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The Eurozone: A Twenty Year Crisis?

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As markets quickly shrugged off the news including that of further central bank rate cuts. Spanish bond yields rose over 7%, as Mr. Market clearly wanted a resumption of bond buying or some other decisive action, rather than a mere reduction of its benchmark rate to 0.75%.

Some commentators, such as Edward Hugh, are a bit flummoxed, since the supposed clarification of key points of the deal, most importantly, how and when Spanish banks will get money, has not answered these basic questions. Wolfgang Munchau argues in his current column, “Eurozone crisis will last for 20 years” that the Europatchup of last week wasn’t simply underwhelming, but was a major step backwards. He confirmed something we took note of yesterday, that Germany insists that there be no bank bailouts until a banking union is in place. That’s putting the medium term before the short term. And Munchau says this is even worse than it sounds, since a banking union requires a political union.

Before we even get that far, Munchau points out that what Merkel is willing to do will not only be impossible to achieve in time to arrest the escalating crisis in Spain and Italy, but is also inadequate in scope:

A group of 160 economists, led by Hans-Werner Sinn, president of the Ifo economics institute, last week published a manifesto against a banking union. It was full of sound and fury, but the importance of this document is that it reflects a consensus view.

Angela Merkel’s answer was revealing. She told them that there is nothing to worry about. The banking union was about joint supervision, she said. There will be no joint deposit insurance. She has a very different understanding of a banking union than the European Central Bank. At most, I expect this new banking union to cover the 25 largest banks, and leave those cajas and Landesbanken in national control…

The banking union that is required is the one Germany will not accept: central regulation and supervision, a common restructuring fund and common deposit insurance. It would take years to create. If done properly, it would require a change of national constitutions and European treaties, if only to redefine the role of the ECB. It is sheer madness to make crisis resolution contingent on the success of what would be the biggest European integration exercise in history.

And Munchau sees no way out given the current strictures imposed by key players, in that Germany is firmly opposed to a Eurobond and the ECB is not monetize debt. It seems that most American financial professionals, conditioned by the emergency responses of the Fed and Treasury, believe the ECB will step to the plate to prevent an unraveling. But the US had three key actors, Paulson, Geithner, and Bernanke, who all put saving the banks above anything else and among them had enough institutional authority to do a great deal, largely untrammeled. By contrast, the ECB sees its authority as more limited, and the key actors lack a common vision and a sense of urgency. As much as Munchau often comes under fire for being a Euroskeptic, the political gridlock in the face of an escalating crisis says his dour forecast may indeed come to pass:

The message I took away from the summit is that the eurozone will not resolve the crisis. In that sense, it was indeed a “historic” meeting.

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40 comments

  1. Joe

    Seems like Merkel is playing a holding game. Seems like political union is not only not really possible, but isn’t an attractive alternative for most of the players. Can anyone really imagine wanting to be governed by the Germans– assuming you’re not already German? Because this would be the result of a “unified” Europe– especially as long as England has no skin in the game. I mean, there’s nothing to indicate that we’re anywhere near a serious solution to Europe’s problems.

    To some extent, European eyes are probably on the US. Is it worth trying to fix the financial problems in the Euro zone before the US is sustainably back on track? Really?

    1. LeonovaBalletRusse

      Joe, is THIS the “KULTUR” we want to blossom in the EU and the US?

      The German band, “Rammstein,” toured the U.S. in 2012 to great acclaim:
      “Rammstein at Toyota Center in Houston Texas on 2012-05-25″ on YouTube.

      Behold German KULTUR for export (German exports not limited to Siemens):

      “Rammstein Buck Dich (Uncensored)” YouTube (bmwRZKruspe on Feb 23, 2012) — with Notes — at:
      http://www.youtube.com/watch?v=b_LVaHHNcP4 — Notes:

      “”Buck dick” (“Bend down,” “Bend over”) is a song by the Neue Deutsche Harte band Rammstein that first appeared on their second full-length album, Sehnsucht. the lyrics refer to sodomy.

      “The song is best known for its live performance. … Christian “Flake” Lorenz has confirmed in an interview that the dildo squirts a mixture of Pernod liquor and water; …”

      Enjoy the performance of the namesake of a familiar American Military outpost, “Rammstein.”

        1. LeonovaBalletRusse

          Was the Texas performance designed to inspire nuclear war? Where did the money backing this performance, and the tour, come from?

          Are we to reap the whirlwind?

          1. Joe

            I can’t really say, I’m on your wave-length. Although, if a society needs artist to dream its dreams, then I think I can say that the German society is certainly nothing like it was before the second world war. And Rammstein is not really typical, the Kultur that you’re referring too can better be described as being very normalised, as people are more concerned about being the same than being creative.

          2. travizm

            politically correct racism….nice one.

            who knows….maybe your right….dont think so though.

    2. Jim

      If I were German and my country were to somehow agree to a political union, I would insist that a German voter have SuperMajority rights in the fiscal arena. Otherwise, imagine all the peripheral countries voting for greater fiscal transfers from the core to the periphery. There are far more of them than of the core.

  2. mmckinl

    By 20 years I presume Wolfgang Munchau is referring to the Japanese experience … The EU will not be as fortunate. Japan held its unemployment rate under 5% for most of this time. Japan enjoyed a huge export surplus in lieu of an expanding world economy. During most of these years the Japanese were huge savers.

    When the EU implodes it will not be a 20 year Japanese experience but a deep depression that will either end in war or fascism or both. The EU are net importers. Unemployment rates are already over 10% and rising. The world economy is going into the toilet. The EU is now dis-saving to cover expenses.

    That economists believe the Japanese model is applicable in todays economy for the EU is quite ridiculous. The coming crash will be just that, a crash, not an ongoing rolling crisis. And the EU crash will take the rest of the world with it as financial entanglements and trade dependence pulls the world wide economy apart.

  3. Hubert

    Why do so many people including Munchau think the problems can be “fixed”? Did the US fix its problem? NO, they fixed the bank – or not, really.
    It is all about kicking the can. If Germany goes all in (they are half in anyway) how much time will that buy? What for ? To go down the path we are currently on?
    My best guess is that the can will get kicked in the last moment because pressure will be applied to Germany from all sides including the US.
    But most people on this site agree that the financial system sucks and long for s.th. better. Why then always those “kick the can” cheers ?

  4. ECB-Watch

    Banking union and ESM expand welfare for banks without adressing EZ’s design flaw. Pushing the can down the road. See my last post in which Wolf Munchau is also singled out.

  5. Maju

    I have been until recently advocating for keeping the Eurozone and/or staying in it but seeing the state of politics in Europe, any state of people with a half-decent economy, should “go Swiss” or “Icelander” already: leave the eurozone and EU altogether until the banskters conspiration ends.

    You can be all the Europeanist you want but by giving all the continent to the banksters we are not helping Europe at all.

    Time to revolt!

  6. Warren Celli

    Yves said; “Spanish bond yields rose over 7%, as Mr. Market clearly wanted a resumption of bond buying or some other decisive action, rather than a mere reduction of its benchmark rate to 0.75%.”

    Mr. Market was killed off by Mr. Cannibal long ago. Mr. Cannibal’s forte is usurpation and control of the now blatant scam ‘rule of law’. Mr. Cannibal used that hi-jacked ‘rule of law’ to set up the EU. Its just another ‘corporate takeover’ in a much grander and more guileful suit. But it is not just the EU, nor is it limited to finance. This is a global take down of excess populations — a ‘final solution’, now called full spectrum dominance — being carried out by the Xtrevilists as we are very deftly and incrementally led into a two tier ruler and ruled world with the ruled forced into a perpetual conflict with each other.

    If left unchecked it will not be a twenty year crisis, it will be an infinity crisis, as the future course of humanity is set in stone. Throw away your hopium pipes, the solution will not come from Xtrevilism or Evilism, you should have been out on the streets long ago.

    Deception is the strongest political force on the planet.

    1. LeonovaBalletRusse

      WC, yes, and “the final solution” according to The Georgia Guidestones. It is reasonable to think that we are next.

  7. Susan the other

    I don’t see how the argument about deposit insurance appears to be resolved in the US. The FDIC and the FED have gone back and forth and settled nothing. The last thing we heard from Sheila Bair was her sarcastic suggestion that the Fed loan every American 10m at zirp, etc. But as she and we all know something else is happening: the TBTFs are stuffing the “depositary” of their respective banks with all their bad investments, including zombie derivatives. So why shouldn’t the EZ take this as a cautionary tale? What is happening on both continents is the big banks are totally done for and it is they who need to be redesigned, not constitutions. While we virtually pretend it’s OK for the banks to invade the FDIC, the EZ is putting its foot down. Their going for a banking union first creates a political union. Whereas we are busy obliterating ours. But that’s just my paranoid sense of it.

  8. F. Beard

    Steve Keen, using the example of 1929 -1945, suggests it will take 15 years. But that period included WWII!

    As for government deposit insurance, that is an abomination. Let government itself (assuming it is monetarily sovereign) offer a free (up to normal household usage) fiat storage and transaction service that makes no loans and pays no interest.

    However, in the Eurozone, only the ECB is monetarily sovereign so the above is a non-starter till sovereign currencies are reintroduced.

    1. wunsacon

      Aren’t we in WW3 now already? We’ve been fighting for decades. This one is another Xtian-vs-Muslim crusade.

      1. F. Beard

        Christians are supposed to be peace, not war, makers. The issue is complicated by Israel though

      2. LeonovaBalletRusse

        w, it has been said that World War III has been the War Against the Third World, going on for a long, long time.

        1. Leverage

          WWIII now is a class war, not only reduced to the third world, but also to the first world.

          1. LeonovaBalletRusse

            L, “the first world” becoming “the third world” acc. to The Shock Doctrine.

  9. docG

    20 years of what? Crisis? Sorry, but that sounds a bit too abstract for my musician’s ears. More like 20 years in which the working class (which has apparently vanished into thin air so far as US politics is concerned) is slowly ground into the dirt. It’s once more necessary to quote Greg Palast, one of the few economists who understands the meaning of class warfare:

    “Monti and Draghi cannot credibly explain how, if every country in the Continent cheapens its workforce, any can gain a competitive advantage. But they don’t have to explain their policies; they just have to let the markets go to work on each nation’s bonds. Hence, currency union is class war by other means.” http://www.guardian.co.uk/commentisfree/2012/jun/26/robert-mundell-evil-genius-euro?INTCMP=SRCH

    A prolonged crisis is impossible in any case because at a certain point, workers will simply quit and head back to the fields. While I wouldn’t argue, as Palast does, that there has been a deliberate conspiracy to enslave the working class, that does appear to be what is happening.

    But there is a limit. Because workers are also consumers, and when they no longer have money to spend, then there will no longer be any “free market” to feed the greedy 1 percenters. http://amoleintheground.blogspot.com/2012/06/day-of-rest.html

    1. LeonovaBalletRusse

      docG, Sir James Goldsmith understood the purpose of this quite well in 1994. Book of 1994: “The Trap.” Interview w/ Charlie Rose and face-off with the gangster shill Laura Tyson captured on The Solari Report Blog of Catherine Austin Fitts:
      http://www.solari.com/blog/sir-james-goldsmiths-1994-warning

      Arkansas: Winthrop Rockefeller, Bill Clinton, Mena, Tyson Farms, Wal-Mart

  10. mac

    Funny how things change. Was a time when the 1%’ers were the Hell’s Angels and the like, now it is anyone with a few $$$ more than you have. I thinkI liked the previous era better.

    1. LeonovaBalletRusse

      Hell’s Angels never the 1%. Do you mean “terrorists” – now “bankers?”

      1. Anon48

        He’s not talking about THAT 1%.

        Google “Hells Angels 1% tattoo”

        Ironically, those nasty bankers would probably qualify for this also- not because of the amount of their income or wealth- but rather how they went about earning it.

    2. Joe

      mac, but that’s an interesting thought, because what makes the hell’s angels strong are their gang rules. The code of honour, which allows them to subvert the legal system to some extent. Like the banksters, or other groups, they have created a different social space within regular society– one which _we_ can’t really regulate. Same thing with banking. It will be really hard to put the banking genie back in the bottle.

      1. LeonovaBalletRusse

        Like the gangs in Philip K. Dick novels, like in the Road Warrior films?

      2. F. Beard

        Same thing with banking. It will be really hard to put the banking genie back in the bottle. Joe

        Excellent point. Glass-Stegal II would quickly end up like Glass-Stegal I.

        It not a big problem though since we don’t need banking anyway!

        All we need is a combination of a universal bailout, some MMT and genuine private currency alternatives.

  11. Jim

    But the ECB can’t have Paulson, Geithner, and Bernanke, as they are all citizens of the same country. Why not acknowledge that the interest of the core may not be the same as the interests of the non-core. Why not acknowledge that Greeks want to be Greeks, and French want to French?

    The EuroCup just ended. The Olympics are about to begin. Is there ANY data to support that a German or Spaniard is less nationalistic than he was 15 years ago?

  12. BagHolder

    If governments spend only what they take in in income, the crisis will be over immediately.

    1. Hugh

      Actually the economies of Europe are getting killed because they no longer control their own currency and can’t deficit spend to lift their economies out of recession and depression. Instead their debt loads are increasing due to the worsening economics and costs of debt service to the point that they will never be able to pay off their debts.

      If they had their own currencies, this would not be the case. They could deficit spend and do so without incurring any new debt. The government could create by its spending the demand that the private sector needs to grow. The peoples of Europe got suckered into giving up their monetary sovereignty and what we are seeing in Europe now is the result. European governments are in a situation similar to that of the states in the US, with this difference. In the US, if a state gets into serious financial trouble the federal government can bail them out. In Europe, it’s more like New York loaning money to Ohio but only on condition that Ohio cede much of the control of its government to New York.

      As for the US, we have been off the gold standard for 40 years. Money doesn’t begin to operate the way you think it does. Spending and taxation are about moving resources around society. The one does not pay for the other, which is not to say there isn’t a relationship between the two.

      Taxation and spending don’t need to balance each other. In general spending will exceed revenue from taxes because it is a more direct way of creating demand and addressing the problem of interest. Both have constraints. Spending is constrained by inflation, and taxation, by deflation. Government debt at the federal level is a holdover from the gold standard era which ended 40 years ago. Under a fiat currency, it is not only unnecessary. It is nothing more than a subsidy for banks and the rich.

      1. Eric

        if you’re right about the benefits of the periphery of having their own currency, they would all rush to the exit.
        But I don’t think you’re right. Spain, Italy, Greece all had to pay more for borrowing with their own currency then the current 6-7% that is seen as unsustainable. The periphery can forget about cheap borrowing when returning to their own currency, they are not the USA or Japan. Greece couldn’t even borrow in their own currency when they had the drachma, that’s shows how little confidence investors have in Greece. Alternatively they could print money, but this would devaluate their currency even more. Good news for their competitiveness some would argue, but again: if the periphery thought this would benefit them, they would never have joined the euro in the first place. They joined the euro to escape devaluations and inflation and for cheap borrowing!
        The periphery will kick the can forwards as long as possible, they will only leave the euro when forced to do so.

  13. John

    20 Years???? That’s can’t be serious, if the economy isn’t fixed soon we’re going to have a generation of very poor angry people.

    What get’s me the most (and yes, slightly off-topic) is the cost of education now too. It’s almost like they’ve pulled a kill-switch on the lower-middle class in an attempt to keep money within the families of the already wealthy.

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