Bailout for Spain & Italy is a Prelude to ‘German Empire’

Topher Morrison
PurpleSerf.com

The London Telegraph’s Bruno Waterfield breathlessly reported as many other news outlets had that “On Thursday night, Italy and Spain plunged an EU summit into disarray by threatening to block “everything” unless Germany and other eurozone countries backed their demands for help.

 

How much “disarray” there in fact was is debatable.  Whether the “threat” to “block ‘everything’” had any real teeth or motivation is similarly – dubious.  The cynicism is due to the fact that in Europe all boats rise and fall together.  The German economy relies heavily on exports of which 60% comes from the Eurozone, conversely the Eurozone relies on a growing and healthy consumer base in Germany to buy their exports.

While German Chancellor Angela Merkel and her finance minister Wolfgang Scheauble have balked at mutualization of debt across the eurozone they have signaled it could become more palatable if stricter controls and robust accountability were imposed on individual countries’ spending and borrowing.  Who will decide those controls and regulations will undoubtedly be heavily influenced by Europe’s largest and most healthy economy why any centralization of power may lead to a new “German Empire”.

Motivating factors, however, have seemingly come into play and begun to melt German resistance to common borrowing and other similar proposals and may even lead Germany to rethink their own constitution, which precludes them from such activities.  Fox News reports many analysts:

“…think a downturn would force more Germans to recognize how much they depend on other European nations to buy their goods and support the German economy. They could become more willing to jointly accept the risks of backing weaker countries’ debts.”

Indeed as German business optimism fell in June due to a slowing in manufacturing, at the heart of their export led growth, look for more capitulation like the agreement reached on Friday to save Italy and Spain.

According to the Telegraph:

"Under the deal [reached at the EU summit on Friday], Spanish banks will be recapitalised directly by allowing a €100 billion EU bailout to transferred off Spain’s balance sheet after the European Central Bank takes over as the single currency’s banking supervisor at the end of the year."

The decision detailed in a seven-page document by the “Gang of Four” EU presidents aims at putting the Eurpoean Central Bank (ECB) at the center of a “effective single supervisory mechanism.”  The summit rationalized the move: “We affirm that it is imperative to break the vicious circle between banks and sovereigns.”  How yielding sweeping controls and expansive powers over to a central bank will address the underlying problem of competition, innovation and growth is not addressed in the document.

Relief for Spain was accompanied by promises to purchase Italian bonds using EU bailout funds in order to reduce Italy’s borrowing costs and to “examine the situation of the Irish financial sector” offering possible relief to Ireland by relieving the government balance sheet debt burden.

 

Herman Van Rompuy, the president of the European Council of EU leaders and one of the Gang of Four who crafted the European Federation document to be formally presented in December, lauded the agreement as an important step “to reassure markets and to get again some stability around the sovereign bonds of our member states.”

He did, however, warn the new aid measures would be reserved for “countries that behave themselves” by abiding by the EU’s fiscal rules and austerity measures, but without sticks so far and bailout after bailout seemingly without end these milquetoast threats have had all the credibility of a spoiling mother.   Considering the clear interdependency in the eurozone and the propensity to kick the can down the road one must wonder what “controls” and “accountability” will be incorporated later this year.  But if the economic conditions worsen, especially for Germany look for more bailouts and “draconian” control measures of which all will color the character of this new economic empire.

Escape from EU: Rise of the 4th Reich

Topher Morrison

PurpleSerf.com

Where is Snake Plissken when you need him?  Greece is in shambles.  Spain is on the brink and the planet is on the verge of realizing it never recovered from the last recession.  Japan evidently already realizes it as Tokyo’s stock market hit a 28-year-low today, New York will undoubtedly react.  While some in Europe are rallying jittery technocrats to centralize and unite, reason urges otherwise.

The New York Times reports:

“Mario Monti of Italy called for using euro bonds to create a quicker path to common debt for Europe. And Mariano Rajoy of Spain floated the idea of a common fiscal authority in Europe to synchronize budgets and manage debts.

German policy makers have said that kind of deeper budget integration and supervision is a prerequisite before any sort of euro bonds could be issued.”

This process, to embolden Brussles, is estimated to take between five and ten years, but the wonderful thing about a crisis is its ability to motivate.  To be sure, whatever happens will happen soon.  George Soros predicts three months and Joschka Fischer, Germany’s former vice-Chancellor, gives EU leaders two weeks to save the project.

Either the EU will crumble beginning with Greece’s departure on June 17^th after their elections and return to the Drachma (test trading since last week) or a more powerful central government in Europe will emerge.

If this sounds a bit scary it should.  Spain’s Rajoy urged the 17-nation union to “cede more sovereignty” to a central fiscal authority and parroted the European Commission’s call for a banking union with a single regulator and deposit guarantee fund.  Joining the pro union chorus is also new French Finance Minister Pierre Moscovici: “We need to go toward a banking union,” he said on RTL radio.  With that the socialists are officially on board in Paris.  The thing is who has the money to put where their mouth is?  Not Rajoy.  Not Monti.  Maybe Moscovici, but Germany on the other hand…

Given the current crisis Soros sees a possible 4^th Reich ahead, “a German empire with the periphery as the hinterland,” he said.  While CNBC says this was a “warn[ing]” from Soros his statements clearly suggest he wrestles with little misgivings on the prospect.

With northern creditor nations bailing out ailing Spain and Greece, Germany is effectively at the helm and Soros knows it.  “We need to do whatever we can to convince Germany to show leadership and preserve the European Union…the future of Europe depends on it,” said Soros, reports Bloomberg News.

If you listened to Mosocovici the entire planet depends on what happens in Europe and therefore how Germany plans its next move. “Let’s not delude ourselves: If the euro falls apart, so will the European Union, triggering a global economic crisis on a scale that most people alive today have never experienced,” he said, reports The Daily Telegaph.

In a way he might be right, the world is walking a tight rope finer than frogs hair.  US employment numbers are wilting, a fact Obama “lays at the feet of European leaders.”  Brazil, China and India all see anemic growth.  Iran has been writhing in hyperinflation since at least January with fresh sanctions taking their effect at the beginning of the month and the rest of Middle East on perpetual red alert with Syria in the throws of civil war.  To top it all off the first world isn’t setting any kind of example. The OECD club is at a record average public debt of 106% of GDP and the red flags in bond markets couldn’t be raised higher:

“German 10-year Bund yields closed at 1.17pc. The two-year notes turned negative. British Gilts closed at 1.53pc, the lowest in 300 years. US Treasuries fell to 1.45pc, lower than at any time during the Great Depression.”

Greece is aflame with persistent protests, Cyprus isn’t looking good, neither is Portugal and Italy’s ex-premier Silvio Berlusconi claims his “people are in shock.  Confidence has collapsed. [And they] have never had such a dark future.”  The Daily Telegraph’s Ambro Seevans Pritchard agrees:

“Indeed, the jobless rate for [Italian] youth has jumped from 27pc to 35pc in a year. Terrorism has returned. Anarchists knee-capped the head of Ansaldo Nucleare last month [and] Italy’s tax office chief was nearly blinded by a letter bomb.”

If the real politik lesson holds – let not crisis go to waste – who will pass this global opportunity up?

Should history provide us prologue as it often does.  This is exactly the time when the fearful and insecure turn to anything for security.  With these nations biting their nails strength will need to come from somewhere, lets hope it comes from independence not unity.  Perhaps this is a time when Germany should exit, followed shortly by France and allow the EU to stand on its own for what it is, “a valueless and physically unattractive monument to the hubris of bureaucrats who valued an economic ‘system’ over any actual economies,” writes Tim Cavanaugh of Reason.

The European experiment has failed.  Attempting to prolong the endeavor will only beget more crises down the road.  Individual states should stand on their own, go through the necessary withdrawals and kick the bailout addiction and let the pusher banks sucker some other region.  Let not your hearts be troubled, if the euro is destroyed it will be scary, but we’ll all be the better for it.

It is interesting to note, however, with all the buzz talk about the zombie apocalypse and 2012 how fitting it would be to see Germany’s Angela Merkel leading her zombie states army into perpetual debt slavery.

Estonia Set to Overtake US Economy

Topher Morrison
PurpleSerf.com

Estonia might not be large, but it serves as a big lesson
to its neighbors and to the world.
Image Source: Prescottenews.com

This prediction may be more than premature, but this Baltic Tiger has much to teach Europe and the United States about how to grow an economy.  Virtually entirely self sustaining and enjoying robust growth, almost zero debt, and plunging unemployment rates this tiny country is a state apart from a European Union in fiscal tumult and a languishing US. 


          Estonia has had anything, but an easy history.  For roughly 700 years a once independent Estonia served successive conquerors as agrarian serfs until the 1920s when the Estonian government paid off their German landlords and restored home rule.  Estonia decentralized and modernized its economy only to breathe one fresh breath of freedom until the Soviet Union and their former Nazi overlords returned with ghoulish force.  


          After allied victory in World War II the USSR illegally annexed and plundered Estonia, deported tens of thousands, centralized its economy, and sequestered civilians under iron hard tyranny.  A ravaged country, Estonia was finally able to achieve independence in 1991 after the Singing Revolution, which initially featured spontaneous mass choirs singing illegal songs of patriotism and culminated years later in over 2 million people linked hand-in-hand over Estonia, Latvia, and Lithuania. 


          During the 1990s Estonia embarked on the path of privatization handing over state owned industries to the Estonian people.  In 1995, one year after the last Russian troops left Estonia, the revitalized economy began to grow at 4.6% and skyrocketed in 2007 to 10.4%.  After sustaining a brief contraction of 0.7% in 1999, Estonia from 2000 to 2007 averaged supercharged growth upwards of 8.3%!  


          If you were to dissect this engine of true capitalism (to be contrasted with crony capitalism found in China and the US) you would find that very little of any one part of the economy is favored.  Estonia features a constitutionally mandated balanced budget, the highest levels of internet freedom, one of the world's first flat tax systems (the government has just approved to cut income tax from 21% to 20% by 2015), an open banking system allowing for generous foreign investment, and unlike the United States (sitting on unparalleled and untouched oil reserves) Estonia is self sustaining supplying 90% of their energy from local oil shale.  Aside from the obvious structural and political advantages Estonia benefits from frugal politicians more interested in seeing their country grow than growing their government.  


          The most important characteristic of this economy, however, is its resilience.  Because it is no longer burdened by a centralized economy and slowed down by immense bureaucracy Estonia has shown an uncanny ability to bounce back.  In 2009 the economy plummeted by an abysmal 14%, due to easy lending and over speculation, but as of the first quarter of 2011 the Estonian economy exhibited traditionally strong growth at 8.5% (highest in the EU) and sent its unemployment rate from 18.8% to 13.8%.  While the unemployment remains high, national debt is at a remarkable 6.6% of GDP (lowest in the EU) recently earning Fitch's, a rating agency, A+ rating.  


          Today, the United States Congress just increased its ability to take on more debt by the largest margin in US history.  The fact that US leadership isn't at least taking clues from the mess in Spain, Greece, and Italy who's debts are 60%, 120%, and 142% respectively and are clamoring for bailouts to stave off open revolt is astonishing.  Take a peak at someone else's playbook for once - its not cheating in the real world, its smart.