptical and so is James Bianco:

The problem in Europe is simple – they created a common currency – the euro. For years, the market erred. It thought that meant that every sovereign debt had the same rating as Germany. I was buying Greek bonds. I was buying Irish bonds. I was buying Italian bonds. But I thought I was buying German bonds. Then, a couple of years ago, I had an epiphany – no, I was not buying German bonds; I was buying Greece, Italy, and Ireland, or whatever, not Germany.

Those countries, recognizing that they could borrow into infinity because everybody thought they were lending to Germany, pretty much did that and expanded their welfare states to the point where they cannot pay their debts.

Germany has disappointed everybody with its intransigence, its unwillingness to “get with the program,” and endorse massive ECB bond buying and Eurobonds. Their reason? They believe they will be stuck with the bill. Of course, they are right, they will be:

If a Eurobond market comes with with strict discipline/rules on borrowing and paying debt back, it might work.  Unfortunately no one will agree to a Eurobond market with strict discipline/rules.

If a Eurobond market comes with no discipline/rules, then it is just another way to trick the market into thinking they are buying German Bunds.   It will “work” for a while as the crisis will ease until everyone borrows too much money and then comes back much worse.

I am not even sure it will work more than a few days at this point, but maybe. Either way it is not a solution, but a stop gap at best. It is also a stop gap that should not be attempted unless an actual endgame is in sight:

So how do you fix the Euro crisis?  Unfortunately there are only three solutions and all are distasteful:

  • Call off the union and go back to legacy currencies.  This destroys the banking system who will be paid back with devalued/nearly worthless currencies.
  • Massive austerity.  This option is very unpopular among the electorates and will cause a bad recession/depression.
  • Fiscal union.  This is a nice way of saying Germany finally wins WW2.  Is the rest of Europe now ready to take orders from Berlin?  Didn’t they fight two wars to prevent this?

The only reason ECB printing keeps being mentioned is because the three options above are untenable and money printing is the only other thing they can think of.  Money printing does NOT fix anything, it just makes the problem better for a while until it comes back worse than before.

This dovetails with my analysis in The German Dilemma that their are no good options from the German perspective, and in fact fiscal union is far more problematic than commonly realized:

Full Fiscal Integration: Since all other solutions put in place circumstances that are unstable and merely kick the can down the road, the fundamental flaw in the Euro needs to be addressed. That is the lack of a unified fiscal policy. The answer then is the end of sovereignty, the creation of a US of Europe. An obvious objection is that Germany wants to be a sovereign nation. We’ll skip this niggling little detail, but even if they didn’t want to remain sovereign do they want to harmonize laws and economic policy with Greece and some of the other PIIGS? West Germany just  integrated with East Germany and the experience was traumatic featuring massive transfers to East Germans. The PIIGS will still not be competitive with Germany. That means internal adjustments (internal devaluation or austerity) to allow them to become more competitive for the PIIGS’ or massive transfers. Thus unifying the Eurozone under a single fiscal policy means massive transfers from Germany to the PIIGS to harmonize the welfare states and unify the debt and avoid austerity throwing the entire Eurozone into depression. Germans will pay for the debt in one fashion or another.

Cullen Roche points out that in the US we don’t worry much about the need for internal transfers between states to keep the system sound.  Today that is true, though it has led to large conflicts in our past, playing a role in civil unrest, uprisings, the conquest of a continent and near destruction of its former inhabitants and the Civil War. Our unity was easier to envision and still born of blood and tragedy.

I am not saying unification of Europe would lead to such tragedies and conflicts. However, we need to ask if Germany (or really all the countries) want to make the internal transfers that make such a system work? Germans would pay a great deal, Greece and the other PIIGS would suffer internal austerity to the extent that they contribute to the economic re-balancing. Do Europeans, or most importantly the Germans, view themselves as a people who will be responsible for paying all the bills to integrate the Greeks and others?

Are Europeans ready to think about their home countries in the same way Texans think of Texas? Their state, but completely subordinate to the US? Will they be able to secede? We answered that question in the US with a war of incredible savagery and destruction. My guess is a unified Europe would be far less stable. They will not choose a civil war comparable to the US, but instead countries leaving over time as well as never entering the union. That leaves us with all the problems we have now still being there. Without a European populace overwhelmingly in favor of a true union this will not work. We would be faced with a PIIGS like crisis with every election and the possibility of secession in each of the former countries.

The necessity of creating a union where there is no possibility of secession, where citizens are more loyal to the European sovereign entity than their own countries is incredibly unappreciated. Half measures will not work. If Texas were to get upset about staying in our own Union it would not matter how overwhelmingly popular the idea of leaving was in the Texas legislature, the US military will ensure that Texas stays a subordinate state. We decided that issue in 1865 at the cost of well over 600k casualties.

If a similarly firm enforcement of Eurozone union is not agreed to (and setting aside a war to force union) then why should the market assume the system will remain intact? Why consider the bonds issued by the various states, or the Eurozone as a whole, deserve a AAA rating?  My belief is that eventually the Eurozone will suffer other crises as states face local elections that wish to leave for one reason or another. Critically Eurobonds and fiscal Union make it easier for countries to leave, since the debt will be the Eurozone’s, not theirs. They can leave and stick the remaining members with the bill. That is an incentive which virtually ensures instability.

Treaties don’t matter if there is no enforcement mechanism, and all enforcement mechanisms at the end of the day have to have a credible belief in military force behind them to matter. Otherwise those who wish to exit can just thumb their noses at whoever stays behind. Has there ever been a successful union where the underlying members could leave? Not that I am aware of.

There are no good options, only more or less realistic ones.

The death of the social democratic welfare state

Margret Thatcher boiled it down to its essence years ago – “the problem with socialism is you eventually run out of other people’s money”.

Janet Daley, writing the the UK’s Telegraph, hits a proverbial homerun with her macro look at the “situation” in which both the US and Europe find them selves.  It’s not a pretty picture, but quite accurate.   Per Daley, what we’re going through right now, at least on the European side of the pond, isn’t some esoteric debate about a crisis that will eventually be solved, it is the predictable endgame of the premise that a capitalist system can support an ever expanding social welfare state.  Per Daley, the  answer seems to be a pretty obvious “no”. 

Her reasoning for her conclusion is painful for those who want to believe that such a premise is actually attainable.  Let’s take a look:

The truly fundamental question that is at the heart of the disaster toward which we are racing is being debated only in America: is it possible for a free market economy to support a democratic socialist society? On this side of the Atlantic, the model of a national welfare system with comprehensive entitlements, which is paid for by the wealth created through capitalist endeavour, has been accepted (even by parties of the centre-Right) as the essence of post-war political enlightenment.

This was the heaven on earth for which liberal democracy had been striving: a system of wealth redistribution that was merciful but not Marxist, and a guarantee of lifelong economic and social security for everyone that did not involve totalitarian government. This was the ideal the European Union was designed to entrench. It was the dream of Blairism, which adopted it as a replacement for the state socialism of Old Labour. And it is the aspiration of President Obama and his liberal Democrats, who want the United States to become a European-style social democracy.

The left in this country can deny this all they wish, but Daley succinctly lays out the Democrat’s “ideal” in plain English.  Any attempt to deny that is simply counter-factual.  European-style social democracy has been the ideal of Democrats for years.   And the fight over entitlements makes the point.   The difference between the US and Europe is two-fold.   We thankfully began pursuing that ideal much later than did Europe and the basic difference in make up between Europe and the US is the primary reason:

But the US has a very different historical experience from European countries, with their accretions of national remorse and class guilt: it has a far stronger and more resilient belief in the moral value of liberty and the dangers of state power. This is a political as much as an economic crisis, but not for the reasons that Mr Obama believes. The ruckus that nearly paralysed the US economy last week, and led to the loss of its AAA rating from Standard & Poor’s, arose from a confrontation over the most basic principles of American life.

Contrary to what the Obama Democrats claimed, the face-off in Congress did not mean that the nation’s politics were “dysfunctional”. The politics of the US were functioning precisely as the Founding Fathers intended: the legislature was acting as a check on the power of the executive.

Precisely.  None other than Cokie Roberts noted the “problem” we have here that Europe doesn’t on one of the Sunday shows.  

 

That “problem” and a different but eroding view of the role of government.  And all though we’re on the precipice, that “problem” is  all that have kept us from sliding into the pit Europe has dug for itself over the decades. 

What is going on now is not the fault of the Tea Party, no matter how hard the spinners like David Axlerod and John Kerry attempt to make it so.  In fact, the Tea Party contingent actually represents that fundamental but eroding view of the role of government and the “problem” Cokie Roberts refers too.

The Tea Party faction within the Republican party was demanding that, before any further steps were taken, there must be a debate about where all this was going. They had seen the future toward which they were being pushed, and it didn’t work. They were convinced that the entitlement culture and benefits programmes which the Democrats were determined to preserve and extend with tax rises could only lead to the diminution of that robust economic freedom that had created the American historical miracle.

And, again contrary to prevailing wisdom, their view is not naive and parochial: it is corroborated by the European experience. By rights, it should be Europe that is immersed in this debate, but its leaders are so steeped in the sacred texts of social democracy that they cannot admit the force of the contradictions which they are now hopelessly trying to evade.

Facts are a stubborn thing.  They have a tendency to destroy beliefs and perceptions.  The belief and perception of the “premise” that a capitalist system could forever support an expanding social welfare state is in the throes of being dashed upon the rocks of economic reality.  That’s a harsh thing to see if it is your belief.  And we all know the various stages of grief.   Right now, the true believers are in the “denial” stage.  The only one’s dealing in reality are the Tea Partiers.  Like the canary in the coal mine, they’ve alerted us to a mortal danger that has been acted out in Europe and is now collapsing from within.  They’ve accurately pointed to our problem and how it will lead to the very same conclusion.  They’re demanding we stop pursuing that reckless and doomed “ideal” and return to our fundamental governing ideals – limited government, less costly government, less intrusive government.

And, of course, the true believers in the social welfare state, those who’ve gotten us into this mess and want to deny the problem and continue the pursuit of their destructive ideal are resisting with every fiber of their being and ironically, calling the Tea Partiers the radicals.

What the left can’t control though is the example of our future that Europe provides, like it or not:

No, it is not just the preposterousness of the euro project that is being exposed. (Let’s merge the currencies of lots of countries with wildly differing economic conditions and lock them all into the interest rate of the most successful. What could possibly go wrong?)

Also collapsing before our eyes is the lodestone of the Christian Socialist doctrine that has underpinned the EU’s political philosophy: the idea that a capitalist economy can support an ever-expanding socialist welfare state.

Phenomenally, while the problem becomes more and more undeniable, the solutions being considered are precisely the opposite of what is needed.

As the EU leadership is (almost) admitting now, the next step to ensure the survival of the world as we know it will involve moving toward a command economy, in which individual countries and their electorates will lose significant degrees of freedom and self-determination.

That’s right – those who, through the years, have managed to put us in this situation now think they need more control, intrusion and command, not less.  Those who’ve managed, through their policies and ideology, to wreck the best economies on earth, want more power.  They won’t let go of the belief, despite the reality.  Take for example the Democrats almost single focus on higher taxes.   They still believe they can have their cake (or your cake actually) and eat it too.

We have arrived at the endgame of what was an untenable doctrine: to pay for the kind of entitlements that populations have been led to expect by their politicians, the wealth-creating sector has to be taxed to a degree that makes it almost impossible for it to create the wealth that is needed to pay for the entitlements that populations have been led to expect, etc, etc.

The only way that state benefit programmes could be extended in the ways that are forecast for Europe’s ageing population would be by government seizing all the levers of the economy and producing as much (externally) worthless currency as was needed – in the manner of the old Soviet Union.

That is the problem. So profound is its challenge to the received wisdom of postwar Western democratic life that it is unutterable in the EU circles in which the crucial decisions are being made – or rather, not being made.

Daley speaks of the EU, but listen carefully to the left and the Democrats in this country.   They’re offering exactly the same “solutions” and this administration is attempting that solution by executive fiat through regulation.   Look at the health care grab as well.  We’re headed down exactly the same road Europe has traveled and the left in this country is telling everyone to ignore the road signs telling us so.

The Tea Party has figured that out as have many on the right.  But the left wants to go right on pretending it isn’t so:

We have been pretending – with ever more manic protestations – that this could go on for ever. Even when it became clear that European state pensions (and the US social security system) were gigantic Ponzi schemes in which the present beneficiaries were spending the money of the current generation of contributors, and that health provision was creating impossible demands on tax revenue, and that benefit dependency was becoming a substitute for wealth-creating employment, the lesson would not be learnt. We have been living on tick and wishful thinking.

Couldn’t agree more.  We ‘radicals’ who’ve been saying this for years have been proven to be factually correct.  It is an inconvenient truth the left doesn’t want to either accept or admit.   So the still hold on to the belief that if they could only make the ‘rich’ pay their fair share, they’d find utopia still achievable.  Reality, however, in the guise of the European experiment now imploding, already provides proof their theory has no basis in truth.

So what is the solution?  Well in the short term Daley prescribes some bitter but necessary medicine:

So what are the most important truths we should be addressing if we are to avert – or survive – the looming catastrophe? Raising retirement ages across Europe (not just in Greece) is imperative, as is raising thresholds for out-of-work benefit entitlements.

Lowering the tax burden for both wealth-creators and consumers is essential. In Britain, finding private sources of revenue for health care is a matter of urgency.

More importantly though:

The hardest obstacle to overcome will be the idea that anyone who challenges the prevailing consensus of the past 50 years is irrational and irresponsible. That is what is being said about the Tea Partiers. In fact, what is irrational and irresponsible is the assumption that we can go on as we are.

Dead on. Fundamental change.  Backing government out of our lives.  And we’re dead meat if we don’t heed and act on the fact that the social welfare state is a zombie (but doesn’t yet know it) and we need to finally and irrevocably kill it, never let it rise again, and return to the ways which made us great and are enshrined in our founding documents.

~McQ

Twitter: @McQandO

Observations: The QandO Podcast for 31 Jul 11

In this podcast, Bruce, Michael, and Dale discuss concerns about Turkey, and the debt limit.

The direct link to the podcast can be found here.

Observations

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 2010, they can be accessed through the RSS Archive Feed.

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

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How Bad Is It? Check Out Europe

It is certainly worse abroad than here. As Dale pointed out, if this is a failure of the “free market” why is Europe, which is very tightly regulated, having a worse time than we are? Ambrose Evans-Pritchard has a blog post outlining the woes of Europe. First, the real possibility of repudiation of debt:euro

Ex-Bundesbank chief Karl Otto Pohl has just said that Ireland and Greece are in danger of defaulting on their sovereign debts and/or may be forced out of the Euro, for those who may not be aware of his Sky interview by my colleague Jeff Randall.

“I think there are countries considering the possibility. It would be very expensive,” he said. “The exchange rate would go down, 50 or 60% and then interest rates would go sky high because the markets would lose all confidence.”

Then we have the possible abandonment of the Euro in order to “re-establish economic competitiveness quickly”:

Laurence Chieze-Devivier from AXA Investment Managers — in “Leaving the Euro?” — says that the rocketing debt costs of Ireland, Greece, Spain, and Italy are taking on a life of their own. (Italy has just revised is public debt forecast from 2010 from 101pc to 111pc. That is a frightening jump. While the CDS default swaps on Irish debt is are at 376 basis pouints. Austria is at 240. This is getting serious).

It is far for clear whether all these countries will accept the sort of drastic retrenchment required to stay in EMU. “By leaving the euro, internal adjustments would become less `painful’. An independent currency would re-establish economic competitiveness quickly, not achieved by a sharp drop in employment or wage cuts”.

 

euronations

The possible death of the “European nation”:

Carsten Brzeski for ING in Brussels said the eurozone laggards were more likely to default than pay the punishing costs of leaving EMU.

“It is difficult to believe that Portugal, Italy, Ireland, Greece, and Spain, would be better off outside the eurozone. While a government could possibly get away with a redenomination of its debt, the private sector would still have to service its foreign debt. We believe any attempts to leave monetary union would lead to the mother of all crises, and total isolation in any future European integration”

Mr Brzeski said the bigger danger is that countries will face a buyers’ strike for their debt as a flood of bond issues across the world saturates the markets.

“A further worsening of the crisis could lead to (partial) sovereign defaults in one or several countries.”

How is that likely to happen?

The country’s parliament could pass a law redenominating debt into the new Lira, Drachma, or whatever. But there would be a pre-emptive run on bank deposits long before then. “Anyone not desirous of losing money would presumably see the writing on the wall and transfer any funds beyond the reach of the state. In other words, close down that account with Monte dei Paschi di Siena and open a new one with Commerzbank in Germany”.

Such a wholesale shift would lead to a collapse in the money supply, perhaps equal to the 38pc contraction in M3 from October 1929 to April 1933 in the US — but concentrated in a much shorter period. “Banks would be forced to call in outstanding loans, bring about a collapse in the country’s business.”

Certainly a bit of a doomsday scenario, but, unfortunately, not at all outside the realm of possibility. In fact, as they are, some are arguing it will happen in the near future. Almost every bit of it the result of market distortions implemented or enabled by government.

~McQ