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by Free Market Duck

Forget Britain's David Cameron Veto, Another Eurozone Crisis is Only Weeks Away

by Jeremy Warner
The Telegraph

(Dec 13, 2011)

Leaders in the European Union will not take the measures towards fiscal union that would save their ailing economies.

Mario Draghi, president of the European Central Bank, remains intransigent. ... What he has agreed to do is provide unlimited liquidity to banks, so that they could in theory buy up sovereign bonds instead.  But even if this were to happen, it couldn’t provide a lasting solution. European banks are already bust enough; to exaggerate the problem by loading themselves up with junk sovereign debt is scarcely going to help. As for Germany, hell will freeze over before it accepts joint liability for periphery debts.

There was no fiscal compact of any significance agreed last weekend.  Nor was there any progress made in providing a credible backstop. Even with the extra funds which European leaders are laughably promising via the IMF “back door” (as if they cannot trust themselves with their own money), the financial firewall remains dwarfed by the ever-growing size of the problem. Italy’s funding needs would gobble up the entire bail-out money within two years. In any case, the IMF back-door support is already in trouble. There’s no clarity on where the extra 200 billion euros are going to come from, with the Bundesbank refusing to cough up unless underwritten by the German parliament and confusion over whether non-euro countries are expected to contribute.

If you really want to understand the bankrupt moral philosophy of altruistic collectivism behind what is going on in the European Union today -- as well as in the United States -- I could simply ask you to read Ayn Rand's Atlas Shrugged, or see the movie.  That way, you can also "see" what the obvious result will be.  The question, "Who is John Galt?" will soon be answered in Europe and the US. -- FM Duck

London, England -- You wouldn’t believe it to listen to the fulminating indignation directed at the UK from across the Channel, but David Cameron did the eurozone’s political leaders a favour last weekend. By refusing to sign up, he managed to create a convenient Aunt Sally for Europeans to throw stones at, and divert attention from the summit’s failure to come up with anything remotely credible to address either the single currency’s existential crisis or the gathering economic slump. The latest in a long line of self-styled “make or break” summits, it was in truth no more momentous than any of the others.

What was agreed was some minor strengthening of the Maastricht framework for governing monetary union, though some aspects of the original “stability and growth pact” have actually been watered down. The maximum fine that can be imposed for breach of the rules has been reduced from 0.5 per cent of GDP annually to 0.2 per cent.

In most other respects too, the idea that some kind of great leap forward in terms of fiscal and political union has occurred is a nonsense. Consider what fiscal union of the type that exists within federal states such as Germany and the United States actually means. First and foremost, it requires centralised powers of tax collection and public spending. These powers provide the main mechanism through which fiscal transfers can be made to the more depressed regions of the sovereign state.

The amount of tax collected per head of population varies between regions, but expenditure on schools, hospitals and other public services remains uniform, or even weighted towards the poorer areas so as to provide compensating inputs. Taxpayers in richer regions are made to subsidise the poorer ones, in much the same way as high earners, by paying disproportionately for public services, subsidise low earners. These transfers are thought acceptable because nations are bound together by shared history, language, culture and political institutions.

Monetary union cannot work effectively without such transfers. The eurozone provides a textbook study in why this is so. A common currency and interest rate allowed less competitive nations to borrow from richer ones to finance unsustainable development, public spending and lifestyles. The curtain has now fallen on the abundance of credit that fuelled these booms. With no fiscal or monetary transfers to compensate, peripheral nations are being forced into repeated rounds of self-defeating austerity in order to survive and pay their debts. The default mechanism of currency devaluation is also denied to them.

There was nothing in the measures agreed last weekend to relieve these pressures and therefore no reason to believe we are any closer to a resolution of Europe’s rolling series of debt crises. It is only a matter of time – I’d give it no more than a week or two into the new year – before the financial and accompanying economic contagion breaks out anew, very likely in even more virulent form. The system has essentially broken down, but it is as if eurozone policymakers are still fumbling around in the boot for solutions, rather than looking under the bonnet.

Despite the evidence of its eyes, Germany wants to believe that, provided everyone sticks to its teutonic standards, a monetary union of fiscally sovereign nations is still possible. To Germany, the ideal of European solidarity is all about everyone playing by German disciplines. So in comes the balanced budget rule, in current conditions an economic absurdity which, far from paving the way to fiscal union, hardwires austerity into European law in a manner which seems only to condemn much of the periphery to prolonged depression. There is virtually no chance any time soon of these countries regaining competitiveness against an ever more competitive Germany

The assumption had been that once Germany was persuaded the correct disciplines were in place, it would ease off on its opposition to debt mutualisation and/or more extensive central bank intervention. But even if that’s what Angela Merkel, the Chancellor, would like to do, there is very little sign of it happening in practice.

Mario Draghi, president of the European Central Bank, remains intransigent. It is against his remit, he insists, to engage in monetary financing. What he has agreed to do is provide unlimited liquidity to banks, so that they could in theory buy up sovereign bonds instead. But even if this were to happen, it couldn’t provide a lasting solution. European banks are already bust enough; to exaggerate the problem by loading themselves up with junk sovereign debt is scarcely going to help. As for Germany, hell will freeze over before it accepts joint liability for periphery debts.

There was no fiscal compact of any significance agreed last weekend. Nor was there any progress made in providing a credible backstop. Even with the extra funds which European leaders are laughably promising via the IMF “back door” (as if they cannot trust themselves with their own money), the financial firewall remains dwarfed by the ever-growing size of the problem. Italy’s funding needs would gobble up the entire bail-out money within two years. In any case, the IMF back-door support is already in trouble. There’s no clarity on where the extra 200 billion euros are going to come from, with the Bundesbank refusing to cough up unless underwritten by the German parliament and confusion over whether non-euro countries are expected to contribute.

To survive, the eurozone needs urgently to find some way of internally sharing the burden of its debts. Two years after the crisis began, progress remains as elusive as ever. – FM Duck

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