EU betrays Greece

Over the last couple of weeks the Greek leadership pushed through all the painful cuts demanded by the EU. I have written that this effort is misguided, and the enforcement of these austerity deals will require heavy-handed enforcement, because the majority of the public rejects (and resents) the EU diktats.

By the early February, the Greeks have agreed to virtually all of the cuts demanded by the troika, including a 22 per cent cut in the minimum wage (to less than 600 euros a month), firing 15,000 civil servants and an end to dozens of job guarantee provisions. They couldn't bring themselves to cut an estimated €300 million ($396 million) in pensions.

The EU Finance Ministers reacted with frustration and refused to sign off on the deal, demanding that Athens make up for a shortfall created by the refusal of political leaders to slash supplemental pensions — before their next meeting, which was scheduled for February 15th. "The agreement, as far as I understand, is not at a stage where it can be signed off," said the German Finance Minister Wolfgang Schaeuble leaving the bailout in limbo and the threat of bankruptcy high.

On Friday February 10th, the Greek cabinet agreed to the pension cuts and on Sunday the Parliament approved it. It was not an easy decision after two days of rioting and burning in Athens. The Parliament had to discipline (i.e. to fire) 40 members who refused to vote for the additional €325m of fiscal austerity.However, the troika demanded proof that the Greeks would would stick to the deal, and the mood has been poisoned by EU demands for an escrow account to seize Greek budget revenues at source.

Greece took a step closer to meeting those demands when George Papandreou, the former prime minister who remains head of Pasok, sent a letter to the EU leaders vowing to implement the austerity measures included in the €130bn bail-out. The letter, which came along with a similar missive from
Antonis Samaras, head of the centre-right New Democracy party and the presumptive next prime minister, was demanded by EU leaders as a condition of the deal. Mr. Samaras letter to European Union leaders reiterated his stance that “modifications might be required” to the bailout plan.

The pleas from the humiliated Greeks were received coolly in Brussels. Luc Frieden, Luxembourg's foreign minister, indicated that Greece is disposable for the EU: "If the Greek people or the Greek political elite do not apply all of these conditions, I think they exclude themselves from the eurozone. The impact on other countries now will be less important than a year ago." Mr. Frieden even suggested a return to the drachma. "It might be something which would allow Greece also to get a new start, to create an economy that can create jobs," he said.

The tone of these comments, along with those from Germany, Holland and Finland suggest that the creditor powers have already decided to eject Greece, causing great bitterness in Athens. After the Greek politicians went again the popular will to push through harsh austerity laws, they seem likely to walk away with nothing.

There are rumors that a “Secret Troika Report” showed that even if the most optimistic scenarios are met, Greece will not achieve the desired debt ratio, nor get even close. I have long believed that allowing Greece to default is the best solution, but abrupt withdrawal of EU support is nothing short of a stab in the back.

The cards have been dealt - risks of 'contagion' have been minimized, and Greece is about to be ushered out of the EU. There is going to be an ordinary meeting of the Eurogroup tomorrow on Monday, 20 February. Will we hear the final rejection of the bailout, or will the drama drag on? The outcome is no longer in doubt, only the timing of its revelation.

German cartoon: 'Togetherness'/unity - this is it!

This breakup also belies the attempts of the EU project not to follow, but to generate political zusammenhalt. German people have become tired of this type of 'unity', and the cartoon above illustrates what they think of their role and they are about to take advice from the title of Ayn Rand's masterpiece 'Altas Shrugged' literally. Too bad about the dog.

EU reinvents Russian troika in Greece

The troika is composed of the European Commission(EC), the European Central Bank(ECB) and the International Monetary Fund(IMF). The first two are representatives of a 27 member European unions. There are 26, 25 and 17 member unions that are prominent. Basically it's two bureaucratic manifestations of the full EU.

The composition of the Greek troika:
Toirka = EU+IMF (3=2+1)
EU= ECB + EC (2=1+1)
Europe = All

The IMF is and international, of course, but it's last 10 directors, have been Europeans, and four of them, including the current one - Christine Lagarde - were French. The IMF has committed over $500 committed for a great EU financial firewall including $109, which the U.S.committed  in 2009 to the IMF. No government has ever lost money investing in IMF (according to the IMF - so I'll have to check). The developing nations are also unhappy with having their money committed to stench the bleeding in Europe.

The word troika is Russian, and it refers to a sleigh harnessed to three horses.

The Greek troika views itself as three European entities  dragging a slacker, at least according to the German standards. 

The Greeks, at least, see this differently. The experience three riders (of the apocalypse ?) EC, ECB, and IMF.

I read this as three impatient riders running an inherently slow horse as hard as they can -- although, I don't know how to draw it. It wouldn't work with horses, much less with people.

Force is coming to Greece

Recently I wrote in Germany to Greece: Our money or your life that continued financial propping up of Greece with German money is a bad proposition for both countries. While the leaders of both countries press on with the charade, the people are waking up to the game: Greeks, because their Liberty is at stake, while Germany realize they are fleeced financially.

This situation is a stark example of what is wrong with the West - the issue that concerns me the most is the break-down of the trust between the leadership and the population - the unmaking of the social contract, based on honesty, and a representative government. The irony is that while the leaders have essentially reached an agreement, the public has soured on the whole enterprise.

The Germans are finally getting tired of their part in a Greek tragedy. While the German flags burn in Athens (along with flags bearing Swastikas) what is the upside for the Germans citizens from continued lending? There isn't one according to Der Spiegel, which has  recently published an article calling for the end to the farce. I added some translations to the graph provided by Der Spiegel showing the transfers of wealth (in euros). Germany comes out as the biggest sucker, I mean lender.

After decades of government overspending, compounded by costly political patronage, tax evasion and a strong union movement deeply linked with governing parties, Greece is in a sorry mess: The economy is set to contract for a fifth consecutive year, the government still spends almost ten percent more than it earns and unemployment is at a record high of nearly 21 percent — with the number of jobless exceeding one million in November.

The private lenders have (generously or desperately?) agreed to restructure Greek debt, which will be reduced by > 70% and rolled over into 30-year bonds with a low <4%  interest rate (called the coupon), still provoked Greek indignation: “The creditors are asking for 40 years of submission,” said Georgios Karatzaferis, who heads the right-wing Popular Orthodox Rally. “Greece will not give itself up,” he added.

Greeks have a lot of soul searching to do - for years their politicians cooked the books to provide social programs, which we given our like so many candies. I call this the trick-and-treat strategy, because the unpaid treats are essentially lies. The problem with socialism, as Margaret Thatcher pointed out is that "eventually you run out of other people's money". The Greeks spent their own money, the money of their children and have spent €110bn of the first bailout - mostly from German taxpayers. Now the state can't afford the goodies, and needs to withdraw them from an addicted population.

Lucas Papademos, the Greek economist who was appointed as a temporary Prime Minister in November of 2011, has worked hard to accommodate the demands of the so-called troika -- the European Commission, the ECB and the IMF. The demands included: cutting the minimum wage to less than 600 euros a month, cuts of 25 per cent in private sector wages and 35 per cent in supplementary pensions, abolition of at least one holiday allowance, closure of about 100 state-controlled organisations with thousands of job losses. According to the Financial Times, the list of demands also included cutting 150,000 public sector jobs within three years and cutting this year’s budget deficit by a further 1 per cent of economic output.

In addition, because Papademos’s term is set to end when general elections are held, most likely in April, EU and IMF officials seek guarantees from political leaders in Greece that they will stick to pledges made to receive the financing. If you have any ideas how this provision can be reconciled with meaningful elections in a sovereign country, please contact a Greek consulate immediately.

The Greek unity government knew about the resistance of the public to these terms, before it accepted them piece by piece during painstaking negotiations last week.

Among the warnings were those of representatives of Greek employers and the biggest private sector union on Feb. 3 called on Papademos to resist pressure to cut the minimum wage, holiday allowances other benefits. "The painful measures that create misery for the youth, the unemployed and pensioners do not leave us much room," secretary general of the ADEDY union, Ilias Iliopoulos, told Reuters.

More austerity risks triggering a “social explosion,” Hieronymos II, the head of Greece’s Orthodox Church, said in a statement on Feb. “We are being asked to take even larger doses of a medicine that has proven to be deadly and to undertake commitments that do not solve the problem, but only temporarily postpone the foretold death of our economy,” he said.

Meanwhile, more pressure was applied to the Greek leadership in Brussels - at a closed doors meeting on Thursday the euro zone finance ministers made it plain that they did not believe the figures provided by Greece. The bureaucrats in Brussels demanded that Athens must find an additional $428 million in savings — to make up for a shortfall created by the refusal of political leaders to slash supplemental pensions — before their next meeting, expected this Wednesday.

The birth-place of Western democracy is expressing itself by other means.

The Greek cabinet agreed to all Brussels' demands last Friday. Despite two days of striking by a Greece's two major labor unions on Friday and Saturday against these reforms, during which Athens was set ablaze, the parliament approved the austerity package on Sunday.

One headline summarized the reaction of the financial world particularly well: "Greece Burns as Markets Show Relief". This shows not the wisdom of the markets, but their wishful thinking that the deal will stick despite the desires of the people. The only way this could happen is if the dissenting citizens are beaten back into submission.

I am a big proponent of capitalism, as a source of independence and individual dignity. Unfortunately, the 'Third way' between capitalism and socialism tried in Europe, was essentially a gradual encroachment of the later, and a betrayal of the former. It's beyond sad to read how the perverted capitalist markets cheer, as the birth-place of democracy burns. Clearly, the markets would applaud the inevitable application of Force against the will of the people.

Papademos provided the justification for Force: "Vandalism, violence and destruction have no place in a democratic country and won't be tolerated". What democracy? Brussels demands that Greeks somehow promise to etch the deal in stone, so that the austerity program cannot be undone by elections in April. What other means to affect their government remains? The Greeks have lived above their means, but now they have lost not only their money, but their liberty, which is the upside of responsibility. Perhaps this calls for paraphrasing Ben Franklin's famous dictum to read "Those who give up an essential Responsibility for a little Security, deserve neither Liberty nor Security".

Successful continuation of the vast transfers of wealth would be a Pyrrhic victory for both Greece and Germany. As painful as bankruptcy would be for Greece, and much as it would spread 'contagion' through EU -- such an outcome would lead to a restoration of proper national responsibilities. Most importantly, it is the only way to preserve the democratic social contract in Greece, and prevent the spread of a far more dangerous authoritarian contagion in Europe.

Stable society with happy people

All philosophies have sought to describe societies, which are stable and produce happiness for the people.

The key question is the relationship of the society and the individual. The goal is to guarantee stability and happiness at the same time.

Utopian philosophies, including Marxism, have placed the society first, and relegated an ant's role for the individual. Socialism as well as Plato's Republic, Thomas Moore's Utopia, and Leviathan by Thomas Hobbes are Odes to the Ant Hill. These writers deluded themselves that their conceptions will provide for happiness, when even brief examination of their societies reveal individuals without rights or choices. Such people cannot be happy. These societies are dictatorships of one form or another.

John Locke started his consideration of the perfect society from the level of an individual. What are his Natural rights? By guaranteeing the rights of the individual he built up a conception of a happy society.

As Western democracies show, the 'pursuit of happiness' is not enough to make a stale society. There are always those who fail. Kind-hearted folks see that as an intolerable problem. They want everybody in the society to be happy, which is of course impossible. However much material and other benefits selfish individuality, closely connected with capitalism has brought it is not adequate to address a man's innate desire for universal happiness. This is an emotional drive, and there is no good emotional explanation that would allow one to accept inequality.

So, here's the dilemma. Those who start with consideration of society (top-down approach) can create a stable system, but it is a form of dictatorship. Those who start with consideration of the individual (bottom-up approach) ensure happiness of most, but not all people, and the resulting inequality leads to instability of the system.

Another way to describe this dilemma is to consider the differences of two terms, which are often used together - liberty and equality. I submit that (consistent with Lock's worldview) the only equality worth a damn is equality of liberty that is to say equal rights before the law, and the 'pursuit of happiness'. Equality that exceeds what is necessary to ensure liberty of each individual is a path to tyranny. Equality of outcomes, and 'social justice' and other forms of modern 'fairness' are Utopian concepts, on the road to dictatorship.

The preservation of rights of individuals is no longer seem as adequate in the Western societies. Embarking on a Utopian path is a sure way to lose all the benefits of the Western civilization, and may even destroy that civilization. The answer needs to be found quickly, because the West runs out of money and descends into one form of dictatorship or another.

Any suggestions?

Germany to Greece: Our money or your life

Germany is proposing that debt-ridden Greece temporarily cede sovereignty over tax and spending decisions to a powerful eurozone budget commissioner before it can secure further bailouts, an official in Berlin said Saturday.

Greece's international creditors - the International Monetary Fund, the European Union and the European Central Bank (the troika) - already have unprecedented powers over Greek spending after negotiating with Athens stringent austerity measures and economic reforms in return for the first bailout.

Under the new German proposal, a budget commissioner would have veto powers over Greek budgetary measures if they were not in line with targets set by international lenders.Greece would also legally commit itself to servicing its debt, before spending any money in any other way.

"Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time," the Financial Times quotes the German plan as saying.

The Greeks know how much is at stake: "We must do everything that will restrict the recession and will begin the cycle of growth. The coming days will determine the coming decade," Finance Minister Evangelis Venizelos told reporters as the talks broke up on Saturday.

The idea was quickly rejected by the European Union's executive body and the government in Athens, with the EU Commission in Brussels insisting that "executive tasks must remain the full responsibility of the Greek government, which is accountable before its citizens and its institutions."

A government official in Athens said a similar proposal had been floated last year but got nowhere. In an angry reaction from the Greek government, the education minister, Anna Diamantopoulou, a former EU commissioner, slammed the idea as "the product of a sick imagination" in an interview with local television.

Despite the immediate rejection by the Greek, and the EU's executive body, Germans officials have brought up their proposal for discussion among the 17-nation currency bloc's finance ministers because Greece has repeatedly failed to fulfill its commitments under its current €110bn lifeline.

Greece’s finance minister angrily rejected a German plan for the eurozone to impose a budget overseer onto Athens in return for a new €130bn bail-out, saying it would improperly force his country to choose between “financial assistance” and “national dignity”.

Centralized control is a key point of the new 'unified' Europe that Merkel is calling for. There is no room for national dignity in that supra-national project, or at least not when it costs €130bn.

A powerful budget commissioner would further diminish the political leeway of Greece's government, just as politicians there are gearing up for an election set to take place this spring. Greece is currently locked in a twin effort, seeking to secure a crucial debt relief deal with private investors while also tackling the pressing demands from its European partners and the IMF for more austerity measures and deeper reforms.

The debt relief deal may actually go through, contrary to my expectations - I didn't think it was likely that bondholders would agree to take a the proposed 75% haircut on their investments. According to officials involved in the discussions, negotiators representing Greek bondholders largely completed a deal with Athens last weekend which would cut the long-term value of privately held bonds by just over 70 per cent. This is a sign of how desperate the situation is in EU.

To avoid default, however, Greece needs to succeed on both fronts: giving it's bondholders a 'voluntary' fleecing, and getting more loans from EU. Failure on either front would force the country to default, pouring new fuel on the fires of Europe's debt crisis.

Concurring with German proposals, IMF has also signaled that Greece will have to give up autonomy over its budget if it is to receive the full backing of the international community for its second €130bn bail-out.

Christine Lagarde, the director general of the IMF, said that a new "fiscal compact" was set to be signed by European Union members at the vital leaders' summit on Monday that would 'centralize' budgetary powers.

Greek officials, are not the only ones who have reacted angrily to the IMF and German proposal for an EU budget commissioner with veto powers over Greek taxes and spending. In Athens on Friday, protesters tried to blockade inspectors from the "troika" of institutional lenders - the EU, the International Monetary Fund (IMF) and the European Central Bank (ECB) - into their hotel. The pains of failure to salvage this situation economically are likely to pale in comparison to politcal turmoil, which will result if the German  plan succeeds.

"For your own good, surrender your sovereignty to us temporarily," is the essence of message to Greece coming from Germany. This a bad proposition for both parties, and the kind of proposal that supports the idea that Germany is establishing a Fourth Reich, perhaps unwittingly and with good intentions. It is a route to Germany hegemony on the continent by soft methods - conquering others through productivity, rather than brute force. This proposal supports my description of Angela Merkel as the "Mutti of the Fourth Reich".

Will the loss of Greek sovereignty be temporary? Does Germany benefit from the closer fiscal union proposed by Angela Merkel that leaves it shackled to an financial corpse (or a few)? What do you a call a plan which makes losers out of both parties? I call it a Suicide Pact.

As I pointed out, it's possible for Europe to back out of the euro - the greatest obstacle appears to be inability of leaders to admit that euro was mistake. Yet, even George Soros acknowledge at Davos last week: "The austerity Germany wants to impose will push Europe into an inflationary debt spiral. The architects of the euro knew it was an incomplete currency when they designed it." Soros didn't mention why such a flaw plan was pursued - you can read my opinion here.

It's hard to predict how this difficult situation will play out. I am certain of one thing - Benjamin Franklin was right when he said: "Those who would by up Essential Liberty to purchase a little Temporal Safety, deserve neither Liberty nor Safety".

Another EU downgrade: stop digging already

Less than two weeks after S&P downgraded credit ratings of nine European nations, Fitch just cut the long-term issuer ratings of 5 EU countries:

Belgium:   AA+ to AA
Spain:        AA- to A
Italy:         A+ to A-
Cyprus:     BBB to BBB-
Slovenia:   AA- to A

While Fitch says that it supports EU leaders actions to address the crisis so far, a lot more has to happen before these countries are out of trouble:

In Fitch's opinion, the eurozone crisis will only be resolved as and when there is broad economic recovery. It is evident that further substantial reforms of the governance of the eurozone will be required to secure economic and financial stability, including greater fiscal integration.

The first statement seems tautological. The second suggests that Fitch agrees with the current thinking in EU that the solution lies in greater economic integration. As I have stated on this blog earlier, it is the problem. Increased fiscal integration will only exacerbate matters.

Fitch also suggested that large-scale purchases of sovereign bonds by domestic banks has not helped:

...the divergence in monetary and credit conditions across the eurozone, and near-term economic outlook highlight the greater vulnerability to monetary as well as financing shocks faced by these sovereign governments.

Of course, Fitch knows its proposed solution of greater integration to address 'greater divergence of credit conditions in the EU' means transfers of wealth from the EU core (northern nations) to the periphery (primarily southern nations), and there's little political appetite for it. Fitch is repeating the harebrained mantra of EU bureaucrats. Is Fitch trying to give Eu political room for this action, or does it also not realize that doubling down on the failed tactic and expecting a different outcome is the definition of insanity?

The first thing to do when you find yourself in the hole - stop digging. Instead, Fitch is suggesting EU needs a bigger shovel.

Identifying the problem to exacerbate it

Some 1,600 economic and political leaders, including 40 heads of states and governments, will be asked to come up with new ideas as they converge at Davos, chic ski station in eastern Switzerland, for the 42nd annual World Economic Forum (WEF), which opens coming Wednesday.

"The main conversation will be about a deficit of leadership in Europe as a prime problem," said John Quelch, the dean of China European International Business School.

There's have been dozens of meetings, initiatives and promises in Europe. So, there is plenty of leadership; what it lacks is coherence, and most importantly, honesty. The leaders seem to admit there exists a credibility gap, but deny their role in bringing it about:

"We have a general morality gap, we are over-leveraged, we have neglected to invest in the future, we have undermined social coherence, and we are in danger of completely losing the confidence of future generations," said Klaus Schwab, host and founder of the WEF. "Solving problems in the context of outdated and crumbling models will only dig us deeper into the hole", he added.

Klaus Schwab. Worried at Davos.

At the upcoming meeting the economic and political elites will seek ways to reform a capitalist system they believe is "outdated and crumbling." EU is crumbling, sure, but to call capitalism outdated is another attempt to avoid responsibility; Europe has given up on capitalism some time ago. Over a decade ago it decided to pursue the so-called "Third way", between capitalism and socialism. (Check out this prescription by Tony Blair and Gerhard Schroeder from 1999).

An article from the semi-official 'Third Way' website published in October 2011 admits the problem: "Ten years ago, Europe faced a looming debt crisis but economically, fiscally, and demographically they buried their heads in the sand, were afraid to confront voters with the truth about their fiscal situation, and now face draconian measures that may not even be enough."

I'm sure blaming the current mess on "outdated, crumbling capitalism" will work out better this time around.

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.

The legal mess in EU

I December of last year I wrote a blog stating how UK is fortunate to be out of EU. The British demands demanded special treatment for the city of London that could start an open season on egalitarianism and was a non-starter. One senior Nordic official involved in negotiations said: “When we saw their list, our experts said: ‘They’re not serious. It’s just too much.’ ”

Financial times wrote and article about miscalculations of the British in negotiations with UK. FT has pieced together the evens of the crucial two weeks leading up to the vote in Brussels. This means that not only was the strategy of the British flawed, but so were their tactics.

UK is doubly lucky to be out of the new EU.

The new IMF chief,  Christine Lagarde, (who started after the her predecessor's scandalous rendezvous with a maid in NY hotel, who alleged rape) has recently scared a lot of folks by mentioned similarity of current events with those of Europe in 1930's. A number of commentators found comfort in the fact that the bogeymen of 20th century Europe: communism and nazism are not politically viable leaders. This may prove to be wishful thinking - political extremists could use a mixture of old ideas, or invent something new. Stability founded on public apathy in a rotting political system lasts only until a clear alternative emerges, which draws very sharp contrasts with the existing (moderate) status quo, resulting in a move to one or another extreme. Inability to imagine a specific extreme outcome, offers false comfort of apparent stability.

I have also expressed the view that bonds of three treaties in Europe could also imperil stability. First, all of them take sovereign rights from nations and vesting them in pan-European institutions. These ties have already requires large transfers of wealth from the core of EU to its periphery. Third, these layers of treaties are a potential legal nightmare today, and political nightmare tomorrow.

Furthermore Cameron said: '“Clearly, the institutions of the European Union belong to the union, they belong to the 27.” A “treaty within a treaty” would improperly force the Commission and ECJ into “serving two masters at the same time”.

Sounds reasonable, but this implies nothing less than a scorched-earth tactic. Britain’s rejection of treaty changes means that its 26 EU partners must do without the European institutions.

Herman Van Rompuy, the European Council president who brokered Friday’s deal admitted: "This formula has some handicaps but we will try to overcome them. We will need a large interpretation of the roles of institutions.” What happens when British and French lawyers disagree about this re-interpretations of the roles of EU institutions? Could British enforce their rights?

Guy Verhofstadt, the former Belgian prime minister who is the European Parliament’s most outspoken advocate of a United States of Europe, said non-EU treaty would set a dangerous precedent, potentially leading to a splintering of the bloc into subgroups of member states who decide on their own when EU institutions can apply, and threatened to take EU leaders to court if they proceeded with a treaty outside EU strictures. “ It’s not just the UK in or out: it’s mostly about the nature of the union. There are a growing number of countries . . . which will not accept the use of this treaty to execute a coup.”

Meanwhile, the European Commission officials are insisting that the new treaty can rely on EU institutions even if they are not formally included in the new pact. This is a very hypocritical position, consider that the new EU solution was premised on members legal obligation to live within their means. Even if re-interpretation succeeds, allowing the use of EU intuitions by the 26 countries, the precedent undermines credibility in all EU promises, and rules. How can European Commission's authority to enforce the new “fiscal compact” after this? Talk about sawing off the branch you sit upon!

Officials said the treaty was likely to bind all signatories to abide by Commission recommendations on how they should get unbalanced budgets back in line, but this measure that would not formally pull the Commission into the treaty. The promises could be enforced under rules, which regulate bilateral trade relations that have been on the used only 10 times since 1958 treaty of Rome. Let me restate the above, because it's so illogical: enforcement is proposed to come from European commission which is not a part of new treaty, and be enforced by archaic rules which are also no part of either the old or new EU treaties, but predate both. So, recommendations for compliance, and enforcement both is supposed to from institutions outside of EU treaties.