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We’re heading for economic dictatorship

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by Janet Daley via the Ludwig von Mises Institute of Canada (originally posted on The Telegraph)
November 27, 2012

Forget about that dead parrot of a question – should we join the eurozone? The eurozone has officially joined us in a newly emerging international organisation: we are all now members of the Permanent No-growth Club. And the United States has just re-elected a president who seems determined to sign up too. No government in what used to be called “the free world” seems prepared to take the steps that can stop this inexorable decline. They are all busily telling their electorates that austerity is for other people (France), or that the piddling attempts they have made at it will solve the problem (Britain), or that taxing “the rich” will make it unnecessary for government to cut back its own spending (America).

So here we all are. Like us, the member nations of the European single currency have embarked on their very own double (or is it triple?) dip recession. This is the future: the long, meandering “zig-zag” recovery to which the politicians and heads of central banks allude is just a euphemism for the end of economic life as we have known it.

Now there are some people for whom this will not sound like bad news. Many on the Left will finally have got the economy of their dreams – or, rather, the one they have always believed in. At last, we will be living with that fixed, unchanging pie which must be divided up “fairly” if social justice is to be achieved. Instead of a dynamic, growing pot of wealth and ever-increasing resources, which can enable larger and larger proportions of the population to become prosperous without taking anything away from any other group, there will indeed be an absolute limit on the amount of capital circulating within the society.

The only decisions to be made will involve how that given, unalterable sum is to be shared out – and those judgments will, of course, have to be made by the state since there will be no dynamic economic force outside of government to enter the equation. Wealth distribution will be the principal – virtually the only – significant function of political life. Is this Left-wing heaven?

Well, not quite. The total absence of economic growth would mean that the limitations on that distribution would be so severe as to require draconian legal enforcement: rationing, limits on the amount of currency that can be taken abroad, import restrictions and the kinds of penalties for economic crimes (undercutting, or “black market” selling practices) which have been unknown in the West since the end of the Second World War.

In this dystopian future there would have to be permanent austerity programmes. This would not only mean cutting government spending, which is what “austerity” means now, but the real kind: genuine falls in the standard of living of most working people, caused not just by frozen wages and the collapse in the value of savings (due to repeated bouts of money-printing), but also by the shortages of goods that will result from lack of investment and business expansion, not to mention the absence of cheaper goods from abroad due to import controls.

And it is not just day-to-day life that would be affected by the absence of growth in the economy. In the longer term, we can say good-bye to the technological innovations which have been spurred by competitive entrepreneurial activity, the medical advances funded by investment which an expanding economy can afford, and most poignantly perhaps, the social mobility that is made possible by increasing the reach of prosperity so that it includes ever-growing numbers of people. In short, almost everything we have come to understand as progress. Farewell to all that. But this is not the end of it. When the economy of a country is dead, and its political life is consumed by artificial mechanisms of forced distribution, its wealth does not remain static: it actually contracts and diminishes in value. If capital cannot grow – if there is no possibility of it growing – it becomes worthless in international exchange. This is what happened to the currencies of the Eastern bloc: they became phoney constructs with no value outside their own closed, recycled system.

When Germany was reunified, the Western half, in an act of almost superhuman political goodwill, arbitrarily declared the currency of the Eastern half to be equal in value to that of its own hugely successful one. The exercise nearly bankrupted the country, so great was the disparity between the vital, expanding Deutschemark and the risibly meaningless Ostmark which, like the Soviet ruble, had no economic legitimacy in the outside world.

At least then, there was a thriving West that could rescue the peoples of the East from the endless poverty of economies that were forbidden to grow by ideological edict. It remains to be seen what the consequences will be of the whole of the West, America included, falling into the economic black hole of permanent no-growth. Presumably, it will eventually have to move towards precisely the social and political structures that the East employed. As the fixed pot of national wealth loses ever more value, and resources shrink, the measures to enforce “fair” distribution must become more totalitarian: there will have to be confiscatory taxation on assets and property, collectivisation of the production of goods, and directed labour.

Democratic socialism with its “soft redistribution” and exponential growth of government spending will have paved the way for the hard redistribution of diminished resources under economic dictatorship. You think this sounds fanciful? It is just the logical conclusion of what will seem like enlightened social policy in a zero-growth society where hardship will need to be minimised by rigorously enforced equality. Then what? The rioting we see now in Italy and Greece – countries that had to have their democratic governments surgically removed in order to impose the uniform levels of poverty that are made necessary by dead economies – will spread throughout the West, and have to be contained by hard-fisted governments with or without democratic mandates. Political parties of all complexions talk of “balanced solutions”, which they think will sound more politically palatable than drastic cuts in public spending: tax rises on “the better-off” (the only people in a position to create real wealth) are put on the moral scale alongside “welfare cuts” on the unproductive.

This is not even a recipe for standing still: tax rises prevent growth and job creation, as well as reducing tax revenue. It is a formula for permanent decline in the private sector and endless austerity in the public one. But reduced government spending accompanied by tax cuts (particularly on employment – what the Americans call “payroll taxes”) could stimulate the growth of new wealth and begin a recovery. Most politicians on the Right understand this. They have about five minutes left to make the argument for it.

Things that make you go hmmm…

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by Grant Williams
25 October 2011
With deference to European readers, I have removed (most of) the original baseball references. Please forgive, Grant!! – Aurick

“Everyone needs the ECB to step up to the plate. The ECB has no excuse not to act. In trying to keep its monetary virginity intact, the bank threatens to destroy the Euro Zone. If that happens, nobody will be able to profit from its virginity.”
– Paul de Grauwe

“Simple Math:

The total overall cap [of the ESM] is 500 billion Euros

160 billion Euros has been spent

340 billion Euros remains

340 billion Euros + zero Euros = 940 billion Euros“

– Mike Shedlock, on the latest European ‘Masterplan’ to merge the EFSF + ESM

“The trouble with quotes on the internet is that it’s difficult to determine whether or not they are genuine”
– Abraham Lincoln

Right now, the team comprising the ECB, EU and the various parliaments that make up that fractured and faltering alliance are sending, in baseball parlance, pitcher after pitcher to the mound (sometimes in groups of two or three) trying to combine for the perfect game that they NEED in order to escape the debt trap they have backed themselves into.

Being in a situation where you lose unless you can pull something off against odds of multiple-thousands to one and pitch a ‘perfect game’ is a ridiculous spot in which to find yourself, but as this month has rolled by, it has become ever-more apparent that that is precisely where the Brussels Eurocrats now find themselves. It appears as though, as the pressure has ratcheted up this week, we are now in the ninth inning.

Personally, my own belief (as regular readers are by now well aware) is that the very best the Eurocrats can hope for is to extend the game by an inning or two, but their arms are tired, their bullpen is empty and, at some point, we are going to see an absolute avalanche of runs scored against them as the whole thing finally topples under its own weight.

This past week has been nothing short of farcical as the tension has built towards a crescendo that seemed at first to be willfully engendered in order to generate just enough sense of impending crisis to enable a resolution to be forced through in a similar fashion to that which preceded Henry Paulson and Ben Bernanke’s now-infamous closed-doors fright-fest (hyphenation alert!) that led to the passing of the TARP in late 2008.

Obviously, any and all capitulation towards outright bailouts (or ‘QEU’) must at least be seen to be against the will of the Germans and that proviso goes a long way towards explaining the raft of headlines that have flooded the Reuters and Bloomberg screens of investors all around the world this week. We have seen misdirection, scaremongering, u-turns and abject incompetence as well as the kinds of ‘leaks’ that are, frankly, laughable – the prime example being the ‘leaked’ draft copy of the Euro Summit statement which was printed, in its entirety, in the Daily Telegraph on Thursday – coincidentally at the precise moment when things were starting to come unglued as it became clear that this Sunday’s Summit would NOT produce the magic bullet required.

The statement itself is priceless. It begins with a bit of back-slapping for the passing of the EFSF (after no less than six months of wrangling and an eleventh-hour drama in Slovakia):

The strategy we have put into place encompasses determined efforts to ensure fiscal consolidation as well as growth, support to countries in difficulty, and a strengthening of euro area governance. At our 21 July meeting we took a set of major decisions. The ratification by all 17 Member States of the euro area of the measures related to the EFSF significantly strengthen our capacity to react to the crisis.

The agreement on a strong legislative package within the EU structures on better economic governance represents another major achievement. The euro continues to rest on solid fundamentals

It then moves on to more familiar ground; an agreement to display their strong determination to fix things. Nothing concrete, of course, but they sure as hell are determined:

The crisis is, however, far from over, as shown by the volatility of sovereign and corporate debt markets. Further action is needed to restore confidence. That is why today we agree on additional measures reflecting our strong determination to do whatever is required to overcome the present difficulties.

The rest of the text, should you want to read it, is here, but allow me to summarise it through a few select phrases that will save you the trouble of doing so:

“blah, blah, blah… All Member States are determined, blah, blah, blah… We want to reiterate our determination, blah, blah, blah… We reaffirm clearly our unequivocal commitment that, blah, blah, blah… All other euro area Member States solemnly reaffirm their inflexible determination, blah, blah, blah… The euro area Heads of State or Government fully support this determination, blah, blah, blah… All tools available will be used in an effective way to ensure financial stability in the euro area, blah, blah, blah… We fully support the ECB, blah, blah, blah… “

See. I told you they were determined.

But, buried deep in the draft are (amazingly enough) some specific measures that will surely help solve the crisis:

• There will be regular Euro Summit meetings bringing together the Heads of State or govern­ment (HoSG) of the euro area and the President of the Commission. These meetings will take place at least twice a year

• The President of the Euro Summit will be designated by the HoSG of the euro area at the same time the European Council elects its President

• The President of the Euro summit will keep the non euro area Member States closely informed of the preparation and outcome of the Summits

• As is presently the case, the Eurogroup will ensure ever closer coordination of the economic policies and promoting financial stability.

• The President of the Euro Summit will be consulted on the Eurogroup work plan and may invite the President of the Eurogroup to convene a meeting of the Eurogroup, notably to prepare Euro Summits or to follow up on its orientations

• Work at the preparatory level will continue to be carried out by the Eurogroup Working Group (EWG)

• The EWG will be chaired by a full-time Brussels-based President. He/she should preferably also chair the Economic and Financial Committee

…and my personal favourite:

• Clear rules and mechanisms will be set up to improve communication and ensure more con­sistent messages.

It’s at this point that the non-Europeans amongst you are possibly finally beginning to get the joke that anybody caught in the tractor beam of ineptitude that is ‘Europe’ (and by ‘Europe’ I mean the bureaucratic construct rather than the land mass) has understood for years.

THIS IS HOW EUROPEAN BUREAUCRACY WORKS, PEOPLE!!!!

Millions of Euros spent on days of‘talks’ to come up with solutions that fail to address any REAL problems.

Don’t believe me?

Article 47 of the Common Fisheries Policy will ensure that every fish caught by an angler is notified to Brussels so that it can be counted against that countries quota. If you go out for a day’s fishing and catch a couple of cod or mackerel you will now be required to notify the authorities or face a heavy fine.

There are EU regulations on the greenness of the person on the pedestrian crossing lights.

There are 3 separate EU directives on the loudness of lawnmowers.

Regulation (EC) 2257/94 – a great read, by the way – stated that bananas must be ‘free from malformation or abnormal curvature of the fingers’. It also contained stipulations about ‘the grade, i.e. the measurement, in millimetres, of the thickness of a transverse section of the fruit between the lateral faces and the middle, perpendicularly to the longitudinal axis’ …

And then there are cucumbers:

Under regulation (EEC) No 1677/88 cucumbers are only allowed a bend of 10mm for every 10cm of length.

Do you think any of those were drawn up in ten minutes on a single piece of paper?

No. (Actually, in fairness to Europe, they don’t have a monopoly on silly legislation: there IS a law in Alaska that makes it illegal to push a moose out of a moving aircraft.)

The Brussels bureaucracy has always been something of a laughing stock amongst the people of Europe – since long before the final creation of the EU, in fact. Way back in 1955, with a European union freshly on the drawing board ten years after the end of WWII, Russell Bretherton, an English Civil Servant was dispatched to Brussels to inform European ministers what Britain thought of plans for an ambitious new European treaty. Upon arrival, he had these words of wisdom for those assembled:

“Gentlemen, you’re trying to negotiate something you will never be able to negotiate. If negotiated, it will not be ratified. And if ratified, it will not work”

Three years later, the Treaty of Rome was signed, establishing the European Economic Community and from that day to this, the degree of meddling, interference and sheer bureaucracy has increased year after year until we find ourselves here.

Europe is broken and the people charged with trying to fix it are clearly not up to the job. There are way too many vested interests, too many national peccadillos and way too many good, old-fashioned egos in play for it to come down to anything but a last-ditch solution when they are forced into it – and that solution WILL be the printing of money in some shape or form which will help to magically inflate the debt away. The other alternatives are either just too painful (default/ forgiveness) or plain unworkable (growth).

A look at a selection of newsflashes that hit screens this week shows just how ridiculous things have become as everybody involved in trying to sort out the mess that is Europe attempts to get themselves in front of a microphone in order to let the world know just how important they are. Some of these appearances, it would seem, are stage-managed for maximum effect on markets – others are simply self-important politicians who just can’t bring themselves to utter the words “no comment”:

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The imminent failure of the Eurozone

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by Econophile
Posted  September 2, 2011
This article originally appeared on the Daily Capitalist.

YOU KNOW THOSE MOVIES WITH THE BOMB SET TO A TIMER ticking down to 00.00 where the sweaty hero nervously cuts one wire at a time while holding his breath and then at 00.01 he stops the bomb? Well, Europe is like that except that the bomb goes off and kills everyone.

Our planet has a problem. Its leading economies, the U.S., Japan, and the E.U. are declining. That is, about one-sixth of the world’s population is losing ground.

These big economies are the ones that lead the rest of the world, including China. Countries like China, India, and Brazil, depend on the health of the big economies to keep buying their products and commodities so they can grow and generate wealth for their citizens.

What is especially concerning is the blow-up that is about to happen in Europe. It is not something that is happening “over there.” In a world that is so interconnected financially and by trade, a sinking Europe is everyone’s concern.

Their problems are much the same as ours with a twist. Their governments and central banks have also pursued reckless monetary and fiscal policies and now, effect is following cause. They have more or less followed the same policies as has the U.S., much to the same end. They spent large, engaged in Keynesian fiscal stimulus in a bailout attempt, ran up huge debts and deficits, and their economies are in decline.

The twist is the European Monetary Union (EMU), known as the eurozone. It is as if here in the U.S. there was no federal government and each state was truly sovereign, but there was a Federal Reserve Bank. Some states spend more than others, funding deficits by borrowing huge sums to support programs their citizens wanted. The profligate states want the Fed to buy their debt and float them loans created out of thin air, or otherwise they will go belly up and they will take down many states’ banks. The responsible states know they will be stuck with the bill.

The EMU started on the idea that it would bind the EU closer. In essence it was a political decision rather than an economic decision. They passed a stern rule that said no state could run of deficits of more than 3% of their GDP. Except for Estonia, Finland, and Luxembourg, all countries, including Germany, now exceed the limit. Thus their politicians sacrificed fiscal probity for political gains.

They have hit the wall: Greece will soon default on their sovereign debt. On Tuesday, yields on one year Greek bills  reached 60%.  It is a sign that investors have no faith in the Greek government’s ability to repay their debt.

The EU, ECB, and the IMF are trying to establish a European Financial Stability Facility (EFSB) in order to further bail Greece out. They have already pledged €110 billion and they are trying to put another package together of €109 billion. But Finland insists that Greece puts up additional collateral, which is not possible. Since the collateral would be part of the bailout money, it would be, in essence, Germany and France guaranteeing Finland’s contribution.

Greece has missed every fiscal target it or its saviors has had. They are trying to get their deficit down to 7.6% of GDP through more austerity measures, but it looks like they will miss again (est. 8.5+%). Basically they are asking the Greeks to do something they don’t want to do, and they will no doubt take to the streets again in protest.

If they default, then that opens a can of worms. European banks, other than Greek banks, hold €46 billion of Greek sovereign debt. Belgium’s Dexia hold Greek sovereign debt equal to 39% of its equity; for Germany’s Commerzbank, it’s about 27%. On top of that, EU banks are into private Greek companies for about €94B (France, €40B; Germany €24B). According to the Wall Street Journal, the total market cap of all EU banks was just €240. The same article also points out additional unknown liabilities to insurers and investment banks.

The International Accounting Standards Board (IASB) has warned banks they need to write down, or mark-to-market, the Greek debt they hold. Whether they do or don’t doesn’t matter. The fact is that these banks are undercapitalized and in trouble. Their “stress tests” are a fiction. Liquidity is starting to shrink in their banking system because of these jitters. Rabobank, for example, said it is growing cautious about interbank lending – now limited to overnight loans. More banks are stepping up to the ECB window for funds. Overall, credit is starting to tighten. Nervous Greek depositors are withdrawing funds from their banks. Rich Greeks never trusted their banks.

In other words the Europeans have created a problem that they can’t solve, easily at least.

Here are their alternatives:

1. Keep bailing out Greece, with the specter of Italy and Spain being the next target of market forces as EU economies cool off. This is not appealing to Germany and France who know their taxpayers will have to put up most of the money.

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Saving the Euro Zone

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by Gordon Brown
Posted August 15, 2011

[I never imagined in my wildest dreams that I’d be posting a piece by Gordon, an elitist insider by some accounts, and who famously sold the UK’s gold at the lowest possible price back when he was Chancellor, but this is not bad at all, and is linked to the previous post by Jeremy Warner here on QP: Collapse in German growth will lead to Euro rebellion. – Aurick]

LONDON — How could a group of nations that came together with such promise and commitment more than half a century ago, prepared to surrender their currencies and much of their political sovereignty to strengthen integration, now find that their union has been brought to the brink by the small state of Greece, economically and geographically one-fiftieth of Europe? And how can we now prevent a European crisis from writing a new chapter in what will be called “the decline of the West”?

For months we have been told that Europe’s salvation lies in austerity, in the whole Continent applying Germany’s prescription of fiscal discipline to its deficits. We have been told that if austerity does not work it is just because there is not enough of it.

But when Chancellor Angela Merkel of Germany and President Nicholas Sarkozy of France meet in Paris on Tuesday they will find all around them evidence of what they did not expect — failing banks, waning growth and capital flight.

This confirms what many of us have argued from the outset: that Europe’s difficulties have arisen not merely from the one-dimensional issue of deficits, but from a disastrous, three-dimensional configuration that is financial and economic as well as fiscal.

These past few weeks have demonstrated that Europe has a deeply flawed banking system, a widening competitiveness gap, and a debt crisis that cannot get much better if the economy gets worse. It is an already lethal cocktail that becomes more deadly when mixed inside the euro, a currency created without the resilience to withstand difficult times and which has no structure for effective decision-making.

In the normally quiet month of August we have seen these difficulties escalate so rapidly that little now stands between Europe and a decade of low growth, high unemployment, industrial decline and popular discontent, the nearest modern economic parallel for which is the 1930s.

Some time ago I reached the conclusion that there was no solution possible within the existing euro structure. Either the euro has to be fundamentally reformed by Europe’s political leaders and the European Central Bank or it will collapse. After the events of the last few days I know for sure there is not even a chance of a middle way.

I was present at the first meeting ever held of the euro zone heads of government in October 2008, in the immediate wake of the Lehman Brothers crash. Although not a member of the euro, Britain had been invited to explain its decision to restructure and take ownership of some of Britain’s banks. I explained that Europe’s banks were under-capitalized by billions and that the prospect of them collapsing jeopardized the safety of the entire European economy — we could not run capitalism without capital.

I remember the skeptical looks when I explained that European banks were in fact more vulnerable than American banks, that they were far more highly leveraged and far more dependent on short-term wholesale funding. In fact, half of America’s toxic sub-prime assets had been bought by reckless institutions in Europe. Worse still — as we have subsequently discovered — the greater the European banks’ problems, the poorer their insurance coverage, the worse their leverage and thus the more dangerous the risk to us all.

Yet even as the crisis grew, it was difficult to get Europe’s leaders to accept that it was anything other than an Anglo-Saxon one. By convincing themselves that the problem was simply fiscal, they have drawn back from taking proper action.

Europe’s leaders are also handcuffed by an inadequate treaty of Union, by the problem of getting a coherent response from 27 different nations, and by a rise in anti-European sentiment in their home countries (particularly in Germany), which has deterred them from sanctioning collective action beyond that which protects short-term national self-interest.

The exigencies of domestic politics have locked the euro zone into an impossible set of economic constraints — no defaults, no deficits, no stimulus and, of course, no devaluations — which mean that there can also be no banking stability, no lasting growth, no sustained job creation and no boost to competitiveness from their currency.

There is no escaping the basic fact that Europe’s difficulties are indicative of deep structural defects — its declining competitiveness, aging population and persistently high unemployment. Its share of world output, which has already halved, is set to halve from 20 percent today to around 10 percent over the next two decades.

Yet as the world’s financial crash has evolved — expanding through Europe into an economic downturn, and then a debt crisis, the Continent has, at each stage of the process, remained doggedly behind the curve. Even as recently as a month ago it could have avoided the events now driving it to breaking point. A European stabilization fund of some €2 trillion could have convinced the markets that Europe meant business wherever it was confronted with problems. A Brady bond solution for Greece, Ireland and Portugal — in which private creditors restructure their holdings — might have cauterized the issue of insolvency in Europe’s periphery. (Forcing Spain and Italy to join the new precautionary facility might have worked as late as two weeks ago as a solution to the cost of financing their loans). A root and branch recapitalization of the banks would have sent out the desperately needed signal that the Continent was serious about the underlying weaknesses in its financial sector. Demanding private sector involvement not just in Greece but across Europe would have produced a lasting framework for sharing the Continent’s burdens.

But Europe has flinched at every turn from showing the decisiveness that its problems require — and in the market panic of the last few days its leaders have been caught out once again trying to stem the fallout from yesterday’s disasters instead of planning the pre-emptive action that will avert the problems of tomorrow.

The time for extemporized solutions is gone. The Continent has to commit to a plan that accepts difficult realities and underpins the several trillions in funding needed to ensure that governments from Greece, Ireland and Portugal to Spain, Italy and Belgium are adequately funded from now to 2014.

So there is no way out except through the biggest recapitalization of the banks in European history and a wholesale reformation of the euro, which will require the coordination of its monetary and fiscal policy, fiscal transfers from rich to poor nations and a commitment to a common European debt facility.

Of course no single country, not even Germany, can afford to bail out all the banks and underwrite all their neighbors. It will require an undertaking that is pan-European, involve commitment from the private sector, and will have to draw on support from the I.M.F., and possibly China and America.

These massive guarantees will necessitate a big shift in Europe’s thinking; that if the world used to need Europe, Europe now needs the world. And this global insight is also essential to equip us for global competition ahead. We will need a repositioning of Europe from consumption-led growth to export-led growth. It will require right across Europe the kind of radical capital product and labor market reforms only a few countries have tried.

The restoration of European growth will also depend on better global coordination, in particular a G-20 agreement with America and Asia to ensure financial stability and to coordinate a higher path for global growth. But for all this to happen Germany will have to take the lead.

Gordon Brown, a Labour member of the British Parliament, was Britain’s prime minister from 2007 to 2010 and chancellor of the Exchequer from 1997 to 2007.

Collapse in German growth will add to euro rebellion

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by Jeremy Warner
from The Daily Telegraph
Posted August 16th, 2011

NEWS THAT GERMANY RECORDED ONLY MARGINAL, 0.1%, GDP GROWTH in the second quarter is not just an economic event; it is a political one too, for the German economic “miracle”, with output rebounding from its post Lehman low far more rapidly than any other advanced economy, has been about the only thing that has kept Germans onside on measures to support the euro during the last year and a half of turbulence.

Indeed, in some respects, the crisis has seemed a positive boon for German industry, for it has meant that its exports have enjoyed a far more competitive exchange rate than would have been the case had Germany still had the Deutsche Mark. Trade has boomed accordingly.

But as the world economy slows, even that advantage is beginning to fade. Now of course there are lots of anomolous reasons why the German economy would have slowed in the second quarter, not least the after effects of the Great East Japan Earthquake, which because of the disruptions it caused in the global supply chain would have hurt the German economy, with its high dependence on manufacturing industry, particularly badly.

Even so, there’s much to worry about. Consumption and investment in construction are slowing fast, and most of the forward looking indicators are turning down. If Germany isn’t even deriving a trade benefit from membership of the euro, then its support for further bailouts will begin to look more questionable still.

The European Central Bank’s decision to start tightening policy a couple of months back is looking ever more indefensible. Even in Germany, money has been contracting for some while now, yet the ECB has allowed itself to be persuaded by Bundesbank hawks into an almost suicidal approach to policy. The ECB’s actions have become dictated more by the intractable politics of the eurozone than the interests of sound policy. Thus it is that in order to quell German alarm over the way the euro is being managed, the ECB has thought it necessary to attack an imagined inflationary threat to sacred German principles of sound money.

It’s tempting to mock the piece on saving the euro that Gordon Brown, the UK’s former prime minister, has written in today’s New York Times. Why is he writing for the NYT, for heaven’s sake? Is it because he’s so discredited back here that he has to go to the US for anyone to take him seriously any longer?

The contemptuous way in which he used to treat other European policymakers and leaders certainly means that none of them will be listening to him. Yet it has to be said that this is a surprisingly good piece, which demonstrates a pretty sound understanding of the extreme nature of the threat Europe faces to its continued economic prosperity. Many will vehemently disagree with his solution, which is in essence just the European superstate the euro area seems to be careening towards in any case, but it’s well worth a read anyway.

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From GoldCore:

Merkel and Sarkozy plans fail to assure markets

The Merkel Sarkozy plans to centralize financial and economic governance in the EU has failed to calm markets and there is further weakness in stock markets today. A key aim of the meeting was to restore confidence in the euro. In the short term this has not been achieved and it is highly unlikely that it will be achieved in the long term. Centralised financial and economic governance will not be a panacea to the current debt crisis. It does nothing to address the root cause of the problem which is massive indebtedness and the saddling of taxpayers with massive liabilities incurred by banks. Concerns about currencies and currency debasement is leading to continued safe haven demand for gold

A Free-Market Sovereign Debt Manifesto

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by Ron Holland
Posted August 11, 2011
Reporting from Greece 

THERE IS AN EERIE DISCONNECT INVOLVED WITH ANALYSING THE FRIGHTENING financial and economic consequences of the ongoing 2011 Sovereign Debt and Equity Market Crash while sailing around the Greek Islands. But taking a look at Greek history clearly shows some parallels and solutions to what the nations of the West are facing today. For the last couple of days we’ve been in Spetses, the first Greek island to have raised the flag of insurrection and secession from an already crumbling Ottoman Empire on April 3, 1821.

Some economists and political experts believe the only way out of the deepening recession is for Greece to now withdraw from another empire, the European Union, and to repudiate the EU and sovereign debts, primarily to German banks.  This would require the restoration of the independent Greek currency, the Drachma, and would likely create another short-term drop in the Greek economy as was previously created by the earlier EU austerity demands.

Looking back, Greece was one of the first European nations in the faltering Ottoman Empire to withdraw from the failing, bureaucratic and bankrupt regime. Although independence was a long and difficult process, this action served Greece well then, just as pulling out of the EU now could create a new long-term positive economic environment for the nation.

Although the German-led and majority German-financed EU is a relatively new political entity or economic union of nations, this dream of powerful German leaders from Bismarck to Hitler is now a reality.  However, it was mistakenly modeled within the EU on the now failing US system of debt democracy and is now sinking like the earlier Ottoman Empire. I respectfully suggest Greece should follow their earlier historical parallel with Ottoman rule and seek to get out of the EU sooner rather than later.

The costs of remaining inside the European Union and paying crushing debts owed to German banks is too great when the option of restored national independence and a Greek currency together with limited taxes and free markets tailored to Greek needs is an alternative solution, one that worked before and can work again for the country. Why totally impoverish a nation to support a few banking elites with the euro and sovereign debts when debt repudiation now is the answer?

Yes, establishment experts have argued, in defense of the euro and the EU, that Greece has an economy based only on tourism, with very limited industrial and agricultural assets; therefore the nation has no way to support an independent Greek currency.

I agree with the establishment defenders that the Greek economy is based primarily on tourism and most tourism is island centered.  Certain EU economists have also suggested that Greece should sell selected islands, which are the only valuable assets really available to be mortgaged or sold, to guarantee their unpayable sovereign debts to the banks. Rather than ceding this national territory to the German banks to be sold with big profits going to the banks, however, I suggest a course of action to benefit Greece rather than the EU and banking elites.

Greece needs to repudiate the existing sovereign debts and develop a new currency, should it withdraw from the EU. I suggest many of the Greek islands could be leased or pledged to back a new Greek drachma rather than given to the banks to postpone the day of reckoning on the sovereign debt.  The banks could go under without the wealth of Greece or ownership of island assets but giving these profits to them would guarantee Greek poverty; using the islands to back a new currency could restore Greek prosperity, jobs and economic growth.

Historical Parallels of a European Union

The goal of European union under Germany has had a long and conflict laden history. Many wars, starting with the French and German late 19th century conflicts and the arms race leading up to the First World War, were instigated by powerful banking dynasties and their favored arms industries for financing and war industry profits. There was little regard as to the severity of any conflicts or the question of winners and losers. But for the British and French politicians their war goals were somewhat different and designed to ultimately prevent the German economic domination of Europe. They were willing to use even military means if necessary to achieve their political and economic goals.

These wars, shifting alliances and brinkmanship diplomacy continued back and forth until the Second World War.  Here, Hitler used military actions similar to the British and French attempting to undo the harsh results of World War One and the infamous Treaty of Versailles. Thankfully, his short-term military success was followed ultimately by defeat.

Now, once again, Germany the economic powerhouse of Europe is attempting to build a European union and succeeding this time using economic and political rather than military means.  Few talk about it but the European Union today is predominantly controlled from Berlin and financed by Germany but lead by a Brussels bureaucracy fronting for the German banks.

The EU was established with the full support of London and Washington to serve first as an economic power but with the eventual goal of an all-powerful political union and full ally of Anglo-American interests in Europe. This earlier dream of German leaders now endorsed by Washington and London was mistakenly modeled after the powerful American union born out of Washington’s victory in the American Civil War. Therefore, it deliberately does not have a mechanism for nation withdrawal.

Consequently, both flawed unions seek to maintain monopoly control over formerly sovereign nations in Europe and sovereign states in the US by powerful special interests that often conflict with the will and best interests of member countries and their citizens.

The real problem for Greece and other EU captive nations is that Wall Street, the Federal Reserve and the Bank of England developed a sovereign debt model to fund the EU takeover of independent nations. They supported using political bribes and unsustainable benefits designed to build an EU base of voter support inside each new controlled nation.

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Merkel faces a Hobson’s choice on eurozone

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by Philip Aldrick
Telegraph Economics Editor
Posted 06 August 2011

Muggings have been on the rise on the streets of east London, Scotland Yard said this week. And blood-stained necklaces have been turning up in pawnbrokers with alarming frequency. It’s no coincidence, police claimed. The surge in snatch-and-grab is all to do with the soaring price of gold.

GOLD HAS BEEN HITTING RECORD HIGH AFTER RECORD HIGH because the precious metal is considered the ultimate safe-haven by nervous investors. And there are a lot of nervous investors in the markets. This week gold struck another record, at $1,681.67 an ounce. Nick Bullman, managing director of ratings agency CheckRisk, reckons it will not stop until breaking its inflation-adjusted peak of $2,300.

It’s not just the shoppers of Canning Town who are getting a mugging. Fear is stalking the markets. Fear of a US downturn, fear of a sovereign debt crisis in Italy or Spain – countries considered “too big to bail”, fear of another global recession. As those fears gathered into panic this week, the world witnessed an extraordinary series of events.

Stock markets did not just crash, they crumpled. Some £149bn was wiped off the value of Britain’s blue-chip stocks as the FTSE 100 suffered the fifth largest fall in its history. Trading in the shares of the country’s biggest banks were suspended after dropping more than 10pc. In just seven trading days from July 26, $4.5 trillion was wiped off the value of equities worldwide.

As investors fled to traditional safe-havens of the Swiss franc and the Japanese yen authorities were forced to act. So strong had panic buying made their currencies that it threatened growth. Both nations intervened. Japan sold about ¥4 trillion (£30bn) of its yen reserves and did ¥10 trillion of quantitative easing (QE). Switzerland cut rates to zero and launched Sfr50bn (£40bn) of QE. The moves bought temporary relief.

The hunt for safety created other bizarre distortions. Yields on US treasury bills – short-term government debt – turned negative. Similarly, Bank of New York Mellon, America’s biggest custodial bank, started levying a fee on deposits of over $50m as it was flooded with cash. Market norms were turned on their head. Investors were paying to lend money. “When you do that, you are saying everything else is just too scary,” said Mr Bullman.

What had the markets spooked was the dawning realisation that Spain and, in particular, Italy may not repay their debts. If that happened, the world would suffer another seizure. “It would be Lehman Brothers on steroids,” as some traders have put it. Italy has been worrying markets since mid-June, a month after Standard & Poor’s put its credit rating on watch. Its benchmark 10-year bonds have been creeping higher ever since – the clearest sign of a looming crisis.

This week’s panic, though, was the culmination of weeks of frayed nerves and political paralysis. “Politicians keep scaring the hell out of people as they seem to be burying their heads in the sand,” Mr Bullman said. Which is why, if there was an original tipping point, it can be traced to July 21. That was the day the second Greek rescue was agreed and further measures unveiled to prevent another eurozone country being sucked into the crisis – following Ireland and Portugal as well as Greece. The backstop was dangerously weak, though. The size of the eurozone bail-out fund, the European Financial Stability Facility (EFSF), was increased from €250bn to €440bn and the terms of its operations broadened to make it more nimble. But the agreement needed a vote, due in September, and seemingly ignored the risk of a Spanish or Italian crisis.

To provide a real firebreak, the EFSF needs about €2 trillion, analysts reckon. Italy’s national debts are €1.8bn, the third largest debt market in the world behind the US and Japan. Spain’s are €640bn. An EFSF with €440bn was woefully inadequate. Europe’s leaders, though, simply closed their ears to the siren voices and turned to planning their summer holidays.

Alarm bells should have already been ringing. At 4.8pc on June 21, Italian bonds had surged to 5.68pc shortly before the Greek bail-out. The lesson from Greece, Ireland and Portugal was that once bonds top 5pc, they soar to 7pc within 30 to 60 days without intervention. At 7pc, the debt problem becomes a full-blown crisis – as markets decide the country can no longer pay its bills. With no credible backstop, market fears were allowed to burn out of control.

Already wearied by the drawn-out deal to raise the US debt ceiling, which only entrenched political cynicism, and unnerved by evidence that the global recovery is stalling, the second tipping point came this week. First the President of the European Commission, José Manuel Barroso admitted in a letter to European heads of state that the size of the EFSF needed to be increased. Hours later, the European Central Bank intervened in the markets – but instead of buying distressed Spanish and Italian debt it targeted Portuguese and Irish bonds. Seemingly, political divisions within the ECB were neutering its powers.

Holger Schmieding, economist at Berenberg Bank, said the ECB’s move “may go down in history as its worst blunder yet”. “What would we make of a fire brigade that responds to a major emergency but then drives to the wrong place and refuses to turn around and douse the real fire?” Traders scented weak political will and rounded in fear on Italy. Its bonds rocketed to 6.189pc – a fresh euro record.

If it can’t raise funds, Italy has until the end of September before it runs out of cash or Europe comes to its aid. Spain has until February. The problem is now purely political. Italy needs more austerity to reduce its debt burden, and to push through structural reforms to make its labour market more competitive. Spain must recapitalise its banks, and accelerate its own austerity plans. In return, Europe has to make the EFSF a viable safety net.

As usual in Europe, it all comes back to truculent Germany. Only Berlin can provide the guarantees needed to restore confidence. But it is too late to buy confidence cheaply. Angela Merkel, the German Chancellor, faces a classic Hobson’s choice. Put taxpayer money on the line and lose her job, or risk a catastrophe. That’s a mugging in all but name. Unsettling parallels are being drawn between the current panic and the market meltdown in 2008.

Then, as now, oil had blown sky high. It hit $145 a barrel in July 2008 before coming back down. This time it struck $125. Inflation, too, was out of control – at around 5pc – in line with most economists’ forecasts for the next few months. Stock markets had moved sharply lower and growth had started to slow.

More pertinently, the country had been wrestling with a looming crisis for months – that time with the banks. Seized by similar indecision, policymakers took five months to nationalise Northern Rock and failed to recapitalise other lenders until too late. Then, a political decision not to bail out Lehman Brothers triggered panic that paralysed markets. This time, it is again in politicians hands. The parallels are not surprising. Ultimately, the current crisis is the latest manifestation of the last one.