Thursday, August 9, 2012

The Euro sovereign debt crisis finally gets interesting!

After several years of this slow-motion train wreck starting with the saga of Greece and its endless spiral to the bottom, the Spanish and Italian debt crisis is finally shaking things up in Eurozone politics. Greece with its leadership was an easy pushover. Spain and especially Italy as larger countries with more political and debtor leverage as well as better political leadership are a more difficult match for the EU elite. The most painful duet is Monti and Draghi: Draghi pushing for non-conventional monetary policy and Monti, keeping Frau Merkel up until the wee hours of the night for a banking union and debt mutualization.

The growing economic divergences from the Eurozone policy makers’ self-inflicted debt deflation coupled with their dubious techniques of "internal devaluation” is taking its economic and social toll. The Europhiles have created macabre Great Depression-level GDP collapses in places like Greece with appalling levels of unemployment and private sector bankruptcies. Whilst you hardly hear a peep from the Greek political elite, who continue to be ardent believers in the confidence fairy of Eurozone economics, this mess is causing the political leadership in Spain and Italy to balk and resist a similar fate, seeing what is in store for them where the EU has left scorched earth.

Private investors remain highly skeptical, looking at all this carnage.  Bill Gross of PIMCO recently wrote an interesting piece in the Financial Times, where he reveals the obvious: EU policy makers are looking for private sector money to reflate and cover their growing mountain of bad debt, but against a dismal track record where they have not hesitated repeatedly to bilk investors and leave them with significant losses to promote their political agenda.

Ambrose Evans-Pritchard, the business editor of the Telegraph has been very astute early on to see that Northern and Southern Europe are not compatible in a common currency zone. The crisis is accelerating the structural divergences and this is leading to growing political fractures.

Italy’s Silvio Berlusconi has already threatened the Eurozone that either Germany must leave or Italy will depart with a growing coalition of industrialists, who see the solid advantages of Euro exit for Italy as confirmed in a recent Merrill Lynch study. Mario Monti on the other side of the spectrum wants to keep Italy in the Euro project, is trying to muscle Germany to accede to debt mutualization and more flexible monetization policies by the ECB to deal with the debt overhang.

Clearly, as economic conditions deteriorate, the die is cast: either the Eurozone needs substantial structural changes so North and South can co-exist or there must be an amicable divorce. No political union of diverse peoples has every taken place without mass repression.

The Soviet Union that the predecessors of the present generation of Europhiles adored as a model of human progress in the 1930’s is a good example. The Austro-Hungarian Empire prior World War 1 with its efforts of benevolent reforms echoes the German domination today in the EU and policies towards the EU Periphery. By its nature, forced political integration and dissolution of the nation state means the end of the right of self-determination for diverse peoples and forced collectivization.

Indeed today’s utopia of a European super state with a common currency has an eerie resemblance to the Communist utopia of the Comintern, otherwise known as the 3rd International. The European Union operates by unelected officials, who currently dictate the majority of laws of its members and drive this sovereign debt crisis that is deepening in the Periphery and moving to the Eurozone Core. 

Whilst it not hard to understand how the European Left has embraced this concept, it is surprising how easily the European Right has capitulated to this forced collectivization and abandonment of the nation state together with the abrogation of civil and economic liberties as well as the right of national self-determination.  Their stand reminds one of the Girondists and let's not forget the chilling fate that they met in their time.

Greece is an astonishing case where the conservative New Democracy Party is leading a coalition government with two parties of the Left, embracing economic programs that are impoverishing large sectors of the population, especially in the private sector.  Most European parties of the Right behave in a similar ambivalent fashion.  Consider the present Spanish government in its current dilemma.  Even the UK Tories continue naively to believe that somehow they can build a firewall from this growing storm by promises of vague renegotiation of their EU membership.

Already the Eurozone has shown an iron fist of political and economic repression, making debt slaves of its weaker members like Greece, Ireland and Portugal; drastically reducing economic freedom and national sovereignty. Confronted with a similar fate, the larger Eurozone members of the Periphery are beginning to realize that these issues have real political substance. Remaining in the Eurozone, accepting the loss of national sovereignty, civil liberties and economic freedom is a question of balancing costs and benefits of Eurozone membership, something that was always taboo in the past.

If there is a break up, the costs would be different in terms of who is the first to leave. If the Germans leave and revalue, the costs will be less for the South. The larger PIGS like Spain and Italy are beginning to realize that they do not have much to lose, taking aggressive stands with the Germans.

On the other hand, the Germans for the first time now begin to feel Eurozone malaise and the burden of the costs. Debt mutualization will certain result in a credit downgrade, having to carry the burden of the over indebted South. Already Germany has been put on negative watch list. Monetization and non-conventional monetary policy would market the end of a comfortable system where the ECB is in Frankfurt and under rules that have made it a Bundesbank clone accommodating German needs, until Mr Draghi has begun to shake things up.

Leaving the Euro, the Germans would be forced to revalue, losing their comfortable advantage in exports and to revise their policies. They would be compelled to recapitalize their banks for the sovereign loan losses of the South. Long term that might be preferable than the present course of endless bailout loans to the South and taking on endless liabilities to carry a failed and dysfunctional currency zone, but few in German political elite are eager for this bitter pill to be swallowed up front.

Meanwhile, the Greeks live in an Alice in Wonderland state where the political elite still clings to the Eurozone concept even as a colony with limited sovereignty, political and economic freedom. Ultimately their outcome in the Eurozone as well as the fate of the Eurozone itself is not in their hands, but most of the Greek political elite – at least in their mindless public statements - seem hardly cognizant the major battles that are raging outside of Greece.

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