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Europe on the brink

I’m just going to highlight a few extraordinary passages in this Der Spiegel report on the machinations in European political economy as usury, dependency and imposition threaten to combine and apply the ruin of the Continent.

One of the items on the agenda was the possibility of Greece withdrawing from the monetary union.
Banks in many euro-zone countries could eventually find themselves dependent on the billions from Luxembourg, because they would have to write down their holdings of Greek government bonds. Greek banks would suffer the most from the consequences of a national bankruptcy. For this reason, German officials argue, it is quite conceivable that Greek banks could still receive aid even after the Greek government itself had been cut off from EFSF assistance.
Contrary to earlier assumptions, restrictions on the movement of capital, which could be used to prevent Greek citizens from moving their money abroad (something that would endanger the country’s banks), are now seen as being compatible with EU law. Article 143 of the Treaty on the Functioning of the European Union offers a loophole, in that it permits certain countries to “take protective measures.”
But there are also companies on the list that will struggle to attract buyers at the moment, like the Greek national railroad, which has been losing billions for years, and the Hellenic Postbank. In addition, the powerful labor representatives in many state-owned businesses will deter potential investors. Union organizers at the electricity monopolist DEI are seen as especially radical. They have already threatened to cut off electricity if the company is privatized. The unions are fighting for their perks. Greece's state-owned companies are a benefits paradise. In some cases, bonuses are even paid to employees for washing their hands. The roughly 20,000 employees of DEI earn twice as much as a high-school teacher on average.
Greek citizens and companies owe the state a total of almost €40 billion in taxes. The sum would more than cover the government's budget deficit for 2011. But many government agencies are seen as inefficient and corrupt. Now that their salaries have been cut by 20 percent or more in the course of several rounds of austerity measures, the Greek tax authorities often perform the bare minimum of their duties, and sometimes even less. Some 17 tax offices did not perform a single audit in the first seven months of the year. In Corinth, a city near Athens, the local tax authority collected only €18,000 in value-added tax within six months, even though the region is home to one of Europe's largest casinos and a number of companies are headquartered there.
The Spaniards have already put up two of their airports for sale and enshrined a balanced-budget provision, also known as a “debt brake,” in their constitution. The new law limits new government borrowing to 0.4 percent of GDP, but not until 2020.

Really, that is one stiff drink indeed. Straight Makers or something. In assaying its more general meaning, I am again struck by the instinct to mistrust those would, as Burke put it, consult their invention and reject their experience.

Find me the man who, three or four years ago, predicted that normal European papers would be complacently reporting on the break-up of the Eurozone, conceding that banks matter more than countries, that public sector unions tend to be pernicious to the public prosperity, that Spain is so stricken as to be open to austerity programs of startling directness, etc.

You will not find such a man, I submit. He cannot exist. Events are in the saddle and ride even the wisest of prognosticators. (Keep in mind that being wrong is the very farthest thing from a detriment to a career in prognostication.) We’re still in uncharted waters and the old certainties are crumbling in the teeth of brute reality.

Comments (8)

They have already threatened to cut off electricity if the company is privatized.

Considering how much money the Germans have put into Greece, it would be fitting to have the German Army march into Greece, dismantle most of its electrical infrastructure and sell it at a firesale auction to more responsible third world countries looking to upgrade their infrastructure on the cheap.

Once they got their feet under the Eurozone table, the Greeks borrowed with unbridled enthusiasm. They figured Germany and France (maybe) were rich enough to bail them out when their debts became a menace to the solvency of the entire economic system.

The endemic corruption of Mediterranean societies was winked at; nobody can seriously maintain that Greece and Italy (not to mention Spain and Portugal) were likely to kick the pecuniary habits acquired and refined through centuries of graft for the whims of a few killjoy bankers.

'Twas all a tempest long foretold.

At the following link is an excellent introductory discussion from 2009 of the Who, What, How and Why of central bank currency swaps. The kinds of swaps currently in the news. Also discussed is what these currency swaps mean for the future of the world financial system and the dollar standard.

http://fofoa.blogspot.com/2009/11/money-talk-continued.html

"Find me the man who, three or four years ago, predicted that normal European papers would be complacently reporting on the break-up of the Eurozone..."

The precise question is impossible but a quick review of the relevant literature reveals that folks have have qualms about monetary integration without fiscal integration for a while - Barry Eichengreen (Berkley) comes to mind. This also might be of interest:

"TAGGESSPIEGEL- INTERVIEW WITH KRUGMAN

Published on December 7, 1998

Taggespiegel: In three years the euro will be launched. Will the new currency lead to booming prosperity or straight into catastrophe?

Krugman: The euro is simply a bad idea economically, even if neither of those scenarios comes true. If I compare the pros and cons, the cons have more weight. But nobody has recognized them in time. Now it's too late. Nobody wants to say that the decadence of Europe will come with the euro. But the really important question is: how will Euroland be governed?

How, then?

I worry about that. So much has changed since the European states decided for the euro in Maastricht in 1991.

What has changed?

Deflation is suddenly a problem again. By contrast, inflation is hardly one anymore. We had financial crises that nobody expected. In that situation, what is needed is a central bank that can evaluate the risks, both of inflation and of deflation. The bank may be neither too strict nor too lenient..."

The endemic corruption of Mediterranean societies was winked at; nobody can seriously maintain that Greece and Italy (not to mention Spain and Portugal) were likely to kick the pecuniary habits acquired and refined through centuries of graft for the whims of a few killjoy bankers.

'Twas all a tempest long foretold.

I think the architects of the euro currency had good and rational reasons for bringing the Mediterranean states into the Eurozone. Look at the big picture. By the end of the 1970's, the US dollar was a failed international currency. Redeeming dollars for gold at the official price was no longer possible, we had printed too many to fund big government and Vietnam. But oil was still priced in dollars on international markets so the oil states began acquiring gold in the open market driving the price to $850/oz. They would have broken the international monetary system making gold the world oil currency. But the massive deflation this required was politically unacceptable to everyone and there was, as yet, no alternative to the dollar for the role of international medium of exchange. So the dollar was patched up.

Oil states were thus given dollars for their oil above table in addition to gold for their oil below table (future mine output via forward contracts). This maintained the participation of the oil states in the system while keeping oil cheap in dollars. And the paper gold markets formed in the 1970's were successful in funneling most world demand for gold into paper promises (which could be fractionalized) rather than the real thing, keeping down the price of gold. Meanwhile, the euro architects worked to get a dollar-alternative up and running. But for a currency to be a viable and major international medium of exchange it needs a large trading zone to establish itself. Hence the inclusion of even the poor credit nations of the Mediterranean. And despite all the debt troubles in Europe, the euro has in fact established itself as a major world currency.

From this perspective the euro is a good thing. The era of dollar as world currency is ending. And unless we have something lined up to take its place, that transition could be awful.

As to recent events, I don't think the ECB worries about having to print too many euros. The ECB is only interested in keeping the system operating nominally. The real (as opposed to nominal) effects of their actions will be absorbed by their gold reserves which are open and transparent and marked to market every quarter, and in each of these respects are different from the US gold reserves which are locked up, hidden away, somewhat mysterious and still kept on the books at $42.22/oz. Further, it is much easier for the people of the Eurozone to buy physical gold as it's available at bank branch locations throughout Europe at the clearly identified market price. Whereas Americans still have to seek out reputable coin dealers to get the real stuff, something maybe 1 in 100 at most know how to go about doing. If the euro does hyperinflate, the ECB will look to direct that hyperinflation into one asset only, physical gold, preventing the euro from collapsing against all economic goods a la Weimar Germany. If the US dollar hyperinflates, which is more and more likely every day, the Fed does not have the infrastructure in place to channel the demand into physical gold. It will not be pretty.

Whereas Americans still have to seek out reputable coin dealers to get the real stuff, something maybe 1 in 100 at most know how to go about doing.

Plus paying state sales tax on the purchase, plus having (if following the law) to keep records of the amount paid at purchase in order to pay a whopping "collectibles" federal income tax on any profit made above that basis on later resale of the coins. In other words, a pain in the posterior and a disadvantageous tax situation vis a vis other investments (such as mutual fund shares).

@ Andrew E.

There are good reasons for believing that the Mediterranean states were invited into the Eurozone to satisfy an ideological aspiration rather than being a rational move based on sound economic considerations.

Whether the euro will take the place of the US dollar as an international currency seems at least doubtful. As things are, what's the point of jumping out of a frying pan into a fire?

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