Allister Heath is one of the best economic columnists in Europe and his analysis of Europe’s fiscal situation is rather grim. But Americans can’t be smug. This is where the Bush-Obama policies, combined with demographics, are leading America.
Here’s Allister’s analysis of where things stand in Europe.
Gold hit £1,000 an ounce today for the first time, as equities fell, Club Med government bond yields jumped, spreads increased and the fear and loathing in the credit markets intensified – and all of that in response to the EU’s banking stress tests on Friday night, which were supposed to reassure investors that all was well. What a farce. The tests’ preposterous lack of credibility – they didn’t even envisage the possibility that a government could go bust – have been greeted with the contempt they deserved.
In other words, feckless behavior and grotesque dishonesty from the political class have made a big mess. So what’s going to happen? Allister clearly is a believer in Mitchell’s Law, so he expects the politicians and bureaucrats to use the crisis they created as an excuse to impose additional bad policies.
…the most likely outcome is that the EU will eventually find a way (by bending or rewriting rules) to federalise the debt of failed, bankrupt states: they will issue vast amounts of EU-backed bonds (say €1 trillion, as an order of magnitude) and tell all financial institutions, including insurers and pension funds, that they wish to buy every single government bond from bankrupt countries that they are willing to sell, probably at the discount to face value being priced in at that particular time by the markets. The authorities would give holders an ultimatum: sell now, or bear all future losses. It may be that such an arrangement will not be ready on time for Greece, which could yet be left to go bust and be thrown out of the euro. But regardless of the details, a giant euro-bond would transfer the default risk from private institutions stupid enough to trust Club Med governments (or who were forced, for regulatory reasons, to hold their bonds) to all European taxpayers. This could damage the credit rating of more solvent countries – but even if it doesn’t, it would be tantamount to a massive bailout. In return, the EU would want its pound of flesh: the weaker Eurozone countries would be turned into quasi-protectorates. Such a plan would further discredit capitalism (even though the people who caused the crisis were over-spending politicians) and it would rob the EU of its legitimacy in the eyes of both Southern Europeans (who would lose their independence) and Northern Europeans (who would pay for the south’s greed, stupidity, mismanagement and economic illiteracy).
Allister closes with a very accurate observation about why bureaucrats and politicians enjoy a good crisis.
The EU has always worked on the basis that every crisis is good because it invariably provides an excuse to centralise powers. But the present nightmare could prove to be a bridge too far and herald the beginning of the end for the entire project. Fun and games are about to start.
Yes, they are. And American politicians are playing the same game – more government, less freedom, more government. Lather, rinse, repeat.
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I have noticed that people tend to draw the conclusion that the USA and Greece are on the same path; too much debt, aging population, spending out of control, etc.
Given that the key difference between Greece and the USA is that the Federal Government can produce dollars on command, via the Treasury and the Federal Reserve, and Greece CANNOT create Euros, America does NOT face the same fate as Greece. We as a nation might see some above-trend inflation (in light of all of the Dollar Creation, such as QE2 and the like) but not bankruptcy.
Any comments?
In the distractions of weekly politico-economic events, the general and overriding theme for Europe, and increasingly so for America, remains the same:
Already on a pathetic aggregate 1-2% growth trendline (a 2% growth trendline earns you “Tiger Economy” status in Europe), and thus falling behind in prosperity by 3% per year, in a world that grows by 4-5% annually, Europe will now seal its fate of decline by further reducing the incentives to produce, innovate, excel. America will do the same by trying to force its population into a few Paul Krugman style themes of coercive, top down, centrally directed paths to prosperity.
The next phase of European decline will come when Germans and other northern Europeans, many already at the margin, operating on the flat part of the Laffer curve, thinking whether it is all really worth it, finally say “enough is enough, I’m going to start taking easier too, its not worth it” and start pulling back from working.
People will work to the maximum of their abilities to benefit or help themselves, their families, their friends and the limited number of others they choose to. They will not work nearly as productively if they have to work three or four hours a day to benefit some distant presumably needy unknowns, neither can they be forced to do so, no matter how much useful idiots hope to alter fundamental human nature. But hope springs eternal, so the engine of motivation and growth stalls and the ship goes down.
Three billion people in this world have finally, at least partially, dumped their shackles and making use of their new, even partial, economic freedom mare growing gangbusters. They have no time to wait for the developed world to complete its experiment with “useful idiocy”. They will take no prisoners.
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Mitchell’s Law? Well, electing Obama to fix Bush’s mistakes. That’s Mitchell’s Law.