"The current crisis has uncovered the deficiencies in the construction of EMU (European monetary union) mercilessly," was the uncharacteristically frank admission from Angela Merkel and Nicholas Sarkozy in a joint letter to the European Council President on the eve of the December 9th summit. What is typically exasperating about this telling diagnosis of the euro's ills is that the treatment that the heads of government recommended at the close of the summit -- namely tougher budgetary rules with fines -- neither addresses the deficiencies in the construction of EMU which the leaders referred to, nor offers any prescription for ameliorating the severity of the current crisis.
This yawning gap between rhetoric and reality, between identifying the seriousness of the crisis and delivering an adequate solution, has plagued the euro zone for the last two years as it has wrestled unsuccessfully with the Greek debt crisis. Indeed, the failure of the December 9th summit to produce a "breakthrough of sufficient size and scope to fully address the euro zone's financial problems" was one of the reasons cited by Standard & Poors in its recent decision to downgrade over half of the bloc's 17 countries, including France.
In Germany, the country most capable of providing the political leadership and financial muscle to support the euro and reassure sovereign bond holders, it seems that political elites and the media are far more enthralled with the scandal which has engulfed the country's president over his business dealings. Perhaps a sense of debt crisis ennui has set in but it seems that the Germans are doing all that they can to ignore the undisciplined euro crisis elephant sitting in their Wohnzimmer.
Of course, anyone who has travelled on the Berlin subway will be familiar with how masterful Germans are at ignoring awkward or embarrassing situations, such as the often deranged people who get on and off the trains at regular intervals. However noisy the interlopers get, Berlin's commuters just sit quietly reading their books, seemingly oblivious to the gesticulating demented individual standing in front of them.
For Germany, the euro crisis is the loud crazy person on the Berlin subway. The Germans, who have already provided guarantees and direct support to the European Financial Stability Facility worth billions of euros, keep shelling out money to profligate Peloponnesians and sun-soaked southern Europeans, each time hoping that they won't get back on the train. But it's always been too little money, given too late to do any good. Now, however, the euro train is coming to a dangerous junction and it is the Greeks who yet again are showing every indication of derailing the train before they get kicked off for not buying a ticket.
Although overshadowed by news of S&P's downgrade of France, the far bigger story last Friday was the collapse of talks between Greece and its private creditors to agree a voluntary reduction (or haircut) in the amount of money that Athens must repay. An agreed outcome to these discussions is a precondition for Greece receiving enough money to repay 14.5 billion euros of bond redemptions due in late March, otherwise a Greek default looms large.
The exact effects of such a default are difficult to predict. Some German lawmakers have been wistfully contemplating the prospect of getting the debt monkey off their shoulders if the Greeks were to leave the euro. Greece is an isolated case, they argue, and such an event would not trigger bank runs or a calamitous exit from the single currency of other PIIGS countries such as Portugal, Spain, Ireland and Italy.
The markets are less sanguine, and not just about the damaging effects of a Greek default, but about the survival of the euro itself. Italian five-year credit-default swap contracts, which insure against defaults by governments,
Unfortunately, these optimistic, yet dogmatic German policymakers are in plentiful supply. As the crisis has shifted from the periphery of the euro zone to the core, rather than raising their game and taking incisive action to boost market confidence in the single currency, German policymakers have been found wanting. Such is their state of denial that one of them, the country's foreign minister Guido Westerwelle, even spoke of the damage being done to market confidence by the ratings agencies' decisions.
In fact, it was the German suggestion in 2010 that holders of Greek debt should not expect to be repaid in full that first created uncertainty in the bond market. This was the first time that a chink appeared in the notion of zero risk European sovereign debt, leaving bond investors asking how risky their other holdings of European government debt might be. The damage was done.
Unlike Herr Westerwelle, Chancellor of the Exchequer George Osborne sees the current problems as stemming from a failure on the part of the euro zone to "provide confidence to the market that they will stand behind their own currency." The S&P downgrades have, thus far, had relatively little effect on the markets, since they largely reflect what investors already know about the inadequacy of the German response to the crisis.
Chancellor Merkel and her policymakers have been acting on the basis that Greece is an isolated case. Yet every reactive decision and feeble measure by Berlin increases the likelihood of a Greek tragedy becoming a Europe-wide one. That will be one elephant and one crazy person that the Germans won't be able to ignore so easily.
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Mitch Feierstein: A Hundred Billion Here, a Hundred Billion There
http://www.bbc.co.uk/news/business-15748696
I could see a CEU (Central European Union) developing, composed of Germany, Netherlands, Belgium, Austria, Czech Republic, Slovakia, Slovenia, and Luxembourg. I think it would be easier to achieve unity here due to the relatively greater affinity -- culturally, linguistically and politically.
I could even see a MEU (Mediterranean European Union) developing, made up of Portugal, Spain, France, Italy, and Greece. But, of course, it would not perform at the exalted level of the CEU. Arguably, France would fit more aptly with the CEU.
The equivalent would be Mexico demanding that The United States taxpayers subsidize their debt.
http://viableopposition.blogspot.com/2012/01/negative-sovereign-bond-yields-sign-of.html
When investors are willing to pay a government to take their money, the world's fiscal situation is dire.
The law abiding Germans are stuck with the tax evading Greeks, while the Greeks are stuck with the Germans who want to make all the rules.
The whole one currency eurozone was a bad idea from the beginning.
(Yea, I said so back then though the euro has lasted longer than I thought....due to good economic times.)
Sovereign countries with their own ways of doing things should each have their own currency.
Mr. Miles should rename his magazine the "Miss America Pageant", because the ideas are similar to the "On Stage Question" portion of that contest.
It is a clash of business cultures and I really hope that French and German (and other's) etatism wins over neocon/neo-liberalism/Friedmanite individualism.
The EU and the Euro, run by and for the sole benefit of one or two countries. Most of the others can be sacrificed along the way, if necessary.
But IMO it's the height of hypocrisies to claim that - against all rules, both legal and common sense - the "bad guy" is the one who refuses to just simply privatize gains and socialize losses.
We cannot lament TBTF on the one hand and then grant an indulgence for all bondholders. These bondholders have been asking an interest rate from Greece for the risk that they would not be paid back. Now the risk manifests and they should get not only their money back but also the interest rates on top; paid by the European taxpayers? We would never act like that when an industrial sector company is affected.
Besides, where would that have led to? So, next they would have gamed the system for as long as it would take that they really got 100% of their investments plus revenues and all the risks were held by the taxpayers.
I really do think that one of the steps necessary to take so that the financial sector stops taking absurd risks is that they need to bear the consequences again.
Well, they get 100% of their investment and pay back the surplus interest. And then let's move on.
And it's not like Greece, Ireland, Portugal and Spain would have avoided their current calamities had they still their sovereign currency. I think that Hungary right now shows the opposite. Nor is it that nothing is done on their behalf, it is just not announced with fanfare. After all, the ECB is intervening into the bond markets. Money is given to Greece. Guarantees are given (EFSF) and additional money will be put into the ESM and IWF. But there are limits to the burden that Austria, Finland, France, Germany and Holland CAN carry. It's not like we are running surpluses. or have low debt rates ourselves.