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Eurozone Update – Greece ? Italy ? Spain ? Portugal ? … Maybe – or ?

Euro - flickr creative commons

The on going and deepening economic crisis in Europe once again has come to the for front in at least a few media outlets.  Now before I go any further let me point out what has been going on in reality – at least according to Richard Wolff.  He has given a good synopsis of the situation in a number of his presentations on the economy.

The European Central bank – funded primarily by Germany, France and Belgium – has been “bailing out” various peripheral countries.  Mainly Greece, Spain, Portugal and Italy. But where is the money going ? Well back to the big banks in Germany, France, Belgium and Switzerland.   That’s where. In other words it has been and continues to be a stealth bailout of these big banks, mostly by Germany.

And Germany is keeping this part quiet since Merkel and all know damn well that the German people would not put up with this if they knew this was what was really going on.  I suspect they do however and this is why this item from Ives Smith over at Nakedcapitalism is not and should not come as a big surprise.  She gives a good rundown on the situation – as linked to by Faster – and what it may mean.  Beginning with this revelation.

Data point one. One of my colleagues studied in Germany, has extensive, high level political and economic contacts there, and reads the press daily. He also describes his sang froid as “somewhere between that of a Chinese sage and a dead animal.”

Needless to say, he not prone to overstatement or overreaction and also has a propensity to makes Delphic remarks.

He said the Eurozone is over. In pretty much those words, a simple sentence, no caveats or conditionals. I nearly fell out of my chair. This apparently reflects the German recognition as a result of the Italian elections that they will not be able to surmount domestic opposition in Italy and potentially other periphery countries and would rather pull the plug than continue funding their trade partners. He said there was a fair bit of discussion of Germany leaving the Eurozone after the election. I quizzed him on how they thought they could do that, since the new DM would presumably trade at a big premium to the Euro. We discussed that the likely outcome would be further labor “reforms”. Maybe I am naive, but I don’t see how this would not undercut an critical German strength, that of the good, if also sometimes combative, relationship between German workers and management. My source finally said widespread recognition of the existential impasse at most a couple of months away. He’s never this definitive.

Germany throwing in the towel ? If Merkel’s Christian Democrats do as badly in the upcoming elections as it has been doing in the local elections recently, this is a good bet.  Since they have been footing the bill for most of this themselves. Not something that has proven popular with the German people one bit.

And with Italy in a dead lock politically,  the ministers of Portugal fearing for their safety and the police and firefighters refusing to enforce evictions in Spain – the likelihood of the enforced austerity programs IE bank bailouts  continuing apace grows dimmer and dimmer.

Greece is on the verge of exploding and imploding all at once. And other countries are taking notice. As Ives says.

Thus Greece for the Germans served pour decourager les autres, to show what would happen if you let your debt levels and finances get as badly out of whack as Greece has. But that might have backfired. Citizens in periphery countries now suffering high unemployment might decide they’d rather take more pain now and gain control over their destiny rather than face being broken later on the Trokia’s rack.

As I said, I don’t have an answer here. I’ve long thought the technocrats underestimated the risk of democratic revolt. Those tail risks are bigger than you think! The European elites beat back that threat in Greece, but Italy may (stress may) prove to be different.

Not to mention Spain and Portugal…among others.  It has been said in the past by other economists that the Euro was a bad idea poorly implemented and not really thought through . I tend to agree. I also think that Merkel’s loyally to the banks and her conservative ideology has been laid bare to the German people through all of this. Not good for her or her party and I see no way she can come out looking good.

So what does this mean for us ? Well according Ives sources in hedge funds circles, happy days are here again. But we have seen this kind of denial and naive exuberance before from Wall Street and even the FED and Treasury under Bush.  Even in the late 1920s just before the market crashed. And we actually had a manufacturing base back then.

I could be wrong but I suspect an unraveling of the Eurozone would lay bare a lot of uncomfortable realities concerning these masters of finance both in Europe and here.


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