Sunday, January 22, 2012

Mutti of the Fourth Reich

I originally wrote this article back in mid-December of 2011. Perhaps it is for the best that there were some unfinished parts, which delayed my publishing of it, because there are few occasions for retrospection in our fast-paced news cycle.

Comparison of EU rhetoric and actions strongly suggests that the EFSF rescue fund (euphemistically called "stability" fund) Ms. Merkel has only bought some time to handle the euro crisis in the meeting on December 9th in Brussels. This is an expensive delay predicated on wishful thinking - a Pyrrhic victory, in fact.

I wanted to track down sources of the money for propping up the EU, and was immediately confronted with the complexities of multiple financial mechanisms acting concurrently in Europe (in addition to the political layers, which render the regulation of EU unclear at best). This is symptomatic of the larger problem - a patchwork of incongruous choices does not amount to a strategy, but only makes this problem less tractable technically and conceptually.

There are at least three sources of rescue money: the ECB, which bought some sovereign bonds of PIIGS to keep down their borrowing costs, there is the rescue fund, EFSF and finally IMF has gotten involved.

The new EU security fund (EFSF) has supposedly agreed distribution of over €600bn funding to troubled EU nations last week. This is slighty more than it gave out in 2009. To survive in its current form EU needs to redistibute over €300bn per year. Despite these costs, Vítor Constâncio, vice-president of the ECB has blasted any suggestions of break-up of the euro as “absurd” and “unthinkable”.

As the former IMF chief Dominique Strauss-Kahn pointed out the €640 billion rescue fund (about $833 billion) being assembled by the EU and the IMF is "in limbo" because it requires political approvals that may take months to obtain. Europe's political shortcomings are "bleeding away, day by day, the remaining confidence investors may have in politicians being able to solve the crisis," Mr. Strauss-Kahn said. He predicted as many as seven years of sub-par European growth unless the Continent's leaders changed policies.

This money is to be doled out by EFSF bureaucrats based on 'need' of EU members. How is that different from Marx's wish 'To each according to his needs'? This strategy is closer to the central planning of the Russian economy from Moscow, rather than more federal taxation in the US. Spreading wealth is an easy road to popularity. The problem, as Margaret Thatcher so eloquently put it in regards to socialism is that 'eventually you run out of other people's money'.

So, where's the money for EFSF coming from? In essence, the contributions are voluntary. In absence of political unity there are no enforcement mechanisms, as UK highlighted by its refusal to give additional money to the rescue fund. Voluntary contributions are not as reliable as taxation, but wishful thinking masquerading as policy. In the past such wishful thinking has invariable devolved into tyranny, according to the beginning of Marx's quote: "From each according to his ability".

So, where did we stand a month ago?

Fitch said the risk of downgrading EFSF bail-out fund has increased. (The fund's AAA rating depends on France remaining AAA, which is likely to be reduced within a few months. (S&P lowered the rating of EFSF by a notch within a month). French banks hold the most the Greek debt of any EU country. Meanwhile, Greece is trying to set up a deal with creditor banks writing off half their debt by the beginning of January (This has failed, and Greece is likely to default in March). According to the French trade minister, the country's 2011 trade deficit is likely to hit a record of between €70bn and €75bn.

France had "no doubt" that Britain would help boost the resources of the IMF to ward off the eurozone debt crisis. UK has decline to volunteer more money.

Rising unemployment and the high cost of living has left UK consumer confidence close to an all-time low in November. It seems that both UK and France are likely to lose their AAA ratings. (France has.) France already pays a significant premium for borrowing compared with its AAA neighbor Germany. France has to refinance short-term debt exceeding a trillion euros in 2012 alone. French treasury expects the nation will have a budget deficit of €78.7bn corresponding to approximately 8.4% budget deficit (as opposed to almost 14% last year. That's a lot, although US ran over 36% deficit: revenues $2.3T, expenditures $3.6T). The point about the projected deficit, is that 8.4% is much higher than the 0.5% maximum annual deficit which the new EU agreement stipulates.

Finland may have entered a recession, the country's finance ministry said, cutting its forecast for growth in the northernmost euro member’s economy.

Incoming Spanish Prime Minister Mariano Rajoy has said the country needs to cut its deficit by at least €16.5bn in 2012. That corresponds to 3.3% reduction of total expenditures, but would reduce the deficit from over 20% to just under 18%. Nowhere near 0.5% EU is looking for. That means more large transfers of wealth will be required.

Italian exports fell 3.2% month-on-month in October - the biggest fall since 2009. (Italy was downgraded by 2 notches by S&P, and now has the rating equivalent to Kazakhstan.

One of the few brights stops on the continent - Germany. Following good news about German consumer confidence, the country's business confidence marked the second consecutive monthly upswing - gaining 0.6 points to 107.2 in December.

Denmark minister of the economy, Margrethe Vestager, said "contributing through the IMF is how far Denmark should go because because they have the euro opt-out”, referring to Denmark's rejection of euro membership in two referendums.

UK has rejected IMF solicitations for additional funds. IMF is €50bn short of its announced €200bn target. This is separate from the €633bn EFSF.

It's illuminating to compare reality and the rhetoric. Even before this spat there were spreading signs of tension that took a harsh form in the UK: "Welcome to the Fourth Reich", read some signs. The point is that regardless of differences, there result is German dominance on the continent - while the Third Reich achieved its short-lived dominion by manly violence, the Four Reich is taking the road of good intentions to get there.

Financial times wrote a nice exposition of some of the events in Brussels, where UK vetoed changes proposed changes to EU treaties by Merkozy, and was promptly booted from the 'new and improved' union.

Angela Merkel said on several occasions that “if the euro fails, Europe fails.” Despite finding the British reasoning and politics “incomprehensible”, she promised to look for “sweeteners" for Mr. Cameroon. During the meeting she passed him a note "Tell me what you want and I will find a way,” according to the minutes of the meeting. One big question remained - “What about France?” asked Mr Cameron, fearing President Nicolas Sarkozy would have his own ideas. Ms Merkel, Europe’s reluctant paymaster, calmly noted: “Nicolas will agree.”

Merkel, affectionately known as 'Mutti'(Mommy) in Germany is the one wearing pants in this relationship. Intentionally, or not, she's become the 'Mutti of the Fourth Reich'.

There is too much democracy within Europe for technocratic-minded schemes (see the article here). In that article Gabriel Kolko writes: "Abstractly, this means that national parliaments and key legislative bodies can no longer make economic policy." There's nothing abstract about it. Not any more - the European Commission has launched a challenge against the new Hungarian constitution. They have good intentions - to protect democratic rights, etc. Perhaps a harder line is needed in Hungary to fix its troubled economy, or maybe it is a power grab. Regardless, it sets a troubling precedent about Brussels overriding national constitution.

The agreement reached on the 9th of December in Brussels is just a return to the fiscal rules agreed upon at Maastricht in 1991. These rules were never enforced in the first place–and are not being applied now(ECB recently complained that the 'watering down' of new rules is rendering them pointless). For political reasons — too much democracy — these rules at not viable. The governments that implemented austerity measures have fallen in Greece, Italy and Portugal. How many European political leaders are ready to lose power just to attempt to implement the draconian economic rules, which Merkel thinks can solve everything?

The opportunity-cost of this experiment is great. For example, in December the chairman of the U.S. Joint Chiefs of Staff said there's a risk of “civil unrest and the breakup of the union".

Even before the Brussels summit, politicians in Berlin knew that there would be no compromise with the Tory government in London. When Cameron visited Berlin in mid-November, he told his German counterpart that as much firepower as possible had to be used to combat the euro crisis (just not their money). To which the German chancellor responded coolly: "One shouldn't pretend to have power that one doesn't actually have." Champions of EU should take this bit of advice to heart, before their wishful thinking imperils the social contracts Europe.

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