"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Thursday, March 24, 2011

The Rise of the Fourth Reich

Let's not kid ourselves.  Most of EU policy, especially EU monetary policy, is heavily influenced by Germany.  There's a reason the ECB is located in Germany;  from the get-go Germany had the greatest influence in Europe.

So where does that leave us today?  The Portugal crisis is flaring up again with the recent dissolution of its government.  It is only a matter of time when Portugal goes to the ECB and IMF.

So the next question is - will Europe converge or diverge?  Will the EU evolve into a United States of Europe - closer to the system the US has?  Or will it slowly break apart with members leaving the EU as they see debt deflation/depression slowly rip apart their economies?  Who wants to sign up for that scenario?  I just don't see peripheral countries staying in the EU if the transition to fiscal and political union is that destructive to their economies.  Unlike Americans, Europeans have a habit of taking to the streets en masse and reminding their governments of who they serve.

And so, political and fiscal union all depends on the rest of the countries' willingness to belong to the Fourth Reich.  Let's not kid ourselves, the EU is a German-run shop.

The so called sovereign "bailouts" are really banking bailouts, and disproportionately, German ones at that.  The banks get fed, while the southern sovereigns plus Ireland and their subjects get "disciplined."  When the German banks, the highest leveraged in the EU banking system get disciplined, then I'll change my mind. But so far - they are the only ones that are being maintained "as-is" without experiencing any discipline or failure on the horizon.

This is how I see things playing out in Europe.  There will be debt deflation/depression in the periphery, followed by fire market sales to the benefit of German companies financed by German banks that enjoy re-capitalization via sovereign "bailouts."  France too, will be jumping in on the game.

It is unavoidable.  The periphery countries can not cut government spending, belong to an expensive Euro, and expect to somehow manage their ballooning existing debts as their GDP plummets.  With a strong Euro, they can not export their way out of debt, and they can not devalue either.  The US is playing this game, the smaller EU countries - which soon, by the way, will include Belgium, can not play this game.  They gave up their sovereign rights to control their currency.

I fear that Germany has not changed.  Dreams of a German Europe only faded away temporarily after WWII.  History repeats.  Yet if history is any guide, the Germans will once again fail spectacularly in their endeavor to conquer Europe by economic means.

But there is one more recent development that sheds light on a future political union in Europe - it's the Libyan Conflict.  What a disaster.  France and Germany are at odds with each other on how to handle this crisis.  It is a political crisis for the Libyans, and an energy crisis for the Europeans.  If Europe can't agree on how to handle the Libyan turmoil, how can it transition to a United States of Europe?

There's no leadership structure.  And when there is no leadership structure that looks after Europe as a whole, there is only conflict.  What leadership exists is narrow in scope, and one nation needs to have an advantage to use that leadership.  Right now, the only leadership in Europe is in the economic/monetary sphere.  And that would be Germany.

But is Germany formulating an economic and monetary policy that will benefit all of Europe, or is Germany formulating a policy of Deutschland ├╝ber alles?  The imbalances in Europe need to be addressed, not re-enforced.

Otherwise, the grand EU experiment will end in failure, along with the Euro.

11 comments:

boatman said...

how can you have a currency union without a political union?....and ultimately a cultural union.

EU goes in the dumpster....at best survives(?) without PIIGS n belgium.

now they are kicking the can UP a hill.....have run out of downhill to kick it on.

*******************************

in US, wall street n washington think its 2004 all over again(real estate doing well in both places). main street knows its morelike 2009.

Misthos said...

Hey Boatman,

Gold silver are acting up again - kinda crazy days. Tells me that precious metals are really rising more due to instability in geopolitics and the current monetary system than inflation concerns.

And yes, the EU is doing nothing to address the issues, they are merely delaying the inevitable, unless they have something up their sleeve that they can't disclose for fear of the market getting ahead of them.

But I doubt that scenario because I have yet to see the EU act as one in dealing with other issues - particularly their lame Libya response. Either you go in 100%, or you stay home. That's my opinion. None of this half-assed shit that accomplishes nothing at best, or worst case scenario - they make the situation more unstable.

If Gadaffi toughs it out and survives this, he's not going to forget this incident.

Kind of reminds me the last time I went spearfishing. There was this huge moray eel in one of the rocks, and I poked at it at first because I only saw its tail and wasn't sure what the rest of it looked like. That was a mistake. He came right after me, head the size of a softball. I had to make a decision real quick - either shoot it (and you only get one shot with a speargun) or swim away.

Though I know people that eat moral eel - I don't, so I swam away as fast as I could.

boatman said...

i do know what u mean...i pointed my powerhead at a jewfish that looked like a volkswagon once n then thought better of it.

tho moumar did sober up after reagan almost got him....but its the usual mess this intervention....n obozo doesn't want to even talk about it....him on the tightwire act w/his lefties.

strange metal actings for sure.

boatman said...

ooohh....and turkey holding up everything (gaddafi gave them a 'human rights award' when he was on the UN human rights council).....more proof the UN is past delusional.

from champion of human rights to public sociopath in weeks...yeah they know whats going on alright.

Misthos said...

I agree, the UN is a joke.

Turkey may have some major problems soon. If Syria's troubles intensify, the Kurdish population in Syria will could get more active and vocal. Turkey and Iraq also have large Kurdish populations - I think they ultimately want a chunk of each country for themselves.

Jim Slip said...

I was checking the list of countries by external debt in Wikipedia:

http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

Germany - 143%
Netherlands - 344%
Austria - 226%
Japan - 51%
Greece - 165%

Now the way I interpret this (and please correct me if I'm wrong) is that the trade-surplus nations in the Eurozone have been taxing their private-sector too much in order to avoid inflation, and thus forcing it to borrow a lot of money.

By fighting inflation, they also avoided having a correction in trade within the Eurozone (the only meaninful correction that can happen within a monetary union), leading to the current near-collapse.

Japan, on the other hand, who has been pursuing perma-deficits, has massive private savings.

Misthos said...

I'm surprised by the German number. You might be onto something.

At the beginning of the Euro, Germany went thru a sort of austerity program so it would be more competitive with the lower wage economies of Spain and Italy. Germany basically decreased aggregate demand by lowering wages. This too contributed to imablances; Germany's policy was to export, and not import so much.

boatman said...

how much trouble is merkel in and what would replace her?

Misthos said...

Merkel is definitely having a tough time. But from what I hear and have read in Europe is that the nuclear issue is really big in Germany.

The opposition is more likely to approve bailouts for the periphery, but that too, in my opinion is a short term solution to the Euro problem.

Either way, I see gridlock in Germany. Which means no clear course for Europe.

Jim Slip said...

Misthos, is there really hope for countries like Greece? Greece would only get it's account in surplus if it exports. So companies must brings their factories to Greece, which is obviously not going to happen. The other obvious solution, tourism, is going to continue being negatively affected by the expensive Euro.

Now, Greece can also get it's account in surplus if it just gets poorer, so that it won't be able to consume imports. But that is going to set off a wave of bankruptcies in the private sector, which will eventually go back to German banks who lent money to Greece either directly (by buying bonds) or indirectly (by lending money to Greek banks).

Really, c'mon, there's no solution.

I also want to add, are people missing the point with globalization? If this is really a global economy, then people must treat it as a global economy. This means that just like the people of a country don't complain when the state spends money on the economy (which as we know increases aggregate demand and so expands the economy), then similarly people must not complain if the Eurozone would spend money on Greece, or if the US pursues big deficits, because it adds to aggregate demand in the global economy, and this means that China and Germany can have their economies functioning at near full capacity.

But no, people don't want a "transfer union" in the Eurozone.

Short-sighted or what? I think they just don't understand sectoral balances.

Misthos said...

Jim,

Germany is in the driver'seat right now. They have been calling the shots from the beginning. Regarding sectoral balances and how the system works, I think:

Either Germany "gets it" and is purposefully pushing the periphery into a debt default depression while using the "bailouts" as backdoor bailouts for their own banks. And the, they will swoop in and buy periphery nations' assets on the cheap. The fourth reich. (This is my conspiratorial, sinister view)

Or

Germany doesn't "get it" and they will plunge all of Europe into political, economic, and societal turmoil and the Euro dies. (This is my view that policymakers are truly inept)

We'll find out in a few years.