Economic Denial

100,000 peaceful anti-austerity protesters in front of the parliament of Greece on 29 June 2011. (Photo credit: Wikipedia)

Without question, things are getting a whole lot worse in the Eurozone and in Greece and Spain in particular. 

I’ve done a good deal of Germany and ECB bashing, all of it I believe well deserved.  The German solution to everything has been crushing austerity for everyone except the banks while forgetting that their own prosperity is derived from a fixed game where everyone else has to buy their stuff while simultaneously being unable to devalue because it’s impossible to devalue a foreign currency.  I think it is now pretty much settled that the ECB, by concentrating almost exclusively on inflation, has ignored fundamental economic equality and growth factors needed in Europe.  It is also pretty much settled everywhere outside of Berlin that austerity does not produce growth and without growth you get massive unemployment, poverty and social upheaval all of which might lead to the end of the European Experiment.

Angela Merkel is on the way down unless her party changes course. There are hints of that after the recent drubbing of her party in regional elections.  Even Germans are unhappy.  I would assume that someone has a contingency plan for Greek default, unwinding of the Euro in Greece (and perhaps elsewhere) and the cracking of the current economic structure. After all, even the US has a contingency plan for war with the UK.  But don’t count on it because it is very difficult to convince a buyer that he has bought a fake painting despite evidence to the contrary.

The meetings in Greece over the weekend in the desperate attempt to form a government and avoid another round of expensive elections have not gone as planned.  Curiously, what may result in a new election is the support for the moderates, as opposed to the radical left party, because Greeks actually seem to want to stay in the Eurozone.  This is strikingly similar to the former Greek government announcing that a referendum on the agreed upon austerity program would be held to approve or reject it which, at the time, came as a shock to both Sarkozy and Merkel.  That idea was shot down very quickly and publicly leading to the instant collapse of the Greek government.  Now, we are back to the same position, except Germany can hardly object to elections as opposed to an unscheduled referendum.

The austerity plans so far have resulted in extraordinary economic suffering for people who had little to do with the banking crises but who now are expected to pay for it.  The no-growth austerity policy is virtually impossible to implement and if a policy remains that unachievable (and it was from day one) then it is just a Panglossian academic exercise that is better suited for someone’s doctorate thesis rather than the real world.  So, as in war and sports – everyone has a plan until they’ve been hit. The Eurozone has been hit. The getting-up is up to them. 

EU - The Great Unravelling

Not that it has escaped notice, but the EU and the Eurozone are unraveling at an alarming pace.  With the multiple “last opportunity” summits, electoral pronouncements by soon-to-be-unemployed Nicholas Sarkozy, and utter intransigence in Berlin, the EU is headed into another recession while simultaneously showing effectively to the world how incapable it is of taking any new direction in economic policy.  Most of the frozen dialogue is designed to save Germany – which would crash and burn should it adopt any sort of fiscal austerity it so easily demands of others in order to maintain its export driven economy which accounts for about 40% of its GDP.

Adding to the economic insanity promoted by Berlin, is an ECB which is focused like a laser on inflation.  News flash to Frankfurt – inflation is not even a looming threat on the horizon.  Unemployment (now having risen to 10.3% - 20% among youth) is and represents the TGV (in the US otherwise known as the 5 o’clock express) heading straight at everyone. Frankfurt, under the ever watchful eye of Berlin, is following policies established by Herbert Hoover and is the opposite of the actions taken by every other central bank in the world.  It’s not too fine a point, I guess, to note that France, tied as it is to whatever the current economic policy whim is at the ECB and the Euro, lost its credit rating of AAA while the UK – not in the best economic condition and not in the Eurozone – did not.  And no, S&P is not part of some Anglo-American conspiracy to attack the Euro as some German and EC representatives have claimed.

And just in case the technocrats in Brussels or the great deciders in Berlin and Paris think the EU or the Eurozone is a popular place to be these days, 70% of Czechs oppose joining the Euro; 49% in Lithuania (43% are pro-euro); and in Poland only 16%  support joining the Euro. Oh, and to cap the pyramid of euro-skeptics, almost 80% of Norwegians don’t want to join the EU.  Paris can stop worrying about 8% annual growth rate Turkey.

Now last week, with the unfortunate idea to abolish nations who don’t comply with their austerity requirements, Germany and the ECB may have alarmed Greece, Ireland, Portugal and Spain to the point of permanent alienation.  The fact that this idea arose in Germany was not ideal PR for some rather obvious 20^th century reasons.

Germany is not going to let the ECB do what it must and abandon its expansionary-austerity program – one of the more stupid ideas of the hard line technocrats in Brussels. But it has now been hoisted on its own petard.  Historically, Berlin actually did not want other nations to indulge in fiscal prudence because they have an interest in promoting consumption and demand for their exports. The currency union allowed other countries to get credit at much lower rates so they would have more to spend. Germany encouraged this spending to absorb exports and cannot now have it both ways. 

The fanciful idea that somehow Greece deceived everyone is absurd.  If any deception existed, Germany deliberately ignored reality for its own benefit.  Whether the Eurozone begins to break up is an open question.  Certainly, Greece would be better off outside the Eurozone.  Germany cannot overplay its hand and the pre-Cambrian thinking of the Brussels-Frankfurt-Berlin axis needs to be radically changed or it will be changed for them.

Leadership Vacuum

The piecemeal approach to address the continuing and worsening financial and growth crises has exposed the biggest missing element – leadership.  There is none and it is an international problem.  The Swiss are in panic mode and need to prevent any further strengthening of their currency;  the ECB is floundering  trying one solution after another – the most recent is the purchase of Italian and Spanish bonds; the US is doing little to nothing when it needs revenues and its tax rates are the lowest in history because its political structure is in a state of collapse – and S&P placed the blame at the feet of the Republicans and their moronic  tea party core; European tax payers – and more to the point German taxpayers – are being asked to absorb Euro debt of the peripheral Eurozone members when the problem is structural economic imbalance.  The political will to do anything, apparently anywhere, is zero.  As I write this, the Dow dropped 200 points in 2 minutes.

If Europe keeps using band aids rather than addressing its structural problems, then the Euro is in deep trouble and, with nationalism on the rise, so is the EU.  If the tea party and Republicans are not removed from the table, then the US moves closer still to banana republic status.

Trouble is no longer on the horizon – it’s in full view.

Economic problems are structural and long-term coordinated plans are required.  There is no magic bullet and everything short-term has been tried. In the US, raising taxes and spending on infrastructure and science are required – in other words, spending.  In Europe, a little introspection and planning regarding the economic imbalances between the core and the rest must be undertaken. What is missing is leadership. Leadership would inspire confidence, also in short supply. But, in Europe and particularly in the US, waiting for leadership is like waiting for Godot.

By the way, for those involved in donor oriented development programs, watch the money dry up.

Estonia, the Euro, Russia

At midnight on December 31, Estonia entered the Eurozone. From an economic standpoint, this was probably a good idea. To get there, Estonia has suffered a depression (not as bad as Latvia but worse, if you can believe it, than Iceland), with unemployment hitting 18% and a weak currency. As usual, shopkeepers promised on their cash registers not to raise prices after the Euro becomes the currency – and they won’t. This is largely because they have already raised prices. The same thing happened when the Euro was originally introduced in Germany, France and Italy so it is nothing new. Failure to adopt the Euro would have further threatened the Kroon.

Perhaps, more important than the economics of the move, is the political statement that has been made. The Russian Federation has put pressure on the Baltics more or less relentlessly since the collapse of the Soviet Union. Moscow was not happy with NATO membership status of the three states, and only slightly less so when they joined the EU. The threat to Baltic autonomy increased as Russia became a democracy In name only and rumblings began of the ill treatment of former Russian/Soviet citizens living in the Baltics, including requirements to learn local languages, the removal of memorials celebrating the “liberation” of the Baltics from Nazi rule by the Soviet army (which then stayed as part of the ultimate allied deals) and bellicosity toward Russia, especially in Estonia.

Then, of course, Georgia’s invasion by Russia, looming on the horizon for months, took place. Despite Moscow’s propaganda and the stupidity of the Georgian government, tanks rolling across a foreign border alarmed everyone from Tallinn to Astana. But now, the political message has been sent to Moscow that the Baltics, at least Estonia, is an integral part of the EU, NATO and the West. Despite the problems with the Euro, the political statement is more important and will, hopefully, begin to affect the mentality of the Russian Federation for the better - much as the overthrow of the Soviet bloc regimes in Poland, Romania and East Germany did.

Bulgaria Chooses the Ruble

Image by St Stev via Flickr

The future of the euro in Bulgaria is vaporized.  The story here!