Saturday, October 29, 2011

More on the implications of the disastrous Eurozone bailout

Two articles in the Telegraph caught my eye today. Both are seriously worrying - and both also bear out aspects of what I said on Friday.

The first is by columnist Liam Halligan, who explains 'Why the latest eurozone bail-out is destined to fail within weeks'.

I want last week's European bail-out to work. My sincere hope is that collective and decisive action by the eurozone's large member states will stabilize global markets, at least for a while, so allowing the global economy to catch its breath.

. . .

Yet the responses of our politicians to recent financial troubles – hiding behind complexity and kicking the can down the road – have not only failed to temper the volatility, but have actually made it much worse.

Last week's eurozone "agreement", for all the related fanfare, was a case in point. Far from making the situation clearer, allowing investors to make considered assessments, this latest announcement made Western Europe's grotesque debt crisis even more acute, sowing further infectious spores of confusion.

. . .

By late Thursday ... and certainly on Friday, the warning signs were there. Global bond markets, by character more sober and smarter than the excitable equity guys, were voting against the deal. This is alarming. For it is only by selling more bonds that the eurozone's deeply indebted governments can roll-over their enormous liabilities and keep the show on the road.

Some say Western governments shouldn't "accept" what the market says. "Who do these trading people think they are," I hear from the lips of the educated but financially-illiterate political elite. Let's be clear – if global bond markets stop lending to a number of large Western economies, we are in the realms of unpaid state wages and pensions, transport chaos and closures of schools and hospitals – sparking the prospect of serious civil unrest. Forgive my intemperate tone, but these are the dangers we face. And I'm afraid the only rational response to Thursday's announcement is that the probability of such undesirable outcomes has just been increased.

. . .

So, the centre-piece of last week's "package" is far less decisive than meets the eye. It was, in fact, singularly indecisive. The hope that Greece will clean-up its balance sheet autonomously now relies even more on a privatization programme that is already laughably behind schedule. So the moral hazard will go on, making it tougher still for the governments of Portugal, Ireland and the other eurozone "peripheries" to sell to their electorates the virtues of fiscal responsibility. These are not clever-clever academic points. I'm pointing-out, quite simply, what the bond markets will have noticed.

. . .

What is needed, urgently, is a clean, transparent Greek default – allowing this flailing semi-developed economy to leave the eurozone, re-establish a weaker drachma and regain its self-respect. Portugal should leave too, its membership of the same currency bloc as Germany is as absurd, and self-defeating, as that of Greece. There would be further market turmoil, yes, but a few more months of volatility, leading to an ultimately more stable outcome, is surely better than the current situation where the entire world is living in fear of a massive "euroquake".

The eurocrats, of course, lack the guts to trim back monetary union to a more manageable size. Too much face would be lost. So "euroquake" fears, once viewed as outlandish, are gaining pace. Despite Thursday's deal, and all the reassurances of a "durable solution", the Italian government on Friday paid 6.06pc for 10-year money, up from just 5.86pc a month ago and a euro-era high. Such borrowing costs are disastrous, given that Rome must roll-over €300bn of its €1,900bn debt in 2012 alone. A default by Italy, the eurozone's third-biggest economy, and the eighth-largest on earth, would make Lehman look like a picnic.

The eurozone must be consolidated. World leaders should similarly force European banks to disclose their losses, we all take the hit and then we move on. Instead, we are served-up, in ever more complex variants, the same "extend and pretend" non-solutions. It gives me no pleasure to write this, but I give this deal two weeks.

There's more at the link. Bold print is my emphasis.

The second article is by Janet Daley, who mourns: 'This was the week that European democracy died'.

Democracy went down in a blaze of glory last week. Both the German Bundestag and our own House of Commons put up one hell of a fight against the dying of the light. Maybe history will record that fact in an elegy on the demise of the great 18th-century experiment in government by the people: they were eloquent to the end. Because at the end, eloquence was all they had.

Trying to hold back the resurgence of oligarchy – the final dismantling of democratic responsibility in the governing of Europe – has been looking pretty hopeless for a long time. That eruption of excellent rhetoric and faultless argument which sprang to the defence of the rights of the governed (and in Germany’s case, of constitutional legality) made the loss seem all the more tragic, but no less inevitable.

So this is where we are. The agreed EU “stability union” triumphantly paraded before the media in Brussels will have the power to approve or disapprove budgets of countries in the eurozone – that is, to vet and police them – before they are submitted to the elected parliaments of those countries. In other words, parliaments which are directly mandated by, and answerable to, their own populations will not control the most essential functions of government: decisions on taxation and spending. Even without the ultimate institutions of economic and political union, which still elude the EU, actual power over fiscal policy will be taken from the hands of national leaders. And if, as a voter, you cannot influence your prospective government’s tax and spending policies, what exactly are you voting for?

. . .

Indeed, it is often quite eerie how the statements and mannerisms of EU officials, seemingly so dedicated to being the precise opposite of earlier, infamous generations, end up echoing (or parodying) the more memorable moments of the war-torn 20th century. When the president of the European Commission, José Manuel Barroso, proclaimed, “I am pleased to stand before you this morning and confirm that Europe is closer to resolving its financial and economic crisis… We are showing that we can unite in the most difficult of times”, I half expected him to wave a piece of paper in the air and proclaim economic stability in our time.

In reality, everybody’s historical experience stands in the way of the EU economic and political union steamroller.

. . .

Far from being an antidote to the ideological delusions of the past century, a trans-national superstate is the same sort of utopian, unnatural, ahistorical folly that earlier generations attempted to foist on the recalcitrant populations of Europe. Its doctrine of “co-operation” is simply coercion by another name. It relies on unswerving belief and enforced conformity, just like all the “year zero” political movements that ended in totalitarianism and terror in the past. The one hope is that the great mass of the people, unlike most of their political leaders, seem to understand all this quite clearly. It remains to be seen whether they will have to go out on the streets to make their case.

Again, more at the link.

I urge interested readers to click on the links and read both articles in full. The problems they predict for the Eurozone are going to directly impact us here in the USA. Frankly, for all our economic woes and current political dysfunction, I'd rather be here than there!


1 comment:

KurtP said...

Actually, European democracy died when they voted form the bloated and self aggrandizing bureaucrats of the EU to take over for the states.
They just didn't know how bad it would get.

Which -given the history of the European states is kind of like not knowing a tiger likes meat...