Another shoe drops: EFSF downgraded

This was fast. On the Martin Luther King day, a holiday in the US, the US-based S&P downgradedthe European Financial Stability Facility (EFSF) from AAA to AA+, even sooner than I expected. 

Just last Friday Standard & Poor downgraded 9 European economies by one or two notches, and had a negative outlook for every EU economy, except Germany. I wrote that these downgrades would inevitably result in the downgrade of the EFSF and contribute to a vicious cycle of negative feedback, because lower ratings ultimately require more money for bailouts, and also deplete the state coffers.

Nicolas Sarkozy desperately tried to avoid the downgrade of France, before the upcoming elections, which he is likely to lose. After the loss of the coveted rating he said "my conviction is that it changes nothing". 

The chief executive of EFSF, Klaus Regling, said: "The downgrade to 'AA+' by only one credit agency will not reduce EFSF's lending capacity of 440 billion euros". Is this an example of the "too big to fail" mentality, or at least "too big to be affected by a downgrade of only one of the three ratings agencies". Neither. Regling added "EFSF has sufficient means to fulfill its commitments under current and potential future adjustment programs until the ESM becomes operational in July 2012". The previous two years averaged transfers of about 300 billion euros from the EU core to the periphery. It seems that Klaus is merely saying that 400 billion should be enough this year.

Sarkozy's motives for a sudden change of attitude for manipulating the public opinion are transparent. Regling's statement is no less disingenuous, because it attempts to hide a long term problem behind 'solution by redistribution', a short-term and short-sighted strategy. 

Also today Germany refused to boost the funding of EFSF, just as the bankruptcy of Greece this spring is beginning to look inevitable. Germany was pushing private creditors to accept new bonds the planned swap to carry that would increase the banks' effective losses to 75 percent. Those private lenders recently turned down the offer to 'voluntarily' accept 50 percent losses. Klaus Regling, as an major economist and a German, cannot be unaware how this very day his country's policies are making Greek default a certainty, barring some miracle. Greek default will have a devastating effect on the French banks, while Germany hold relatively little Greek sovereign bonds. In addition Germany is benefiting politically as its neighbors and competitors in Europe weaken economically. However, is Europe ready to accept this soft, insidious form of German hegemony?

Facing the facts: The great EU credit downgrade

Fitch ratings agency said about a month ago they will review France's rating this coming year, but they were beaten to the punch by the S&P. The inevitable downgrade happened even sooner than expected, and in addition to France, with its heavy exposure to Greek debt and significant deficits, S&P downgraded 8 other European nations. S&P lowered its long-term rating on Cyprus, Italy, Portugal and Spain by two notches, and cut its rating on Austria, France, Malta, Slovakia and Slovenia by one notch. The move puts highly indebted Italy on the same BBB+ level as Kazakhstan and pushed Portugal debt into junk status. The US-based credit-rating agency affirmed the current long-term ratings for Belgium, Estonia, Finland, Germany, Ireland, Luxembourg and the Netherlands. S&P put all 14 of the above euro-zone nations — Austria, Belgium, Cyprus, Estonia, Finland, France, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovenia, and Spain — on "negative" outlook for a possible further downgrade. Only Germany was the retained its AAA rating and a stable outlook.

The downgrade has been precipitated by the breakdown of talks between Greece and its creditors over a debt swap seen as crucial to avert a Greek default. Officials said more talks are likely next week, but also mentioned that there's no agreement on any of the issues involved in a voluntary 'haircut', which is a nice euphemism for being fleeced 40-60% on investments. Chances of Greek default in March are significant, so it's understandable that rating agencies will want to get ahead of the curve.

"Today's rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policy makers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone," S&P said in a press release announcing the downgrade.

S&P is more diplomatic than yours truly. I simply said that the European plan is a smoke screen. This is wishful thinking mascaraing as a policy. No responsible engineer can build a bridge based on hope alone, without adequate calculation. It's unlikely that there's a total lack of understanding for the fundamentals that are apparent even to a layman like me, therefore, I said the leadership (Merkozy and Co.) have been simply lying to the public. Austerity and budget discipline alone were not sufficient to fight the debt crisis and risked becoming self-defeating, the ratings agency said. How much are these people paid? I wrote two months ago: "The idea that austerity alone, or in combination with stricter rules, as Angela Merkel wishes to do, could solve EU's problems, stemming from trade imbalances, is a lie." Almost that far back I also wrote blogging ahead of the curve about the huge cuts such a plan would entail, and the lack of political will for such enormous cuts. I pointed out the inherent weakness of the French AAA credit rating in another article, after UK dissed new EU rules, provoking French comments on the weakness of the British economy, and unsustainability of its credit rating. The goal is not to be self-congratulatory, but merely to point out; once again, the unfolding events were so easily predictable, that the only way to deny them is either total incompetence (which I don't believe) or outright misrepresentation.

The first rule of suicide pact is to lie early and often. Experts agree this is a suicide pact: the chief economist of Commerzbank, Joerg Kraemer, said that the consequence of the downgrade is that the European Financial Stability Facility (EFSF) also will lose its triple-A rating. "That may irritate markets in the short term but wouldn't be a big problem in a world where the U.S. and Japan also don't have a triple-A rating anymore. Triple-A is a dying species," he said.

This is exactly what I mean by the suicide pact in general: a horrible decision taken jointly. This is why Obama's presidency is so favorable for Europe: by following EU's inane pattern of overspending the US has dramatically increased its debts and deficits. European troubles will have been much worse if US had act together, because it would make investments in EU less attractive, and greatly increase its borrowing costs.

The consequence of the downgrade, which was already partially priced into the borrowing rates of soverign nations, is likely to result in additional increase of these costs. The AAA rating is crucial for the functioning of the EFSF, and one of the consequences of downgrade is the need to pump additional money into the bailout fund. At the same time, the downgrades of banks make triggered forced selling of sovereign debt resulting in increased borrowing costs of these nations.

EU monetary affairs commissioner Olli Rehn called S&P’s decisions “inconsistent” and suggested they ignored the “decisive action” taken by the eurozone to commit to budget, structural and banking-sector reforms, and to a more powerful rescue fund.

The German government said the Eurozone’s determination to overcome the debt crisis stood “beyond question”, echoing the sentiments expressed by other countries. At the same time, in Frankfurt, the ECB criticized the draft of a new fiscal discipline treaty for the euro area, saying that the latest version amounted to “a substantial watering-down” of tough deficit levels that could allow “easy circumvention of the [deficit] rule” by struggling governments.

So, there you have it. The leaders are proclaiming piety, while their bean counters are noting that the proposed strict rules are simply wishful thinking. Lies, actually.

Riding out the perfect storm of 2012

To weater the gathering perfect storm US needs to keep to minds its business, and avoid adventures into the turbulent waters abroad.

In the ocean, rogue waves form where strong ocean currents intersect, but they can travel too. In the air, collision of highly mobile weather systems over weather can produce perfect storms. These are less regular than ocean currents, but the presence of several intense systems is good indication of trouble.

Economic and political trends going into 2012, show a similar presence of multiple intense 'systems':
Europe is likely to undergo protracted political and economic slide, and will be very needy and self-centered.

Middle East has given rise to the Arab spring, with hopes are being replaced by harsh realities. In most countries where new situation is possible: Tunisia, Lybia, Egypt the democratic forces are weaker than either Islamic factions or the military. Terrible pictures from this weekend in Egypt prove, among other things, that the interests of military are not identical with those of the democratic forces, or the public at large. During Lybia's civil war there a wave of refugees set of for Europe. In fact, the whole point of US military intervention was to help Europe manage a military and immigration situation on it's periphery. Europe will be less able to provide US assistance with continuing trouble in the Middle East as their intense economic difficulties.

In Asia there are new realities that spell trouble. A newly assertive China has recently launched a refurbished Russian aircraft carrier. Even Vietnam turned to US recently asking to help safeguards it's rights in the South China Sea, which China's first step to re-establishing itself as a maritime superpower centuries after their great exploration came a sudden stop. We could expect the same from the new China, as the old:
In 1405, the emperor Zhu Di who recently usurped the dragon throne needed to legitimize his rule and sent out a great maritime expedition led by his talented slave who became a navigator: “Zheng He has been sent overseas with gifts to declare my will. It is forbidden to bully small and weak nations”.
Officially, the maritime expeditions sought peace and friendship, but in reality achieved economic and political domination wherever they passes. “The Chinese simply arranged to replace unfriendly leaders in countries where they encountered difficulties with someone willing to trade on their terms”, summarized Louise Levathes in her book 'When China ruled the seas'.

North Korea's old leader Kim Jung Il finally died today of a heart attack. He's been replaced by his unknown play-boy son. Recently, South Koreans expressed their fears that passing of the old leader could lead to instability. North Korea is one of the most repressive nations on earth, John Bolton correctly called it 'a horrible nightmare', and this is one of the few instances when some change in that horrible situation is possible. Forgive me, if I don't pine to status quo with any zeal. Of course, destruction of the nepotistic Stalinist regime could be a very, very painful process.

Russia is in revolutionary throes. The most likely outcome appears to be increasing modern, non-lethal repression and victory of Putin in March's elections. His angry and provocative disrespect of demonstrators is increasing the scepticism of the weary public beyond thresholds which even the stout Russian soul can tolerate. It likely outcome, is a restive populace fighting modern surveillance and repression through demonstrations, and civil disobedience. The opposition to Putin is committed to non-violent means, but the question remains can they make it impossible for him to govern?

Iran has delivered a public humiliation to Barack Obama and his administration by belittling his pleas to get RQ-170 spy plane back. Given the relationship between the countries, and the spying on Iran the drone was likely involved in, there was absolutely no reason for US to subject itself to this humiliation. On top of an intelligence and technology fiasco, it gave the perception of impotence which is very dangerous in the region. Besides, do we need to give mullahs any more confidence, while they defying the world to build nuclear weapons? Iranians have recently flaunted on of their cards by holding an exercise to close the straits of Hormuz, through which a thirds of the worlds oil is shipped.

Israel is surrounded by Hizbollah, Hamas and it's ally Palestian Authority, an increasingly hostile Egypt while threats Iran makes periodic threats of annihilation. If Israel is forced to acts against Iran without direct involvement by US things would be very ugly.

United States will have to deal with a lot even before elections in presidential elections on November 2012. We can expect no leadership from Obama. I foresee a sole exception: Obama may allow an Israeli strike on Iran in the late summer of 2012, not to help Israel, but to score political points. The Supreme Court is going to rule on Obamacare in the summer, in the heat of the political battles. Things are getting hot. And we need a cool-headed leader. Recently, I wrote an article explaining why think that Romney is be the best candidate in 2012 GOP field. Romney has strong credentials and interest in domestic politics. He is relatively weak and disinterested in foreign relations.

Considering the gathering perfect storm of 2012 I see Romney more favorably because of this limitation.

With the exception of Iranian crisis, the best strategy for the US is to get its own house in order and away from the world's troubles. The world will long for the good old days of 'US hegemony', when it tried too hard to solve the worlds problems. The war in Iraq is a sad example. For the cost of hundreds of billions and several thousand lives of US armed forces, what have we achieved?
We removed a major counter-weight to Iran, and replaced it with a democracy which is already under Iranian influence.

Syria. There little motivation for US to get involved with Syria. After all US got involved in Lybia's conflict to help Europe (primarily Italy) secure its borders against refugee flux, not Lybia's quest for self-determination. I am not suggesting any military involvement in Syria, but taking a clear moral stand. Even the dictator's club of Arab league has denounced Assad more strongly that US under Obama. Obama's term was very expensive for the US, and abroad; nobody can afford another.

To weather the coming perfect storm US needs to forgo invasive foreign policy and simply get its economy in order. Meanwhile, we should express outrage against violence in Egypt, and ballot stuffing in Russia, etc. but limit ourselves to the right words, even if the world burns around us.

Moderation over extremes of idealism

Triumph of extremism over moderation is a danger for social structures which are based on lies or misconceptions, and hence inherently unstable. When the jig is up, as the saying goes, and the contract is revealed to be a fraud, moderation loses to expediency. Compromise about existential matters is not possible, and then disappears altogether under the rule of victorious new order.

One such area has to do with immigration into Europe. The simmering discontent is a pressure cooker, which builds up steam slowly, bur irreversibly. I believe there is a clear majority in most of Western European countries for strongly curtailing immigration, but the leadership prefers to ignore this or to dismiss it as unmitigated bigotry. This is a very dangerous tactic, which is accelerated by the economic crisis.

According to studies, such as those by the social scientist Wilhelm Heitmeyer who has been publishing studies on German attitudes for a decade, where more than 50 percent say that they would have a big problem moving into an area where many Muslims live. About 10 percent of society has thoroughly right-wing views, defined as antipathy to non-natives; immigrants, Muslims and Jews. The resentment for the generous welfare system, including the payments for the long-term unemployed (Hartz IV) to a disproportionate number of immigrates has contributed to the misanthropic mood in Germany under the strains of the economic crisis.

There are some intellectuals, such as Thilo Sarrazin,  who raise concerns about immigrations, particularly Muslims in his controversial book, "Deutschland schafft sich ab" ("Germany Does Itself In"). Sarrazin was recently chased out of a Turkish restaurant in Germany by angry patrons. Even the manager asked him to leave, saying "We Turks are usually very hospitable, but I don't think I can serve you." "A rational discussion was impossible," Sarrazin wrote; he and the television crew left the restaurant "like beaten dogs".

Sarrazin lamented when a "former Berlin senator, guilty of nothing more than writing a book with unwelcome numbers and analysis, is literally mobbed out of a central Berlin district that calls itself the spearhead of German integration. Woe betide us if, as many hope, the conditions in Kreuzberg are the workshop for future Germany".

This is the type of uncomprehending tension can only be addressed by government action, because tensions will not resolve themselves. The current trajectory leads into trouble, and this slide is accelerated by the economic difficulties.

The EU leadership needs to wake up, and fast, but they are fully preoccupied by integration concerns rather than each minding their own business. According to Heitmeyer, it is very late in the game: "Our democracy is a functioning shell, as evidenced by low voter turnout. Our numbers show that many people have already given up. They no longer have any expectations of politics.  Some 64 percent of society believes that striving for justice is pointless. Solidarity and fairness, values that are vital to the cohesion of a society, are being eroded." This is a recipe for xenophobic demagogues to take power in the heart of Europe. Protests, similar to American 'occupy X' movement are not normal expressions in of opinion in a democracy, because the seek for impose themselves. It's an extreme form of speaking out, that destroys foundations for moderation.

Heitmeyer suggests that on the bright side: "I do not recognize a potential for unrest in Germany at the moment. Instead, I suspect that apathy and disorientation are on the rise." Apathy may be preferable to unrest, but it is neither a stable nor comfortable situation.

The situation found in many countries, such as Netherlands, and France are much more grave than those of Germany, discussed above. In another articles, I would like to talk about Geert Wilders, and some others to illustrate the continent-wide nature of these problems. Unfortunately, just as these problems are becoming more acute, the leadership is busy working on closer economic integration, which will make it more difficult to exercise national sovereignty and effect immigration. Echoing that sentiment signs at a recent demonstration in Warsaw read: "Keep the euro, we want our nation back".

Suicide EU: blogging ahead of the curve

I'm still looking for this site to be indexed; and came across an article by a financial market analyst Charlie Fell, who writes the column 'Serious Money' for Irish Times.

Charlie Fell wrote an article today entitled Europe's suicide pact pointing out that "The summit’s proposals reveal that the EU’s political leaders remain in denial or are blind to the true nature of the crisis that afflicts the euro-zone."

Charlie mentions the incongruity between the problem and proposed solution:

"The EU’s leadership continues to believe that profligate government spending among the euro-zone’s periphery is the central problem and, insist that fiscal austerity is the only path to future stability. With this in mind, the summit proposed that euro-zone members adopt constitutionally-binding debt brakes requiring states to maintain balanced budgets, defined as structural deficits of no more than half a percentage point of GDP."

I have been writing about the same idea, and even took the same name for the blog to make my point inescapable. I have no special knowledge or training in finances. What I do have is sufficient boldness to use common sense to analyze the proposed solutions, and to suggest that they will exacerbate the disease.

This is not merely a figure of speech, but a reference to the restrictive bonds of common monetary policy that are supposed to be tightened by mutual promises in the smaller core EU.
To add something new to my prior analysis, I'd like to comment on the idea of austerity. It is a involuntary reduction in government (over) spending, imposed upon profligate members of the EU by the collective. This has the possible benefit to greatly shrink government expenditures on the periphery, but therein lies the difficulty, also. Greece, for example, would need to reduce its government expenditures by 21% to eliminate annual deficit while keeping the euro. Italy and Portugal would need to cut government expenses by at least 10% and 14%, respectively. These are average, 'across the board' cuts, targeting some cuts would require others to be even deeper. Think about the scope: these cuts affect everything from education and research to transportation and health services. Ten percent or more may not sound like so much until you think about your own occupation and its budget.

I do not believe that vague promises in the name of EU unity will conjure up the political will to cut that much. It will be really healthy, if they do. In the meantime, Germany, the Netherlands are among a few not obligated to undergo austerity. Bringing down the question of austerity to the level of an individual, I would ask you, gentle reader: "Would you go on a (lengthy) diet, if you neighbor told you to, as he continues to live large?"

First rule of Suicide Pact: lie early and often

Nicolas Sarkozy, French President, said: "We want, in essence, that the malfunctioning that led to the situation of the Eurozone today can never happen again. This is what Germany and France want: that what happened can never happen again."

Angela Merkel, German Chancellor, said: "I've always said that the 17 Eurozone countries must restore their credibility. And I think with these new measures we can and will do just that. "
So there are 17, 26 and 27 members in different layers of the union. In addition, the latest grand bargain, lauded by Merkel and Sarkozy, may take until March to negotiate. Then all the new members (26) have to ratify.

This fiscal outcome of this confusion of laws seems to be going the way of sub-prime mortgage lending, when banks admitted inability to price their sliced up piece of mortgages. This time it is (former) nations of Europe, rather than banks that may go bankrupt, with the additional inter-national acrimony resulting from basic inability to establish facts, such as who owes who. For example, are the Germans going to be repaid for bailing out Greece, through ECB or any other mechanism? Will Greeks 20 years from now consider that a legitimate debt, or will the (rightly) state: We didn't ask for it, we didn't want it, we reject responsibility for this debt.

On the bright side, even if things go smoothly between nations, the interaction and conciliation of different laws is going to keep a generation of lawyers employed in each nation.

The real travesty of this situation is the Lie I mentioned in the beginning, namely that there is a strategy in place. All there is, are words. An agreement, to reach an agreement. To adjusting rules on the fly, during a crisis. To top if off, what Merkel's old insistence that EU members promise to maintain fiscal discipline, is market as a 'strategy' and a 'solution'.  As I described previously, latest debts have resulted primarily from import-export disbalances of countries with a single currency so to pretend that a mere promise can address this fundamental problem is to Lie.

It is anyone's guess to what extent these lies result from ignorance or malice. In other words, are they fooling us, or do they really don't know any better? As bad as lying is, the alternative explanation of economic illiteracy at the very top of European leadership, which is shaping a common future, may be worse. When dealing with an idiot and a cheat, pick the cheat, who's at least predictable.

The further things go EU goes down this road, the more entangled the financial mess will become. The one innovation proposed in the new treating is the creation of a centralized, EU-wide taxation.

This caused two of the more sceptical nations amoung the core 26, Hungary and the Czech Republic, to say in a recent joint conference in Budapest they were ready to reject the planned treaty, with the Czech prime minister Petr Necas saying, they are “convinced that tax harmonisation would not mean anything good for us."

EU will become the Gordian knot holding the Suicide Pact together. UK will be seen as fortunate for its early escape form the impending mess. Those who delay the inevitable because of wishful thinking increase the cost to their nations.

Economic weakening of UK: look who's talking

The French are more vocal in their expressing dislike of UK for snubbing the EU, than the Germans.

Yesterday the governor of the Bank of France, Christian Noyer, said: 
"Great Britain is in a very difficult economic situation, a deficit close to the level of Greece, debt equivalent to our own, much higher inflation prospects and growth forecasts well under the eurozone average. It’s an audacious choice the British government has made," referring to rejection of updated EU treaty.

French policymakers were angered last week when Standard and Poor’s, a ratings agency, threatened to downgrade eurozone nations — including France — if leaders did not act urgently to address the single currency crisis. In an interview with Le Télégramme, a French regional newspaper, Mr. Noyer said the downgrade did not appear “justified in regard to the economic fundamentals”.

“Otherwise, they should start by downgrading Britain which has more deficits, as much debt, more inflation, less growth than us and whose credit is collapsing,” he added.

I trust the three ratings agencies to judge the financial situation more than politicians interested in preserving appearances. And the ratings agencies are suggesting that it is France, and other continental nations that need to be reviewed. Today Fitch Ratings lowered France's outlook, and is reviewing ratings for Italy and Spain, citing failure of EU leadership to find a “comprehensive solution” to the debt crisis.

The last part is the part that amuses a cynic like me the most. The agreement reached by 26 European nations (EU minus UK) is all about promises to maintain fiscal discipline, which is nothing but wishful thinking that ignores that underlying problems that lead to the deficits in the first place. The truth about EU as a suicide pact is revealed by the shady behavior of it's leaders. You may think, despite my statement of the emptiness of new EU agreement, that it there is merit in the fact that 26 nations reached agreement. Actually, three of them are uncommitted, and only promised to try to ratify the new treaty. Here's the real kicker, and why statement about lack of 'comprehensive solution' is mild: there is no agreement, there's only an agreement to agree. The 'new EU' rules are still being put together, and should be worked out by ... March. After that, all EU member states will bring the new rules up for a ratification in national assemblies.

This is just great. These EU bureaucrats think they after they surpassed the legal boundaries of past agreements, by directly bailing out Greece among others, they can come up with new and and more extensive regulations on the fly. The real absurdity is that these 'means justify ends' are destroying the last vestiges of faith in all EU agreements by over-reaching their mandate and trampling on national sovereignty. What is to stop EU from changing rules again in another couple years, while financially stronger 'core' nations dictate to the weaker ones?

Agreements at the heart of EU necessarily are win-lose for different member states. That is why the union is unstable economically, and political disharmony is likely to get significantly worse during the breakup of EU with layers of rules, debts and obligations. This entanglement of money through an unnavigable web or rules makes the slicing up of sub-prime home loans that precipitated the mortgage crisis in the US look like an orderly and well-thought out process.

Unassimilated minorities in EU: a poisoned well

One of several major challenges that faces the Western nations, especially those within the EU, is the changing demographic. Western nations everywhere are aging, this combines adversely with the increasing number of foreigners, who are much less assimilated than those who come to the US. The tention results from fundemental cultural differences, but I see economics being the spark, as dwingling money is divided among the retired and those leaving off wealfare, including a disproportiane number of immigrats, or their unassimilated descendants.

According to this logic, as EU runs into financial trouble due to disparaties between consumption and exports of individual countries, we should expect to see less tolerance, including towards culturally segregated communities, such as the Banlieues in France, where neither the police nor ambulances dare to go.

Angela Mekel has said earlier this year that 'Multi-culti' (multiculturalism) has failed. Nicolas Sarcozy made a similar statement even earlier. Both of these leaders are (belatedly) stating the obvious.

The timing of this piece was motivated by the release of a 10-year long study study of prevaling attitudes in Germany and a recent shooting in Florence that both support my regrettable conclusion above.

Social scientist Wilhelm Heitmeyer has been publishing studies on German attitudes for a decade. In a SPIEGEL interview, he discusses his latest results, which show that says 'German society is poisioned''German society is poisioned': relationship of natives has become increasingly hostile to immigrants.

Heitmeyer says that status-based thinking is particularly widespread in utilitarian Germany.

An Italian gunman with fascist sympathies went on a Rampage in Florence on Tuesday, killing two African street vendors and wounding three others in broad day light before shooting himself dead. To make the racist, anti-immigrant nature of his hatred clear the gunman shot several Senegalese vendors in one town in an open-air market, got in his car drove to another town in Florence and shot several more Senegalese, before taking his own life.

The shrinking EU core and PIIGS (US)

Bloomberg news recently commented on convergence of Netherlands and Germany. Curiously, Netherlands has almost three times as much trade (90 billion euro) with Germany than with France (32 billion euro).

Dutch Finance Minister Jan Kees de Jage said: "Trade between Germany and the Netherlands isn’t only extensive, it is enormous. It is flourishing today thanks to the internal market and the euro. If there are two EMU countries that should logically stand together, they are Germany and the Netherlands.”

A breakup of the euro bloc would cut exports of Dutch products by 25 percent next year, ING Groep NV (INGA) economists Teunis Brosens and Dimitry Fleming said in a Dec. 6 note to clients. “As a trading nation with large pension funds and an international financial sector, we’re closely tied to the euro zone” and may be the country with the biggest interest in maintaining the currency, they wrote.

Is this a counter-example of the badness of EU, which I describe as a suicide pact?

No, it supports that unfortunate thesis. I wanted to find out why Netherlands in particular stands to lose so much from breakup. Netherlands is the 6th largest exporter worldwide, and the 3rd in Europe, just a hair behind a much more populous France. I put together a little table from publically available data to illustrate what I'm always referring to in writing.

Country	Exports (M)	Population (M)	Per capita	Imports (M)	Exp - Imp (M)	(E-I)/capita
Germany	1337	81.729	16.4	1099	238	2.9
Netherlands	485.9	16.847	28.8	429	56.9	3.4
France	517.3	65.027	8	590.5	-73.2	-1.1
Portugal	46.27	10.561	4.4	68.22	-21.95	-2.1
Italy	448.4	60.706	7.4	473.1	-24.7	-0.4
Ireland	115.7	4.581	25.3	70.36	45.34	9.9
Greece	21.14	10.787	2	44.9	-23.76	-2.2
China	1506	1339.7	1.1	1327	179	0.1
US	1289	312.7	4.1	1936	-647	-2.1
	2010 est.	2011 est.		2010 est.	2011 est.

The imports, exports and 2010 estimates, while populations are estimates from 2011, but the newborns will not seriously jeopardize this argument. I grouped PIIGS in red. Clearly, Irelands' fiscal difficulties are of temporary nature, while for Portugal and Greece problem are more fundamental. Of course, the per capita annual deficits do not show outstanding debt, which makes even Italy's relatively modest deficits unsustainable. Italy's bond rates about 7-7.5% while comparable German bonds are about 2-2.5%.

My initial purpose was to show similarity between Netherlands and Germany: they are both major net exporters, with a huge market in the EU. The net trade deficits in the rightmost column mean that net importers would need to subsidize their imports through debt, because allowing currencies to adjust to market conditions would make exports very expensive. What benefits the Northern Europe hurts the South, when they are tied by a common monetary policy. Not surprisingly the northerners would like to simply ignore this difficulty, or to overcome it by speaking about fiscal responsibility. There has been vast overspending by the politicians; however, there is a bigger fundamental issue.

The suicide pact is what happens when the desperate North and South try to band together for short-term gains despite the likelihood of long-term pain. The alternative proposed by the North: severe cuts in social services and government jobs, called 'austerity' to address accumulated deficits together with a cultural and economic revolution that puts the entire union on par with the core, such as Germany and the Netherlands.

The leaders in Brussels will be the last to admit the reality of differences between the North and South of Europe. Economically weaker nations are likely to be pushed off the new band-wagon, until the entire periphery (South) is stripped from the core (North). The pressure for this separation will be great. After this separation, the benefit of common currency will no longer benefit the Germans and the Dutch by making their exports more affordable in Greece and Portugal. I was very impressed by the 25% reduction in trade mentioned in the article above, because it appeared to contradict my point about the detrimental economic consequences of the euro. Following up on this revealed that the benefit occurs at someone else's expense. The win-lose is a fundamental characteristic of a common currency: it helps some and hurts others making the system unsustainable.

One last point, the PIIGs are us(US). Look at the plot of the per capita trade deficit (E-I)/capita in the table:

The numbers above reflect the amount of borrowing, per capita, in dollars. US is bleeding far more red ink that Italy, for example. Is US trying to replicate Greece? How do you explain US following down the same path, but expecting a different result - Insanity or Arrogance? Because it cannot be Ignorance.

The euro plunges faster than its support in EU

Below are comments from three analysts indicating the outlook for the Euro is totally negative:

“It’s hard to see a positive scenario for the euro,” said Kumiko Gervaise, an analyst in Tokyo at Gaitame.com Research Institute Ltd., a unit of Japan’s largest online currency margin-trading company.

"Absent any commitment from the European Central Bank to buy more sovereign debt, I think the outlook remains weak for the euro," said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey.

"The euro is unlikely to rebound in a clear manner unless the European Central Bank lowers its interest rate further and takes quantitative easing measures," said Yuji Kameoka, managing director of the investment strategy and research department at Daiwa Securities Co.

Don Surber cites the following averages for the support of euro:

41% want are content the way things are

42% want ideas behind the euro reviewed

12 % want to get out immediately

5% don't know

That means only 1 in 8 Europeans on average are in favor of action to get out from under a falling brick. The rest, minus the totally ignorant ones (5%), are evenly split between being content with status quo despite the warning signs, and another half want to think about it. Do they seriously think the bureaucrats in Brussels are going to review the raison d'etre in an honest way, which may result in conclusion that ideas behind the euro are fundamentally flawed? That the experiment is in danger unless underlying agreements can be re-negotiated? The only answer they can produce is the solution of doubling down on all the initial bets, and hoping that the magic of public ceremonies of commitment to fiscal discipline will by themselves cure unrelated, fundamental problems resulting from trade imbalances?

It's a sad spectacle there, across the pond from the US, but for me realizing the motivations of the players makes it more of a farce than a tragedy. After all what can be a more reliable than bad consequence from continuous self-delusion?

British benefit from selfishness

The British are beginning to break with EU. The benefits of their leaving what is increasingly becoming a suicide pact should not be long in coming. Europe's financial future looks bleak. There British are explicitly modeling themselves after the independent Swiss, rather than partaking in the common problems of EU.
A suicide pact is like Jamestown at the end its road; you drink the poisoned cool-aid willingly, or you're helped to overcome the weakness. Attempts to leave the club at such a time are resented.

Predictably, many European commentators took out their frustration on David Cameroon, after he vetoed changes to EU regulations last week. As I mentioned in an earlier post, the British were seeking unique protections for the financial activities in London, and can be legitimately criticized for that, however, that's not the main issue take up by critics like the German magazine 'Der Spiegel' sugguests that Cameroon's decision would backfire at home and abroad.

Indeed, EU is moving to sideline and even to punish UK for its independence, and in UK there is strong polarization between Euro-philes and Euro-spectics/Euro-phobes. However, a poll taken in UK after the veto shows conservatives have benefited from standing up to EU, despite taking their stance over selfish financial reasons.

The prediction for domestic unpopularity resulting from Cameroon's distancing UK from EU appears to have been wishful thinking on the continent. What about the reality in EU? EU ratified a new union, based on stronger set of rules by 26 nations; everyone besides the UK.

Below: Mercozy (Angela Merkel + Nicolas Sarkozy) were all smiles about their tighter union last week.

'Der Spiegel' hurried to proclaim the formation of a 2-speed Europe, implying no doubt that the new, stronger union would move at a faster speed, and outdistance UK. The rest of the article seems to belie this hope; it admits political costs of the fracture, as well as the fact that additional regulations don't help the immediate problem - dramatic escalation of borrowing costs in the EU. There have already been wealth transfers to Ireland, Portugal and Greece that were never imagined by the Germans and the French when they ratified EU treaties. That's the point - the rules needed to be amended, on the fly. The initial rules, in fact, the union itself, were not very well thought out. Who has the confidence that European leaders came up with a sound resolution under this time pressure, one that will not backfire?

According to the reasoning that I've been laying out on this blog, the European Union is deeply, fundamentally flawed, and should be abandoned. The loss of face for the bureaucrats is one of the reasons preventing that from consideration until all other options are explored, including running the risk of a messy joint bankruptcy.


Leadership of a cult that has lost a member, directs full fury on the traitor, but also tightens the bonds that bind its remaining members. It both ways the response of EU to individualistic, selfish concerns of UK mirrors the attitude found in Jamestown, after several members escaped.

Not only is new regulation not dealing with the immediate underlying financial crisis, it seeks to resolve imbalances in trade between members of EU through the most unlikely method of expecting the Italians and Greeks to produce like the Germans, they present the newly-forged chains that bind the collective more tightly together as evidence of its impending success.

The markets appear to know better, than the delusional EU leaders, and the euro has plunged again today to multi-month lows.

Signs of economic malaise in the EU

One of the points I try to make in this blog is that the Lies that prop up mature Western democracies are coming to roost, first of all economically. I left Russia shortly after USSR fell apart. That collapse did not come about as a result of moral failures - they have been very long and depraved, but primarily for economic reasons. Cheap oil plus expensive competition with US military might under Reagan. The flip side is that countries that in many ways are moral, like US, are still subject to economic failure, as a result of corruption and over-reach.

First China, and recently the developing nations balked at investing in EU. US also is ruling it out (aside from our obligations through IMF work at least $109B).

The latest clue is from the Israeli Foreign minister. There is no reason to doubt we was not posturing, but sincerely speaking about his concerns to a domestic audience:
"One of our main efforts is to push Israeli exports to the rest of the world, because some 70 percent of Israel exports go to the developed world and we are trying to encourage exports to China, India and South America in order not to be dependent only on western nations," Steinitz stated.

Over the last two years Israeli exports to these nations have already risen by a third.

Nobody wants to invest in Europe.
Steinitz predicted that a European crash could cause a 5-10 year recession.

Tightening interdependence of EU-Britain, in absence of political unity, has been any of the causes of economic problems. It seems like reduced EU is doubling down on a proven loser of a strategy.

Do you ever read things, and wonder if the writer ever thought about what he was writing, and drew out the obvious conclusions, instead of leaving them like some over-ripe and spoilt fruit on the view?

Here's a bit from Reuters on today's push for tighter EU without Britain:

"From the German perspective, only by reforming economies, cutting social benefits and working longer would the indebted members of the euro zone and the single currency project itself emerges from the turmoil…"

Reading the following picture: Dieter is journalist working with Reuters in Darmstadt. Re-reading his comments (above), he turns and says with satisfaction: "If everyone could just be like us, ja, and work like us, ja, the world would be a better place, oder?"

It helps to have German relatives of friends to truly appreciate the above joke, but the point can be understood by considering the conceit involved. All that that we need to avoid future problems like this is for Portuguese, Italians, Spanish, and Greeks to be like ... the Germans.

What is easier to homogenize these disparate cultures and work ethics, or to manage individual exchange rates for each currency with the dollar and the yen?

If you think it's the former, Marxism is definitely for you.

Here's the preceding paragraph from the same article:

"Germany - Europe's biggest economy - was intent on changing the European Union's treaty to enshrine stricter budget discipline and penalties for countries that failed to adhere to them, to ensure there could be no repeat of the current crisis."

All these PIGS needed was strict discipline, and they will be in ordnung. Line up, schnell, macht schnell.

Because this is a young bong, I will explain my sarcasm here, this one time. Be careful what you wish for. Even if the Germans could dominate rulemaking in the new EU, do they want to find themselves in the role of enforcers and over-seers? There's already been plenty of serious talk about sending an empowered delegation from Brussels to 'manage' Greece, and possibly oversee other countries, and help them avoid sins of over-spending, or under-spending, or mis-spending. Whatever the collective requires.

Spreading the wealth

Republicans are trying to minimize the impending costs to US of IMF lending to EU, put simply: US dollars bailing out Europeans.

http://www.foxnews.com/politics/2011/12/10/gop-lawmakers-push-to-keep-us-funds-out-euro-bailouts/

US has leverage over IMF, but we're on the hook for at least $109 of credit extended by the Obama administration in 2009. There is little need to get excited.

IMF lending is a stop-gap measure that could sour the relations between EU and US disproportionate to the actual costs. American dollars given bureaucratically through IMF will be received with no gratitude; on the contrary such dependence inevitably breeds antagonism. Natural reticence of many Americans to being fleeced, expressed by conservatives could serve as a convenient lightning rod: "Oh, these greedy Americans." Combine this with socialistic dogma based of zero-sum game that believes that great wealth is always stolen, never earned, and you have a recipe for trans-Atlantic discord.

In addition, over the last few of days the relationship between EU and UK appears to be moving swiftly through pangs of marriage that precede divorce - it's not pretty. Further rancor is inevitable as EU tries to reshuffle itself and work without UK, Czech Republic or Hungary, and possibly others, like Greece that may need to be ditched overboard. The lack of political unity will backfire on the European project, and I see nations on the continent increasingly frustrated with each other as a result, not becoming more harmonious.

EU is fatally flawed, and its (suicide) pact will drag everyone down, as long as wide economic disparities are present between members. A few unions, each moving at different economic speeds could be viable, but this solution lacks the ideological imperative for totality. Furthermore, such a patch-work is clearly not much better than countries working out their finances individually, and it does not need to result in reduction of trade. The truth about EU is that economic benefits of the union were largely realized before the common currency, and non-elected (but rotating - whoopee!) governance from Brussels. The desired benefits were political, but common currency could not overcome national, linguistic and cultural realities, which distinguish European nation, and make it such a colorful region. The pan-European projects endanger these national identities.

Using IMF money to prop up the EU amounts to giving men fish, when they should he taught to fend for themselves. It's an expensive little Band-Aid, not just because of the money, but also because of the national friction involved. Even 'developing' nations are reluctant to lend to EU - the word is out, and confidence is gone. While costs of borrowing are barely survivable in Italy, they are also going up in Germany. All the Band-Aids can do is delay the inevitable, and kick the can down the road a bit.

There is little US can do to safeguard it's money, besides trying to put political pressure on the new IMF chief . It isn't worth the trouble. If the unfolding European fiasco only costs US $109 billion, we should consider ourselves lucky. We have plenty of our own problems to fix, starting with 1.5 trillion dollar annual deficit. Why does our government cost 3.5 trillion per annum? The Pentagon's budget is a little over half a trillion, so where do we spend 3 trillion besides the military every year?

I find myself physically nauseated by the blatant double-speak and lies behind those shilling for more 'revenues'. But, I digress.

US should let EU have its IMF dollars with minimal rancor - even from conservative commentators. They should direct their fire to our own glaring problems. It would be interesting to find out the rate at which Europe bleeds red ink, basically how much it needs to borrow on a monthly basis and figure out how long that $109 billion would last. My guess is it would be a disgustingly short term, around ten weeks.

The scary part is that there is little desire to deal with real problems in the halls of power of either US or EU. Cameroon's selfish moves, are positive in that they increase skepticism in the EU project, which ultimately has to be dismantled.

Shackled to economic corpses

After committing to WWI the Germans lamented that they were 'shacked to a corpse' of Austria-Hungary.

The EU treaty has shackled the economic corpse of Greece to Germany's ankle, as well as a few others. There is another sad connection: Austria-Hungary was a multi-ethnic union, but it was a prison for nations. The internal fractures in Austria-Hungary included resentment in Serbia, which eventually led to assassination of Duke Ferdinand in Sarajevo, which started WWI. This unfortunate analogy may prove very apt if EU introduces rules which are seen as oppressive bonds imposed by non-elected bureaucrats in Brussels.

The shackling of modern Germany that I'm referring to is a fitting analogy, because many other European countries such as Portugal, Ireland, Italy, Spain, and Greece (PIIGS) are all financial corpses.

I see more equality in the foolishness of both parties despite their financial asymmetry, because this shackling reminds me a dark stories from days of German occupation of Russia, when prisoners or hostages were bound together to save bullets by drowning some of the victims bound to corpses. The point is that last one alive still perishes - the shackling is fatal to everyone. Will Germans want to trade the obligation to lend money to Greece for the power to increase their retirement age in to be commensurate with that of Germany? Or to enforce some other measure of austerity? Economic success is doubtful, but political failure is almost guaranteed: people would not part with their sovereignty in either Greece or Germany with the ease elites envision.

Positive thinking on EU

Majority of my commentary about the EU experiment is very negative - reflecting my opinion that the union was a mistake, and even a travesty.

I wanted to write something positive regarding EU, but I can't without descending into deep cynicism.  The best I can do, is to write something positive about Europe. Greece, the cradle of Western civilization, is bankrupt. If that happens to the entire EU, a good bet is that Western civilization will be marginalized, clearing the way for Asian century, when nations prefer to side with and emulate China not US. It hardly requires saying that I would like to see a prosperous Europe that maintain its rich cultural heritage, which is worth preserving and does not belittle it as just another trinket in a bag of multiculturalism.

To summarize: I wish the best to Europe, and I think that requires dismantling the EU.

As a sub-point, I see EU as a result of misguided over-reach, driven by an anachronistic competition with US, which is clearly having similar problems: namely lies that lead to overspending. China, Russia, Iran and India are of greater strategical significance to Europe, than juvenile competition with US. The first three do not play in good faith, and their attitudes present direct challenges Europe, although in very different ways. Economically weak Europe will cow-tow to these bullies, and take down the achievements of Western civilization that are truly worth preserving, such as individual freedom and equality, by a couple of painful notches abroad, initially, then progressively at home. I see these outcomes as near certainty, if European economies fail en masse, as they might when tied together in EU.

First to go, last to know

          Below I'm quoting what I consider to be a very revealing paragraph in an article about IMF that appeared today:
"Emerging markets, which are contemplating lending more money to the IMF -- which couples monetary assistance with tough conditions that seek to ensure a country does not default -- have also raised concerns in the IMF about the risks to the fund's capital, officials from emerging nations told Reuters."

So, even 3rd world, developing nations have wised up to the game. IMF has never lost money yet, but these formerly 'developing' nations now see financing Europe through IMF as too risky for their money!

Such good troopers, these Europeans. It seems they will be the last know they have a serious problem; it was a finance problem when the investors questioned the credibility of European bonds, now these investors are beginning to question the viability of the EU.

Don't hold your breath, waiting for Merkozy to wise up to the increasing gloom. Germany and France are too committed to their ideal of strength through unity to be stymied by mere facts.

Fiscal mess in the EU

I am going to write a few comments about a bit of history of the slow-motion train wreck going on in Europe, going backward.

What are we to make of the latest development - Cameron's veto of new EU rules? You can read about the reaction of the Germans here.

The bottom line is that Mercozy (that's Merkel + Sarkozy, hence, plural) need to maintain the appearance of progress, and the best way to do that is to promise structural changes that would accompany a new set of laws for EU. Cameron tried to obtain guarantees of special privileges for the financial hub of London - over a million well-paying jobs in finance could be at stake.

Understandably, the French and Germans balked at this special treatment. Now, they are threatening to go forward alone.

One Brussels insider warned: "This is going to cost the UK dearly. They have antagonized everyone."

Mrs. Merkel complained: "I really don't believe Mr. Cameron was ever really with us at the table."

Others said, "It was a mistake to admit the British into the European Union."

There were even reports that the fuming Frenchman had to be "restrained" at one point. Mr. Sarkozy likened Mr. Cameron to "a man who wants to go to a wife-swapping party without taking his own wife", a strange analogy that would probably only occur to a Frenchman, perhaps it explains his hot-headedness.

"We are going to be a satellite on the edge of what is going to be an economic superpower. We need a different relationship", fretted the Liberal MPs. Deputy PM, Nick Clegg, warned Britain could end up marginalized in a two-speed Europe, where approximately half of the population is sceptical of the EU:

Foreign minister, William Hague, dismissed concerns about two-speed Europe: "No one should assume the Eurozone moves at a faster speed than the United Kingdom."

David Cameron's veto is completely consistent with the covetous nature of the European Union. It was initially founded on the assumption that unification will automatically bring prosperity. The events of the last couple of years belie this naive hope. The actions of the British reveal their motivation and attitude towards the EU - count us in, if there's a financial incentive, guaranteed by special privileges. This is why a senior Eurosceptic David Davis can describe the demand for special treatment as "utterly reasonable." The goal of making more money through unification has not changed, but the belief the unification per se can bring prosperity is clearly undermined; it seems all EU is capable of doing is averaging growth by massive transfers of wealth.

The patchwork assembly that impedes EU will be fatally exacerbated by introduction of multiple layers of treaties, because it will undermine egalitarianism, which is the sole justification capable of legitimizing any union, to replace it with a covetous oligarchy, where each nation grabs food from the common bowl according to its ability.