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Is the ECB Ready and Able to Cross the Rubicon?

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The big news of the day on Thursday was Mario Draghi’s pronouncement that the ECB would do “whatever it takes” to shore up the Euro. He also used the same phrases about the need to keep the monetary channel open prior to preceded previous interventions. Two-year Spanish bond yields, which had risen to unprecedented levels, came in by over 150 basis points and global stock markets rallied.

But how seriously should we take this talk? While the ECB is the only actor that can buy the Eurozone enough time for the member states to put in place the needed fixes (and bear in mind there is no guarantee that process will be a success), even measures the Eurocrats appeared to think were on the “shock and awe” scale fizzled. For instance, the ECB’s last big intervention, the LTRO, was a back-door bailout to sovereigns (banks could borrow at 1% from the LTRO and buy sovereign paper at much higher yields). Even Euroskeptics thought the LTRO would buy the Eurozone 12 to 18 months of breathing room. Instead, its impact had worn off within three months.

However, the specter of Spain in such a dire situation and Italy going seriously wobbly has focused the minds of the authorities. Key politicians may appear to be coming around to dropping some of the idees fixes that have stood in the way of giving the ECB rein to hold the crisis at bay.

Helpful NC readers of the European press focused on news of a big shift that appeared to be underway in Germany. Ambrose Evans Pritchard explained why the Germans were critical:

Mr Draghi’s comments came as Spain claimed backing from France and Germany for activation of the eurozone’s rescue fund (EFSF) to buy Spanish bonds, though this would require calling the Bundestag’s finance committee back from holiday for a vote. Action by the EFSF would provide “political cover” for the ECB to join the fray in a two-pronged attack.

There were press reports that finance minister Wolfgang Schaeuble, who mere days ago said he was indifferent to the prospect of Greece leaving the Euro, had relented and said he believed some form of intervention is necessary. Note that Merkel is artfully (at least publicly) having it both ways by making oracular statements along the lines of “every institution should live up to its responsibilities.”

But now it seems the tectonic plates might not be moving. Schaeuble has denied that he is in favor of bond buying and insisted that the rescue facilities in place were sufficient to do the job. This is consistent with a Reuters report on Friday that Schaeuble nixed a request by Spain for as €300 billion lifeline (this in addition to the just-approved €100 billion rescue) if it continued to face high borrowing costs (and that looks pretty likely). Schaeuble said no additional fund before the ESM is operational (expected to occur in the fall).
But numerous analysts and commentators (including this blog) have deemed the current programs to be too small to handle the Eurozone’s burgeoning needs. Think tank Open Europe issued a new report detailing how having Spain locked out of financial markets (which is where things are headed ex a change of course) would exceed the capacity of current programs. Per the Telegraph:

Leading think-tank Open Europe made the estimate based on the assumption the Spanish government would be forced out of the markets for three years because of its unsustainable borrowing costs, as happened in Greece, Ireland and Portugal.

Between now and mid-2015, Spain has funding needs of €542bn, with its banks requiring up to €100bn on top of this. The Spanish regions possibly require another €20bn, according to the study.

A Greek-style bail-out for Spain would bleed dry the eurozone’s €500bn rescue fund, making an alternative solution essential….

“The current bank rescue plan is clearly insufficient, while a full bail-out – which could be in the region of €650bn – is impossible [said Raoul Ruparel, head of economic research at Open Europe].”

Moreover, even if German political leadership were to change its stance, that would not be sufficient for the ECB to move into high gear. The Bundesbank, as well as German members of the ECB, appear to remain firmly against dramatic new measures. Bloomberg tells us that the Bundesbank said in the wake of the ECB statement that it is opposed to more bond purchases. On Friday, the Bundesbank reiterated its objection to reviving the securities markets program which allowed for direct bond buying (and truth be told, when it was implemented last year, it made matters worse). The German central bank no doubt continues to disapprove of giving the soon-to-be-live European Stability Mechanism a banking license, which would allow the ECB to monetize sovereign debt (note that Draghi has not officially changed his stance of being against that option).

While it is hard to be certain from this remove, it looks as if the EBC’s efforts to mount a full court press on the German political leadership and Bundesbank, both via the media talking up Armageddon (a replay of the scare tactics used to get the TARP passed) and private arm-twisting, are not getting the needed traction.

The big date is next Thursday, when the ECB’s governing council meets. Draghi has raised expectations, and the lack of meaningful follow-through on Thursday would be proof that he was unable to overcome opposition. Note that even if the pro-bailout forces are gaining ground on the holdouts, the longer the to-and-fro goes on, the less leverage the proponents have. If Spain about to go into financial asphyxiation and Italy starting to go critical won’t produce a change in posture, it’s hard to see what would.

And even if the ECB were to pull the trigger, would it act decisively? To be effective, the ECB would need to make clear it is willing to act on a monster scale. Half a trillion, or even a trillion won’t cut it. But the ECB has less latitude that the Fed did in the crisis. It isn’t permitted to rescue sovereigns directly. And that brings us to the second problem, that the so-called core nations (the creditor countries) as well as in some cases the ECB itself is blocking the path to ways to get around this impediment.

Draghi, as FT Alphaville points out, flagged that Eurozone member countries are increasingly having to fund themselves from domestic sources (and the ECB) as cross border lending has dried up. Draghi attributes it to the actions of national regulators. From his statement:

There are at least two dimensions to this. The interbank market is not functioning, because for any bank in the world the current liquidity regulations make – to lend to other banks or borrow from other banks – a money losing proposition. So the first reason is that regulation has to be recalibrated completely.

The second point is in a sense a collective action problem: because national supervisors, looking at the crisis, have asked their banks, the banks under their supervision, to withdraw their activities within national boundaries. And they ring fenced liquidity positions so liquidity can’t flow, even across the same holding group because the financial sector supervisors are saying “no”…..

Then there’s another dimension to this that has to do with the premia that are being charged on sovereign states borrowings. These premia have to [do], as I said, with default, with liquidity, but they also have to do more and more with convertibility, with the risk of convertibility. Now to the extent that these premia do not have to do with factors inherent to my counterparty – they come into our mandate. They come within our remit.

This strikes me as an optimistic spin. If regulators were the drivers of the financial Balkanization of Europe, then presumably different noises from the authorities would lead to a change in behavior. However, as Marshall Auerback has been saying for some time, there has been an ongoing run on banks in periphery countries as depositors move funds to banks in the core out of concern for suffering forced conversion into a lower-valued currency in the event of a Eurozone exit. With Citi now placing the odds of a Greek departure at 90%, this is a legitimate concern. So if banks have reason to think that matching assets and liabilities on a national basis is sound business in the current environment (as reports from Gillian Tett also suggest), it’s going to be harder to change behavior than just having regulators make different noises. Banks and investors have to believe that the risk of a Eurozone breakup has been reduced to zero.

By e-mail, Marshall Auerback mused as to whether things were already past the point of no return:

Dealing with this issue means an unconditional backing of all of the national sovereigns including, yes, Greece. Because failing to stand behind ALL of the members of the eurozone contradicts the currency union’s central premise: namely, that it is permanent and indissoluble.

Openly discussing the possibility of a “Grexit”, then, simply exacerbates the current problem and sets up another round of speculative attacks as the vultures guess which is the next member to go.The problem is that it is unclear that all of the member states recognize the inherent logic behind this.

In particular, Germany and The Netherlands have made persistent and less-than-subtle threats to boot out Athens if the latter seeks to amend the terms of its bailout package. They and others, such as the Finns, are moving in the opposite direction from Draghi. I have been documenting this. One cannot just assume that the Constitutional Court will keep rubber stamping the ECB and that the Bundesbank will simply let the ECB go ahead and do “whatever it takes”.

But without securing German support, how do you stop the bank run? People now say the BUBA is a “paper tiger”. Really? The fact of the matter is that deposits are leaving the banks on the periphery and going to banks in the core. The banks in the core lend to the System of European Central Banks (with basically the ECB “on the hook”) which then provide lender of last resort financing to the banks on the periphery. It may be that by April the banks in Greece, Ireland and Portugal had lost half their deposits and the banks in Italy and Spain had lost a quarter of their deposits. To understand the eventual significance of this process, let us assume the bank run continues and the banks on the periphery overall lose the majority of their deposits, the banks in the core have corresponding huge claims on the ECB, and the lender of last resort position of the ECB is now equal to a majority of what was the outstanding deposits in the banks on the periphery.

What kind of a banking system is this? A dysfunctional and a highly unstable one. One would have a set of banks on the periphery that are massively dependent on ECB lender of last resort financing. That would probably be dysfunctional, as they would be disinclined to lend to their normal client base. What does “whatever it takes” really mean? It’s a paradox. To make his “whatever it takes” pledge credible, Mr. Draghi has to go well beyond the traditional boundaries of economic and central banking orthodoxy. But in going well beyond these boundaries, does Mr. Draghi risk creating another crisis of confidence in the euro?

And will the Germans and others let him?

Despite the reports of wavering, the answer still appears to be “nein”. And the window for changing their mind is about to close.

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34 comments

  1. JGordon

    Although I do still like NC, one thing that has always bugged me about Yves Smith and the other guest writers here is their implicit assumption that the financial/monetary (is there a difference anymore?) system itself is alright, but that at the moment it’s just being mismanaged by a bunch of miscreants.

    I think that’s naive.

    In the end, finance is a man-made (forgive the expression) semiotic system that need bear little or no correlation with actual reality. And in fact what is happening right now is that exponential interest component of our money is taking off on the upward leg of the hockey stick, while the actual economy that feeds and clothes people is stagnating on a horizontal line somewhere at the bottom of the graph.

    The take away should be that the monetary system is out of step with reality, and that adding more (exponentially growing) debt to a moribund economy is probably not the right prescription. Saying that the ECB could “rescue” anyone or “buy time” by pushing more abstract symbols around seems incredible improbable and bizarre to me. Because of math, at some point this thing is going to come down in shambles anyway. It’d be less painful to just get it over with and let it happen.

      1. JGordon

        My feeling is that statements like that stem from the belief the people running the system simply are bad apples, not that there is something mathematically and intrinsically wrong with the system itself. Language like “buy time” and “rescue” is one of the big things that makes me think that.

        Since I am a critical thinker I acknowledge that the possibility exists that I could be wrong about that, so don’t worry that I am defending a position just because I really want it to be true.

    1. Mafer

      Karl Marx: XXIV Externalisation of the Relations of Capital in the Form of Interest-bearing Capital.

      V.XXIV.2
      M—M’. We have here the original starting point of capital, we have money in the formula M—C—M’ reduced to its two extremes M—M’, in which M’ stands for M + increment of M, money creating more money. It is the primal and general formula of capital concentrated into a meaningless summary. It is capital perfected, a unity of the process of production and process of circulation, yielding a certain surplus-value in a certain period of time. In the form of interest-bearing capital this appears spontaneously without any intervention of the processes of production and circulation. Capital appears as a mysterious and self-creating source of interest, a thing increasing itself. The Thing (money, commodity, value) is now capital even as a mere thing, and capital appears as a mere thing. The result of the entire process of reproduction appears as a faculty inherent in the thing itself. It depends on the owner of the money, which represents the universal exchange-form of commodities, whether he wants to spend it as money or loan it as capital. In the interest-bearing capital, therefore, this automatic fetish is elaborated in its pure state, it is self-expanding value, money generating money, and in this form it does not carry any more scars of its origin. The social relation is perfected into the relation of a thing, of money, to itself. Instead of the actual transformation of money into capital, only an empty form meets us here. As in the case of labor-power, so here in the case of interest-bearing capital the use-value of money becomes that of creating value, and at that a greater value than it contains itself. Money as such is potentially self-expanding value and is loaned as such, and loaning is the form of sale for this peculiar commodity. It becomes a faculty of money to generate value and yield interest, just as it is a faculty of a pear tree to bear pears. And the money lender sells his money as such an interest-bearing thing. But that is not all. The actually invested capital, as we have seen, presents itself in such a light, that it seems to yield the interest, not as a capital performing its function, but as a capital in itself, as money-capital.

      V.XXIV.3
      And still something else becomes perverted. While interest is only a portion of the profit, that is, of surplus-value, which the investing capitalist squeezes out of the laborer, it looks now on the contrary as though the interest were the typical fruit of capital, the primal thing, and profit, in the shape of profit of enterprise, a mere accessory and by-product of the process of reproduction. Thus the fetish form of capital and the conception of a fetish capital are perfect. In M—M’ we have the void form of capital, the perversion and individualisation of the relations of production in their highest degree. The interest-bearing form is the simple form of capital, in which it is assumed to be antecedent to its own process of reproduction. It is the faculty of money, or of a commodity, to expand its own value independently of reproduction, a mystification of capital in its most flagrant form.

      V.XXIV.4
      For vulgar political economy, which desires to represent capital as a spontaneous source of value and its creation, this mystic form is, of course, a great boon. It is a form, in which the source of profit is no longer discernible, and in which the result of the capitalist process of production receives an independent existence apart from this process.

      http://www.econlib.org/library/YPDBooks/Marx/mrxCpC24.html#Part V, Chapter 24

      1. Mafer

        And I forgot this part:

        “IN the interest-bearing capital, the relations of capital assume their most externalised and most fetish-like form. We have here M—M’ money creating more money, self-expending value, without the process intermediate between these two extremes. In the merchants’ capital, M—C—M’, there is at least the general form of the capitalistic process, although it clings to the sphere of circulation, so that profit appears merely as profit from selling; but it is at least seen to be the product of a social relation, not the product of a mere thing. The form of merchants’ capital presents at least the aspect of a process, of a unity of antagonistic phases, of a movement divided into two transactions, namely into the purchase and sale of commodities. This is obliterated in M—M’, the form of interest-bearing capital.”

    2. Yves Smith Post author

      “Buying time” and “rescues” are necessary but far from sufficient conditions for salvaging the Eurozone. I don’t like them in the absence of reforms, which is what we had in the US recently. The incumbents all seem too committed to austerity for there to be anything other than bad ends.

      The reason for caring about whether these emergency measures work or not is a Euro-blowup will most decidedly blow back to the US. We are looking at a rerun of 1931 (Creditanstalt), which inaugurated the second leg down of the Great Depression. Having a sense of whether a blowup is imminent or whether Europe will go through some attenuated painful self and other destructive process does make a difference, if nothing else in terms of timing.

      And I beg to differ. Financial systems can work. Look at the US from 1940 to the early 1980s. It was a remarkably long crisis free period by any historical standards.

      1. north country

        I’m surprised to be writing this to you, Yves, but here goes.

        We in the US decidely did not “have reforms” to our financial system “recently”, we have had bad jokes like Dodd-Frank (eponymously doomed from the get-go), which left the execution of an already weak set of “reforms” to a regulatory structure already thoroughly captured and neutered by Wall St. and their hired hands in Washington.

        But your last para really threw me. I don’t think JGordon was saying that financial systems per se can’t work, though he was surely wrong when he wrote that “finance…need bear little or no correlation with actual reality” (it’s only when finance depends on a significant relation to economic reality that it has the potential to be of service to society). But citing “the US from 1940 to the early 1980s” as proof that financial systems can work? Could we think of a weaker argument?

        Those halcyon days of the US global empire were indeed a “remarkably long” period during which we were able to exploit WWII’s destruction of our economic competitors, the institutions of Bretton Woods (reserve currency, IMF, World Bank, etc.), a “stable” foreign policy of proxy dictatorships, and nuclear terror to harvest the resources of the world for pennies a pound. Those were the good old days, when Wall St. could concentrate on impoverishing the southern hemisphere (with Washington’s always undivided support) and bring the money home. If that’s what it takes for our financial model to enjoy a few decades of “crisis free” operation, it’s fundamentally the wrong model!

  2. Mafer

    Marx goes on from the above excerpt to explain that this “Externalisation of the Relations of Capital in the Form of Interest-bearing Capital” eventually destroys the ability to pay of the actual productive economy. This has been proven true since Biblical Times, hence the “Jubilee Year.”

    1. jake chase

      Or, put more directly, it is high time for the expectations of speculators in Spanish debt to be blasted into eternity. Instead we get convoluted explanations of how ECB slight of hand can continue to reward them. Ultimately, none of this is going to work, because Spain isn’t Mexico and this isn’t 1982, and the ECB isn’t the Fed.

      1. Jim

        And the ECB isn’t the Fed because there isn’t a US of Europe.

        What’s wrong witht the Balkanization of Euorpe? Isn’t there a financial Balkanization in the Americas, with regulators from the US “overseeing” US banks while regultors in Brazil do so with their own? Do Japanese regulators oversee Chinese banks in Asia?

        Then why this obsession with a regulator overseeing the banks in sovereign countries?

        It’s as if many of you believe that the best for the continent of Europe is a US of Europe, regardless of public opinion. Heck 80% of Germans could be opposed to a US of Europe, but many of you would argue that the German voter doesn’t realize what’s in his best interest, and that unelected Eurocrats in Brussels do.

        Scary stuff.

  3. gerold k.b. weber

    Mario Draghi: “Then there’s another dimension to this that has to do with the premia that are being charged on sovereign states borrowings. These premia have to [do], as I said, with default, with liquidity, but they also have to do more and more with convertibility, with the risk of convertibility. Now to the extent that these premia do not have to do with factors inherent to my counterparty – they come into our mandate. They come within our remit.”

    This is the clear opinion of the ECB President that the ECB must act to mitigate or eliminate the perceived risk of reintroduction of national currencies in Eurozone periphery states. And this action would also improve the money transmission mechanism. It seems he has a majority for this opinion among major decision makers.

    Next step: alignment with Deutsche Bundesbank if possible. If not, what are Weidmann’s arguments? The public should also ask how the identified risk premium can be quantified. And if we will finally arrive at Paul De Grauwe’s very reasonable proposal of an interest cap on Eurozone government bonds. The Draghi version of such an interest cap could be anchored differently than De Grauwe’s. All this will not solve the Great Financial Crisis in the Eurozone, but it could be a big step forward if it clears the air of some Eurozone specific smoke.

    Then we could refocus on some other important questions: how to help the unemployed and poor, how to increase aggregate demand and real gdp without increasing debt-to-gdp – the real challenges for the capitalist system.

    Presumably reduction of wealth and income inequalities by multiple means has to play a big role for capitalism to survive.

    1. Ruben

      “Then we could refocus on some other important questions: how to help the unemployed and poor, how to increase aggregate demand and real gdp without increasing debt-to-gdp – the real challenges for the capitalist system.”

      In the case of Spain the real challenge to the ideal of well-functioning capitalist system is corruption.

      My hypothesis from reading the constant rain of news about cases of corruption in the Spanish press is that a significant part of the private-sector real estate bubble (the origin of Spain’s current predicament) was caused by the possibility to earmark sizable chunks of money in each project to party aparatchiks and party structures, thus providing an incentive to increase the number of projects, thus leading to a bubble. This of course facilitated by the inflow of large sums of capital from the core countries.

      My hypothesis is supported by observing that the most bankrupt regions of Spain are also the most corrupt (Valencia, Catalunya) whereas the most solid region (Euskadi) is also the least corrupt. Please correct me if I am wrong.

      “Structural reform” is usually understood as making things easier for the private sector in dealing with labor and reductions of social welfare program. Although the above is true my take is that it is an incomplete description of what European elites mean by “structural reform”. The missing component is the need to reform the State apparatus so that it does not allow so much corruption. The Spanish State need to cut pieces of it that are the locus of intense efforts to steal money.

      Problem is the current gov’t is more interested in cuts to social welfare than in cuts to the State apparatus. European elites know this. European elites applaud the welfare cuts to ensure short term payments to core banks but they also want improvement on the corruption front to ensure long-term stability of Spain as a partner.

      In the last reform packet the Spanish gov’t included a few changes to reduce the number of municipalities and regional political positions but that is not nearly enough.

      1. Eric

        the sad thing is that if you talk about structural reforms, Anglosaxon keynesian economists claim these are irrelevant, and if you talk about the mistakes made and corruption in Greece and Spain you are being accused of making it into a morality play. And if you mention lack of confidence, they start ridiculing the confidence fairytale.
        There is one area where I agree with these economists however: austerity alone is not going to solve the crisis.
        But without structural reforms, fight against corruption and credible government policies, any plan is going to fail.
        I am convinced the markets have no confidence in the governments of Spain and Greece (and not without reason, if you look at the staggering incompetence of Greek and Spanish politicians sofar), and this is the largest problem for the other eurozone countries.
        They surely want to save the eurozone, but they are watching powerlessly how the Spanish and Greek governments fail to get any confidence of the markets, and without this confidence returning, no ECB money printing or more loans from the creditor nations will bring down bond rates to sustainable levels or stop the slow motion bank run. In fact, these policies might only make the lack of confidence worse.

    2. Susan the other

      I beginning to think there is method to their madness. Especially for Germany and France who are going to foot a big bill. If they let the debt to to astronomical levels and then say OK, the ECB can print money and buy bonds, and we’ll just have to devalue the Euro… who wins? All of the EZ but especially Germany. Whose exports were getting a little pricey.

      1. Jim

        Who loses? The German voter, 40% who own their homes, compared to 82% in Italy.

        Of course, it doesn’t matter that the ECB is violating the German constitution, or that the ECB gave their EXPLICIT promise to the German voter that it would never monetize debt.

        And some of you actually believe that the ECB is concerned about matters such as inequality? Puuhleeze. The ECB’s polcies, spefically the policy announced a few days ago, will serve to exacerbate inequality.

        Want a more prosperous Spain and Italy? Have them reintroduce their legacy currencies. This isn’t rocket science, and I regret that so many progressives I would otherwise agree with on other matters have been so easily manipulated by those in Brussels who believe that a US of Europe will resolve everything.

        1. Maju

          You just seem a fanatic self-appointed paladin of the “German interest”, Jim. Why don’t we see many Germans saying that but mostly Angosaxons?

          Why do some Anglosaxons use this crisis to demolish the EU?

          And why would it be Spain or Italy the ones leaving the Eurozone at astronomical costs and not Germany at much lower costs and (according to you) with more desire to do it.

          Everybody knows that the peseta or the lira won’t be reinstalled unless the Eurozone itself collapses. The Deutsche Mark… that is another story maybe.

          But IMO nothing of all that will happen. The Eurofanatics, led by the Belgian liberals (at least on TV) are pushing strongly for a more cohesive EU with an elected confederate government. That’s a very possible solution. It will still not be a U.S. of E. but a different solution.

          Actually it is Merkel the one proposing a tighter union, in fact, what AFAIK is not of the like of France. I have no idea what kind of media do you read or watch but it’s not accurate.

  4. Hubert

    There is no long-term solution to the problem. Even if Germany writes blank-checks to France, Italy, Spain, Greece, Portugal, Ireland – they are bankrupt one moment later (they may be already without the world recognizing it).
    Still the dichotomy between “No solution” and “The show must go on” will play out for some more time (years, I guess). Auerback will be surprised by next week-end. They will come up with something that will kick the can for some time. It will certainly be inflationary and though it will not be “enough” – as it never is and never can be a “enough” in a ponzi-game.

    1. Hubert

      “They” are meant to be the “Germans” here. The others are already known as bankrupt …..

  5. Maju

    I still think that Spain should not be rescued but the banks let to fall. What is outrageous is that the cost of banks are transferred to citizens in form of social cuts and increased direct taxes.

    Investors should pay for their risky investments, otherwise it is not fair. Banks must fall: one after the other, mercilessly. If need be, the state should take the role of the banks. The ECB must be put to lend to states for that purpose.

    1. Jim

      What is outrageous is that so many progressives who took the Federal Reserve/Geithner/Bush/Obama to task for rescuing the major banks are cheerleading the same policies in Europe.

      In the US, Geithner said that the system was about to implode, so he did what he needed to do. Most progressives don’t believe him.

      In Europe, the overpaid technocrats in Brussels say the same thing, but the “progressives” believe them, and support all of Draghi’s actions, however undemocratic they are, to save the Euro.

  6. Klaus Meine

    “The German central bank no doubt continues to disapprove of giving the soon-to-be-live European Stability Mechanism a banking license”

    So what? It doesn’t matter what the Bundesbank approves or not. Read the ESM, for instance here:

    http://www.european-council.europa.eu/media/582311/05-tesm2.en12.pdf

    Article 32 clause 9 stipulates

    “The ESM shall be exempted from any requirement to be authorised or licensed as a credit institution, investment services provider or other authorised licensed or regulated entity under the laws of each ESM Member.”

    BTW, please note that the contribution key is already obsolete. See article 25 clause 2. The payments by participating countries who are already getting money from the ESM (from the start: Spain) are to be taken over by the (still) solvent ones. You see the pattern?

    The ESM is a mixture of an enablement act and Versailles 2.0. Compeltely undemocratic, uncontrollable, unstoppable by any institution, nation or whatever entity.

    Except by war. I increasingly tend to believe that this is the real underlying cause for this infamous contract.

    1. carol

      “You see the pattern? ”

      Yes,
      Plus, press and blogs complain for nought about the ESM size: 500 billion euros wouldn’t be enough.

      That has been taken care of as the ESM management is allowed to sell bonds of nominal 1 euro for say 10 euro’s. The 17 euro countries, excuse me, the 4 euro countries (germany, finland, netherlands, luxembourg) are obliged to pay the real euro’s, not just the nominal 500 billion.

      If the German, Dutch, Finnish, and Lux. parliaments want to inquire what the heck has been going on: bad luck. NO investigative powers. Archives closed for eternity. FULL immunity for the ESM managers. Remember, Paulson tried that trick in his origial 1 page TARP 1.0 Even the extremely Wall Street friendly US House and Senate did not go along with that one.
      NO Barofsky for taxpayers in Nord euro countries!!!

  7. Joe

    I don’t know, it just doesn’t make sense, the response to this crisis…

    I suspect that Merkel’s strategy was to play to nationalist sentiment until the catastrophe reached such proportions that that sentiment changed– or at least became divided enough to be politically manageable. Looks like that isn’t going to happen as Germans are so jaded that nobody is talking about Europe, let alone saving Europe. Also, national sentiment, as far as I can tell, is still squarely opposed to ‘paying for other country’s debts.’ Seems like German politics is facing a crisis, with the CDU naturally unable to digest the task of ‘saving’ Europe– I mean, ideologically, they are much closer to the Tory party in England, in many respects.

    Perhaps there was some hope that Greek could be ejected, which would free up some money for Spain and Italy. Regarding Italy, a friend who was recently in Rome, said that the atmosphere is not good, with small businesses closing down, etc. I mean, there is no plan, that’s the conclusion, one is forced to make, and I assume, that at the first hiccup, we’ll see a system-critical European bank crater and then it’s in the lap of the Gods. You might as well read tea-leaves, look at animal entrails, throw bones, whatever. Forget planning and engineering. Future uncertain.

  8. Hugh

    If you look at this in its own terms, accepting that the European finance and economic systems are sound and that this is essentially a money problem, the demand which naturally presents itself, as it has with every one other of these purported Euro deals, is: Show us the money.

    Draghi talks big. It was enough to goose the markets/casino for a couple of days. But if he meant it, the money, and lots of it, would already be flowing. It’s not, and there are plenty of reasons to think that it won’t. The powers of the ECB are limited and the Northern elites led by Germany oppose any significant intervention.

    If you look at this from the perspective of kleptocracy, Europe has six problems, none of which are being addressed.

    A weak, ineffective central bank
    The lack of a democratic fiscal and debt union
    An insolvent, predatory banking system
    Mercantilist trade patterns within the eurozone
    Corrupt political classes
    Ultimate power residing in a class of rich kleptocrats

    And not only are these problems not being addressed, they can’t be addressed under the current politico-economic framework because the ruling class of the elites and the kleptocrats are themselves among these problems. Nothing can happen until this ruling class is overthrown, and the wealth of the kleptocrats and the power of the elites are returned to the peoples of Europe.

  9. steelhead23

    I have posited that it is Germany, not Greece that should leave the Eurozone. First, it is clear that Greece does not want to leave the Eurozone. They have had ample opportunity – and not just a little encouragement. Yet, they show no sign of leaving. Why? If they left and reinstituted the Drachma, it would be a very soft currency and would at least initially fall in value. Of course, over the longer term, defaulting, leaving and living within their means would likely be the best outcome, the fear of the nasty short term forces political leaders, always cognizant of the next election, paralyzed.

    But Germany is an entirely different matter. If they left, their productive strength would ensure a strong Deutsche Mark with high buying power. Eventually, that might reduce exports, but they wouldn’t be carrying around the weight of the peripheral countries and would enjoy the financial flows a strong economy provides.

    And forcing Greece out is dangerous. If Greece is to leave, she must want to leave. But if she won’t, Germany would be within its rights to head for the exit.

  10. Bernd

    I´m not sure I entirely agree with your analysis.
    First of all Draghi is essentially correct when he talks about the need to keep the monetary channel open. If, as has been the case in Spain as well as Italy lately, interest rates offered by the banks based in the countries in question no longer move in line with the rate set by the ECB but rather in line with the interest demanded on domestic government bonds, the monetary channel actually is effectively closed. This pretty much seems to cover any questions what the legality of such an intervention is concerned.
    A further aspect is the misconception that Marshall Auerback has: “Dealing with this issue means an unconditional backing of all of the national sovereigns including, yes, Greece.”
    This precisely not what it means! The key issue in Germany and probably most of the northern european countries is: “Pacta sunt servanda”, a concept that Spain, Portugal, Ireland as well as Italy(since Berlusconi) have been doing their best to adhere to whilst the Greek government has been incapable of actually enforcing decisions passed in parliament(privatizations, enforcement of tax laws, fighting extreme corruption, enforcing cuts in bloated, loss making publicly owned enterprises).I´m not arguing, that these austerity measures where(or, given that they haven´t actually been implemented in the case of Greece: would have been) the best course of action, the point is just that there are countries with governments actually capable of implementing what they have agreed to and countries with governments that do not have that capability.

    Hence, after having gotten rid of the failed states in the Eurozone(Greece, probably Cyprus) there seems little reason for the ECB to not set a ceiling of reserve rate + 4-6% on long term government bonds of member states, to ensure that the monetary channel remains open.

    Most of the rest of your analysis seems to be based on absolute rather than relative considerations(or the expectation of the whole thing spiralling out of control); the UK for example is in a worse position than Spain economically (worse data, worse general setup, larger deficit,…); so it´s essentially just a question of the focus moving on. As soon as it is known, that Spain will never pay more then 6%, the crisis is over and the overall numbers for the Eurozone(most likely without Greece and Cyprus) wil start to matter, which actually don´t look all that bad(being more or less in equilibrium) when compared to the UK or even the US.

    1. Jim

      Bernd, for the ECB to do what it announced last week presupposes a path to a United States of Europe, comprised of 17 states, based in Berlin, with German as the official language, and PERMANENT fiscal transfers from the Norht to the South. It is so galling that those of you who want more ECB actoin are not courageous enought to concede this point.

      I ask, why not allow the German voter, the same voter who was EXPLICITLY promised that the ECB would never monetize debt, to vote on a US of Europe referendum. If a majority of Germans and citizens from the North support fiscal transfers, then we’ll have a US of Europe. If not, then the dissolution of the EZ occurs, and the German voters bail out German banks, perhaps to the tune of US$ 1T Euros. But at least it wouldn’t be an open-ended figure, similar to the substantial permanent transfer of tax dollars from rich states in the US of A to the poorer ones.

      What really bothers me is that so many progressives are ready to disregard democracy, to disregard German public opinion when it comes to matters EZ. It’s as if many of you can’t acknowledge that the best path for the citizens of Spain and Germany is to reintroduce their legacy currencies. Commited to the EZ, far too many progressives will justify the indefensible so long as the Euro continues to exist.

      1. Bernd

        Jim, what you seem to fail to realize is that these transfers have already been made. Whether it´s Target2 liabilities or loans extended by German/French/… banks(+Greek bailout, EFSF, ESM, IMF commitments); eventually someone will have to take a loss for bad investments. My point was just that the german pubic is unlikely to stand for a further bailout of essentially kleptocratic regimes(Greece, Cyprus). Spain (budget surpluses til 08) and Italy (overall debt(gvnt+HH+corp+fin sec.))< Germany´s are a completely different issue, as are Portugal and Ireland.
        But do you understand how monetary policy actually works? I
        It´s not just a morality game!

        1. Hugh

          On the national level, the euro acts as a gold standard. On the European level, it is a fiat currency. If the ECB were a true central bank, it could bail out everyone without increasing the debt on anyone. I am not an MMTer but MMT lays out pretty well how a fiat currency functions. And these are basic MMT ideas.

          The North-South divide which you seem to buy into is really just a means of setting Northern and Southern, or core and peripheral, 99%s against each other. You say that monetary policy is not a morality play but you treat it as one.

          What is going on is that Northern elites and the rich want to recapitalize Northern banks and make good Northern bondholders, and they are trying to stick Southern sovereigns and 99%s with the bill. If this doesn’t work, then and only then will they try to stick the Northern 99%s with it.

          Southern elites and rich have no problem with this Northern strategy because they have already moved their wealth out of the country and because austerity and internal deflation increase both their power and wealth at the expense of the Southern 99%s.

          Most of your argument seems just a recasting of the old and discredited meme of the virtuous lender and the profligate borrower. In other words, why should the virtuous North bail out the profligate borrowers in the South? What I don’t think you quite realize is that can easily be turned around. Why should the South bail out profligate lenders in the North?

    2. Maju

      What you say is very reasonable Bernd but there is an element which is incorrect: the UK could have been “worse” than (or in similar conditions as) Spain a few months ago, but the Bankia bailout has been a trigger for massive demolition maneuvers aimed at destroying the living standards of the Spanish working class.

      This has got everybody very upset because they realize that their salaries and services are being cut ONLY to pay for the Bankia corruption (or whatever, Rato says that the bank is fine and he was IMF chief not so long ago – we do not know of any clear figures yet, just media agitation at extreme levels).

      [Incidentally what happened with Barclays, HSBC, Deutsche Bank and the Libor/Euribor scandal? Compared with all that the Bankia case is peanuts - but still the main pretext to smash the living standards of the Spanish working class and get Spain indebted to the eyebrows: forcing the unavoidable bankruptcy some years from now].

      The real problem in Spain is that under Aznar and Zapatero business and the wealthy became almost exempt from taxes and now that the economic base has collapsed (partly because of the housing bubble, partly because of the orchestrated psy ops that have driven investors out of the country), the state cannot collect enough taxes.

      Also there is clear political intention by the current government, with backing from Brussels/IMF, to not just demolish working class living standards but also to demolish the decentralized regional administration.

      All this is placing Spain in a situation far worse than that of Britain, what is reflected in the GDP figures, which are collapsing as we speak, but even more in the unemployment ones, which are ridiculously extreme (35% in Andalusia for example, similar to that of Algeria or French Guiana).

      1. Bernd

        Hi Maju,

        I get feel(an get) what you are saying, but that is precisely the point I was trying to make, Spain in terms of it´s government policy has been acting extremly responsiblyin the run up to the 2008 crisis. Sticking to agreements, in terms of public debt even more so then even Germany did, I do believe that what has been imposed on Spain in terms of austerity measures is far too harsh and counterproductive.
        However that does set Spain (and for example Ireland)apart from Greece where the government quite obviously is not capable of enacting and enforcing commitments that it has entered into, and quite frankly I don´t see how any further help will be forthcoming for Greece.
        Spain(and Italy since Monti) is a different story though, there have been joint statements from the Spanish, French and German governments that current rates on spanish bonds aren´t justified considering the fundamental data(e.g. less debt than Germany), that together with the fact, that the monetary channel what Spain and Italy are concerned is closed, provides a firm footing for draghi to cap rates on spanish and italian bonds. The BUBA is not going to be happy, but quite frankly who cares? Let them pound sand. The german government is not supporting them and german industry as well as the population just wants the whole thing to calm down.

        In terms of Bankia vs. Libor scandal, I think you are absolutely right, it´s peanuts in comparison. That´s why I believe that attention will turn elsewhere e.g. the UK once spanish&italian rates are capped at a max. of 5-6%(high, but feasible).

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