I’ve already poked fun at Herman Van Rompuy, the nondescript über-bureaucrat who has risen to the non-elected post of European Council President. I’ve mocked Rompuy’s attempts to compete with other European politicians, and I encourage everyone to have a good laugh at this video of Van Rompuy getting eviscerated by a British MEP.
We now have a new reason to roll our eyes about Van Rompuy. He is whining about those mean, nasty bond traders who have decided that it is a somewhat risky proposition to lend money to Europe’s welfare states. Even though Van Rompuy has no experience with money (other than spending the fruits of other people’s labor), he imperiously thinks it is “absurd” to put Greece and Portugal in the same category as Ukraine and Argentina.
I guess he would prefer if everyone just pretended these countries were in good shape and able to pay their bills, sort of like a fiscal version of “The Emperor’s New Clothes.”
Here’s the relevant passage from an article in the EU Observer.
European Council President Herman Van Rompuy has lashed out at ‘bond vigilantes’ over the treatment of peripheral eurozone economies in recent months. Speaking in London after a meeting with Prime Minister David Cameron on Thursday (13 January), Mr Van Rompuy described recent events as “absurd” and said the likes of Greece and Portugal should not be treated the same as poor countries: “Recent market developments are sometimes rather strange. The spreads now show default risks for some eurozone countries bigger than for emerging countries like Ukraine or Argentina: that is absurd.”
[…] ** Whining about markets downgrading Europe’s welfare states. […]
[…] Whining about markets downgrading Europe’s welfare states. […]
[…] is not the first time this has happened, by the way. Back in January, I mocked the President of the European Council for whining that “bond vigilantes” had the nerve and gall to demand higher interest rates to […]
[…] is not the first time this has happened, by the way. Back in January, I mocked the President of the European Council for whining that “bond vigilantes” had the nerve and gall to demand higher interest […]
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Here are the numbers from the Observer article:
Spain sold €3 billion worth of five-year bonds at a rate of 4.54, up roughly a percentage point on its last such auction in November. Italy was successful in its issuance of €6 billion in five-year debt, which saw rates of 3.67 percent, up from 3.24 percent also in November, and in its auction of €3 billion in 15-year debt, with rates of 5.06 percent, up on 4.81 percent.
First, it’s not clear that the many arguments against the Euro zone don’t mean the Euro zone will break. When the elected German politicians decide they’ve spent enough, too much, the Germans can leave the Euro and return to their increasingly beloved D-Mark. (If current pols don’t decide that soon, the German people might vote for change, hoping other pols will decide it.)
Another alternative is for Euro countries to borrow from their own people, with 0% 1-year Bearer Bonds, which the gov’t promises to redeem at par (100%) for tax payments. Such bonds would not be “legal tender” and thus private businesses aren’t required to accept them, but would be allowed to. Then the gov’t uses these bonds to pay wages and other entitlement benefits, instead of Euros.
Most businesses will accept these bonds at a small discount, maybe 5 or 10%.
The problem is that the gov’t is spending too much, and doesn’t want to cut the spending. Tax, borrow, or print are the usual options, but in the Euro zone, it’s only Tax more or borrow more.
And borrowing is only seen as problem when the rate goes up. With bearer bonds, those getting gov’t benefits become the less than happy lenders. Which seems more fair than higher taxes, even if not as good as spending cuts.
Well he (Mr. Rompuy) may be right because in an increasingly integrated continent that almost universally believes in the Welfare State, it will, sooner or later, become morally indefensible to have the more productive amongst Germans support less productive Germans but not the even less productive Greeks. As the European continent integrates more, such dichotomy will become, sooner or later, morally indefensible within the moral framework of the European Welfare State. “Support poor Germans, not poorer Greeks” is not a stance that is likely to survive within the European moral framework.
So, in the minds of European politicians, productive Germans will slowly but surely, eventually become accustomed to these permanent wealth transfers, just like money flows from productive US states to less productive ones through the IRS and other progressive redistributive policies at the Federal Level (except that for Europeans the Federal EU redistributive system will be added ON TOP of an already existing very strong redistributive national system – incentives to produce will go from low to dismal).
This is the deal Germans and the other still productive nations of Europe essentially signed up to when they created the European Union. They initially interpreted union as a deterrent to endemic tensions and warfare (which was partially true in the beginning) then totally misinterpreted the success and competitive challenge posed by the United States into the asinine collectivist theory that more mandated adherence to harmonizing and homogenizing central plans is the key to high production and thus high prosperity.
So what Mr. Rompuy is really saying is: “Why are bond holders so paranoid? Can’t they just see that sooner or later the more productive people of Europe (well those that remain at least) will be convinced to fully accept yet another layer of permanent re-distribution from the still more productive European core to the periphery?”
There are a few reasons why the European periphery is not productive. But I see no way in which the citizens of the sunny European periphery will ever become productive and worldwide competitive at anything but tourism. In cloudy frozen Sweden you probably continue to produce some, even at very high taxation levels, there is little else to do. But in sunny Greece you go Galt and head for the beach at much lower burdens. So citizens in cloudy dreary Hamburg and Copenhagen will become subject to an ever increasing additional layer of redistribution to help those who have gone Galt in Crete and Sardegna.
The EU is truly at a juncture now between the new forces trying to break it apart and the persistent utopia of success through mandated adherence to harmonizing and homogenizing central plans and re-distribution. Either the EU will start disintegrating, freeing the more productive nations into a chance to survive and compete internationally, or the emerging European Empire will claw them once and for all into the slavery of supporting the less productive and the whole continent will fade away into insignificance in a world that grows at x2-x3 the rate of dis-incentivized European citizens. The US follows on the same tracks, not too far behind. Praise American freedom, but keep your bags packed.
The EU, as a whole, still has resources to support the integration scenario (overall averaged debt amongst European States is still not that high – actually lower than that of the US). So integration into oblivion and worldwide marginalization seems, by far, the most likely scenario for Europe at this point.
[…] This post was mentioned on Twitter by Dan Mitchell. Dan Mitchell said: Emperor Rompuy Complains that “Bond Vigilantes” Don’t Appreciate Euro Clothes http://tinyurl.com/4fg7g42 […]