The European Stability Mechanism (ESM) – A Treaty of Debt

October 30, 2011 · Posted in Global Economics · 1 Comment 

So long as people give moral justification to organized aggression, namely the concept of government, there will be governments. So long as there are governments they will grow and grow until they completely cripple the economy they are leeching on or until they become unable to meet obligations entered into, triggering a reset.

In the long run, government power always tends towards centralization, with more and more power consolidated with fewer and fewer people, with less and less representation of the governed in the process.

It is true that, prompted by public ire from past failures, bureaucrats have throughout history devised methods to try and limit and balance state power through things like constitutions, bills of rights, balance of powers, parliaments, etc. What these measures have accomplished has been to slow down the growth, centralization, and overreach of the affected governments, but they have happened nonetheless, and with catastrophic results in many respects one could argue (1.4 million dead Iraqis might agree with me, just to bring up ONE example).

This is why even a limited government is so dangerous, because all the wealth and economic growth it brings about simply supplies more potential tax loot and thus sets the stage for more and more taxation and indebtedness, and an all the more gigantic and imperialistic state. (This is, by the way, why in the long run, after having suffered from repetitive government depredations again and again, at some point people will have to accept the validity of voluntaryism.)

These are the theories that I have been working with for years now, and there is plenty of historical evidence over the past millennia to corroborate them. The most prominent current example is of course the federal government in the United States, which has grown from a tiny government (about 7% of US GDP back then with lots of sovereignty for individual states) to the largest, most powerful, and most imperialistic government in the history of mankind, with more and more power being centralized in Washington, with Democrats and Republicans complicit in skillfully supplying their respective reasoning in their respective areas of public policy in order to consolidate power in the fields of social and military policies, respectively.

Another contemporary example is of course the European Union. Brussels represents what Washington has been in US history. Each individual crisis has been supplying and will continue to supply Brussels bit by bit with ammunition to expand its powers over member states in their endeavor of building a European Empire.

The ESM that is being discussed now fits right into this pattern and you can find out more about it in this informative clip:

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Eurozone Breakup Inevitable?

September 10, 2011 · Posted in General Economics · Comment 

Mish writes in Europe Out of Time; Differences Impossible to Untangle; Merkel’s Mind is Fried; Eurozone Breakup Inevitable; “Let the Euro Die”:

Is the Euro Worth Saving?

Regardless of what you or I may think, that question is where European voters come in. From that standpoint it does not look pretty.

German Chancellor Merkel, Spanish Prime Minister Zapatero, Italian Prime Minister Berlusconi, and Greek President George Papandreou will all be gone after the next set of elections.

French President Nicholas Sarkozy may bite the dust as well, and if he does it may be to a vehemently anti-Euro candidate.

All it takes is one government to say “to hell with this” and the whole mess unravels.

The current set of politicians all want to “save the Euro”. But what did the Euro buy Greece, Ireland, Spain, or Portugal except misery?

Even German and Finland voters wonder what it bought them.

Eurozone Breakup Inevitable

Merkel’s half-baked proposal raises more questions than answers. The market (and voters) will not possibly wait for details of her proposal to get hashed out. If this is the best Merkel can come up with, a Eurozone breakup is inevitable.

I think that a complete political breakdown of the European Union would be the best thing that could happen to Europeans. Ditch all European political institutions, but maintain the free mobility of persons, capital, and goods across countries, really the only positive aspect of the Eurozone project. Oh, and you want one unified currency that actually works? I know I’ve been saying this over and over again, but … how about a gold standard? Anyone?

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Riots in Greece

June 15, 2011 · Posted in Global Economics · Comment 

With a formidable yield of over 16 percent on their government bonds, way ahead of such shining beacons of economic stability as Pakistan and Colombia, Greece sure is a good example for how you can act like a third world country and get paid like an industrialized nation for a while if only you are lucky enough to find a pool of greater fools who would conceive of a deranged and imperialistic project such as the European Union.

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Roubini on Europe: We Are Kicking the Can Down the Road

May 10, 2010 · Posted in Global Economics · Comment 

From Yahoo’s Tech Ticker:

With a $1 trillion bailout package for Greece and the other sick men of Europe, the EU and IMF spurred a huge global rally in stocks Monday, with the Dow rising 405 points, its biggest gain since March 2009.

The massive bailout prevented “another systemic seizure of the global financial system” and, “in the short run, markets are happy we’re not going to have another global meltdown like Lehman,” says NYU professor Nouriel Roubini, co-author of Crisis Economics.

But in the long run, Europe has just “kicked the can down the road,” Roubini says, agreeing with our earlier guest Richard Suttmeier.

Even $1 trillion isn’t enough so solve the “fundamental questions” facing Europe, the economist says, citing the following:

* — Even in Europe, There’s No Free Lunch: All of the bailout money is conditional on countries approving what Roubini calls “massive fiscal consolidation,” i.e. big austerity packages like Greece’s parliament just passed. Such measures mean fewer public sector jobs (and lower salaries for those who remain) and higher taxes in countries where a lot of people work for the government and already pay relatively high tax rates. “Politically can they do that…or will there be riots and strikes that are going to limit” fiscal austerity measures, Roubini wonders.
* — Tough Love Hurts: Raising taxes and cutting government spending should help alleviate the short-term debt crisis in Europe’s so-called PIIGS but will also likely lead to recession, if not outright deflation. “That will make it harder to force austerity” on the public, he says. There’s already violence and rioting in the streets of Athens. “The question is: Will we see the same thing in, for example, Lisbon, Madrid [and] throughout the euro zone?”
* — No Easy Way Out: One reason the European Union is in this mess is because few of its countries are able to compete in a global economy, especially since they lack the ability to deflate their currency, the economist says. Considering it took Germany 15 years to restructure its private sector so unit labor costs came down low enough to compete globally, nations like Greece, Portugal and Spain face a long, hard slog even if they embark upon such painful programs immediately.

So what does all that — and the political pressure against more bailouts in Germany — mean for the future of the euro and the EU itself?

In late April, Roubini said “in a few days, there might not be a euro zone for us to discuss,” at the Milken Conference.

In the accompanying clip, the founder of Roubini Global Economics says he was “just joking” about that dire prediction, which potentially contributed to the recent rout in Europe. But expect “volatility in economies and markets” is going to be with us for the foreseeable future, Roubini says, offering cold comfort (and an odd sense of humor).

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The Failing European Experiment – A Wakeup Call

February 11, 2010 · Posted in General Economics · Comment 

The NYT writes Germany, Forced to Buoy Greece, Rues Euro Shift:

As Europe edges toward emergency guarantees to stem market panic over one of the most profligate members of the euro bloc, the country that the region turns to for leadership, Germany, is suffering from growing doubts about the European experiment it long championed.

Reluctant German leaders now find themselves forced to help Greece remain solvent, or risk watching markets attack one weak member after the next, from Portugal to Spain to Italy, threatening the stability of the euro, the European currency Germany fought so hard to create.

In a conference call with the finance ministers from the 16 countries that use the euro and the president of the European Central Bank, Jean-Claude Trichet, officials said that some action had to be taken to calm markets and take pressure off Greece. But what form that rescue would take — be it loans, loan guarantees or a promise to buy Greek government bonds — still had not been decided Wednesday night, ahead of a summit meeting involving all 27 European Union governments on Thursday.

What did appear clear was that Germany, with an assist from France, would have to take the lead. “The Germans are the only ones with deep pockets,” said Daniel Gros, director of the Center for European Policy Studies in Brussels. “If it was just Greece, they could consider letting them go down the drain, but it threatens the entire euro zone.”

Berlin has been mostly silent on the matter. That is partly to put pressure on Greece, as civil servants struck there Wednesday to oppose cutbacks that the government has promised in order to rein in its enormous budget deficit.

But a bailout will be politically awkward for Chancellor Angela Merkel’s government. It is precisely the financial millstone that opponents warned about when Germany gave up its treasured mark, a move that a majority of people here, in contrast to their political leaders, opposed at the time.

“If the German government would just transfer money to Greece, people in Germany would feel their worst fears had come true,” said Thomas Mayer, chief economist at Deutsche Bank.

The role of savior has been thrust upon Germany by default. The euro bloc has myriad rules and regulations intended to avoid the need for prosperous members to rush to the aid of those with weak economies.

But the markets have ignored the rules, fluctuating with unconfirmed reports that the Germans have agreed to rescue the Greeks, which often carry the implicit warning that everyone will suffer if they do not. As the largest European economy with the most fiscal flexibility, Germany is crucial to any euro zone effort to save Greece.

The apprehension in Germany runs much deeper than a single crisis. It comes in the same week that Germany gave up its most cherished title, world export champion, to China, heightening fears of a declining stature and importance globally.

Germany also faces a demographic challenge, managing a population that is not only graying but shrinking. Last month the government announced that the population dropped below 82 million last year for the first time since 1995. That means fewer people trying to pay off a growing national debt, with a projected budget deficit of $118 billion this year.

After Mrs. Merkel’s re-election in September and triumphant turn on the world stage in November for the 20th anniversary of the fall of the Berlin Wall, her approval ratings have fallen to their lowest levels in more than three years. Criticism of her government over infighting in the governing coalition — mostly over tax cuts and the budget — has risen steadily. She has been noticeably reticent about the crisis in Greece, speaking out far more forcefully on populist issues like tracking down tax dodgers hiding money in Switzerland.

“It’s a conscious decision to keep quiet,” said Jakob von Weizsäcker, an economist at Bruegel, an economic policy research institute in Brussels, who used to work for the economics ministry in Berlin. “In reality, they are thinking about what they could do.”

The pressure was apparent in a harsh statement against the idea of a bailout issued Wednesday by the coalition partners in Mrs. Merkel’s government, the Free Democrats. There should be “no direct financial help for Greece,” the statement said. “It would send the absolutely wrong signal to other euro countries that no country has to strain to save any more.”

But even German opponents of the euro said a bailout appeared likely. Joachim Starbatty, a professor of economics at the University of Tübingen, was one of four professors who sued before the German Constitutional Court in 1998 to stop the formation of the currency union, which the court rejected as “obviously without foundation.”

Professor Starbatty said he believed that Germany would bow to pressure and back measures to protect Greece from market pressure. “Looking at it realistically, I think you’ll see some form of help that isn’t too damaging for the donor countries,” he said.

Peter Bofinger, professor of economics at the University of Würzburg and a member of the German government’s independent council of economic experts, said in its report that last November, the council recommended that the European Union could give guarantees for newly issued government bonds from a country in Greece’s predicament, if it had presented a workable plan for getting its finances in order.

After European governments helped stabilize financial institutions during the crisis, it was necessary to send a signal that they would not be allowed to break the currency union, Professor Bofinger said. “It’s important also for politicians to show, we will not allow you to rock our boat. We did so much to save you, you destroyed yourself almost, but we saved you.”

The truth is very simple: The best that can be done for the people of Greece is to not provide one cent of assistance to its corrupt, bloated, and union-controlled government apparatus. A country’s bailout is like a corporate bailout, only many times worse! From this logically follows that the absolute worst Europe could do to the people of Greece would be to give their rulers any more means to continue their irresponsible policies.

The European Currency Union and the European Union itself are both such gigantic failures that it is already pre-ordained that the entire experiment will go down in flames sooner or later. Now is certainly not that time yet. What we are seeing are just a few more cracks emerging in the structure of the system. The European bureaucrats will come up with some sort of pseudo solution to paper over and patch the Greek problem for now.

But the structural problems remain. Remember, this is not the first time a European country has abused the EU’s lucrative transfer system, and it surely won’t be the last! Portugal, Italy, and Spain are in very similar situations. Almost exactly 1 year ago we had the same debate going on. Back then I wrote:

Consider the European stability treaty dead. One member state after another will violate the requirements. The fact that a bailout of some Euro states by others is discussed, just shows how torn this European Union really is, how severe its imbalances are. With discrepancies like these, it is completely unfeasible to maintain a currency union. (…) Individual responsibility per member state rather than complete collectivism should be aspired. Unfortunately Europe has not been very keen on individual responsibility. In Germany, France, and Italy, all one can hear is rants about “neoliberalism”, “anarchism”, “capitalism on steroids” which supposedly are to blame for the financial crisis.

Even if the Greek government were saved to the detriment of the people it tyrannizes, this won’t be the last time we’ll be having this discussion, and it sure as hell won’t get any better!

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