Europe’s Inevitable Plight

Europe vs America

The failing and fundamentally flawed project called the European Union continues its slow, yet unstoppable, slide toward mad grandeur, imperialism, tyranny, collectivism, and fiscal chaos.

It is now coming to a minor clash between citizens within the individual European countries, and the governments who exploit them on behalf of the EU.

I do not believe that the European Union will get that same kind of free ride that the the growing central US government has enjoyed over the past two centuries. On the contrary, I expect opposition and healthy cynicism toward this ongoing centralization to grow incrementally. In particular the Eastern European nations have had their instructive lessons when it comes to becoming protectorates of an imperialistic and tyrannical force.

The US has had, over the centuries, the advantage of having a large part of public opinion behind the idea of a close union of American states (finding symbolic manifestation and direction in the War of Northern Aggression), an important factor when it came to enabling its central government to grow without major limitations in its way ever since.

This is not so much the case with Europe, at least not yet.

Many people in European countries are rather reluctantly moving along with the developments toward a more centralized union. I remember, growing up in Berlin, when politicians aspiring offices within the European government started the first campaigns for European parliament. People had no way of assigning any relevance to these efforts. What did we care for some guy asking us for his vote so he can pursue a career in Brussels? The detachment of European citizens from the European political process is completely justified.

So long as it didn’t affect Europeans fundamentally in their lives, they sort of acquiesced with this process. Now this is changing. People are beginning to notice that their own hard earned money is on the line to subsidize corruption in other member countries. This sentiment did flare up several times over the past decades, but never came to a culmination in the way that it is now. Populist right wing parties, whom I obviously have no sympathy for in general, have really been the only ones consistently pointing out these problems. So long as mainstream parties don’t pick up on this, I expect the popularity of such extremists to grow over the next 5-10 years.

Fiscal Discipline?

It is also noteworthy that in the US, individual states (except Vermont) are, by and large, required to balance their budgets:

All the states except Vermont have a legal requirement of a balanced budget. Some are constitutional, some are statutory, and some have been derived by judicial decision from constitutional provisions about state indebtedness that do not, on their face, call for a balanced budget. The General Accounting Office has commented that “some balanced budget requirements are based on interpretations of state constitutions and statutes rather than on an explicit statement that the state must have a balanced budget.”

I would be the last to claim that the US states are a beacon of fiscal responsibility. Many deficits are hidden in the form of substantial public sector pension plans. But as a tendency, existing restrictions provide for fewer frictions between member states.

Such provisions don’t exist in European countries. What does exist is a completely clawless tiger called the “Stability Treaty”. What it basically says is this: “It would be nice if you governments could try not to exceed a budget deficit of 3% of GDP. If you do, we’ll give you a big and instructive wag of the finger!”

This treaty is now, more than ever, null and void, but nobody likes to talk about it. The fact of the matter is that if you violate the treaty you won’t even get a wag of the finger, but you’ll be rewarded with more money! As I said over a year ago:

The 3% ceiling won’t matter anymore from hereon. 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. The Euro will keep taking its beating for it.

And it is precisely this which is currently stirring up the debate within Europe.

Why Do We Have to Pay?

The head of the ECB visited Berlin as Germans oppose the Greek bailout:

European Central Bank President Jean-Claude Trichet is on a diplomatic mission to Berlin as Germany’s reluctance to bail out Greece helps fan a fiscal crisis now burning around the euro region’s periphery.

Trichet and International Monetary Fund Managing Director Dominique Strauss-Kahn will brief German parliamentary leaders in Berlin around noon today about the $60 billion aid package for Greece, which has met with opposition in Europe’s biggest economy. The joint European Union-IMF package would require Germany to stump up the biggest individual loan to Greece.

“It’s a sales pitch in front of an audience that needs it,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “The lawmakers probably need it spelled out that this is not about financing luxury pensions in Greece. Not helping Greece will unfortunately have a direct impact on the euro-area economy and German jobs.”

Standard & Poor’s yesterday cut Greece’s credit rating to junk status and slashed Portugal’s two notches, intensifying a bond market sell-off across the southern euro region amid concern that debt-ridden countries will struggle to refinance their loans. The crisis has highlighted the absence of a common fiscal policy to cement Europe’s monetary union, frustrating Trichet’s efforts to promote a “common destiny” for its 16 members.

‘Why do we have to pay?’

“Why do we have to pay for Greece’s luxury pensions?” Germany’s biggest-selling tabloid newspaper, Bild Zeitung, asked on its front page yesterday. Almost 60 percent of Germans don’t want to help Greece, Die Welt newspaper reported, citing a survey of 1,009 people.

German Finance Minister Wolfgang Schaeuble asked Trichet and Strauss-Kahn to speak with lawmakers to “facilitate direct insight into the actions as they stand.”

Trichet, Strauss-Kahn and Schaeuble will brief reporters on the talks at 2:30 p.m. in Berlin, a finance ministry spokeswoman said. Trichet declined to comment on the S&P downgrades yesterday.

In Greece, Prime Minister George Papandreou will speak around 8 p.m. local time at a conference entitled “Shaping the Agenda: In the face of a crisis for Greece and the EU.”

Trichet, who once called himself “Mr. Euro,” has been powerless to stop the currency’s 12 percent slide against the dollar in the past five months as politicians haggle over aid for Greece. While he presides over interest rates for the region, he has no say over how taxpayers’ money is spent.

IMF Money

Trichet’s appearance with Strauss-Kahn to promote the joint package comes less than two months after he dismissed the IMF’s financial involvement in a rescue package as inappropriate. Trichet argued that money from the fund would show Europe is incapable of solving its own crises.

“Trichet can only give his opinion,” said David Milleker, chief economist at Union Investment in Frankfurt. “The ECB can’t do anything else. It’s up to the politicians now.”

German Chancellor Angela Merkel is facing a crucial state election on May 9, which could explain some of her reluctance to write a check for Athens, said Juergen Michels, chief euro-area economist at Citigroup Inc. in London.

“We’ve never been in a situation like this before so it’s not that unusual to have national interests supersede those of the euro area,” he said.

Merkel’s Audience

Merkel drew applause from an audience in North Rhine- Westphalia this week when she said that “Greece must do its homework” before getting any aid.

The problem is the crisis is now rapidly spreading, undermining confidence in the euro and even fueling speculation it could splinter.

“The most frustrating point in all of this is that those who followed the rules must now help out those who didn’t,” Cailloux said.

Portugal, Ireland and Spain are “conspicuously vulnerable” and may need funding, former IMF chief economist and Harvard Professor Kenneth Rogoff said in an interview this week.

Euro-region members are considering holding a summit to discuss releasing aid to Greece, an official from the Spanish EU presidency, who declined to be named in line with policy, said yesterday.

In the meantime, “it’s crucial for Trichet to regain his stature by reminding lawmakers that they are all in the one boat,” said Michels.

Trichet on April 12 said the ECB wants “the governments of the euro area to live up to their responsibility.”

“Their countries share a common destiny,” he said.

Brain bending and fuzzy conceptual nonsense such as the statement from Jacques Callioux is of course completely inevitable. He is doing his job, that’s all and that’s OK. But I hope he doesn’t expect rational individuals to listen to him for a second. There is absolutely no justification for bailouts whatsoever, be it a corporation or, worse yet, a gang of people controlling police, army, and prisons, a.k.a the government.

The German government also held a special session on Greece:

Chancellor Angela Merkel’s Cabinet met to debate help for Greece as Europe’s growing debt crisis tests her refusal to rush German approval of aid.

Key ministers stayed on after the weekly Cabinet session in Berlin today to discuss disbursing Germany’s 8.4 billion euro ($11 million) share of a European Union-International Monetary Fund bailout. A government spokesman declined to provide further details.

Merkel is insisting Greece commit to several years of deficit reduction as a cut in the nation’s debt rating to junk yesterday drove up borrowing costs from Italy to Portugal and Ireland and boosted indicators of corporate credit risk around the world.

Action “has to be done now, has to be done very fast,” Organization for Economic Cooperation and Development Secretary General Angel Gurria said in an interview today with Bloomberg television in Berlin before he was due to meet Merkel. “It’s not a question of the danger of contagion. Contagion has already happened. This is like Ebola. When you realize you have it you have to cut your leg off in order to survive.”

European stocks slid for a second day and the cost to insure against bond losses rose. Greek two-year note yields soared to 21.4 percent. The euro traded near a one-year low against the dollar.

To counter with yet another (German) limb-metaphor (since this seems to be the intellectual level of this debate): When you extend your small finger, people will want your whole arm. This is precisely what we’ll see. Once German taxpayers are on the hook for a Greek bailout, pension recipients in Spain, Portugal, and Italy are going to get in line and we will have the same debates. This is completely inevitable.

How much is needed for Greece?

The IMF says this:

International Monetary Fund Managing Director Dominique Strauss-Kahn told German lawmakers in Berlin today that Greece may need as much as 120 billion euros ($159 billion) in aid, Green Party parliamentary spokesman Michael Schroeren said by phone today.

Our dear friends the bankers are saying this:

European policy makers may need to stump up as much as 600 billion euros ($794 billion) in aid or buy government bonds if they are to stamp out the region’s spreading fiscal crisis, said economists at JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc.

No contagion?

European policy makers continue to play down speculation of contagion, with ECB Executive Board member Juergen Stark saying yesterday that Greece should be seen as a “unique case.” Leaders will wait until around May 10 before meeting again to discuss Greece, EU President Herman Van Rompuy said yesterday in Tokyo. He also said there was “no question” of Greece restructuring its debt.

Some economists are optimistic that market turmoil will ultimately force politicians and central bankers to do what’s necessary to rescue the euro region.

Eric Kraus, a strategist at Otkritie Financial Co. in Moscow, said he’s buying Greek bonds on the bet policy makers will eventually strike back.

“Sooner or later those morons in Brussels and Berlin will realize that they are playing with fire, have already been burned, and will have to stop feeding the flames,” said Kraus, who works at a brokerage part-owned by Russia’s second-biggest bank. “Then we should see a very nice bounce.”

Of course the ECB will say there is no contagion. And of course they are as always 100% wrong. Contagion will spread rapidly.

Irony and hypocrisy will always we so rampant and staggering in disasters such as the one above. Thus Kraus is almost right when he makes a statement like the one above. Only that the morons he is referring to are not playing with fire by not bailing out Greece, but rather by considering that very option. Also, the morons don’t only sit in Brussles and Berlin, they also sit in offices in banks in Moscow and have signs on their desks saying “Eric Kraus”.

Merkel’s language already makes it obvious: Germany will go along with the package to bailout Greece, one way or another. She will sell it as a victory to have put strict requirements on the Greek bureaucrats to pursue fiscal discipline once they have been rewarded for their past indiscipline. This is of course how incentives work in the fantasy land of government officials. On the other hand, every sane individual sees it how it is: as sheer and utter madness.

All of this is completely inevitable until people reject the fantasies of interventionism and understand the blessings of voluntaryism.

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The Failing European Experiment – A Wakeup Call

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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Imbalance Increases in Eurozone

Bloomberg writes Steinbrueck Says Euro States May Bail Out Members:

German Finance Minister Peer Steinbrueck said euro-region countries may be forced to bail out cash-strapped members of the 16-nation bloc, going further than his counterparts in saying euro states can’t be allowed to fail.

“Some countries are slowly getting into difficulties with their payments,” Steinbrueck said late yesterday in a speech in Dusseldorf. “The euro-region treaties don’t foresee any help for insolvent countries, but in reality the other states would have to rescue those running into difficulty.”

Steinbrueck’s comments underscore mounting investor concerns as European nations pile on debt to bail out banks and counter the deepest recession since World War II. The EU governing treaty says member states aren’t liable for other members’ obligations.

While declining to identify countries facing problems, the German finance chief said Ireland, which has a widening budget deficit, is in a “very difficult situation.” The comment came in response to a question from the audience. Ireland’s debt- rating outlook was cut by Moody’s Investors Service Jan. 30.

The European Commission predicts budget shortfalls this year of 11 percent of gross domestic product in Ireland, 3.7 percent in Greece, 6.2 percent in Spain and 3.8 percent in Italy, compared with 2.9 percent in Germany. The EU ceiling is 3 percent.

The 3% ceiling won’t matter anymore from hereon. 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. The Euro will keep taking its beating for it.

Euro Weakens

The euro fell below $1.26 for the first time since early December. The difference in yield, or spread, between 10-year Irish and German bonds widened nine basis points to 257 basis points today. It widened by almost six times since the middle of last year as investors demanded higher premiums to hold Irish debt.

The Irish government is committed to restoring sustainability to public finances by 2013, the Dublin-based finance ministry said today in an e-mailed statement. At 41 percent of gross domestic product, the country’s debt is below the EU average of 60 percent, it said.

EU rules don’t “really constrain the ability of euro area countries to support one another during a period of exceptional stress,” David Mackie, chief European economist at JPMorgan Chase & Co. in London, said in a research note. “It’s hard to imagine that the region as a whole wouldn’t come up with a package of measures to support the individual economy.”

Governments including Germany’s may call in help from international organizations first before committing funds and pushing their own budgets deeper into the red to help others.

There is nothing much that international groups can do. Please consider in particular IMF Running Out Of Cash:

Dominique Strauss-Kahn said the Fund needed an urgent cash infusion if it was to continue bailing out troubled economies in the future. Mr Strauss-Kahn also indicated that the world’s advanced economies were now tipping from recession into full-blown depression, cementing fears about the scale of the economic slump in rich nations.

Who will bail out the IMF? I little while ago I wrote about the disastrous balance sheet of the Federal Reserve Bank, and concluded with a question. Who will bailout the Federal Reserve once it needs help? The IMF? It seems like the IMF will need help first.

European member states needs to come to their senses. An absolute and unconditional abandonment of any more bailout talks is highly necessary. Member states need to consolidate their finances, cut spending, trim down their obtrusive bureaucracies and cut their unsustainable tax burdens. Germany, France, and Italy should be leading the way in these efforts. The European Commission needs to put an end to its disastrous policy of subsidizing agriculture.

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.

The sentiment in the US is not at all different. As the US economy continues its decline, Europe is unwittingly joining the bandwaggon.

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