August 8, 2011

What happens if Germany says enough?

Posted in Euro · 128 comments ·

You know the feeling when you get a text and have to look at it twice to make sure that what you are reading is what you just thought you read.

On Friday morning, I got a message from a friend who was caught in a huge midsummer traffic jam at the Swiss border coming from a family holiday in Italy.

On the main road out of Milan to Lugano in Switzerland, the Italian police, under instruction from the Guardia di Finanza, were stopping everyone.

They were searching all cars, trucks and vans for money – actual wads of euros – because ordinary Italians are now moving their money to Switzerland.

They are panicking. This has always been the case in Italy. At the first hint of a financial crisis, they head with their savings up the road to Switzerland.

When a financial crisis moves from the relatively opaque trading rooms of investment banks to the ordinary people, you know you’re in trouble. In Italy we are seeing not just a run on a bank; this is a run on a country.

Two weeks ago this column opened with the following words: ‘‘Let’s be clear.

The European deal announced last Thursday night is designed to do one thing and one thing only. It is designed to persuade investors to buy Italian and Spanish government bonds.” I thought this deal would fail, but had no idea that it would be blown out of the water quite so quickly.

Now even the average punter is moving His money out of Italy and Spain.

This makes a mockery of the likes of Olli Rehn and the rest of the European elite who claim that the ‘fundamentals’ are strong and that everyone is overreacting.

When you look at the fundamentals, you see that the picture is actually quite frightening and people are right to be cautious.

Italy has a debt stock of 120 per cent of GDP. This accounts for 23 per cent of all eurozone sovereign debt and it needs to be rolled over constantly.

At an interest rate of 2 or 3 per cent, that might be manageable. But at an interest rate above 6 per cent, it becomes an entirely different story.

The problem for Italy is that it has to keep refinancing, even though its budget deficit, at less than 4 per cent of GDP, is among the lowest in the eurozone.

Without debt payments it is running a budget surplus, so it can’t be regarded as being fiscally irresponsible, but when the rate of interest on its debt rises, you begin to see what could happen.

Next year, Italy will need to raise an amount equivalent to 20 per cent of GDP simply to refinance all the debt that is due.

This figure is from the IMF and the bad news is that at 20 per cent of GDP Italy, in relative terms, needs to raise more debt as a percentage of GDP than even Greece.

Suddenly, as interest rates rise, Italy becomes a big – really big -Greece.

But forget Italy’s problems next year and consider what it has to finance in what is left of this year.

Before Christmas, Italy needs to raise €237 billion – and another €296 billion in 2012.

So now you see the euro’s debt problem and how it is spinning out of control. Either the markets finance this – and this week they are signalling that they are only prepared to give the Italians money at above 6 per cent – or someone else has to buy Italian government debt.

That other source of money is the German taxpayer, who from now on everyone assumes will be Europe’s lender of last resort.

This assumption that the Germans will pay is what is driving down Irish bond yields too because certain people are making the bet – a reasonably logical one based on past performance – that Germany will pay. If you believe that the Germans will pay in the end, you might as well sell Spanish and Italian bonds and buy Irish bonds, which are much cheaper because, ultimately, Gunther will bail us all out.

But what if Gunther doesn’t see it this way? What if he says ‘genug’ (enough!)? What if, sitting in his kneipe over a litre of frothy local Weissbier on his parsimonious annual two-week camping holiday in the Schwarzwald, Gunther says: ‘‘Hold on, we can finance the Greeks and maybe the Irish, but the Italians that’s another case.” What do we do then?

Then we must consider plan B.

Already central banks all over the world are making alternative plans.

They are hedging in the age-old fashion – they are buying gold like never before. Central banks are ramping up their gold-buying as they seek to diversify their reserves away from the euro and, of course, the dollar. South Korea became the latest government to disclose a big bullion purchase, saying that it recently bought 25 metric tonnes, more than doubling its holdings to 39 metric tonnes.

Mexico, Russia and Thailand have also been major buyers in 2011.

This year, governments have almost trebled their net gold purchases, increasing their holdings by 203.5 metric tonnes this year, up from a 76 metric tonne rise last year.

Before this year, governments had on balance been shedding their bullion for two decades, during which gold was seen as a relic, with 1988 being the last year that official holdings increased.

Now all that has changed and will continue to change. In short, other central banks are betting that Gunther will not pay and that something will happen to the euro.

Clearly they are betting against the dollar too, but for us Europeans Gunther’s next move is what we are focused on. So let’s see what might happen.

Plan A is based on the notion that the Italians, Spanish, Greeks, Irish and Portuguese will all run huge budget surpluses to pay creditors – in most cases, foreign creditors. This is hardly politically plausible, for a variety of reasons, the main one being that growth, such as it is, will disappear.

Without growth all bets are off, and politicians know that.

Plan A is also predicated on the notion that if we get fed up of running budget surpluses, Gunther will step in and bail us all out.

This is also reasonably implausible.

Why mightn’t Germany do what it did in the 1993 currency crisis, when Germany undertook to buy all French government assets to protect the battered French franc?

Germany didn’t wade in like this for anyone else. All other embattled currencies devalued.

The Franco/German arrangement was described by Bertie Ahern at the time, as a ‘‘sweetheart deal’’, but it was much more than that. It underscored what being at the ‘heart’ of Europe means – it means Germany and France and when push comes to shove, that’s it.

What if, when this debt crisis threatens France, as it will, the Germans say they will help France but no one else?

What if they realise that the reason the markets are selling Italian bonds is because there is no Italian currency to sell? If there were a currency to sell, the markets would express their scepticism about Italian economic policy by selling the currency.

If this were the case, German savers would be insulated from the delinquency of the Italians and others. What if they were to figure this out?

What if they were to come to the conclusion that either they underwrite everything in the euro and thus put themselves on the hook for all of us, or the euro goes and they are off the hook?

This hot August, somewhere in Bavaria, Gunther has a lot to think about as he barbecues his bratwurst over the holiday campfire.

Meanwhile, Guido isn’t waiting around as he bolts for Zurich with his swag.

  1. mediator

    Is there any chance that the regular contributors to this blog could limit themselves for once to discussion of the above article and more tellingly what they are doing or would recommend that people do to prepare for the upcoming financial chaos?

    David what would you be doing with YOUR swag???

    • Eireannach

      Buy gold or silver, if you have savings

      • private1

        How does a small parcel of farm land sound say 20 acers should a person swap say half of any saveings they have in to farm land?

        • 20 acres of arable land could be very useful and provide you with plenty of food and a surplus which you could sell or trade with other people. However most people live in cities and towns

          If I lived in the city and had enough savings I would leave and buy a cheap place on the west coast and start living life the way it is meant to be lived – off the land.

    • A lot of people don’t have any swag pal therefore the content of the article is irrelevant. Watching all these people panicking and wondering where to stash their swag makes you want to piss yourself laughing. You can’t take it when you go

      • Maeve Harrison-Barbet

        But it sure helps while you’re still here!

        • Perhaps if you are putting your swag to good use.

          As far as I can see people with swag spend most of their time worrying about losing it rather than putting it to better use such as buying that 20 acres (see my post above) and having the security of their own food source and a modest roof over their heads. That to me is more sensible use of money than hoarding it in a bank and worrying if it will still be there tomorrow morning. Then again some people just love to worry

    • Maeve Harrison-Barbet

      What a brilliant suggestion mediator. It would be great if contributors followed your advice on every subject.

      I second your question as far as everyone’s, and particularly MY, ‘swag’ is concerned.

    • molly66

      on the subject of chaos does any golf guys know if mr cowan was playing golf with seaney fitzs in portugal in recent days.

    • Juanjo R

      Moving to a BRIC. The footballey one to be exact…I don’t fancy the other three one iota…

    • redriversix

      buy gold or silver,i reckon gold will go up by another 25% between September and december !
      Turn everything else in to hard cash.

      Treat every euro as a prisoner,spend only on essentials

      We are facing the greatest financial armageddon the world has ever seen.
      As David says in his article,Countries all over the world are buying as much gold as possible, it could reach $3000.00 an ounce !! [BASED ON SUPPLY & DEMAND }

      Nobody in power anywhere wants to face up to reality that U.S and Europe are Bankrupt.
      Forget about irish bailout , their is not enough money in the world to payback or guarantee bonds from around the world.

      Possible prediction ; U.S ground troops to enter libya by end of Oct under N.AT.O.and U.N banner ! [hope i am wrong ]

      Watch Asia and China for Contagion from U.S and European Crisis.
      Did you know that China holds over 3 Trillion dollars in Treasury bonds,they have to be nervous !

      Fill your swag if you have one.Hope you all enjoyed reading this.Stay Happy and put your families First……

  2. @ Mediator,
    I bought gold a few yrs back, it’s been steady and is now about to go parabolic. But that’s really only because of the debasement of the euro and dollar due to the printing press/ inflation.

    Keep some cash handy if you have it, enough to get you through a few weeks worth of petrol and food.

    Buy some silver coins also, they are still cheap enough to invest in.

    There is no perfect place to be but at least it’s better than paper money.

  3. Oh and maybe stock up on some food stuffs, pastas, rice etc.

  4. adamabyss

    Ellan Vannin.

  5. NeilW

    If Germany doesn’t pay up then the unemployment they have exported along with their goods finds its way home to Deutschland.

    The Germans lend money to the periphery so that they will buy German goods and avoid the Germans having to deal with their chronic underconsumption problem. That is how all exporters try and purchase a ‘get out of jail free’ card – dump the unemployment on some other poor sop of a country.

    So the Germans have a simple choice – buy up the periphery debt and sit on it, agree to a transfer payment to the periphery to clear some debt, or watch German unemployment go through the roof as exports collapse.

    The sooner the periphery points out the game that Germany is playing – ably assisted by the failures of neo-classical economists to grasp the simple money circuit that is in play here – the sooner the Germans will put their hands in the pockets or blow Europe to pieces again.

    The European Union was supposed to stop Europe going to war. Unfortunately they didn’t realise that all that happened is the countries swapped bullets for coins.

    • Maybe Neil’s right, David? Maybe Gunther can’t afford to say ‘genud’?

    • Eireannach

      Of course there is intra-European competition between different fiscal policies, cultures of speculation vs production, savers vs spenders.

      Europe will experience shifting power dynamics forever. It can never be otherwise.

    • Eireannach

      Are you threatening Ze Germanz with unemployment if they won’t give all the peripheral countries more and more bailout money?

      I’m not German, but I suspect that would be greeted as an intimidation FAIL.

    • mark hannon

      as an irish citizen living in germany and selling an irish produced product for the last 20 years i have seen the boom of the after wall period go to hard recession and come back now to a boom (export led). the positive affinity towards ireland from the man in the street has not changed.

      There was a reason for the wage constraint over the last 10 years. The millions made unemployed when east german industries were shut down en-mass ( a mistake still being paid for) had to be found employment. this has led to the creation of a whole sector of the workforce being employed by contract companies, and thus a low wage workforce on €400 – €800 a month. this has led to the situation whereby average german wages have fallen considerably compared to other european nations. german high-tec companies still pay high wages for high spec jobs. also what can be outsourced has been outsourced(for good or for bad).
      welfare payments have also been radically cut and those in full employment have seen their wages rise at less than the rate of inflation for the last 12 years. 20 years after the fall of the wall we still have 2 germanys, a low wage east and a high wage west germany. thus, productivity has risen and is out of sync with the rest of europe now.

      what gets people here most is the fact that germany is expected to bail people out who for the most part stretched themselves buying property, with money lent by german banks amonst others, while they themselves couldn´t get a loan because their wages didn´t meet the lending criteria (25%-40% own capital) laid down by the very same banks.

      most germans who understand what is happening know that ultimatly germany will end up paying a large part of the bill, and also why it needs to do this.

      what they want to know is that 3 years into this debate when the reforms of the finance system will come so as this can crisis will maybe not happen again.

      • Harper66

        as an Irish citizen living in ireland I find your post most informative however I take major exception to the idea that “what gets people here most is the fact that germany is expected to bail people out who for the most part stretched themselves…”

        Ireland would never have found itself bankrupted thus required “bail out” funding if the private debt of banks had not been forced onto the sovereign. The pressure for Ireland to take on private banking debt came from EU policy, for EU policy read French and German interests.

        The EU banking system bankrupted itself through “wild west” banking practices and greed.When this dawned on the banking fraternity they turned to their equally complicit political counter parts and so the greatest transfer of wealth from sovereign to private occured. Make no mistake Irelands debt went directly through Ireland and back into part refinacing German and French banks.

        The act of making private debt sovereign can never be justified.

        Ireland is paying a punitive interest rates on the “bail out”.

        I feel for the average German person because they too are victims in this mess, however they would be better served to refocus their anger to those deserving of it.

        • EMMETTOR

          Absolutely, Harper66, if the amount of the private bank debt that our politicians have illegally foisted on the Irish people had actually been spent on the Irish people, we’d be living in a modern European country with stuff like a mass transit system in our capital city. Whatever about AIB and BOI, giving money to Anglo was like bailing out the Mafia and it was only done because the EU (a.k.a. France and Germany) demanded it. The EU (& it’s bastard offspring, the Euro)has no democratic mandate and is the enemy of the people of Europe. There will be no meaningful reform of banking and the current crisis will repeat itself until our civilisation collapses.

    • wills


      *chronic underconsumption problem*.

      Tis called balance, moderation and prudence.

      We need some of this chromic under-consumption over here.

      Greed has destroyed society.


      Absolutely right NeilW. The whole problem is that Germany, like Japan, refuse to balance their trade. If they still were trading under the Deutschmark, it would continue to soar to stratospheric levels due to German export surpluses. But because their export performance is buried in the general trading performance of the Euro it is the Euro that rises but it does not rise as much as the DM would have. Thus, poor exporting countries like Greece suffer a strong Euro which makes it difficult for them to trade.

    • Interesting Guardian article about Germany

      “Which is the No 1 problem economy in Europe?”

  6. paddyjones

    I think the term “Gunther” is a racist slur , the good German people are hard working, industrious , inventive and prudent. I have many German friends and feel ashamed to be Irish when I speak to them , I try to be more like Germans and less Irish.
    I save 20% of my salary , I am deleveraging big time and hope to be mortgage free in 5 years. Debt is the biggest problem of the Irish both sovereign, corporate and personal.
    Only adopting a more German way of life will save us , is it no wonder they were once descibed as the master race !

    • Eireannach

      Belgium produces over 750 varieties of beer.
      Wales, by contrast, produces no commerical beers (maybe a few home brews).

        • Eireannach

          Brilliant. Their range looks tasty.

          How about this – Ireland produces one major lager (Harp) yet we consume huge quantities of lager. Why don’t we make our own lager? The Scots are considerably ahead of Ireland in whisky production. England produces vast quantites of ale, we have 3 big brands in Ireland: Smithwicks, Kilkenny, Macardles.

          Producer economies seem more sturdy, mor resiliant than consumer economie to me.

          There is hope for a productive economy in Wales (and Ireland) yet.

    • Should change your name from Paddy so (if that’s not a racist slur :-)

    • “I think the term “Gunther” is a racist slur”

      When I worked in England people used to call me Jock. I didn’t have a problem with it

    • Maeve Harrison-Barbet

      With reference to the last part of your last sentence: – Mainly by the Germans themselves!

    • Harper66

      ” I have many German friends and feel ashamed to be Irish when I speak to them..”

      Your not alone their Paddy,with opions like yours I feel quite ashamed your Irish too.


      Paddy, what would you prefer David to call them? Germans, perhaps? Something witty like that?

  7. Dorothy Jones

    David, Germany [State] will probably continue to support the Euro project in some form or other. However, a further note to your article above: the Aeusserungen [expresssions] of the average German taxpayer has taken on a vastly different tone in recent months. In the 20 years I have spent dividing time living and working in Germany; there has been a huge shift in how opinions are published. The Leserbriefe [letters to the editor] in publications such as the FAZ [Frankfurter Allgemeine Zeitung] and the Sueddeutsche are openly highly critical of the behaviour the bailout ‘Laender’. Now, while this is not counteracted within such media with an informed discussion on lending by the German Banks, the reality is that the Geerman taxpayer has had ‘die Schnauze voll’ [a somewhat stronger expression for 'genug'].Angela Merkel is the subject of much vitriol from the tabloids; and can expect this hostlity to mount in the coming weeks.

  8. morganf16

    Folks at the helm really need to start understanding exponential maths. 6% equates to a doubling of the debt in a very short time!!! Gets out of control very quickly
    Here’s a quick tutuorial

    • Eireannach

      The doubling time for a compound loan is 70/interest rate.

      So 70/6 = Less than 12 years, Italy will have to pay bondholders 200% of what it borrows.

      It follows that Italy cannot borrow at 6%. Where will they get double the money in 12 years? So now nobody will want to lend to them, so the interest rate will increase.

      Not good for Italy, at all.

  9. “Next year, Italy will need to raise an amount equivalent to 20 per cent of GDP simply to refinance all the debt that is due.”

    Remember The Stability and Growth Pact (SGP) is an agreement among the 17 Member states of the European Union …. it consists of fiscal monitoring of members by the European Commission and the Council of Ministers and, after multiple warnings, sanctions[3] against offending members.

    The pact was adopted in 1997,[4] so that fiscal discipline would be maintained and enforced in the EMU. Member states adopting the euro have to meet the Maastricht convergence criteria, and the SGP ensures that they continue to observe them.

    The actual criteria that member states must respect:
    an annual budget deficit no higher than 3% of GDP (this includes the sum of all public budgets, including municipalities, regions, etc)
    a national debt lower than 60% of GDP or approaching that value.

    The SGP was initially proposed by German finance minister Theo Waigel in the mid 1990s. Germany had long maintained a low-inflation policy, which had been an important part of the German strong economy’s performance since the 1950s; the German government hoped to ensure the continuation of that policy through the SGP which would limit the ability of governments to exert inflationary pressures on the European economy.”

    By the terms of the above agreement, the euro has already disappeared into oblivion. DmcW “Italy has a debt stock of 120 per cent of GDP. This accounts for 23 per cent of all eurozone sovereign debt and it needs to be rolled over constantly.”

    Basically, the EMU has failed. It failed to monitor and police itself, countries acted in a similar fashion to Anglo. Germany and France could go for eurobonds and guarantee debt across the eurozone.

    But this would be MAD(mutually assured destruction). On a much broader scale, it would be similar to the guarantee the Irish government gave to guarantee the private debt of the Anglo fleet, as public or sovereign debt.

    Euro bonds would actually work well were the terms of the Stability and Growth pact implemented in full from the beginning. The fact that these terms were abandoned and set aside by leading members of the eurogroup, means the EMU is in a considerably weaker position than it would be otherwise.

    Does Gunther, on his visit to the beach, really want to invest all his future in the Euro castle, built on sand, ready to be swept away, the very first time the tide comes in:)

      • Deco

        A bit of an oxymoron.

        It has delivered instability.

        And the growth was only phantom growth.

        All a bit Orwellian really.

        I am sure we will be entertained with more absurd phrases from Imperial HQ in future also.


      Merkel’s position is as irrelevant as the desires and needs of the German volk. If she looses the next federal election in Germany, whoever replaces her will continue all her policies, no matter what the German people want. Large German and French conglomerates were the (designated) beneficiaries of the “Single Market” and that can’t really exist without the “single currency”, the creation of which, was the most cack-handed, incompetent operation since the C.A.P.

  10. Nina Ogden

    It is important that people in Ireland know that the German Constitutional Court is to issue its decision in Seotember to a challenge by a number of leading professors as to the legality of Germany funding the massive bailout Whatever the Court’s decision, there is huge pressure from the people, parties and miuch of the press, against the insanity of the German role in this. They are continually reminded of 1923, when it took the proverbial wheelbarrel to buy a loaf of bread. They are horrified at the thought of the hyperinflation inherent in what is supposed to be their role in these insane bailouts.Angela Merkel has already lost one by election on this issue. A couple of weeks ago Obama promised her, in a well publicized phone call, that the fed discount window would be fully open to Germany for this purpose. The events of the last few days throw all these already doomed plans into a cocked hat.

  11. Come an everybody. We are not going to get out of the mess until government gets a lot smaller in Europe and especially in Brussels. Maybe the Tea Party have one good idea, For me, I’m out of the country, I’m off to S E Asia until the “Penny Drops”.

  12. corky

    So where do we go now, withdraw what cash is in the bank and put it under the mattrass or switch to a different currency ?

  13. wills


    Good read.

    I reckon the insider / ruling classes / corpocracy / etc, the credit system itself is cornered.

    If one looks at it from the perspective that the *credit system* functions on the economies future growth.

    So, the insiders constantly running with their debt now, pay later, scam has a limit.

    At some point the debt needed to keep the scam running hits the buffers. The future economic growth been there in the future to fund the debt made in the past does not materialize.

    I reckon we are there.

    The system is freezing under the debt now, pay later scam running on empty.

  14. mediator

    What about the majority of us who live paycheque to paycheque? Most people have little or no savings so there are no worries as to how to protect it by buying for eg gold and silver.

    Whats the prognosis for the next year?

    • Juanjo R

      How about bottom of one credit card limit to bottom next credit card limit.

      Prognosis; a default , aka Morgan Kelly says, soon after Italy or Spain give up the ghost and eject themselves from the euro. We haven’t the courage to be trailblazers on that front. We are goody two shoes.

      Spains hiding her debt in her regions typical story linked here ( in spanish )

      I guess I don’t know who will be first I was figuring it would be Spain.

  15. Incident

    Spotted Bertie about 2 hours ago at Dublin Airport, boarding a flight for Zurich. Suitcase looked remakably heavy!

    As did he come to think of it!

  16. BrianM

    We’re not going to leave the Euro. Neither is Germany. The Eurozone debt crisis is extremely serious, as is the US debt crisis. Both will ultimately be resolved. Narrowing the budgetary deficit to less than 3% and even running a surplus is something we should be doing anyway.

    In Europe blue bonds (or cross guarantees) will be the ultimate solution. A properly implemented and monitored stability and growth pact (a la the current troika monitoring mechanisms) will be implemented. We’ve already signed up the the S&G concept – this time it will actually be adhered to. Austerity for another 3 or 4 years, significant shrinking in our current spending and a very slow economic recovery is all we have ahead. It’s not going to be nice, it will be very difficult but there is no easy solutions and talking rubbish about defaulting, leaving the euro, reintroducing the punt or buying swiss francs and gold & silver coins won’t change that.

    Time for some realism.

    • The debt cannot be sustained by the working and middle classes. The bankers are just looting the ship before it sinks.

      Time for some REALism….not fascism!

    • Re “Time for some realism.”

      There is a debt mountain that has to be dealt with. No amount of blue bonds or belated adherence to S&G will make it go away.

      No amount of recovery is possible without debt default.

      EMU had its chance and blew it. This is EMU’s 2008. Its time to play tag and whoever gets caught gets to play Lehman’s:)

      However there are other opportunities in the current game play.

      One opportunity that might save the precious euro would be a g7 decision to redenominate the euro and peg it at a gold standard rate, effectively creating a new currency pegged to gold.

      This would reassure markets. It would need a new name, the ‘uo’. Then bring on the S&G with penalties against countries that do not fulfill its regulatory mandate conditions.

      It would require a concerted effort by jack in the beanstalk politicians to take on the banking industry.

      A public banking culture should be promoted to serve the people, replacing a culture of private investment banks scamming the people with debt, that steals from the future and imprisons the present.

      But alas the Grendel banks have our politicians led by the scruff of their necks to do their sinister bidding!

  17. uchrisn

    Italy is the crux of the issue, G7 member, next president of the ECB.
    Ireland, Greece and Portugal were sacrificed to save Italy and Spain. One of my Italian friends since 2008 they has been thankful for Irelands bail outs of their banks as he realised the precarious position Italy was in.
    So its Italy and Spain on one hand Germany and France on the other. The other 13 eurozone economies are all small.
    The Germans are culturally very different from the Italians. They have different perspectives on life. As are the people in the North and South of Italy. Its not that the southerners are lazy, its more that they value their free time and their work/life balance is different. They like long summer holidays, longer lunches,earlier retirements and spending more time with family instead of working. This they are generally not as productive or competitive as the Northeners. This is a life view and I don’t think its going to change. You can try and force them to change, might not either be the right thing to do or be succesfull.
    So how can you feel your way around that in a monetary union? For me this is the base issue of the crisis.
    Well In the Lira they did so from Northern to southern Italy simply by large fiscal transfers. The south is still much poorer than the North, salaries and oppurtunities are lower in the South. You have many Northern Italians who want to break away from the South for this reason.
    So the solution is Italy and Spain should give up their ability to issue government bonds and spend all taxes collected in Italy. A federal European finance ministry should issue Eurobonds, collect federal taxes and decide on how much money Italy and Spain can get on a yearly basis. Much as with the South of Italy in Federal Italy receives more money than it gives in tax receipts etc, so Italy will receive more money than it gives in tax receipts and really is getting a better deal.
    Italys current debts could have a haircut of say 20% applied and be converted to Eurobonds and thus become the debts of all Europeans.

  18. uchrisn

    Germany can’t pull out for the following reasons.
    1. Historically they were helped enormously after WW11 to get back on their feet and given every chance by France etc. They simply can’t ignore that.
    2. They accepted East Germany and powered on, they are not quitters.
    3. If they did pull out their currency would be really really strong compared to other EU countries with whom they have forged strong trade links.

    • I believe Germany and France will revalue upwards to DM2 and FF2 along with Netherland and together pegged .And the rest remain in the Euro that will disintergrate and default and devalue from existing value.

      What fireworks that will be .

  19. Malcolm McClure

    This talk of ‘Plan A’ and ‘Plan B’ is based on the assumption that somewhere there exists a rational, intellectual, economic solution to the crisis if only everyone would agree to it.

    There has been a gradual realization since the election that this is an Existential crisis, not one that economists can solve. However, most economists don’t do existentialism.

    Sartre’s “indifference of ‘things in themselves’ to the human will” has now defeated the best minds in Europe, so all we can do is sit back and watch what happens. We have plainly lost control, whic presupposes that we ever were in control.

    Economists are hidebound by angst, cherishing their freedom to offer solutions but fearful that their offered solution will somehow limit that freedom.
    The facticity of being Irish determines our choices and limits our capacity to accept a European solution. Existentialism asserts that people actually make decisions based on the meaning to them rather than rationally, so each nation in Europe is doing exactly that.

    Despair in existentialism is more specifically related to the reaction to a breakdown in one or more of the defining qualities of one’s self or identity. If a person is invested in being a particular thing, such as a bus driver or an upstanding citizen, and then finds their being-thing compromised, they would regress to a state of despair–a hopeless state.

    The existential notion of the Absurd contains the idea that there is no meaning to be found in the world beyond what meaning we give to it. This meaninglessness also encompasses the amorality or “unfairness” of the world. This contrasts with “karmic” ways of thinking in which “bad things don’t happen to good people”; to the world, metaphorically speaking, there is no such thing as a good person or a bad thing; what happens happens, and it may just as well happen to a “good” person as to a “bad” person.

    Because of the world’s absurdity, at any point in time, anything can happen to anyone, and a tragic event could plummet someone into direct confrontation with the Absurd.

    It seems that we have now entered the economic realm of the absurd, so fore-warned is fore-armed.

    • @malcolm

      What you said above is a parallel to the Golden Calf when the Jews were lost in the desert.Do we have a Moses among us who has gone fasting for forty days and forty nights and then receive a new Code of Law written in Stone or will it be Googled to Googlaw in a tablet .How many googlements ( commandments ) will there be?

      Is Sin obsolete ? Or will it be Thou shall not be an existentialist ?

      • rebean

        This fasting for 40 days and 40 nights sounds like what might happen if we dont find a way out of this mess. Try fasting for the rest of your life if this economic armageddon takes hold. I think I will buy some rice from Lidl and hoarde it

    • Juanjo R

      “I can calculate the motion of heavenly bodies, but not the madness of people.”

      What Sir Isaac Newton said this after he lost a whale of money in the ‘South Sea Bubble’ in 1720. Thats nigh on 200 years before Sartre.

      A similar mix of financial laissez faire and global exploitation existed then as now to bring it about. Not to mention hubris and widespread herd-mentality.

      There is nothing new here at all no unchartered realms have been entered.

      All this has happened before – and all this will happen again.

  20. uchrisn

    On another point if Germany had gone for this Eurobonds and finance ministry earlier then they would prob have had to swap all Greek/Italian debt at 100% of face value under the Eurobonds heading, which is obviously what the markets want. This is hardly fair as greek debt for example was trading at 50-75% of facevalue.
    If they hang on and let Greece/Italy etc go bankrupt then they have a much stronger negotiating position with the markets. They can impose haircuts on bonds with private losses. Then after much has been cut, they can go for the eurobonds option.

  21. piombo

    Buongiorno tutti,
    The Italian gov is going to reconvene next Thursday to push through the latest emergency budget measures. There is little cohesion among the government parties and the infighting is in crescendo.

    On southern Italy, the real brakes are organised crime, chronic tax evasion, and corruption.
    There is also a strong risk of geographical tensions between north and south. Added to this is the fact that the majority of the police and armed forces are from the south while the disgruntled tax payers are, well, from elsewhere.

    I have changed my mind on Germany. After this morning’s point blank refusal by Angela Merkel to pony up on extra EFSF funds, my gut feeling tells me we are heading for a new D-mark with Austria and The Netherlands.
    David could be closer to the truth than I would have given him credit a couple of months ago.

    From personal experience, I don’t believe Germany is afraid of returning to the D-mark. Their sights are set on Asia, Africa and Latin America. They haved bedded down the EU market in the sectors they have chosen to serve.

    I am unsure how Germany will treat France. Apart from the official facade, we all know that Germans likes French & Italian wine, cheese and having hols there. We know, however, there is no real respect nor even empathy and that the generation of WW2 is all but gone and any residual guilt is buried with them.

    I hope I’ve remained on theme.

    • Juanjo R


      17 countries use the Euro apparently. Another 2 are incoming. Heres my guess;

      I think the core founder members of the EEC/EU will retain the Euro because it suits them and trae beween them and also to reduce individual uncertainty disruption to their economies – so thats Germany/France/Benelux possibly with or without Italy. They all trade heavily with each other.

      The PIGS will go have to go as they default.

      I think other users ( Finland, Slovenia and Malta etc ) will stay or go depending on if it suits them and at their own pace and I would presume the incoming ones are having serious misgivings.

      So in the end a new ( old EEC shaped ) reduced eurozone with 170 million people containing 4 of the top 20 world economies ( or 220 and 5 including Italy ).

  22. An international renminbi is on the way

    Over the last year or so, China has taken the first few steps towards making the renminbi an international currency. And it’s done this by taking advantage of the unique status of Hong Kong.

    As most readers will know, the Hong Kong financial system is completely separate from the mainland one. It has its own currency, which is pegged to the US dollar, and its own central bank. It operates no currency controls and you can freely bring funds in and out of the territory.

    In contrast, China imposes strict capital controls, restricting the ability of foreigners and locals to exchange foreign currencyfor renminbi and vice versa. This is mostly done to prevent large amounts of potentially volatile foreign capital flooding into and out of the Chinese market.

    Nonetheless, some exchange of renminbi for foreign currency has to take place in the normal course of trade and investment. As a result, deposits of renminbi have been building up outside China.

    The crucial point here is that this offshore renminbi cannot automatically be repatriated back to a bank account in China. Capital controls prevent that. Thus there are two separate and segregated pools of the same currency, one onshore in China and one offshore.

    As a result, it’s possible to experiment with developing an offshore renminbi market that anyone can trade in, without having to throw open the mainland financial system to the whole world. And that’s what China is now doing, through the offshore Hong Kong renminbi market, which is known as the CNH market (since CNY is the currency code for the renminbi).

    • The above is called :

      The Economics of The Dim Sum Funds

    • rebean

      I cannot understand why China is hoarding US bonds. Surely the way to go is to buy resources like Alaskan fisheries,oil reserves, gold mines.What good is a load of paper in some vault in some bank. Those bonds I reckon are to be devalued soon

      • redriversix

        Your right Rebean , those U.S treasury bonds have already been devalued since last Thursday.China , like any country does not “hoard”Bonds they buy them to make money.

        The U.S congress passed a bill , very quietly i might add on the 12 / 5 / 11 allowing drilling for Oil in Alaska and south Dakota.The oil is there , they just gotta take it out of the ground.

        America is going to try and become self sufficient in terms of oil.

        I predict America will default on its debts as it believes it is the only superpower.

        China has no Oil to speak of.

        Arab spring rising to continue in middle east ending with Saudi Arabia and intervention under U.N auspices by U.S and maybe U.K.

        This could lead to a huge reduction in oil production across the middle east , driving the cost of crude to almost $200.00 a barrel.

        Meanwhile gold is being hoarded across the world to eventually be used to back up a new trading currency , the petrodollar.

        China was / is the biggest lender of Money to the U.S

        Germany has bought 37% of California,s debt over the last couple of years.
        Be under no illusion , i don,t have all the answers but we are heading for something big.

      • CitizenWhy

        The world agrees with China. There has been a rush to buy US Treasures. Unlike Europe, the US can down much of its debt by cutting its military spending. is banks, as troubled as they are, are in better shape than the EU banks.

        Remember, oil and many commodities must be purchased in dollars.

        There was talk a while ago of replacing this arrangement with the Euro. But the Euro is now far scarier than the dollar.

      • EMMETTOR

        Otherwise they would have to spend their huge export earnings on their people, and they don’t want to be doing that. China is a “Communist”, totalitarian state, just like Cuba but only one of them is excluded from access to the Capitalist marketplace.

  23. wills

    Unicredit bank. Italy. Achilles heel.

  24. mediator

    My own tuppence

    Italians are now doing what most Irish with some “Swag” and a bit of cop on were doing for the past couple of years – placing it somewhere safer (at least in theory).

    However we’ve moving past the point where safer is another Fiat currency (ie transferring from Euro to Sterling or opening a german bank account etc…)

    The gold/silver option is for wealthy people as a safe haven and depending on your attitude towards whats coming, physical gold or silver despite the obvious risks is the way to go as opposed to paper or electronic gold/silver

    For most I’d proffer the following advice:

    1. Don’t keep any money in the banking system other than needed for direct debits etc…Keep some cash on hand
    2. Fill up oil tank
    3. Buy coal etc for winter
    4 Make sure you have enough of everything you need (food meds etc) for at least a month in case there’s a chaotic crash and no ready means of exchange for a while
    5. When you’ve taken care of the above chill as what will be will be

    If any of you follow the above advice and nothing bad happens and everything reverts to normal in the finacial world you’ll be none the worse for it – in other words its free option.

    @John – Advice is free no invoices will be sent

    • I would add my pinch of salt :

      hoard rice , flour, olive oil, jams , coffees , teas , tins of beans mustards etc ;

      get wind up lamps ;

      start your own garden of veggies ;

      buy a small motor peddelled bike not a battery one ;

      do krav maga defence lessons ;

      plenty of hot water bottles ;

      gas cyclinders for cooking ;

      buy candles and oil lamps ;

      buy a cow for your garden to milk ;

      new locks and keys ;

      cover your cars against weather etc

    • rebean

      That sounds like sound advice. People need realistically 6 months emergency suppies in case of an economic armageddon. You never know. Seems like those people on Wall street with their shortselling and derivative trading are determined to push us over the edge. aaaaaaahhhhhhhhhhhhhhhh

  25. Winter

    Relax. It’s all sorted. Those that turn the wheels of power know exactly what is going to happen. The solution to the European debt crisis is further European integration leading to a federalist European state. What better way to coerce a eurosceptic populace into joining a United States of Europe than by fear. It has worked with every referendum on EU integration so far but for the final push to end national sovereignty once and for all, only the threat of the total collapse of society will do.
    There will be no collapse of the Euro or break up of the European Union. In fact the opposite will happen with each country compromising more and more of their national interest for the sake of financial stability. The reason for this is because the ruling elite of Europe, in every country of the EU (our own included), are European federalists even though the majority of the citizens are probably not. Fear of being left alone or left behind will have the infantile citizenry of Europe running after the ever threatening, ever protecting ruling elite.
    Eurobonds will happen and we will submit to whatever demands are made from us to ensure it happens and the Chinese will buy them by the trillions to hedge against the dollar and those that control the wheels of power will keep them spinning.
    The present ruling elite of Europe remind me of the court of Louis XVI just before the revolution, with Czar Cosy relishing his role as Dauphin de l’Europe. One can also hear Angela Merkel say “Let them eat austerity” when been told that the people of Europe are being starved of vital services due to cutbacks. When the boss of Barclays Bank, who has been paid £75 million in the past five years and a BONUS of £6.5 million last year, says ‘WE must continue with the policy of austerity’, is it not time to take out the guillotine?
    Having said that, it is worth noting that the bankers who funded the European Monarchs are still with us (still funding them) and they are even more powerful than ever, still lining the pockets of the ruling elite and demanding their share of the taxes. So who really is in control? Is there any difference between those who sit at the top of the pyramid and the mafia?
    I don’t think so. But don’t take my word for it.

    “Give me control of a nation’s money supply, and I care not who makes its laws”
    - Mayer Amschel Rothschild

    “There is no more direct way to capture control of a nation than through its credit and money system.”
    — Phillip A. Benson, President of American Bankers’ Association, 1939

    “The one aim of these financiers is world control by the creation of inextinguishable debts.”
    — Henry Ford

    “The great mass of people will more easily fall victim to a big lie than to a small one. What luck for rulers that men do not think.”
    — Adolf Hitler

    And for all those wondering how this is all going to end up:

    “If you’re in a card game and you can’t figure out who the patsy is, you’re it.”
    — Warren Buffett

    • We were born to serve you all our bloody lives
      labouring tongues we give rise to soft lies :
      disguised metaphors that keep us in a vast inverted silliness
      twice edged with fear.
      Twilight signs decompose us
      High in offices we stared into the turning wheel of cities
      dense and ravelled close yet separate : planned to kill all encounter.
      Intricate we saw your state at work
      its shapes abstracted from all human intent.
      With our history’s fire we shall harrow your signs.

      Now is the time to begin to go forward – advance from despair,
      the darkness of solitary men – who are chained in a market they cannot control -
      in the name of a freedom that hangs like a pall on our cities.
      And their towers of silence we shall destroy.

      Now is the time to begin to determine directions,
      refuse to admit the existence of destiny’s rule.
      We shall seize from all heroes and merchants our labour, our lives, and our practice of history :
      this, our choice, defines the truth of all that we do.

      Seize on the words that oppose us with alien force;
      they’re enslaved by the power of capital’s kings
      who reduce them to coinage and hollow exchange in the struggle to hold us,
      they’re bitterly outlasting…
      Time to sweep them down from power – deeds renew words.

      Dare to take sides in the fight for freedom that is common cause
      let us all be as strong and as resolute.
      We’re in the midst of a universe turning
      in turmoil; of classes and armies of thought
      making war – their contradictions clash and echo through time.

      extract from living in the heart of the beast(1975)

    • dwalsh

      @ Winter

      You wrote: “the bankers who funded the European Monarchs are still with us”
      Surely you mean the bankers who bankrupted the European monarchs? The merchants destroyed the European aristocracies by means of bankruptcy. Could it be they are now destroying the European nation states by the same means?

    • rebean

      Does this mean that we will finally have some real leadership here in Ireland . Does this cmean an end to all the cronyism and parish pump politics. Bring it on


      Excellent, Winter, just excellent.

  26. dwalsh

    While it is interesting to get this grassroots report from the northern Italian border, I don’t think David’s analysis here is on the ball at all. As usual he is thinking in terms of a Euro break-up; of Germany and France being sweethearts etc; as if They are likely to form some kind of new mini-Europe and leave the rest of us out in the cold.

    The solution is not and cannot be Germany paying all our debts. There is no nation on earth that can pay all our debts…or in more real language…there is no nation on earth which can protect us from the onslaught of the predators operating in the temples of greed — the financial markets. Within the deregulated systems which these predators are permitted to operate globally at this time we stand no chance whatsoever. Our attempts at bailouts and financial security funds are no better than pouring petrol onto a fire; they feed the beast; and this beast is insatiable…which means…THIS BEAST CAN NEVER GET ENOUGH. So all this talk about Gunther stumping up is nonsense; Germany is just another pig on a spit to the predators in the financial markets.

    The only people who can protect us from the financial markets are our politicians. They are the only sector in our societies who have access to the power to rein-in the predatory financial oligarchs. Their first act in our defence must be to regulate the holy of holies — the financial markets; to protect our nations and our public and private assets from the financial war being waged on them by the financial sector; especially the hedge funds. As a minimum to outlaw credit default swaps. But much more is needed.

    In fact I contend the financial sector needs to be placed into receivership and wound-down.

    No one in the media is talking realistically or sensibly about the financial markets. The fact is the financial markets are actively attacking and bankrupting the nations of the world. In a sense, which is not entirely metaphorical, this is the 3rd World War. We were taught to expect a nuclear holocaust but instead we are getting a financial holocaust. And out of this holocaust, over and above the obscene looting of our national and private assets, will come a new world order.

    We need a new world order – that much is clear; but do we want one ruled by financial oligarchs?

    • BrianC


      Those in charge do not have one iota of a clue what to do.

      There is no leadership and it may be too late to apply true leadership. They are floundering. The financial markets can smell this and when a country has to rely on the credibilty of one such as Berlusconi then you should know the game is up.

      Way back at the start of the world financial crisis G. Soros averred to the problem which I succinctly state as ‘diverging eco-political beliefs presiding over a common currency with no common treasury in Europe’. However, he believed the Euro would survive.

      The US is a bankrupt economy and S&P trying to save its credibility has indirectly called its hand. The Chinese have there hand in the US cookie jar with a hand full of cookies and can’t get out without loosing the majority of what is in their hand. German prosperity is hostaged to exports and the delayed effect of fiscal rectitude will impale their export prosperity.

      Greed in its pure economic sense is healthy but when it transgresses into being avaricious then rational is sacrificed and all hell breaks loose. The avaricious financial markets stimulated with deregulation’ free flow of capital has created a wolf pack that exceeds the power all nations put together and this wolf pack will tear at the weaknesses of this Global economic animal until it is torn asunder and they will eat themselves to get the spoils of this floundering economic beast.

      Pile your gold and silver high and as high as you can but if the turmoil we are now witnesses ascends to chaos then Gold and Silver are hard to eat. If David is correct about Italians trying to flee to Switzerland with their cash then chaos is here.

      And if you think that politicians know what is going on then you are as dumb as they are. Professor Albert Bartlett eloquently shows that politicians don’t even know what exponential means.

      and finally

      mathematically perfected economy explains why this system is in crash mode and no matter how hard they apply the brakes impact is imminent.

      • dwalsh

        @ BrianC wrote:

        “And if you think that politicians know what is going on then you are as dumb as they are.”

        Steady on there sir. No need to insult me. I have never made any such claim. I said our politicians are the only class among us with access to the power to rein-in the wolf packs…and that is the truth.

        • BrianC

          No offence intended.

          I agree with you 100%.

          Yes the politicians do have the power it is just that they are too stupid to know that they have the power. And there are some who prefer not to act as their intent is to force deleveraging.

          And once again I agree with you regards the myth of an invisible hand. There is no really true free market so any free hand out there is on puppet strings. I forget the stats but is it 90% of world wealth is controlled by 3,000 people.

          • “A study by the World Institute for Development Economics Research at United Nations University reports that the richest 1% of adults alone owned 40% of global assets in the year 2000, and that the richest 10% of adults accounted for 85% of the world total”


          • EMMETTOR

            I’ve often pondered the economic effect of this insane concentration of wealth. The Law Of Diminishing Marginal Returns makes it clear that when a billionaire earns another million it ceases to be worth a million, to him or her, at least. It also passes out of the economic orbit of the general population, no Multiplier effect as they’re not needing to spend that money any time soon, just convert it into their assets of choice and hoard it. Does this mean that money going into the pockets of the super-rich might as well be vapourised and that the entire effort of economic activity that was used to generate it has been wasted? I reckon the answer is yes.

    • @dwalsh

      +1 but its not a question of “financial oligarchs”, above the oligarchs is the system itself.

      Its more a question of an objective, quantifiable, mathematical and measurable system of usury built on precepts that bind a complex set of financial interactions together into a dynamic whole.

      The problem is its a flawed system built upon the selling of debt by those acting in service of the system.

      The flaws in the system becomes unstable under certain conditions and begin to break down the system itself.

      That’s where we are now. I’ll leave you to work out what those flaws are:}

      • dwalsh

        @ colm brazel

        “the system becomes unstable under certain conditions and begin to break down the system itself.”

        Something like the perfect storm?

        You may be right. Personally I think at the pinnacle of the capital pyramid there is more leverage and control than people suspect; and than those at the top would like us to know. It is to their advantage to propagate myths such as the “invisible hand”. The mythology of the free market and the legal status of the corporate entity are means to hide the true nature of power and the system.

  27. @dwalsh

    you said : ‘The only people who can protect us from the financial markets are our politicians. ‘.

    We have no politicians of substance , no leader of greatness and no statesman to follow.All we are left with are elected local councillors ( known as TDs)devoid of power and MEPs who are disjointed and under external power elsewhere in EU .So what voice for protection do you claim to have?

    With due respect , you are dreaming on this point alone only.

    • dwalsh

      @ John ALLEN

      I agree with your estimation of our political class; I never said they were a noble or courageous lot of leaders. I simply stated the fact: only they have access to the power to resolve this crisis. That is simply the truth.

      • @ dwalsh

        I think I go along with John Allen on this one. But I’d add another factor to the mix you guys are overlooking.

        Let me use an analogy: doctor carries out operation on the inners of person in operating theatre, suppose the patient dies?

        Would someone unqualified in surgery be able to offer a critique of the operation?

        So, we have the problem of ignorance, lack of training, insight.

        In economics it seems to me in Ireland politicians regarded advice from Dept Finance as the holy grail. But a lot of that advice I believe was incompetent.

        There’s also the problem that the system perpetuates itself by hiring economists who sing the same tune as the delinquent system itself.

        Another interesting problem out there is the proponents of an apparently sound critique of the system, eg individuals like Ron Paul, happen to suddenly gain notorious and wacky notions on legalising drugs. Could it be possible the banking industry have got to them and persuaded them its worth their while to do ideological hari kari?

        The same happens with groups such as which corrupt a critique of economic thinking with thinking that in terms of narcissistic egoupitsownarse cultspeak

        “That must be done in favor of what I shall restate here, as a truly Riemannian notion of the transcendental, as this is to be reconsidered from the vantage-point of V. I. Vernadsky’s presentation of the universal physical principle of the Noösphere”

        But the good thing is, flawed systems break down. Its at this point decent and sound minds have to put their minds to fixing the mess. The more this happens, the more sound men like dwalsh, john allen and colmbrazel et al put their minds to seeing and unravelling the mess and proposing solutions to fix it, the better chance it may be fixed:)

        You are unlikely to get solutions from boreen politicians or fake Dept Finance mandarins or from those who built the Nama titanic, the guarantee, or the recent ‘bailout’:).

        • I should correct myself there. Just as there was in the case of Enron financial shenanigans, there are different levels of complexities involved.

          On the one hand, there is the visible one of stocks/bonds/markets/trading/computers/hedging/futures/derivatives/GDP/GNP/budgets etc and on.

          On the other hand, there is a more simplified and hidden away Jeffrey Skilling book of Enron accounting loopholes and high risk practices driving the global economy since deregulation. Its the latter that are easily understood and grasped, the former is smoke and mirrors.

        • dwalsh

          Good points all Colm.
          I would still say it is only through politics that this crisis can be solved…which is not the same as saying that current politicians are up to the task.

          I think larouche is pretty much gaga at this point. The quote you give is typical of the incoherent verbiage he puts out. That said, his reference to Vernadsky and the concept of the Noösphere is actually relevant…but way outside the mental horizon of most folk today. I dont mention it in my comments for that reason; but I do take it seriously. Vernadsky was one of the most advanced minds of his time. A consumate scientist; well worth a look IMO.

  28. Gale Force

    I believe that Gay Byrne when elected President will bring to us a sense of nationhood and leadership and maybe statesmanship .I hope he will have the wisdom to chose the real team to lead the country where that team will act parallel to the house of commons in dublin and independent thereof with a clear empowered mandate to change our codes of conduct in ~The State.

    • imithe

      You may or may not be right John but judging by some of the belittling articles already appearing in the media, it has already been decided that he won’t.

    • Harper66

      “….Gay Byrne when elected President …”

      “…the house of commons in dublin….”


      Thats it. Its offical. The world has gone mad.

    • Deco

      No thanks.

      It is bad enough bailing out Seanie Fitz once, but if the people of this country decide to bailout that hoor again, then we deserve every punishment we get for our collective stupidity.

  29. [...] David McWilliams – What happens if Germany says enough?: On the main road out of Milan to Lugano in Switzerland, the Italian police, under instruction from [...]

  30. MK1

    Hi David,

    A lot of people are going to conclusions without looking at alternatives. Its simple, Germany doesnt want to bail out Italy because many Italians are living very well thank you very much, and the Germans have a point. On the other hand, Germany is
    in a great position in Europe, having the benefit of the euro, and not having to pay for debt levels through euro-wide bonds. Germany is getting a bit of a free lunch.

    Lets use supply and demand market forces. Italy, like all countries SHOULD be able to get its act together and balance its budget PLUS start paying off some debt through fiscal means. All this IS possible through just hard work for Italians. It may be painful, especially the lazy and the many millions in cushy jobs, but thats whats needed. Thats what the “markets” want to see.

    6% is not that far from 5% or 4% which is a reasonable real interest rate on a currency that aims to have inflation at 2%. And if the Italians can re-finance what they have to in 2011 and 2012 even at 6% levels they should be happy with that. Market forces will determine the rates (unless market manipulation or ‘herding’ is happening),
    and the Italian rates should drop in time, IF they have been able to deliver fiscally. Money will compete for those bonds and the rates will come down in the auctions, etc.

    Market sentiment CAN drive rates through the roof, a reverse bubble if you will, and in those times countries do need stop gap measures. BUT, they still have to get their acts together. The US is no different even with all the currency reserve advantages it has. You cant be fiscally inept forever.

    But what to do:
    – Euro-land should be ‘forced’ to have a euro-wide-bond mechanism that each country can use. Not easy to agree on that though now as the euro has been created without such a mechanism, but possible.

    – countries have to get their debt to manageable levels, including US, JP, UK and even DE. The euro targets of 3% budget deficit limites and 60% debt/GDP ratio’s were theoretical exercises that have failed.

    What I would like to see globally, and perhaps the Chinese want this as well, is the creation of a better money system where it represents value and is not fiat, where work that is done gets rewarded and is protected, and where credit cannot be created out of a computer system. That is the only way long term that the human race can have a fair system of money.
    But we compete to the ‘death’, we are human, we err. QED.


    • No social welfare in Italy, average wage is circa 1200€, most couples depend on their parents to supplement their income.

      They only appear to live well, in Italy image is very important, they’ll spend money on good clothes or a nice fancy car and make sacrifices elsewhere. They almost always holiday at home or go back to where their parents migrated from the village in the south, Pulgia, Calabria etc.

    • @MK1

      Agree with your last paragraph there, but take issue with ‘Euro-land should be ‘forced’ to have a euro-wide-bond mechanism that each country can use’

      The reason is the EMU system is structurally flawed. It never followed its own Stability & Growth rules, the result being that ruling elites milked the system. The debt sent out to the peripheral countries was squandered and wasted.

      So, supporting the broken EMU project would be exactly similar to the Irish government guaranteeing the debt of Anglo. See where this has got us. Plus there is the whole issue of the true extent of eurozone debt eg in Spain?

      A better functioning money system based on new rules with debt writedown is the only way to do this.

      At some stage it has to be realised the bike is too broken to fix:)

  31. piombo

    It is estimated that perhaps up tp €300 billion is the annual tax evasion in Italy whose National Income is circa €1700 billion( I stand corrected on the exact numbers). What does this tell us? Simply that Italians, when they can, evade their taxes.
    Why is this so? Many reasons some of them historical, some of them cultural, but in my opinion (strictly grassroots), it is that your average Italian no more thrusts their own state than they feel their state promotes their wellbeing and affords them protection.
    In essence, while Italians are rightly very proud of their country they have little loyalty to a State they see as distant from them in their everyday lives.
    BTW, most Italians while holding passionate political convictions do not esteem nor hold their politicians in any particular regard.
    Finally, Italians are not lazy! I have never witnessed a more industrious people in twenty years of business.

    • Bongiorno nostro pecatori,
      sono in accordo con te Piombo, gli italiani non sono pigri. Italians are far from lazy, the north east of the country is amongst the most productive in the world. They work long hours and spend lots of time commuting. Many southerns moved north to work from the 50s onwards, the south has been badly neglected.

      Here at home in Ireland we’re paying around 70% tax on our earnings when you take into account VAT on purcahses, more fools us. The state never cared for it’s peo-ple they only care for the ones they serve i.e. the ruling corporate class/ British Empire.

      Ciao tutti :-)

      • Deco

        We are a debt servicing machine.

        That is objective number one.

        Vote Yes for a job as part of the debt servicing machine.

        Do this one for the team. The Green Jersey. Pride. And the downfall.

    • Deco

      I think you hit the nail on the head.
      Berlosconi spent ten years saturating the Italian media with propaganda trying to get Italians to spend money like a bunch of Irish nifty-fifties in Manhattan, or a collection of drunks on a stag weekend in Kilkenny.

      And the Italians went the other way.

      The Italians have a healthy level of scepticism towards the state, the businesses that own it, and the media that blasts their message to the people. Italians just ignored the stuff that was too good to be true.

      The Irish on the other hand have proven to be true crowd pleasers, and lemmings – being sceptical about the whole thing was the greatest social stigma anybody could have. Living with your means was frowned upon. Planning the future usually meant moving to a more upmarket residence – it did not mean saving. Media balance was ICTU arguing with IBEC on how to inflate the economy the most.

      The difference is in the result. The Italian people have been saving and preparing, but the Italian state is really skint.

      In Ireland both the people and the state are skint. As comical Lenny was one to say “we all partied”.

      I am not concerned about Italy. Italy is a very wealthy country, and there is a lot of money there. The state is loaded with corruption. But look at Ireland, with the financial regulator playing golf with the bankers, and then telling the people that they were all doing a great job and everything was in good shape.


      If various Europeans don’t trust their governments, will they ever be able to trust the unelected supra-national EU government, with it’s aims of closer integration at odds with what most Europeans want? Does any European really want to be one vote in 350 million? I’d rather be one vote in 4 or 5 million. The EU experiment has been a disaster for the people of Europe, surely the only measure for it’s success or failure. It is an experiment, because nothing like it has ever been tried and while it’s early days were a series of gradual, thought-out steps, it has disintegrated into a series of rash and rushed decisions (Eg integration of Eastern countries) as our political classes realised they could side-step democracy by making European integration a “Prime Directive” that could not even be analysed effectively, never mind opposed, without being labelled as some sort of small-minded peasant. I don’t want to live in the U.S. even if it’s a U.S. of Europe, no thanks. Give Ireland back to the Irish!

  32. Philip

    A couple of articles ago it was about global imbalance. Next up was, nothing will be the same again. And now, we have to entertain the notion of Germany walking off with the ball. In all of this, there is some notion that governments with keynesian stimulation policies combined with austerity can save the day – e.g. Rep. Tea Party building a few aircraft carriers while cutting health and education :)

    The reality is now dawning on the bond merchants that governments cannot save the day in the West. There are no policies or fiscal measures that can be deployed to fix this problem. The Eurobonds will fail just as quickly because the backers will come under fire. Why? The history for the last 25-30 years was based on the notion of “Trust us, we are good for the loan, we are advanced etc and sooner or later will pay back and our current spend is meeting the interest bills…just…and while our employment is falling, the knowledge economy is taking up the slack and yes…we do have structural unemployment issues with youth and middle aged, but with a bit more money we can fix that and … “. Economies are broken and unsustainable. You cannot go on tearing the heart out of European and US economices and moving them to Asia if you have nothing to replace them with. Facebook, twitter and other fads will not solve this crisis.

    India, China and other fast growth countries are about to falter simply because there are no buyers. That is all the market is reflecting. There is no magic about it at all. And we do have the usual financial charlatans in their flashy regalia offering financial hope in return for commission and shorting the unfortunate in the process. People have been risking savings to hedge for the future – a future of no jobs or scant security.

    I would be slow to blame the spooky EU, or financial avarice or the incompetence of politicians – we all played a part in this mess unconscienciously. It could be that is happening is the natural order of things when cheap communications and transport exists , leading to hollowing out and having financial industry replacing real industry. Financial leaders replace the corpulance of apathetic political leadership and then this. There is a big adjustment underway with people scrambling to keep things the way they were. It is too late.

  33. rebean

    I will not be surprised when Germany finally get fed up bailing out the rest of Europe. It was always Germanys ambition to run Europe ever since the days of Bismark. Anyone who has studied history will know this.We are seeing the rise of the commodity based markets . The bottom line is if you have resources you are ok. Unfortunately Fine Fail gave away all ours. Republican party me arse.

    • CitizenWhy

      What about the rest of Europe getting fed up with the “export-driven” German economy?

      German exports included totally irresponsible loans to all the big banks and most of the governments in the troubled countries. Meanwhile the German banks were required t make only prudent loans within Germany.

      What about the ret of Europe getting fed up with Germany’s not taking responsibility for its BIG role in causing this financial crisis.

      • rebean

        Yes you are correct we are fed up with the German model too. The cheap credit was like a financial heroin people became credit junkies, spend now pay tomorrow. Unfortunately some people cannot make enough money now to pay their debts. Consider a painter which I once was in the nineties. I made a 1000 euro a week . I subsequently returned to college actually during the boom because my kids were young. I built my own house so my house is worth what I built it for because I did not line some developers pockets. I cannot go out tomorrow and earn the money I once earned as a painter because that work no longer exists. Unfortunately many people paid through the nose for houses and its the lack of work that has them in trouble . It is different if you work in the public service they have guaranteed jobs

  34. wills

    Great posts.

    Very informative.

    Learning all the time here.

  35. CitizenWhy

    Switzerland is taking steps to manage/prevent this inflow of capital. Abnormal capital inflows are a huge problem for any economy, causing bubbles and crashes and currencies that are too strong, discouraging tourism, exports and foreign business activity. Switzerland has its own currency so it is particularly vulnerable.

    Abnormal capital inflows, in the form of ridiculous loans to Irish banks by EU banks, are what caused the irresponsible lending and real estate bubble/bust in Ireland.

    At bottom the EU is still vastly rich. It has just decided that all its riches would go into bailouts, to irresponsible banks and mildly (Ireland) to severely (Greece) irresponsible governments.


    1. The EU has to seriously consider debt write-downs, forgiveness so it can get back to an investment economy that builds up real assets, including jobs.

    2. A new EU economic order would need to impose strict prudential rules on banks in regard to their lending ANYWHERE in the EU. The EU and Germany let the German banks act irresponsibly outside Germany, with huge and foolish loans, while making prudent loans within Germany due to German regulations.

    3. The new EU economic order would also have to restrict excessive capital inflows into any EU country form any source outside the EU, especially from snake-tongued Wall Street super salesmen who are specifically in the business of selling money, with no concern for long range harm to the borrowers.

    • dwalsh

      Excellent points all.
      I would add…shut down the speculative financial sector; especially derivatives which are the real cause of this crisis.

      • EMMETTOR

        Another excellent point, dwalsh. Derivatives (a pig in a poke) and then Credit Default Swaps, which claimed to eliminate risk (insane!) are a development of the globalisation of the financial markets, which started under Clinton and now need to be stopped, immediately. In a way, it’s too late, but better late than never.

  36. thirdeye

    If the germans do say enough to any more bailout of other eurozone members an admittance that the euro currency created to some way control germany within a neutral currency has proven to be a failure for both Germany who are paying the bill and the european union.

  37. [...] David McWilliams noted in August, what happens if the Germans say enough? Well, they wake up a morality crisis that may not end for any of [...]

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