Steen Jakobsen, chief economist for Saxo Bank in Copenhagen, pinged me with a personal thought regarding Europe:
“I am just back from Italy and Russia and what really strikes me is how people have given up, and I mean totally given up. To my mind we are entering extremely difficult time where balancing EU, US debt and social tension makes for a black Swan event.”
On his blog, Steen writes: Time is Running Out for Europe
Europe is close to losing a generation of youth in Spain, Ireland, Portugal and Italy, with between 20 and 45 per cent youth unemployment. To avoid losing this generation, European politicians and the ECB need to come up with a radically new game plan.
First, we need to stop pretending we can dance around the word “default” Let me help: if your income is less than your expenses and you can’t borrow money, you are done, finito, insolvent and in default.
That is another lesson from Greece; the longer you avoid facing the truth, the more you solve debt with debt, the deeper the hole you are digging as your new beginning necessitates a larger and large initial trauma.
Politicians tend to underestimate their voters ability to deal with a crisis. If the population at large knows it’s coming, they can and will deal with it. Many of today’s generation of politicians forget that their grandparents lived through two wars, the depression and several stock market crashes only to create the most robust growth era in modern history.
Yes, there will be some contagion and some short-term high volatility if Greece goes the default rout, but as they say in the world of sports: no pain, no gain.
In fact, a crisis 2.0 could be what is needed to create both the economic and political platform that will solve Europe’s problems: namely, a fiscal union. Do not misunderstand me – I am agnostic on the EU’s existential question, but the EU was created as a political institution, not an economic one. Europe is a house without a financial foundation: no ministry of finance.
The time has come for some major decisions if the great European experiment is to survive. The Euro Zone needs a Ministry of Finance, one that should probably issue Euro Bonds from EFSF/ESM.
The idea that one day the voters of Europe will rise up and embrace the EU idea is fading fast. The rising social tension in all of Europe shows us that – similar to my impatience with the Danish national football team – time is running out. Let’s for once hear some straight talk from the EU and the ECB and let’s put an end to the extend-and-pretend nonsense and attempts to pull the wool over the public’s eyes. Otherwise, Europe will continue to score own goals. That’s a pity, as a new start – even if painful at first – could set up decades of sustainable growth as more transparency and less leverage would bring more stable financial markets.
Nanny State or a Breakup?
Steen says ” I am agnostic on the EU’s existential question, but the EU was created as a political institution, not an economic one. Europe is a house without a financial foundation: no ministry of finance.”
That is precisely the problem. Unfortunately, the only solutions I see are as follows:
- Breakup of the Eurozone
- Creation of the European Nanny State
I have written about the “Nanny State” several times.
…Is Germany unfit for the Euro or is the Euro unfit for the PIIGS? Isn’t that the real question?
Such discussions are the consequences of a currency union with a one size fits all interest rate policy combined with widely varying fiscal policies, pension structures, union benefits, and other problems.
Arguably, the Euro experiment was never meant to work in the first place, at least for such a complicated heterogeneous mix.
Rather than admit the innumerable mistakes has has made, ECB president Jean-Claude Trichet has continually upped the ante on taxpayers with increasingly risky measures such as loading up the ECB with junk bonds from Greece and Ireland in clear violation of the Maastricht Treaty.
Today, in the wake of still more failures of the bond market to follow his wishes, Trichet openly calls for a bold new initiative, one that would effectively transform the Euro-Zone, into a fiscal Nanny-Zone as well. ….
My friend “HB” commented
This is what the fools that rule the Eurocracy want – a huge centralized nanny state in which taxes are ‘harmonized’ and citizens can no longer choose between low and high tax nations.
It is the absolutely worst thing that could possibly happen. It would be better for the euro-area to break up.
Trichet was one of the architects of the Maastricht Treaty, and he has violated that treaty at will ever since.
Now he wants to completely trash the treaty, effectively transforming the Euro-Zone into a nanny-zone “Eurocracy”.
When will Germany finally step up to the plate and tell Jean-Claude Trichet in no unmistakable terms where to shove it?
Right Place to Crash the Plane
The quote of the week can be found in the Yahoo!News article Rising euro pressure could force Merkel U-turn
“At the moment we are just trying to win time in the hope of preventing contagion to other weak countries,” said one senior lawmaker from a party in Merkel’s conservative coalition.
“The truth is that for Greece, what we are really looking for is the right place to crash the plane. It should not be over a city, but in the countryside if possible.”
Deutsche Bank chief economist Thomas Mayer wrote this month that if political leaders did not offer bold new solutions, the outcome could be determined by grass-roots events — a rebellion by Greek or German lawmakers, or a Greek bank run.
“Given the recent momentum in the political debate, we would give such an outcome over the coming 6-12 months the highest probability,” he wrote.
We all realize the plane is going to crash. The debate now is when, where, and how big the crater.
Mike “Mish” Shedlock
Global Economic Analysis