Thursday, February 11, 2010
For those of you who love "King Dollar" (as Larry Kudlow describes it), take some joy in the recent precipitous decline in the Euro. The reason is that the so-called "PIGS" -- the free-spending Eurozone countries of "Club Med," Portugal, Italy, Greece and Spain -- are in a lot of financial trouble, with Greece leading the way. Candidly, the issue is beyond my ken, but there are clearly those who believe that the financial crisis amounts to the first really harsh test of the European monetary union. With that background you might enjoy this bit from Stratfor's "Geopolitical Diary." And please, if any of you actually understand this issue please declaim thereon in the comments.
Germany’s ruling parties — the Christian Democratic Union (CDU) and the Christian Social Union (CSU) — announced on Tuesday that they would meet on Wednesday to discuss a financial assistance package for Greece. This is the issue of the year — if not the issue of the decade — for Europe.
German power since the Second World War was nonexistent until reunification was completed in 2003. Germany was flatly denied both an independently tasked military as well as an opinion on international affairs. Yet it was still the largest economy in Europe, leading the other Europeans to use Germany as a slush fund to pay for European projects. Now, however, Germany has woken up, and while it still does not have meaningful military capacity, it does have an opinion again.
This fact turns Europe’s crisis into an opportunity. After a decade of spending money like it grew on (someone else’s) trees, the so-called “Club Med” countries of Spain, Italy, Portugal and especially Greece are facing financial meltdown. Should these countries crack, it could spell the end of the eurozone and the EU as globally significant institutions. The only likely way to prevent this from happening will be for Germany –- the only European state with budgetary stability and sufficient economic heft — to pour cash down the Club Med financial whirlpool. Doing so would grant Berlin the leverage it needs to remake Europe in its own image, but would likely run up a bill in the hundreds of billions of euros. Not doing so would be Germany’s sweet revenge — and probably the cheaper option — against the European spendthrifts, but would also come at the political cost of any great power aspirations.
It is a tough call, and the Germans are debating what they are going to do. Early information indicates that they are leaning toward intervention, and will begin briefing their fellow EU members on their plans this Thursday.
As I press the "publish post" button CNBC is reporting that "there is a deal" to rescue Greece, but no details. German money will almost certainly play a role. The question is whether it will be disproportionate to France's contribution.
Off to give a rousing speech. Wish me luck.
1) Minor quibble: it's PIIGS, as Ireland is in the group, too. See this related Stratfor article: http://www.stratfor.com/weekly/20100208_germanys_choice?utm_source=GWeekly&utm_medium=email&utm_campaign=100208&utm_content=readmore&elq=4dffd882ec974bba8b07444462ffd18d
2) If Germany chooses to bail out Greece, it will be a monumental mistake. First, the Greeks never will grow up. Yesterday, they struck and rioted like spoiled 2-year-olds because their government attempted to reduce their handouts by a pittance. Second, if Germany acquiesces in the bailout, they will remain subordinated to the rest of Old Europe as thoroughly as they were after the Versailles Treaty. Germany has been used by the rest of the EU--and of the Eurozone--as a DM40 Strasse, umm, lady solely to satisfy their neighbors' urges.
Germany will be free when they're no longer the forced pocketbooks of the others. Not sooner.
The PIIGS have no hope of correcting their situations as long as they continued to be bailed out--to be spoiled and rewarded for their refusal to discipline themselves. And the PIIGS will continue to be a drain on the the rest of Old Europe. Their protestations that they will do better is just so much Obamatalk--idle chit-chat with no intention actually to do anything.
The Zerohedge website has by far the best and most extensive coverage of this issue. The extent of the European debt problems is staggering, as is the degree to which it has remained hidden. Much of Europe has no hope of ever digging out from under the mountain of debt the Eurocrats have accumulated for them.
If they bail out Greece then Ireland, Italy, Portugal and Spain will be next on the queue. Austria and Belgium aren't far behind. There isn't enough wealth in the EU to cover these debts.
Much like the U.S., the choice is between defaulting on the debt or devaluing the Euro. Why should Germany, and to a lesser extent France, accept a massive devaluation of their currency (and thereby their standard of living) to bail out the PIIGS?
This is the beginning of the end of the EU. It is extremely fortuitous timing for Obama, as it is driving capital into the "safe haven" of U.S. Treasuries.
>> The PIIGS have no hope of correcting their situations as long as they continued to be bailed out--to be spoiled and rewarded for their refusal to discipline themselves. And the PIIGS will continue to be a drain on the the rest of Old Europe. Their protestations that they will do better is just so much Obamatalk--idle chit-chat with no intention actually to do anything.
I don't disagree with these comments, Eric, but to be fair much of their problem is demographic, not behavioral. It's no coincidence that the PIIGS are the first countries in Europe to slide into financial free-fall. Demographers have been warning that their birth rates are too low for years.
Low birth rates coupled to a welfare state inevitable results in national bankruptcy. There's not much these countries can do anymore.
The basic problem seems to be that the Greeks don't pay their taxes.
It is hard to see why the tax-paying Germans should bail them out.
In the medium term, the only way out of debt is inflation, which reduces thge value of what is owed.
"Low birth rates coupled to a welfare state inevitable results in national bankruptcy."
Not if people stay healthy longer (e.g no smoking), work to a greater age, and pay their taxes.
Your plan to worsen the over-population of the Mediterranean region is not practical. Raising the retirement age is, and so is jailing corrupt tax collectors.
Via email from Charlottesvillain:
I agree with previous commenters. Zerohedge has the best ongoing coverage of this that I've found, and the more I learn the more convinced I become that this is the beginning of the end for the Euro.
It will be interesting to learn the details of the bailout, and to watch the domestic political repercussions in Germany in particular. The Germans have endured their own version of austerity integrating the former East Germany. I suspect voters there will not take kindly to additional sacrifice to bailout undisciplined countries. Watch for the rise of opposition voices from the right.
I actually thought the IMF would eventually be brought in to do this (thereby spreading the pain to the US and other developed economies outside of Europe). That still may be the case, but I am not confident that either bailout solution will do more than put off the crisis by a few months. Regardless of the source of the bailout, to be effective it will need to come with draconian domestic spending conditions that encroach on the sovereignty of Greece (and those countries that will come later). Will the people of these countries submit to austerity forced on them by Brussels in order to stay in the union? I suppose one outcome here is a more centralized Pan European government, but I think dissolution is more likely.
Anonymous of Thu Feb 11, 09:42:00 AM suggests that the problem is demographic rather than behavioral. It is a behavior that folks migrate, and it is a behavior that better-off folks tend to choose to have fewer children. Demographics are just behavior writ large. And it is behavioral for folks to demand a welfare state to coddle them: "I exist, therefore you--anybody else--owe me a living. Pay up."
While, to be fair, it was difficult in the past to foresee the outcomes of migration and of lowering birthrates (demographer warnings notwithstanding), today we all do know better. The warnings have been/are being empirically demonstrated. And the disaster represented by demanding to freeload off others has been well known for decades, with empirical demonstrations abounding in New Europe, northern Europe, and elsewhere.
That there's not much these PIIGS can do anymore is true enough as long as they demand to continue their present course--this is painfully true. However their willful failure in no way obligates any other nation to continue to fund their social demands or the economies which pretend to underlie these demands.
Mr Cox says, "Your plan to worsen the over-population...." Wow. Perhaps you can quote the actual words used, and then perhaps you can walk us lesser mortals through the logic you employed to get from those words to your conclusion.
The impetus for the European Community was the idea that in order for Europe to matter in the world it would have to become a bloc as large as the US. The first major step was to establish the Euro as the bloc wide currency, emulating the US. The fatal flaw was to let the signatories borrow on their own.
Almost all of the United States have a balanced budget requirement, thus avoiding the Euro disease. The most dangerous element of the current economic situation is the state bailouts from DC. This, I fear, would trigger a tailspin spiral. A few airplanes can pull out, but very few.
@ Charlottesvillian: ZH reported posted a screenshot of what appears to be a Bloomberg terminal posting indicating that Greece has ask for IMF assistance. What the hell--we might as well print a few trillion more dollars while we're at it. Welcome to the matrix.
@ Don Cox: Far from being in danger of overpopulation, the Med region is in danger of extinction. Go read a bit about birth rates in the region then come back. In short, many of the countries in the region have fallen below the 1.3 birth ratio, which demographers define as the death spiral for a country. They are being kept afloat only by immigration from N. Africa.
As to Greece, their problems are intractable, and far beyond tax avoidance. About a month ago I read an article with the statistic that every private sector worker in Greece is supporting almost three other people (1.x government workers and 1.y pensioners/dole receivers). Obviously, this is not sustainable.