MacroMouse

Author: Fabius Maximus

Summary: Today Europe’s leaders have the last opportunity to avoid a great crisis. Will they continue to demand increasing austerity of the Greek people, pushing them further on a path devoid of hope and leading to poverty and political collapse? Or will they realize the folly of their actions?
Contents

1. The last exit before disaster
2. “Can a return to the drachma save Greece as unemployment soars?”
3. “Restructuring Greece Within the Euro is Illusory”
4. Letter from Archbishop of Greece Ieronymos to the Prime Minister of Greece
5. An explanation of what’s happening and likely consequences
6. Other posts about the crisis in Europe

(1) The last exit before disaster
The German people drew the wrong conclusion from their post-WWI experience. They saw the damage from the Weimar hyperinflation of 1921-1924, probably an inevitable result of the WWI settlement. They suffer amnesia about the Weimar deflation which brough Hitler to power (see A lesson from the Weimar Republic about balancing the budget). It’s sounding a fire alarm while the ship sinks. Now they repeat in different form Weimar’s mistakes of 1929-32, imposing a crippling austerity on the PIIGS while striving to balance their own budget — almost certain to result in recession and deflation (for description of this process see Debt – the core problem of this financial crisis, which also explains how we got in this mess).
The PIIGS nations grow weaker, the eurozone economy slows, and the centrist political parties lose support to extremists. Greece leads this parade, but the other PIIGS – and France — follow in its path. We can only guess at how this plays out, but it probably ends badly.
Today’s meeting of Europe’s Finance Minsters looks like the last chance to change course. Like all previous opportunities, they will almost certain drive by this last exit. They are ill-equipped to do otherwise, much like 13th century priests treating the Plaque on the basis of Scriptural precepts.

• Myopically focused on the need to protect politically powerful banks,
• seeing Europe as a morality play rather than the product of cold laws,
• believing in a mixture of pseudoeconomic economic myths (eg, confidence fairies, invisible bond vigilantes and the curative power of austerity), and
• unwilling to recognize their own role in creating this crisis.

The series of posts last Fall forecast a resolution – a crisis-driven policy change — in the near future. Three months later nothing has happened. Europe leaders continue to improvise with sh0rt-term measures, while Europe — especially the PIIGS – grow weaker. Each passing month reduces their ability to avoid a crash. The devotion of Europe’s leaders — both in the North and South – to the unification project exceeds my expectations, but no longer appears rational. Perhaps they do not see the cost in broken lives. Perhaps they do, but do not care. Perhaps they value the shining dream of a future Europe more than blasted lives of proles. Collateral damage.
Next are several articles report from the Greece, the front lines of Europe, watching their society crack under the stress.
(3) “Can a return to the drachma save Greece as unemployment soars?“, Ambrose Evans-Pritchard (Business Editor), The Telegraph, 19 February 2012 — “Greece’s unemployment bomb has detonated. After a deceptive calm, the surge in job losses since last summer is shocking even for those who never believed that combined fiscal and monetary contraction could possibly lead to any result other than ruin.” Excerpt:

A variant of this lies in store for Portugal as its “internal devaluation” starts in earnest. The young Schumpeterians in charge of the Portuguese economy insist otherwise — cocksure that shock therapy will triumph without the cushion of debt relief and devaluation — but events have a habit of demolishing dreams.
In November alone 126,000 Greeks lost their jobs in a country of 11 million, equivalent to three and a half million Americans in a single month. The unemployment rate jumped from 18.2pc to 20.9pc. This has not yet fed through into social breakdown. Greeks receive unemployment support for an average of thirty weeks, with a ceiling of €454 a month, according to Professor Manos Matsaganis from Athens University. Those with civil service tenure are placed on labour reserve for two years at half their basic pay, or a third of their actual pay. Once these cushions are exhausted, Greeks are on their own. The monthly ratchet effect will then become painfully evident.
… Dimitra Noussi, who runs two homeless shelters and a soup kitchen for the City of Athens, said the crunch comes once people have been unemployed for five or six months and cannot pay the rent. Most fall back on the kinship network but there comes a point when critical mass overwhelms even this cultural backstop.
… One can see why the high priests of the EU Project wish to prevent elections taking place in April. The political centre is disintegrating, with the once triumphant PASOK party down to 9pc in the polls and New Democracy at 18pc – each party reduced to a pro-Memorandum rump after the mass expulsion of dissidents, and each stunned almost senseless.
The latest best-seller is the Greek translation of Heinrich Winkler’s “Weimar 1918-1933: History of the First German Democracy”, narrating how an indebted Germany pursued the same deflation policies under the Gold Standard as Greece is now pursuing under EMU — with the same results. The book culminates in the Reichstag elections of July 1932 when the Nazis and Communists between them won half the seats, and Weimar died. Such parallels are always inexact. The radical parties of Syriza and the Democratic Left are not authoritarian. Yet their ascendancy surely threatens to shatter the existing order. “If we achieve a Left-dominated government, we will politely tell the Troika to leave the country, and we may need to discuss an orderly return to the Drachma,” said Syriza MP Theodoros Dritsas, choosing his words carefully.
The news that Iceland has regained its investment grade rating — with unemployment down to 6pc – comes as a timely reminder that countries can indeed go it alone and live to tell the tale. Though of course, Iceland’s debts are in sovereign krona, not Mr Schäuble’s euro, and Iceland exports a lot of aluminium.
Mr Papademos warns that default and EMU-exit would lead to “uncontrollable economic chaos”. But is that not already the case? No Greek bank has been able to issue a letter of credit accepted anywhere in the world since November. Large Greek companies are having to relocate their headquarters to Bulgaria in order to conduct basic trade.
The “drachma risk” has already killed investment. Greece is suffering the anticipated consequences of EMU exit without the benefits, so it might as well lance the boil, impose capital controls, and create a new banking system (as Iceland did). Such catharsis might start to unlock €60bn of cash savings in gold, dollars, German euro notes (letter`X’, Greece`Y’), and such-like, sitting in the proverbial mattress. Foreign investors might start to nibble again, once the Greek exchange rate reflects reality at around seven Chinese yuan.

(3) “Restructuring Greece Within the Euro is Illusory“, Der Spiegel, 20 February 2012 — Opening:

Europe’s finance ministers plan to approve a second bailout for Greece on Monday but Hans-Werner Sinn, the head of Ifo, a top German economic think tank, warns that the money will only help international banks — not the Greeks. He argues that Greece can only solve its crisis if it quits the euro.
SPIEGEL: The finance ministers of the euro zone want to approve a new bailout for Greece this Monday. Can the additional €130 billion ($172 billion) save Greece?
Sinn:No, and the politicians know it can’t. They want to gain time until the next election. I think we’re wasting time by doing this. … Because Greece’s external debt is rising with every year that passes until it leaves the currency union. We’re getting ever further away from solving the problem. The basic problem is that Greece isn’t competitive. The cheap loans that the euro brought the country artificially raised prices and wages — and the country has to come back down from this high level.
SPIEGEL: So the euro countries shouldn’t approve the aid?
Sinn: They should give them the money to ease their exit from the currency union. The Greek government could use the money to nationalize the country’s banks and prevent the state from collapsing. The state and the banks must continue to function through all the turmoil that an exit will entail.
SPIEGEL: This turmoil would hit the population hard.
Sinn: Yes, undeniably. But the turmoil would only be temporary, it would last one to two years perhaps. This time would have to be bridged with the financial aid from the international community. But the drachma will immediately depreciate and the situation will stabilize very quickly. After a short thunderstorm, the sun will shine again.
SPIEGEL: How would a euro exit help Greece in concrete terms?
Sinn: It would become competitive again. Because Greek products would rapidly become cheaper, demand would be redirected from imports towards domestically produced goods. The Greeks would no longer buy their tomatoes and olive oil from Holland or Italy but from their own farmers. And tourists for whom Greece has been too expensive in recent years would return. In addition, new capital would flow into the country. The rich Greeks who deposited so many billions, possibly hundreds of billions of euros, in Switzerland would see the falling property prices and wages and would have an incentive to start investing in their own country again.
SPIEGEL: Does the exit from the euro zone entail Greece going bankrupt?
Sinn: No, quite the reverse. The bankruptcy forces the exit. The Greeks will immediately leave if they don’t get any more international aid because the bankruptcy couldn’t be managed within the euro system. The state would be insolvent and the banking system too. The entire payments system would fall apart. The chaos can only be avoided if Greece leaves and the currency depreciates immediately.
SPIEGEL: Does that mean Greece should be forced to leave?
Sinn: No, no one should force anyone. But at the same time Greece doesn’t have the right to receive permanent assistance from the other euro countries, and Greece’s creditors aren’t entitled to have the debt repaid by the international community. Everyone has to earn their standard of living themselves, and those who choose to earn money from risk must bear that risk.
SPIEGEL: If Greece were to exit the euro zone, would the tough austerity measures still be necessary?
Sinn: In this case, savings really only refer to a reduction in debt growth. The economist only refers to savings if debt is actually repaid. Greece is nowhere near doing that. But it’s true that Greece has gotten used to the flow of cheap credit from abroad, and that it’s politically impossible to cut wages to the extent needed to make the country competitive.
…
SPIEGEL:Why are the euro-zone countries so adamant that Greece must remain in the currency?
Sinn:This isn’t really about the country. The Greeks are being held hostage by the banks and financial institutions on Wall Street, in London and Paris who want to make sure that money keeps on flowing from government bailout packages — not to Greece, but into their coffers.
SPIEGEL: What about the contagion that a bankruptcy or a Greek exit would involve? Financial markets may speculate that other countries will suffer a similar fate as Greece.
Sinn: There may be contagion effects. But I think this argument is being instrumentalized by people who are worried about losing money. People keep on saying “the world will end if you Germans stop paying.” In truth only the asset portfolios of some investors will suffer.

(4) Letter from Archbishop of Athens and All Greece Ieronymos to the Prime Minister of Greece

Homelessness and even hunger – phenomena seen during the [Second World] war – have reached nightmare levels … A sense of patience among Greeks is running out, giving way to a sense of anger, and the danger of a social explosion can no longer be ignored.
… We must all understand the feeling of insecurity, desperation and depression in every Greek home. This, unfortunately, is continuing to causes suicide among those who can no longer stand the drama in their family and the suffering of their children. … We are being asked to take even larger doses of a medicine that has proven to be deadly and to undertake commitments that do not solve the problem, but only temporarily postpone the foretold death of our economy … And what is likely to follow are more painful, more unjust measures in the same hopeless and unsuccessful course of our recent past.

The full text in Greek is on the website of the Archdiocese of Athens.
(5) An explanation of what’s happening and likely consequences

1. Fetters of the mind blind us so that we cannot see a solution to this crisis, 1 April 2009
2. A lesson from the Weimar Republic about balancing the budget, 10 February 2010
3. All about deflation, the quiet killer of modern economies, 19 July 2010
4. Government policy errors as a cause of the Great Depression, 1 November 2008
5. The simple explanation of why night falls over Europe, 9 December 2011
6. Explaining the gold standard, the Euro, Default, Deflation, and Hyperinflation, 12 December 2012

(6) Other posts about the crisis in Europe

1. The post-WWII geopolitical regime is dying. Chapter One , 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
2. Can the European Monetary Union survive the next recession?, 11 July 2008
3. The periphery of Europe – a flashpoint to the global economy, 8 February 2010
4. A great speech by the PM of Greece. How soon until an American President says similar words?, 3 March 2010
5. Governments cannot go bankrupt, 2 April 2010
6. The EU does Kabuki for Greece. Is it the next domino to fall?, 14 April 2010
7. About the Euro crisis: the experts are wrong; the German people are right., 7 May 2010
8. Former Central Bank Head Karl Otto Pöhl says bailout plan is all about ‘rescuing banks and rich Greeks’, 20 May 2010
9. The Fate of Europe, nearing the point of decision, 13 September 2011
10. Europe drifts towards the brink of a cataclysm, 26 September 2011
11. Delusions about easy fixes for Europe, dreaming during the calm before the storm, 30 September 2011
12. Every day the new world emerges, yet we see it not. Like today, as Europe begs China for loans, 15 September 2011
13. Is Europe primed for chaos, as it was in July 1914?, 7 October 2011
14. We see the outlines of the next cure for Europe. Will it work?, 14 October 2011
15. Today Europe’s leaders took another step towards the edge of the cliff, 27 October 2011
16. Where to from here, Europe? Some experts share their views., 8 November 2011
17. Status report on Europe’s slow re-birth (first, the current system must die), 10 November 2011
18. Europe begins its endgame. Watch and learn, for Europe’s problems are the world’s., 11 November 2011
19. Looking ahead to see the new shape of Europe, 22 November 2011
20. Hot news! The Wehrmacht failed to take Greece. Now Germany tries again, with a different method., 28 January 2012

This post originally appeared at Fabius Maximus

Author: Marshall Auerback

So the ratings agencies have finally followed through on the big threat and downgraded a number of the eurozone’s credit ratings, including France and Austria, both of which have now lost their coveted Triple AAA status. Italy, Portugal and Spain were downgraded a further two notches.

What does this mean and why does it matter?

Investors (often badly informed) use ratings agencies like Fitch, Moody’s and S&P as an indicator of default risk of a country. Countries that receive lower credit ratings are at a disadvantage when they sell bonds because buyers will not pay as much for bonds from a country perceived to be at risk. In effect, ratings agencies are able to bully countries into adopting policies that are friendly to the ratings agencies’ investors. A compliant government often reacts like Pavlov’s dog to the threat or implementation of a downgrade, putting aside the interests of its citizens and starting to introduce discretionary contractions in its net spending, which it does by either raising taxes or cutting spending.

My take is that the ratings downgrade causes a vicious cycle in which countries will end up adopting policies that will put their economies even more at risk than they were already. The reason for this is that in Europe, you’ve got a flawed financial structure that can’t be fixed by austerity measures because it is incapable of dealing with huge external shocks to the demand for goods and services on the part of consumers.

As readers of this blog are well aware, Eurozone countries have faced two types of problems by entering the euro regime that have made them unstable.

First, they have given up their monetary sovereignty by giving up their national currencies and adopting a supranational one. By divorcing the fiscal authority (that which governs a country’s public treasury) from the monetary authority (that which governs the supply of money) member countries have relinquished their public sector’s capacity to provide high levels of employment and output because they are restricted in what they can spend and how they can introduce stimulation in the form of jobs programs or infrastructure projects.

Second, by entering the eurozone, these countries have also agreed to abide by something called the Maastricht Treaty, an agreement which created the European Union and led to the creation of the euro in 1992. This treaty restricts each member country’s budget deficit to only 3 % and debt to 60% of GDP. Therefore, even if a country is able to borrow and finance its deficit spending, like Germany and France, it is not supposed to use fiscal policy above those limits. So countries have resorted to different means to keep their national economies afloat, from trying to foster the export sector, as Germany does, to cooking the books through Wall Street wizardry, like Greece and Italy did. Nations that exceed the limits by the greatest amounts are punished with high interest rates that drive them into a vicious death spiral because deficits rise and lead to further credit downgrades. That is what has happened to Greece, Ireland, Portugal, etc., and now threatens Italy and Spain. Vultures will soon be looking further into the core to places like France.

By contrast, a sovereign government which issued its own currency (such as the US or Canada) could respond to a huge drop in economic activity by expanding fiscal stimulus, or allowing the currency to fall (thereby enhancing growth through exports). On the other hand, eurozone governments ceded their national currencies to the European Central Bank (ECB), the sole entity that can issue unlimited amounts of euros. That is why we’re left with a situation in which the solvency crisis can only be solved by the ECB: It is the only entity which is in a position to buy unlimited quantities of national sovereign bonds in order to ensure that these countries do not continue to pay ruinous rates of interest and suffer further declines in economic activity as a consequence. Fiscal austerity only adds to the problem.

And despite the ongoing hawkish rhetoric from the ECB, there are signs that they are getting it: The LTRO can’t work, as you’re essentially just swapping one liability for another one (albeit more long term in duration, therefore making it better for the banks).

But note the way the ECB balance sheet is expanding: The consolidated assets of the European system of Central Banks is now 4.4 billion euros or $5.7 billion. In effect, the consolidated ESCB balance sheet is almost two times that of the Fed and its increase over the last 6 months is almost equal to the entire increase in the Fed’s balance sheet over the last several years.

The figures on the ESCB balance sheet neither includes the recent half billion euro Long Term Refinancing Option (LTRO) introduced last December, nor further mooted policies in that direction. CLSA has suggested that the speculation on the February 29^th LTRO is EUR1trn. Some have suggested even higher numbers.

Bottom line: the system of European Central Banks (ESCB) has been engaged in massive QE and much more is in the pipeline.

With such massive injections of “liquidity” into the European banks, a European Lehman type failure with Lehman’s systemic consequences becomes ever less likely.

Some might argue that the ECB’s balance sheet would be impaired by buying up the government debt of countries in distress. But this is not true, because by definition, the “profligates” cannot default. In fact, as the monopoly provider of the euro, the ECB could easily set the rate at which it buys the bonds (say, 4% for Italy) and eventually it would receive a profit on those loans, which addresses the endless issues about the ECB’s supposed balance sheet risk.

Speaking of which, I have seen so many pieces on this alleged Target 2 problem and I think it’s another misguided panic, much like the hyperinflationists were venting about the dangers of QE in the US last year. And maybe the Germans are guilty about this misguided thinking because they somehow think that because their claims increase on the ECB (which effectively takes on the liabilities of the other NCBs), they are exposed in the event that the ECB goes bust. Why should the ECB go bust?

Look at this another way:
-German net exports to the eurozone entail a surplus in target 2 and thus for the Bundesbank.
-The ECB runs the SMP on the ESCBs balance sheet (ESCB comprises 28 central banks. ECB plus ALL 27 EU central banks, BoE included!).
-In case of euro bond default, these would be losses to the Bundesbank.

This seems to be a reading that goes beyond the “spirit of the Treaty” (as they say), considering that the ECB does not have a statutory minimum capital requirement. It transfers profits to national governments but in times of losses it can only request a capital injection should its capital be depleted.The European Council (which is representative of elected governments) is not compelled to accede to this request.

Hence, the ECB is a perfect balance sheet to warehouse risk since it’s losses need not become a fiscal transfer as it can rebuild its profits via seignorage over a number of years, as I wrote in a recent NEP piece. So there’s no losses to Germany and the Germans are going nuts over nothing. In the end, the “senior creditor” argument explains an unwarranted fear of the Germans.

The Weimar stuff may be for public consumption, but the BUBA default stuff is not any better?

And despite Draghi’s public statements, this time the central banks and governments are committed to move heaven and earth to prevent such a repeat. Hence the $650 bullion three year ECB loan facility and more if it is needed (which doesn’t solve the underlying problem, but defers it for a long time).

The ECB acting this way flies in the face of many of Mario Draghi’s public statements and in light of ongoing German opposition, many think a vast expansion of the ECB’s balance sheet is well nigh politically impossible. But democracies don’t “do” deflation very well. Contrary to conventional wisdsom, it’s the eurozone’s currently ruinous fiscal austerity policies that are truly politically unsustainable. They will not only cause more economic and social misery, but they undermine much of the residual political support for the common currency. Consider the case of Austria, which lost its AAA rating along with France. The leader of Austria’s far right FPÖ, H.C. Strache, has embraced an explicitly anti-euro position, and he is gaining political traction in the polls, as is Marine Le Pen, leader of the National Front in France, where Presidential elections are due to be held in 3 months’ time.. Both oppose the euro — to be fair — for the right reasons. The only problem is that the rest of their policies are a dystopian nightmare. Similarly, in an interview with German daily Die Welt (and the choice and location of publication is extremely important), the new head of Italy’s “technocratic” government, Mario Monti, lamented that despite Italy’s considerable fiscal austerity measures, they aren’t seeing lower interest rates. Fiscal austerity in the midst of a recession is bad policy at the best of times, but Monti did what he was told and now he’s got nothing to show for it. Has he become the victim of a German “Italian Job” (all you Michael Caine fans will know what I’m talking about here).

Monti has pointed to the threat that Italian sentiment is finely balanced. Make the wrong decision now, he said, and the populists will take control. With that in mind, observe that the Italian Social Democrat party commented last week that it would like to see Italy leave EMU.

Are we about to re-enact the 1930s? Perhaps the ECB is finally realising that the stakes are too high, even in the midst of their Bundesbank-like Germanic posturing.

Also see:

• Why Investors will buy Italian bonds after ECB monetisation from Nov 2011
• On the ECB’s Long-Term Refinancing Operation and 2012 macro ideas for investors from Dec 2011

This post originally appeared at Credit Writedowns

Satyajit Das I
Satyajit Das II

I thought this short comment, by Richard Wood to Satyajit Das' post at Roubini's blog, placed the horse in the field, where he belongs...

"I should have summarise my proposal.

Throughout the centuries governments have had two options: they could finance their budget deficits by printing money or by borrowing from the public. When inflation is high, or a threat, then it is appropriate to finance the deficit by borrowing money from the public. But when public debt is already very high it is appropriate to print money to finance the budget deficit.

When unemplyment is high it is essential to run budget deficits, to put more money into the economy than you take out, to raise demand.

It is not the budget deficit as such that is the problem in periphery countiries today. Rather it is the manner of their financing, borrowing from the public, that is the problem. With aggregate demand depressed the way forward for periphery countries is to stimulate by financing the on-going budget deficit wirh new money creation. In this way the rise in public debt is stopped and debt default can be avoided. Inflation can be avoided by sterilisation as appropriate. Austerity is unnecessary and takes the economy into depression. "
Richard Wood

Check out the statistics at CHIPS...

http://www.chips.org/docs/000652.pdf

And the BIS...

http://www.bis.org/statistics/otcder/dt1920a.pdf

Oughtta' warm your heart... Those are all 'trillions of dollars' statistics...

(NEW) Fragile and Unbalanced in 2012 http://www.economonitor.com/nouriel/2011/12/15/fragile-and-unbalanced-in-2012/?utm_source=contactology&utm_medium=email&utm_campaign=EconoMonitor_Highlights%20-%20A%20Weekly%20Recap%20of%20some%20of%20the%20Best%20Pieces%20on%20EconoMonitor_10_27_111  Author: Nouriel Roubini

(NEW) http://mobile.nytimes.com/article?a=882026&single=1&f=28 Will China Break?, Paul Krugman

Author: Satyajit Das
(Note: I highly recommend Satyajit's work, especially his book; "Traders, Guns and Money" on the global derivatives toxicity; "Knowns and Unknowns In The Dazzling World of Derivatives." You can read no-one with more real world ground experience and authority in the banking and derivatives trading business. This 2006 book is even better than his newest... Also, this most recent article sums the world problems most succinctly...)

European summits – over twenty at last count – have produced little. The planned summit on 9 December 2011 may well be the last chance for Euro leaders and Euro-crats to avoid a financial disaster. Unless European leaders overcome their common sense deficit, which is proving as intractable as budget and trade deficits, this may not end well.

The last comprehensive and final plan – the fourth in the last 18 months – failed to mollify investors and markets. The crisis is now engulfing Italy, Spain and now re-infecting Ireland and Portugal. Stronger countries like France (at risk of losing its AAA credit rating) and Germany are increasingly vulnerable.

Standard & Poor’s is reviewing the ratings of a number of 15 Euro-zone countries with negative implications. This action was “prompted by … belief that systemic stresses in the Euro-zone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the Euro-zone as a whole.” The rating agency highlighted tightening credit conditions across the Euro-zone, higher funding costs for many Euro-zone sovereigns, high levels of government and household indebtedness, the rising risk of an European recession and a lack of agreement among European policy makers on tackling problems.

Critical Points…
The curious pas de deux between European banks and sovereigns has reached a critical stage. Needing to raise money and keep interest costs down, governments are pressuring banks to buy their bonds and use them as collateral to raise fund from central banks and the European Central Bank (“ECB”). At the same time, European banks exposed to the risk of large losses on holdings of sovereign bond, which would render them potentially insolvent need governments to support the banking system.

Time is running short. European Sovereigns and banks need to find Euro 1.9 trillion to re-finance maturing debt in 2012. Italy alone requires Euro 113 billion in the first quarter and around Euro 300 billion over the full year. European banks need Euro 500 billion in the first half of 2012 and Euro 275 billion in the second half. This means they need to raise Euro 230 billion per quarter in 2012 compared to Euro 132 billion per quarter in 2011. Since June 2011, European banks have been only able to raise Euro 17 billion compared to Euro 120 billion for the same period in 2010.

There has to be acknowledgment that austerity – draconian budget cuts and tax increases – to bring budget deficits and public debt under control cannot deal with the problem – the deflation of the debt-fuelled bubble. There also has to be acknowledgment that Europe doesn’t have a “liquidity” problem which can be alleviated by substituting fleeing private sector lenders with official lenders such as the European Union (“EU”), ECB or the International Monetary Fund (“IMF”).

The European Financial Stability Fund (“EFSF”), the European bailout fund, is now largely irrelevant, It lacks the resources to quarantine Spain and Italy as well as, increasingly, Belgium, France and Germany from contagion.

Schemes to increase the capacity of the EFSF – borrowing to leverage the fund or partial guarantees or seeking Chinese funding – are simply far fetched or incomprehensible. The EFSF’s attempt to raise money to meet existing commitments has run into problems, meeting lack lustre support and a sharp increase in costs.

In the event that the AAA guarantors are downgraded, the EFSF structure, as originally envisaged, becomes unworkable. Rating agencies have signalled that the EFSF’s AAA rating is under threat. The risk that the cost of funding for the bailout fund is greater than the rate that it can charge is now increasingly evident.

European countries have a “solvency” problem – they have debt that they can never seriously expect to pay back. Stronger nations cannot save the peripheral nations without ultimately destroying their own credit and ability to raise funds.

Commonly touted solutions, such as fiscal union (greater integration of finances where Germany and the stronger economies subsidise the weaker economies) or debt monetisation (the ECB prints money) are unworkable.

Germany and France are unwilling or unable to increase the size of their commitments. Restricted by the German Constitutional Court’s decision, for the moment, Germany cannot or will not go above Euro 211 billion in guarantees for the bailout funds already committed –about 7% of its GDP. Fiscal integration would have a higher cost than Germany is willing to pay or can sustain without affecting the country’s creditworthiness.

France is at the limit of its financial capacity and at risk of losing its AAA credit rating. Fragile coalition governments in Netherlands and Finland are increasingly reluctant to increase their commitments to the bailout process. These constraints make full fiscal union difficult.

Stronger European countries have seen a sharp increase in the cost of their financing. Netherlands 10 year debt is trading around 0.40% above Germany, down from a November high of 0.68% but well above the 0.10% where it traded historically. Austria’s 10 year rate relative to Germany fluctuated between 0.80% to 1.90% in November, up from an average of 0.23% over the last 10 years. Finland’s 10-year spread to German bonds reached 0.79% in November, well above the low of 0.07% in January 2011 and an average of 0.35% over the last year. Finland’s 10 year bonds are trading at around 1.00% over that of neighbouring Sweden, down from a high of 1.37% but well above an average difference of 0.04% since the introduction of the Euro in 1999.

The higher rates and increased volatility of rates has made it increasingly difficult for these countries to finance, despite relatively sound public finances. For Finland, where 75% of its debt is sold to foreign investors, this is increasingly problematic.

The ECB is not allowed and also unwilling to print money. Germany’s Bundesbank opposes debt monetisation. The accepted view is that, in the final analysis, Germany will embrace fiscal integration or allow the printing of money. This assumes that a cost-benefit analysis indicates that this would be less costly than a disorderly break-up of the Euro-Zone. This ignores a deep-seated German mistrust of modern finance as well as a strong belief in a hard currency and stable money. Based on their history, Germans believe that this is essential to economic and social stability. It would be unsurprising to see Germany refuse the type of monetary accommodation and open-ended commitment necessary to resolve the crisis by either fiscal union or debt monetisation.

Printing money may buy some time. But it does not deal with the level of debt, the problems related to bank holdings of sovereign bonds (a small fall in value may affect the solvency of many institutions), allowing countries to regain access to investors on a sustainable basis or economic competitiveness.
If fiscal union and debt monetisation are unavailable, a “controlled” debt restructuring of some nations may be the only option available.

Contagion…
What happens in Europe will not stay in Europe. The shock will be rapidly transmitted through trade, investment and the financial system to the rest of the world. Problems in international money markets will not be welcome for America businesses and the Federal government, which relies on foreign investors for financing. It may truncate the nascent American recovery.

Not only are their financial health and savings affected by what happens in Europe, if the International Monetary Fund (“IMF”) gets involved American will be bearing around 16% of the bill for any European bailout.

The US and Europe account for around 40% of world GDP and 25% of trade. They also make up around 60% of direct investment flows and 60% of financial assets. Europe and the US is each other’s most important market for goods and services.

In 2010, the EU purchased just over $400 billion worth of US goods and services, around 20% of total exports. US exports to Asia are frequently components of or driven by exports to Europe.
The expected economic slowdown in Europe will affect US exports, one part of the American economy that is doing well growing are around 11%, the fastest rate for more than a decade. The slowdown in emerging markets that trade with Europe will have secondary effects on America’s economic activity.

A September 2011 report prepared by the Congressional Research Services estimated that American banks exposure to Greece, Ireland, Italy, Portugal, and Spain — some of the most heavily indebted euro zone economies — amounted to $641 billion. US banks direct exposure to European sovereigns is around $100 billion. The net exposure is probably lower due to hedges.

Indirect exposure via dealings with banks exposed to Europe is larger. American banks have exposure to German and French banks are greater than $1.2 trillion, about 10% of total commercial banking assets in the United States. US banks also have substantial open derivatives contracts with European banks, face value of around $750 billion although the current value of the positions is much lower.
In case of defaults or debt restructuring of one or more European nations or distress of a major European bank, US banks would suffer both direct and indirect losses, such as failed hedges. MF Global’s losses and bankruptcy are a stark reminder of the risks.

US retirement investments in European securities are at risk. Indirect exposure to losses on European securities is even greater. Around $800 billion of China’s currency reserves are invested in Europe.
Losses would reduce this savings pool which would affect China’s ability to purchase US Treasuries.
The problems of European banks, previously active in financing local businesses, will compound the problem. These banks are required to increase capital to cover losses, including those on their sovereign bond investment. As they can’t or do not want to issue equity at deeply discounted prices and the limited investor appetite for such issues, the banks may sell assets or reduce lending to raise the required capital. Estimates suggest that these banks could have to sell (up to) $2.5-3.0 trillion in assets, resulting in a sharp contraction in availability of credit.

While they are not a significant component of lending to American businesses, in 2007, European banks accounted for 30% of loans in Asia-Pacific. This has fallen by around half to 15-16% and is likely to shrink further as a result of the problems of these banks. Troubled French banks account for about 11% of maturing loans in Asia Pacific in 2012. It is unlikely that these banks will maintain their level of commitment. Asia-Pacific banks have taken up the slack but are not sizeable enough to fill the gap completely. The absence of credit will affect Asian businesses, which will then flow through to the US through reduced exports.

Recent action by central banks to lower the cost of US dollar funding via liquidity swaps for non-American banks was designed to alleviate some of these pressures. While they have had some effect, the funding position of European banks remains fragile.

The US will be affected through the appreciation of the dollar against the Euro. The Euro has declined in value by already 5% in a few weeks and further falls are possible. This will reduce the competitiveness of America exports, particularly relative to European businesses. Continued decline in the Euro will have a substantial adverse impact on US exports.

Historically, growth in the two economies is highly correlated. A slowdown in Europe is generally reflected in lower growth in the US reflecting the economic linkages. US growth may slow in response to Europe’s problems.

Stock markets are also correlated. American companies, especially with major European operations, have already signalled lower earnings as economic activity slows. Firm affected includes bellwether businesses like GE and McDonald’s. Automobile companies, with sales of nearly 25-30% in Europe, food and tobacco companies are exposed.

Continued problems are likely damage weak consumer and business confidence affecting the recovery.
American investors and financial institutions have reduced exposure to European debt and investments. The US Federal Reserve has provided dollars via European Central banks to help calm markets and avoid a dollar liquidity crunch. But beyond these measures, Americans are largely spectators to the events in Europe.

Nien or Non…
Early signs are not good. The French President has pronounced that no European country will be allowed to default. Germany has placed its faith in more austerity without increasing her financial commitment, proposing a revised treaty between Euro-Zone members to reinforce a commitment to fiscal discipline. Automatic, court-enforced sanctions on countries that exceed 3% of GDP on budget deficits and 60% of GDP on debt are laughable. The bulk of Euro-Zone countries do not and can not meet these limits now or in the forseeable future. As for the proposed fine, they would have to borrow the money to pay them.

Plans to leverage the EFSF are to be tabled, although no one honestly knows whether any investor will support it with cash. The Chinese have said “nein, danke” and “non, merci“.

The ECB will probably slash Euro interest rates and lengthen the term of emergency funding of banks to say two years with easier collateral rules. European central banks may provide money to the IMF to provide money to beleaguered nations. But IMF funding would rank above ordinary creditors and impede the receipt’s access to commerical funding complicating the problem.

No restructuring of the Euro is contemplated as the French, Germans and the EU appear hopelessly devoted to the common currency.

European leaders seem content to discuss long term lifestyle changes with the near death patient in ER.

"New"__The Main Event – The U.S. Debt Crisis

S___, the solution was offered by Plato some 2400 years ago__Nobody has eyes or ears__Yet...!!!










Comparative Advantage and Supply and Demand have turned to Outright Comparative Dis-Advantage, Through Massively Imbalanced Currency Manipulation Mechanics... So, you better start looking at the real figures, say at the I.M.F., B.I.S. and C.H.I.P.S....

Author: Fabius Maximus  Link...

Summary: The endgame for Europe (in its current form) probably has started. Like birth, nobody knows what comes next. Will the process be easy or difficult? Fast or slow? Produce an angel or monster? Here we make some guesses. Pay attention, as Europe’s travails mirror those to come for the world.
Contents

1. The present: rising stress
2. What comes next?
3. The lesson Europe offers to the world
4. For more information

(1) The present: rising stress
In a troubled marriage the first mention of divorce can spark its dissolution, as the partners protect themselves by grabbing assets and consulting attorneys. Something similar afflicts the Eurozone. The G-20 conference was advertised as the last chance to save the Eurozone. After it passed with no strong action, Greece’s PM proposed a referendum — in response to which Germany’s PM threatened to eject Greece from the EMU.
Now they have taken the next step, making contingency plans. “French and Germans explore idea of smaller euro zone” (Reuters). “Merkel’s Party May Adopt Euro-Exit Clause in Platform, CDU’s Barthle Says” (Bloomberg). Italian bond yields have spiked up in response to the increased risk of default. Next will come capital flight from the PIIGS to safer lands. Such things will destabilize Europe. If continued the current structure will collapse, forcing either unification or fragmentation. Most experts bet on the latter, although anything is possible.
The news media describe the European crisis — like they do almost everything — as a morality tale. Strong northern Europeans sell their fine manufactured goods to their swarthy southern neighbors (loaning them the money to do so). We consume these tales like children. In fact all these nations did well until they joined the EMU. Only after 2000 did the debt for goods trade develop, the inevitable result of a monetary regime designed for Germany wrecking the competitiveness of the southern members of the EMU.
The outcome might disappoint those in the audience hoping for a victory of goodies over baddies. The likely fragmentation of Europe might mean devaluation and default by some of the PIIGS. Freed of their excessive debt burdens and mad German-imposed austerity programs, competitiveness restored by their new (and devalued vs. the Euro) currencies, their economies might recover. That assumes that they manage the process well, using the turmoil as an opportunity to make vital reforms.
What of the heroes of the north, liberated from their weak and feckless southern cousins? Their exports will fall due to the lost southern markets. Their currency (perhaps a super-DeutschMark) might rise in value — like the Japanese Yen and Swiss Franc — to levels making their exports uncompetitive in much of the world (a too-strong currency is an anvil tied to a nation). Their banks will require massive government support, as some of the PIIGS default (in some fashion) on their bonds.
Economics, like medicine and engineering, is a practical science – not a morality.
(3) The lesson Europe offers to the world
The G-20 Summit statement of November 2008 (in the midst of a global collapse) nicely described the problem within Europe and of the world:

Major underlying factors to the current situation were, among others, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes. These developments, together, contributed to excesses and ultimately resulted in severe market disruptions.

In the three years since nothing has been done to solve these problems, either in Europe or the world. Now events force Europe to take action. Events will similarly force global action, eventually.
(a) The madness of the “everybody must save” policy goals, and the lack of necessary global policy coordination
From “Europe is choking on imbalances, will the global system be next?, George Magnus, 9 November 2011

{about deflationary policies}:

• European countries give top priority to deficit adjustment through more austerity – witness current deliberations in Italy and France.
• The US debt ceiling crisis resulted in deficit cutting proposals now reaching a critical deadline at the end of November.
• And many emerging countries, including China, have continued to restrain nominal and real exchange rate adjustments, while pursuing restrictive economic policies to contain inflationary pressures.

The asymmetry of policy adjustment is only ‘sustainable’ in the sense that for as long as it continues, the outcomes will be negative for growth, financial stability and trade and capital movements. This is the result of advanced nations looking to deleverage and raise savings, while key emerging nations pursue economic models based around high levels of savings.
The creation of the G20 in 2008 was a notable milestone in bringing together most of the world’s biggest creditors and debtors. But apart from the coordinated 2008/09 response to the financial crisis, much of which had been pre-determined nationally, its subsequent record doesn’t amount to much of consequence. The recent Cannes Summit showed all too clearly, in spookily reminiscent tones of the London Economic Conference of 1933, that the G20 lacks the leadership to draw up an agree and implement an agenda to unwind imbalances. The financial crisis has sapped the US ability to lead, left China’s unwillingness untouched, and further undermined the capacity of Europe on both counts.

(b) The madness of vendor financing
The current structure of Europe cracks under the slowly rising stress of vendor financing: export-based prosperity for some, debt-financed consumption by others. Unless reformed, this can only end badly. The global economy has similar imbalances. In 2010 the trade surpluses of China, Russia, and East Asia (China being half the total) were almost equal to the US trade deficit of $560 billion. OPEC, Germany, and Japan accumulated another $518 billion surplus. These numbers continue year by year, accumulating stress that will eventually break the current global financial order.
We should watch and learn from Europe’s experience in the months to come. We, and the rest of the world, may follow them sooner than we expect.
(4) For More Information
Articles about Europe:
(1) “Endgame Approaching“, Tim Duy (Asst Prof Economics, U OR), 9 November 2011
(2) “Why Italy’s Days in the Eurozone May Be Numbered“, Nouriel Roubini, Roubini Global Economics, 10 November
(3) “Is This the End of the Faith-Based European Monetary Union?“, L. Randall Wray (Prof Economics, U Missouri-Kansas City), Roubini Global Economics, 10 November 2011
(4) “Europe’s Next Nightmare“, Dani Rodrik (Prof Political Economy, Harvard), 9 November 2011 — Opening:
“As if the economic ramifications of a full-blown Greek default were not terrifying enough, the political consequences could be far worse. A chaotic eurozone breakup would cause irreparable damage to the European integration project, the central pillar of Europe’s political stability since World War II. It would destabilize not only the highly-indebted European periphery, but also core countries like France and Germany, which have been the architects of that project.”
Other posts about the crisis of Europe:

1. The post-WWII geopolitical regime is dying. Chapter One , 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
2. Can the European Monetary Union survive the next recession?, 11 July 2008
3. The periphery of Europe – a flashpoint to the global economy, 8 February 2010
4. A great speech by the PM of Greece. How soon until an American President says similar words?, 3 March 2010
5. Governments cannot go bankrupt, 2 April 2010
6. Our government’s finances are broken. How do we compare with our peers?, 8 April 2010
7. The EU does Kabuki for Greece. Is it the next domino to fall?, 14 April 2010
8. About the Euro crisis: the experts are wrong; the German people are right., 7 May 2010
9. Former Central Bank Head Karl Otto Pöhl says bailout plan is all about ‘rescuing banks and rich Greeks’, 20 May 2010
10. The Fate of Europe, nearing the point of decision, 13 September 2011
11. Europe drifts towards the brink of a cataclysm, 26 September 2011
12. Delusions about easy fixes for Europe, dreaming during the calm before the storm, 30 September 2011
13. Every day the new world emerges, yet we see it not. Like today, as Europe begs China for loans, 15 September 2011
14. Is Europe primed for chaos, as it was in July 1914?, 7 October 2011
15. We see the outlines of the next cure for Europe. Will it work?, 14 October 2011
16. Today Europe’s leaders took another step towards the edge of the cliff, 27 October 2011
17. Where to from here, Europe? Some experts share their views., 8 November 2011
18. Status report on Europe’s slow re-birth (first, the current system must die), 10 November 2011

by Fabius Maximus...

(Also:) Europe’s Plan to End the Debt Crisis Can’t and Won’t Work – Part 1
.
Summary: The conference of Europe’s leaders concluded with little results, a failure judged by the expectations they had set. They don’t have time for many more such failures as conditions worsen, the financial contagion spreads across Europe, and their credibility diminishes. Here we conduct a post-mortem on the Summit.

Today the leaders of Europe concluded their 14th meeting during the 21-month-long crisis, their last opportunity to produce specific proposals for the G-20 meeting at Cannes on November 3-5. They failed to agree upon specific and substantial measures to contain the growing economic stress — now reaching Italy (which has the world’s 3rd largest government debt) – and treat Greece’s problems (now the most afflicted sick man of Europe). The few measures they did agree upon are of dubious effect, much like the austerity programs they have prescribed for the PIIGS (now pushing most of them into long-term contractions).

Does anyone give much weight to their expressions of resolve and large promises for future action? While they talk, the rot spreads.

Contents

1. The announcements from the Summit
2. The effect of these agreements
3. China to the rescue!
4. What about those lazy profligate Greeks?
5. Other articles on the FM website about Europe’s crisis

(1) The announcements from the Summit

The European Council has resolved to do great things in the future, but today made few or no actual decisions. Details for future actions to come in November.

• Statement of EU Heads of State or Government
• Remarks by Herman Van Rompuy, President of the European Council, after the meeting of EU Heads of State or Government

Reuters provided additional information on the pitifully meager accomplishments of the meeting (the emphasis is mine):

The euro zone aims to leverage its 440 billion euro bailout fund, the EFSF, “several fold” but finance ministers will only agree the details of how that will be done in November, according to a draft statement to be issued after a summit on Wednesday. The statement, obtained by Reuters, says two options are being considered to leverage the fund, one involving it issuing risk insurance and the other built around it taking part in a special purpose investment vehicle. Both models could be deployed simultaneously, the draft statement said.
The Eurogroup of finance ministers will be asked to finalize the terms and conditions for how the EFSF will operate under the leverage schemes in November, the statement said.
In addition, it said the EFSF’s resources could be further enhanced, possibly via cooperation with the International Monetary Fund.
The draft statement also called on Spain to do more to bring its budget into line, while praising it for the steps taken so far. A paragraph on Italy, which is under pressure to do more on pension and other reforms, was left blank but is expected to be added later.

(2) The effect of these agreements

(a) Probably not much more money for Greece, other than the existing programs. Perhaps aid for its banks, and to rollover its government debt.

(b) A large write-down of privately held Greek government debt (which is aprox 200B euro of its 350B debt), two or perhaps even three times the 21% reduction in its net present value agreed upon on July 21st. This would reduce Greek government debt to a still-fantastic 140-150% of GDP (depending on the terms; see this report for details). But Greek banks and pension plans hold much of the this debt. Update: they agreed to 50% cut; see Reuters.

In the short-term this will weaken the banks; only large-scale aid will keep them alive. Long-term this threatens the solvency of Greece’s pension system. Unless accompanied by substantial aid, the net relief might be small.

(c) Europe’s banks will need to raise substantial amounts of new capital from private sources. This might prove difficult to do until Europe’s leaders agree upon long-term and large-scale reforms to stabilize Europe’s government finances and (most important) the internal trade imbalances which have caused these problems.

(d) Most importantly, Europe’s leaders appear to have abandoned (at least for now) their attempts to address the causes of Europe’s problems. The announcement concern only band-aids. They neither fix Greece nor prevent the contagion to continue spreading — as it has for the past 21 months. How the heat has spread to Italy, and even French sovereign yields are rising.

Conclusion: Europe’s leaders are playing Russian Roulette, Each failed conference, each inadequate solution is like pulling the trigger. Each attempt burns time and credibility. Eventually they’ll get a loaded chamber, with the bang initiating the disorderly circumstances they fear. But perhaps only such turmoil will generate the political will to take decisive measures — but it will increase the cost of the measures and making success more difficult.

(3) China to the rescue!

Despite the evident failure of the Summit, excitement spread from a rumor that China would make large loans to Europe, perhaps through the IMF. It’s a mark of the West’s desperation that we greet this foolish story — which has made several appearances this year — with such enthusiasm.

(a) China announced back in January they they would buy EFSF bonds (which are AAA). Both Japan and China have already done so.

(b) The latest rumor originated in China Daily (see here via AFP):

China and other emerging powers have agreed to help eurozone countries facing a debt crisis by taking part in a bailout fund, the China Daily said Wednesday, citing a source close to EU decision makers. The state-owned English language newspaper said leading emerging economies would help to finance the rescue fund through the International Monetary Fund, which would boost their voting rights in the Washington-based lender.The agreement may be written into the final document at a second emergency summit of European leaders, due to begin later Wednesday, the unidentified source told the newspaper.

Reuters published a denial a few hours later: “China diplomat: nothing concrete on investing in EFSF vehicle“.

(c) Europe runs a current-account surplus, and so does not need foreign funds to bailout Greece. If China’s loans are in addition to existing flows, they will depress the RMB (the yuan) vs. the Euro — boosting the competitiveness of China’s exports vs. manufacturers in Europe. Why then seek the funds? Europe’s leaders probably want China’s funds because they do not want to take on the risk themselves of lending to the PIIGS. That of course will not excite China. For more about this see BRICs to the rescue, Michael Pettis (Finance Professor at Peking U; bio here), 6 October 2011.

(d) The previous rumors are discussed in Every day the new world emerges, yet we see it not. Like today, as Europe begs China for loans, including what China will ask in exchange for doing this favor to Europe.

(4) What about those lazy profligate Greeks?

To keep Americans dumb and happy, foreign news must be repackaged as simple morality plays. As has been done with Greece’s problems. In fact they result from stupidity of Greed borrowers and German/French lenders — both locked into a system which depresses Greece’s competitiveness vs. Germany. For a look at the internal dynamics of Greece see The Myth of Greek Profligacy & the Faith Based Economics of the ‘Troika’, “Marshall Auerback and Rob Parenteau, Naked Capitalism, 24 October 2011 — Excerpt:

Rather, the heart of the problem is in the antiquated revenue system that supports that state, which results in a budget shortfall consistently about 10% of GDP. The top 20% of the income distribution in Greece pay virtually no taxes at all, the product of a corrupt bargain reached during the days of the junta between the military and Greece’s wealthiest plutocrats. No wonder there is a fiscal crisis!
So it’s not a problem of Greek profligates, or an overly generous welfare state, both of which suggest that the standard IMF style remedies being proposed here are bound to fail, as they are doing right now. In fact, given the non-stop austerity being imposed on Athens (which simply has the effect of deflating the economy further and thereby reducing the ability of the Greeks to hit the fiscal targets imposed on them), the Greeks really are getting close to the point where they may well default and shift the problem back to those imposing the austerity. This surely can’t be much worse than the slow execution they are facing today.
In reality, the Greeks have one of the lowest per capita incomes in Europe (€21,100), much lower than the Eurozone 12 (€27,600) or the German level (€29,400). Further, the Greek social safety nets might seem very generous by US standards but are truly modest compared to the rest of the Europe.
… Furthermore, if one looks at total social spending of select Eurozone countries as a per cent of GDP through 2005 (based on OECD statistics), Greece’s spending lagged behind that of all euro countries except for Ireland, and was below the OECD average. Note also that in spite of all the commentary on early retirement in Greece, its spending on old age programs was in line with the spending in Germany and France.
In fact, Greece has one of the most unequal distributions of income in Europe, and a very high level of poverty, as the following table shows (source: OECD and Papadimitriou, Wray and Nersisyan). The evidence is not consistent with the picture presented in the media of an overly generous welfare state.
… The country, however, is truly stuck: they can’t devalue, they can’t pay their own way because they do not have a sovereign currency, and nobody will voluntarily finance them. So they must exit and devalue or drop their domestic prices. The massive default, though inevitable, is just a step along the way.
To make the problem worse, export earnings also seem to face their own structural cap that is consistently exceeded by import spending, which means that the debt that finances the government shortfall is increasingly held abroad. The debt is issued under Greek law, but now it is payable in Euros which Greece, as a user of euros, can’t create, given the surrender of its currency and consequent fiscal sovereignty. In this sense, ironically, the fiscal crisis is a consequence of Greece’s success, after a long preparation, in joining the European Union, and hence giving up its own currency, as Professor Perry Mehrling has noted.
The point is that, if this analysis of the source of the problem is correct, then standard IMF austerity policy is unlikely to do much to help. And, as the increasingly intensifying riots on the streets are vividly demonstrating, the patient might not willingly accept the medicine. Despite attempts to turn the country into an economic colony of the EU, Greece is still, after all, a democracy and if one is to judge from the growing unrest in the country, it is far from clear whether Greece (or any other euro zone member for that matter) is really willing to cut spending and raise taxes rates to any degree which will satisfy the Fiscal Austerians dominating economic policy in the euro zone today without at the same time provoking an ungovernable failed state, right in the middle of the euro zone.

(5) Other articles on the FM website about Europe’s crisis

1. The post-WWII geopolitical regime is dying. Chapter One , 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
2. Can the European Monetary Union survive the next recession?, 11 July 2008
3. The periphery of Europe – a flashpoint to the global economy, 8 February 2010
4. A great speech by the PM of Greece. How soon until an American President says similar words?, 3 March 2010
5. Governments cannot go bankrupt, 2 April 2010
6. Our government’s finances are broken. How do we compare with our peers?, 8 April 2010
7. The EU does Kabuki for Greece. Is it the next domino to fall?, 14 April 2010
8. About the Euro crisis: the experts are wrong; the German people are right., 7 May 2010
9. Former Central Bank Head Karl Otto Pöhl says bailout plan is all about ‘rescuing banks and rich Greeks’, 20 May 2010
10. The Fate of Europe, nearing the point of decision, 13 September 2011
11. Europe drifts towards the brink of a cataclysm, 26 September 2011
12. Delusions about easy fixes for Europe, dreaming during the calm before the storm, 30 September 2011
13. Every day the new world emerges, yet we see it not. Like today, as Europe begs China for loans, 15 September 2011
14. Is Europe primed for chaos, as it was in July 1914?, 7 October 2011
15. We see the outlines of the next cure for Europe. Will it work?, 14 October 2011

"Wisdom is an ocean of visions, poured into a dewdrop, of a single ultimate vision...."