The man with the magic words

…turns out to be Trichet, this week, anyway; the bond markets are soothed. Two key comments:

We have got a monetary federation. We need quasi-budget federation as well.

a statement which ought to have all the Eurosceptics, and many others, chorussing “told ya”; then

Mr Trichet also hinted that the ECB could extend its purchase of government bonds, a controversial move within the ECB governing council, saying he could not discuss the issue “at this stage” but that further decisions on the programme would be taken by the board.

The bond markets, which had brushed aside the Irish bailout, and were clobbering not only Greek, Irish and Portuguese debt, but also Spanish, Belgian and even Italian, took a hint that at last there would be a bid somewhere for the less exalted Eurodebt, and backed off. Whether Trichet’s bond purchase programme turns into the EUR2Trillion monster now envisaged by market participants, or not (the ECB has only purchased EUR70Billion of bonds so far, which doesn’t imply great willingness to go down this path), we have at least a pause in what, on Monday and Tuesday, looked ominously like a slide towards panic.

So what now? Securing Eurozone-wide “quasi budget federation”, whatever that turns out to be, between 16 differently-economied sovereign states, isn’t going to be an overnight job, particularly. So in the short term the first question is whether the ECB really will do “whatever it takes” to support periphery funding. Readers will remember that Weber of the Bundesbank in particular is not a fan of this kind of intervention; he is pro-bond-haircut, and Merkel echoes him. If he pipes up again, and looks supported, the bond markets will freak out again.

There are plenty of other background fragilities too, to go with the contradictory official statements that are part of business-as-usual in Euroland. There is the challenge to the constitutionality of the Greek bailout, still trundling along in the Bundesverfassungsgericht in Karlsruhe. That could take years to get settled.

There is still Ireland, with its improbable bailout, its possibly ruinous 4-year plan, its fragile government, and its deeply disillusioned electorate. Ireland still has to pass the budget, elect a government that campaigns on a promise to stick to it, deliver the cuts, and then grow at a rate that pays off the interest and capital on the debt. December 7th, budget day, is one hurdle, but that process could fail at any stage, earlier or later.

Then there’s Greece, and Portugal, and perhaps Spain. The periphery countries may all have a solvency problem, as articulated by Willem Buiter with his usual vim.

Just to top it off, and to illustrate why haircuts give everyone the heebie-jeebies, the FT has dug up an interesting coupling between the periphery countries. Summarizing, it turns out that Irish banks are among the leading lenders to Portugal, Greece, Spain and Italy; foreign banks’ use of Dublin’s financial centre as a low-tax conduit for business (the German bank DEPFA above all) just adds to the coupling. So default, or haircuts, by any of those countries stand a chance of taking out Ireland too (which would give the UK a fair-sized headache, as well).

Anyhow, ECB funding programmes won’t fix any of that. Handouts or haircuts: the next stage of the political debate in Euroland will have to deliver a choice, and a plan, unless electorates get there first (probably without much of a plan).

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  1. Charles Butler


    Expect this to go on pretty well forever. Germany’s got no bullets in their gun – even when they can manage to get two successive spokespersons to not contradict one another.

    Zapatero, much to my disappointment (gotta say), came out with a couple of good surprise moves this week. Suppressing the 429 euro extended unemployment benefit – calling the bluff on the Spanish unemployment scam and saving money in the process, and selling off some state assets. Off the radar, it looks like they’ll be slowly forcing civil servants on to the social security lists and off the mutuals that they now subscribe to. Big plus long-term for SS.

    On the positive side, there are lots of signs that the real world is a little sick of this debate and are going about their business as best they might under the circumstances.


    1. Richard Smith

      The whole thing’s a gruesome spectacle; irresponsible, I suppose, to wish for a proper blowup, just to get it over with, but awfully tempting.

      It could go on a long time though, yes; like some 21st-century version of the Holy Roman Empire.

    2. Maju

      So what are now going to do the millions of Spanish unemployed (which are officially at 20%)? I can imagine the following “solutions”:

      1. Live on your relatives until they kick you out, then jump before a train or commit a crime (at least it’s warm in jail).

      2. Directly join some sort of mafia or even create your own.

      3. Directly kill yourself.

      4. Protest until you die or gather enough people to take over the system.

      Because finding a job is pretty much out of the picture, you know.

      If there have to be cuts, the first thing to cut is the military, specially those expeditions to Afghanistan and the Balkans, which are so pointless and costly. Then you have to cut in bailouts for the banks and salaries of the politicians and the useless Royal House (not even a gesture here). What you cannot cut in a deep crisis as this one is social services that are anyhow totally insufficient (425 euros does not allow for any sort of autonomous living, certainly not in Madrid: you still need in the best case another such amount from somewhere else).

      The only valid reference for how to deal with a crisis of this magnitude in a Capitalist frame is the New Deal (or equivalent contemporary measures): it implies increasing state expenditure in social needs and basic investment. If companies are all bankrupt, only the state can take over.

  2. Hunman

    Yves and all others who have been predicting the eurozone demise with such disgusting glee, will you please remember Trichet’s words next time the markets-media conglomerate you serve so well decides to attack the bond market of some weaker member state?

    You have consistently underestimated the political will behind the euro. Even in largest net contributor Holland, no serious person is contemplating a break-up. Contrary to the rather primitive thinking in the anglosphere, financial integration has long passed the point of no return. Break-up and devaluation would be an unmitigated disaster for every country involved.

    It is true that the EMU has a fundamental flaw in that it opens bond markets of individual states to speculative attacks, as we’ve seen the past year. This flaw though is rather easy to correct with some form of common bond market, which is exactly where the EFSF and ECB are heading. It wouldn’t even require a treaty change – only political will. Which is, once again, not to be underestimated.

    1. Anonymous Jones

      “Glee,” “consistently,” “primitive.” You remind me of Vizzini. I think these words do not mean what you think they mean.

      One thing is for certain. Time will tell whether you have the sole monopoly of accurate prognostication on a complex topic involving hundreds of millions of people and many sovereign governments and difficult political histories and choices. We will see. I think confidence is not your ally in all this. But we will see.

  3. Maju

    You may want to read, if you can read Spanish, the article that economist Alberto Montero published yesterday at his blog titled: “Naive questions for Trichet”.

    “Does Trichet ignore that the Commission has rejected [vetoed] the proposal by the European Parliament to raise the budget from 2.9% to 6% and that, therefore the European Parliament will have to extend the current budget for 2011?
    Does not Trichet know that (…) there is an important group of states, lead by the UK and the Netherlands, that oppose any advance if matters of fiscal sovereignty or even the increase of the common budget on income transfered by the states?”


    “It would not be bad if Trichet began by persuading the members of his own executive committee that their rejection to buy sovereign debt by member states, while, at the same time, he has no problems buying all the debt provided by European banks, even if most of it is just junk”…

    “Or does it make any sense that the ECB keeps lending to private banks at 1.75%, while the rent of these by mere speculative placements in Spanish debt to 10 years already gets 5% or that the interest rate that Irish will be forced to pay for the rescue plan is 6%? Who other than bankers and their investment and retirement funds are the beneficiaries of this suicidal policy of the ECB?”

    “It would be enough that the ECB declared that it would begin to buy public debt for all the speculation (…) to cease immediately”.

    1. DownSouth

      Great article.

      So what Trichet offers up is layer upon layer of hypocrisy.

      Trichet seems to be infected with the same contagion that plagues central bankers worldwide. He takes it as an article of faith that the TBTF banks must be saved at any and all cost, and the people and their governments can just go to hell.

  4. Robert Dudek

    The euro, as the preeminent manifestation of European integration, will not be abandoned under any circumstances. English-speakers tend to underestimate the importance (to Europeans) of continued European integration – a process that seeks to make armed conflict within Europe impossible.

    The next steps will be towards a centralized fiscal authority, the timetable of which has been moved up thanks to the crisis.

    Eventually all the EU member states will join the euro, save perhaps for the UK as the lone holdout. When it is the lone monetary union holdout, the UK may end up being the first and only country to leave the EU.

    1. Paul Tioxon

      Maybe they will also call off the fancy royal wedding in 3D. Maybe they will only serve it up in Panavision.

    2. DownSouth

      Well if conviction and certitude on the part of the champions of European unification counts for anything, then the EU is a done deal.

      But one must remember that the “process that seeks to make armed conflict within Europe impossible” is the same process that made the Civil War in the United States inevitable.

      Texas offers a great example of the vicissitudes of sovereignty vs. integration. The first part of Texas’ story is told beautifully by Josefina Zoraida Vazquez in La Intervencion Norteamericana 1846-1848. The Texans rebelled against the mandates (especially the one outlawing slavery) coming out of Mexico D.F. and achieved their independence. They later joined the United States, only to succeed from the United States for the same reasons they rebelled against Mexico.

      To locate these sorts of happenings within a much larger historical and theoretical context, one could probably not do better than Peter Turchin’s War and Peace and War. It may indeed be true that, in order to compete in the global arena, European unification is desirable. However, this does not mean it will be accomplished “under any circumstances.”

      1. Robert Dudek

        “But one must remember that the “process that seeks to make armed conflict within Europe impossible” is the same process that made the Civil War in the United States inevitable.”

        The American Civil War occurred because the North refused to allow the South to secede (not for nothing is it called the “Northern War of Aggression”).

        It is inconceivable that the EU will forcibly prevent any member state from exiting the EU.

        There isn’t a desire to leave because, despite all the problems, it’s better to be in the EU than outside it.

    3. attempter

      …continued European integration – a process that seeks to make armed conflict within Europe impossible.

      Of course, those same globalizers are waging vicious war in the Global South. But those are just brown people who don’t understand property, right?

      As for armed conflict within Europe, or within any Western land mass, call me crazy, but I don’t think the populace enslaving itself to a handful of gangsters is the answer.

      As we see, that’s all the EU is about. Just yesterday I read George Friedman’s latest Stratfor travelogue, this installment on the Ukraine. He described how EU-lusting finance vermin there are drooling at the prospects of getting their hands on Polish pensions. To flat out steal them, plain and simple.

      Nor will it lessen violence in the end. If nothing else, the eventual police violence will be far more severe than what freedom-hating people feared when they gave up their freedom in the first place.

      The banks are terminally insolvent, and the banksters are history’s worst robbers. The first question any people now faces is whether it will continue living under their tyranny. If the answer to that is “yes”, no further question will ever be necessary.

  5. jake chase

    The solution is ridiculously simple. Have the Fed buy all the debt of the Euro states. This will drive down the dollar, create a bonanza for US exporters. Who cares if the debtors default? Their debt cannot be worse shit than the mortgages now on the Fed balance sheet. All this electronic money is just numbers on a screen. You don’t even have to print it.

    Of course, the ECB won’t let the Fed get away with this attack on home markets. It will retaliate by buying worthless US mortgages.

    1. hermanas

      Been missing you Jack, and while they’re at it, the Fed, with the funny money, can pay off the Federal deficit. “What me worry.” Alfred said.

  6. Richard Lyon

    Economics does involve practical realities. Ideological purity alone is not sufficient to make economic arrangements work. The fact that European integrationists CARE about the euro doesn’t make it viable. The entire EU project has been an exercise in political fudge. Nations and governments are told what they want to hear to get them to buy into deals with vague promises that the practical details and contradictions will get worked out later. Later has arrived and the chickens have come home to roost.

    1. Robert Dudek

      “The entire EU project has been an exercise in political fudge.”

      When is politics anything BUT political fudge?

  7. Maju

    And another “Spanish” (Catalan in fact) economist that has something intelligent to say about the €uro-crisis: Vicenç Navarro: No to financial markets (in Spanish):

    “Both alternatives [Merkel/Sarkozy’s and Zapatero/Papandreu’s] exclude the historically most successful solution, which is to give a greater role to the state and communitarian institutions at EU level”.

    “Why does not the ECB [buy bonds from the states, as in the USA]? The main reason is that German banks have too much power and, as condition to allow for the mark to be replaced by the euro, they imposed several conditions. One was that the main goal of the ECB was to control inflation. (…) This harmed economic growth. Since then the growth rate of EU has been smaller than in the USA, where such demand does not exist”.

    “And another condition imposed by German banks was that the ECB would not buy sovereign debt from the states. (…) and there is the problem: the states had to submit themselves to the “discipline” of the markets instead of, as must be, were the markets the ones submitted to the discipline of the public authority. For a moment, while entering in a deep crisis in 2007, it looked as if some change was going to happen, and the BCE bought some Greek debt in fact. But German banks protested, so it does now only very rarely. The BCE has not assumed its role as the Federal Reserve Board and that’s the problem”.

    “The BCE’s money is public money. This money is used to help the banks, and also lends to the states to pay to the banks. If instead of this, the money would have been used to guarantee credit through the formation of public banks, demanding also that the BCE bought debt from its member states, the Eurozone would not have the problems it has now”.

    In brief: instead of playing its public bank role, the BCE is acting as middleman for bankster mobs whose only plan is take the money and run. And most of the blame is to be placed on German suicidal intransigence, German banksters’ internal colonialism idiocy.

  8. Hugh

    This is not a fix. It is another announcement of a fix. Wash, rinse, repeat, you have to wonder how many times they can get away with this kabuki.

  9. Thomas Barton, JD

    for the last 15 minutes the link for the Eurointelligence blog has been non responsive. A yahoo search also produced a non response. Has the site been silenced or is this just server maintenance issue ?

  10. Bernard

    fascinating to watch the rich Bankers steal everything. and the end run on independent states as well. watching the Euro steal money and countries is astounding to watch from this side.

    this is so similar to what the Republican/Banksters are doing here in America.

    it’s so much easier to read about Europe’s thieves, though. the media here won’t let on what’s been going down for so long.
    absolutely fascinating.

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