November 9, 2011

The euro's contradiction lies exposed by economic chaos

Posted in Articles · 26 comments ·

What is happening in Europe? Greek prime minister Georgios Papandreou was hauled over the coals for suggesting that the Greek people might want to be consulted on their own future. Let’s consider this. Why should a referendum threaten anyone? Indeed, why should democracy threaten anyone? Or maybe the other way to ask this question is: who is threatened by democracy?

Maybe those who are trying to foist something on the population that the population does not want are threatened by democracy. Let us think a bit about what is going on from a political standpoint.

When you strip everything back, what you see is that each recurring European ‘rescue’ package is nothing more than a bailout for private professional investors who are paid for previous risk-taking by the average taxpayer, who normally pays others to avoid too much risk. This is the issue and, if you ask the average citizen whether it is fair or right that he pays for the mistakes of others, he is likely to say no.
The other observation that we can make is that, all over the world, the ‘too big to fail’ notion has meant that the bill of more and more of the individual debts of certain people and institutions is being transferred to more and more people who had absolutely nothing to do with these debts in the first place. But what is happening is that the amounts are getting too big and, at every stage, the entity that the debts are passed on to becomes less credible. This happened here with the botched bank guarantee. The Irish banks undermined the Irish sovereign, so we got ejected from the bond market.

Then the idea was to shunt on the debt to another bigger lender of last resort, the EU and the IMF. But even the EU/IMF wasn’t big enough to bail out the Irish sovereign (or the Greeks or the Portuguese, for that matter), and the contagion continued.

When it was obvious that the Europeans hadn’t enough money, they went last week to the Chinese looking for loot. The reason they are looking for loot is that the focus is switching firmly to Italy

Now that Italy is the focus of the crisis, things are getting really hairy. If the eurozone is struggling to find enough cash to bail out Greece, how the hell can it bail out Italy?

The G20 was unable to come up with anything concrete last Friday, because everyone is beginning to realise that the problem of living for years on credit is that, when it comes to paying back, someone is going to get burned badly.

At every stage when the EU leadership has shunted the debt of someone on to someone else, it becomes less and less democratic, more institutionalised and more remote from the average person, who is getting fed up and fearful in equal measure. Here in Kilkenny, where I am writing from John’s Street at the festival, people are increasingly worried about where this is all going to end.

Ultimately, Papandreou, seeing this and realising that Greece faces an enormous choice, decided that it was time to ask for a mandate from the people about their future. This would seem to be what democracy is about. But in response, the rest of the EU leadership (including our own) went ballistic. Why should they be so afraid of the people, particularly when they have not come up with any other solution, bar shunting on the problem?

They are afraid because Papandreou also raised the idea of Greece’s continued membership of the eurozone. In normal circumstances, the eurozone leaders should be happy to be rid of Greece because, without Greece, the euro would be immeasurably stronger. But these are not normal circumstances. If Greece elects to leave, who else will want to leave?

Regular readers of this column will know that it has been arguing since 2007 that the endgame of this eurozone debt crisis will be some break-up of the currency and that the reason is very simple. Membership of the euro gives a massive subsidy to German producers and imposes a massive penalty on producers in the rest of Europe. In addition, the nature of the European economy means that, if the euro wants to stay in place, its main beneficiary will have to tolerate being defaulted on every few years, or at best decades.

If Germany had its own currency, the New Deutschmark would be like the Swiss Franc on steroids. It would appreciate dramatically and force German industry to contract. As things are, German industry has gained a huge market – the rest of Europe – at an exchange rate that makes its goods tolerably priced, so it’s “quids in” for the Germans.

The surplus Germany gets from all these exports finds its way back to German banks.

These banks need to lend this money to someone and, more crucially, German industry needs its banks to lend to the likes of us and the Spaniards and Italians etc, so that we can have the money to buy the German cars – because, if we don’t buy them, who will?

That’s the game, and every so often when the Germans come looking for their money back, it isn’t there. It has been spent.

Once this happens, the present policy is to impose austerity in order to increase the likelihood that the Germans will be paid back. But austerity doesn’t increase the likelihood that the money will be paid back, it decreases the likelihood.

This is the inconsistency at the heart of the euro, and the only way out of it is if we all become better at making things than the Germans are. In fact, the rest of us don’t have to become more German, we have to become better Germans than the Germans themselves, and this is not going to happen – nor should it.

So if nations are not going to change their behaviour and the Germans need to lend enormously to us to buy their goods, of course there are going to be defaults. The only alternative to this is a return to national currencies. National currencies allow us to devalue to compensate for the idea that we might not be as productive as the Germans because we value other things in life. After all, there is more to life than economics.

If this adjustment is not allowed to happen, the rest of Europe – in the euro – simply can’t keep up with Germany.

The best way to understand this dilemma is to consider that, when we had the punt linked to the deutschmark, we devalued six times in 13 years just to try to keep up competitively. Conversely, when we joined the euro and could no longer devalue, we lost 30 per cent competitiveness against Germany. It could not be clearer.

All Papandreou was doing was recognising this for Greece. Without the drachma, Greece can’t work. Europe with all this debt can’t work. You can’t shunt the debt of some people on to others indefinitely. The people will say no, and democracy threatens nobody. The sooner we all see this the better.

  1. mumenomics

    Hi David. I have just one comment. At this stage we all see the rationale for leaving the Euro. Can you answer me this question-I have about 400000 euros of a mortgage on a property worth roughly 200000euros. If Ireland adopts the £punt, how is this good for me? I am part of this lost generation -and are you telling me I’ll have to pay this ridiculous mortgage in a devalued currency? It’s bad enough as it is. Please advise-I’ve asked Constantin Gurdgiev this same question via twitter and have had zero response. Tks in advance to any comments @mumenomics

    • BrianHal

      I’d also like to know the answers to questions like this

    • Deco

      If you bought the Pope’s Children, you might have missed out on the debacle that you are now in…..

    • ambid

      David, I’d very much appreciate an answer to mumenomics question too. I suspect there are many thousands of people who are worried about this too.

      Excellent article as always. Thanks.

    • Seamus Torpey

      Thanks @mumenomics. I’m also interested in an answer to this question. Till be harder to pay a mortgage with a devalued currency.

    • mumenomics

      Update: I got a reply from Constantin G via twitter which although welcome, is not very reassuring. But having done some reading, I’ve got to assume that in the first instance, the £Punt nua will mean that both my debt and wages etc will just move over at the same rate so I am no better or worse off. I know that when Argentina extracted itself from the US$ parity, it converted mortages to peso mortgages-I’m not sure at what rate though-it would be interesting to see how that panned out!!! @mumenomics MJHussey

  2. Dorothy Jones

    That’s good stuff, but events are gathering speed….
    We have a rate of 7+% on ITAL bonds before noon today. So… if yields are artificially controlled to instigate political change [look at the pattern over last 2 yrs] then ITAL will have a reshuffle and a person who will agree to the austerity measures will be in situ……just like IE. On VB on Mon 7 Nov Paul [Sommerville] told it just like it is.
    So….what happens next?
    Downgrade of FR…true extent of ESP exp to be revealed…and all of that…probably
    My question is: When are Deutsche and Co going to be ‘im Visier’. The rating agencies attempted to strong-arm Sparkasse into giving them new contracts in order to avoid a downgrade [if Frankfurter Allgemeine Zeitung is to be believed and I think that it is]. Ackermann sated in Focus in March that Deutsche’s exposure to Greece was limited. Sorry?
    That’s the next piece in the puzzle: We all know that the German Banks lent: why do they retain their rating in the face of this exposure?
    I thought there would be a little more bloodshed there at this stage….maybe I’m wrong.
    Anyway; that’s where the ‘Kasus Knxus’ to this tale lies….Greece is a sideshow…

  3. ex_pat_northerner

    Mumenomics.. the only comment I can make is that David and Constantin have been vocal in looking for a ‘debt forgiveness’ resolution.

    • Deco


      lone voices of sanity, shouting the answer….

      Thank God for that !!

      • mumenomics

        Hi there-sorry for delayed response-thanks to those who botherered to reply! I suppose debt forgiveness is not going to happen-Perhaps I’ll be offered a debt for equity swap in Anglo ;) MJ@Mumenomics

  4. Colin

    Yes, and I find it very unsettling that the European liberal lefty media are demanding that democratically elected Berlusconi must be removed from power and replaced with an unelected undemocratic technocrat who has served time with the useless ditherers in Brussels.

    • Deco

      It is a silly form of amusement.

      The bankers are in control, and those in the institutional left need to be in the middle of a trajectory that they think is going somewhere.

      Not a word out of them, when Papandreou (a left of centre PM) was given instructions to drop the Referendum option.

      Really, we are talking about a bunch of comfortable lazy idiots who will talk lots of lefty stuff, but who are essential to perpetuating the delusion that there is some concern for ordinary people in the system. It is increasingly obvious, that there is not !!!

  5. THE PILLARS OF OUR SOCIETY – Asking the right questions requires knowledge!

    ….Financial institutions are a pillar of civilized society, supporting people in their productive ventures and managing the economic risks they take on. The workings of these institutions are important to comprehend if we are to predict their actions today and their evolution in the coming information age….

    The above words should trigger a shiver going down the spine of the reader that followed the events unfolding, but there is more to it.

    Last time I wrote about the importance of using especially the Internet as a source to educate yourself, and it is really fantastic what you can access these days.

    Yesterday a good friend asked me this question:

    What exactly are the financial Markets?

    I love it when people start to ask these questions!

    She read Morgan Kelly in the Irish Times, she read David Mc Williams in The Independent, she saw Constantin Gurdgiev and Brian Lucey on TV, she reads the papers, and she even understood that the Troika is forcing countries like Greece and Ireland into a protracted default, forcing us to take the private bank losses only to serve the insane political goals of a handful of EURO fanatics, all in all she was really well informed, a Professional who stands with both feet on the ground, but certainly not your daily financial times reader, and much more important, not someone with investments in stock markets, and especially because of that, she is the perfect example of the average person who had no hand in all this mess and who is threatened to become impoverished and enslaved by the proposed solutions where of course, she also has no say in!

    I was pondering how I could help her, and when she mentioned Professor Morgan Kelly, I asked whether she ever heard of Professor Robert Shiller.

    The name did not ring a bell, so I briefly explained that he was, just like David, equally raising red flags to the public as early as 2005 on what we know now as the housing bubble that bursted.

    So, to give her an example for a good source to stay on the ball, with ongoing information, weekly commentary and opinion sharing, I pointed her to Project Syndicate where Robert Shiller is a regular contributor and showed here a few articles by him on global finance.

    She was impressed by this platform, but believe you me, the next thing I showed her caused some spontaneous jaw dropping. – grins – She is using the internet since many years, but like so many, she often slips into a habit of forgetting what for a giant library you have at your disposal, and it is getting better by the minute!

    So I asked her whether she would consider an Enrolment at Yale University perhaps.

    Of course she heard about Yale, and she laughed and mentioned that her leaving cert would probably not provide the required grades, her age, and of course, the costs to be more than prohibitive. Well, on the latter she made an extremely important point in deed, but thats a different story.

    She thought I was joking, I was not!

    The words at the beginning are from the Syllabus of this course held in Yale University by Prof. Shiller and Prof. Arthur M. Okun in 2008 on financial markets.

    You can download audio files only if you do not have broadband, you can download high quality video files of the entire course, you can even get the class session details and reading assignments such this one here referring to chapter 10: debt markets: term structure: abozzi et al. Foundations of Financial Markets and Institutions, chapters 9, 10, 11, 15 and 16, you can download Midterm 1 and 2 and the Final Exam papers, and you can download the Exam solution papers as well, in other words, you sit in this course as if you are in Yale.

    Now it was my turn laughing tears observing her facial expression.

    I had to dismiss her notion that I would be somewhat of an internet wizard, it could not be any further from the truth, on the contrary, I know very little about the world of internet to be honest, but I use it, and the way I use it since the days of the first sets of Hubble pictures arriving at the NASA servers around 1992, well this habit never changed.

    Back in the days, and it really seems like yesterday to me, there was no broadband and I remember learning and hacking somewhat cryptical V32bis standards, you don’t wanna know, AT strings and command sets to tame the costly US robotics modem I was proud to own, achieving a mind blowing speed of 14.4 K! Yeah baby 2400 baud, welcome to the future was the feeling then, my older modem was only capable of 1200 baud. It was in 1991 when this modem hit the market, and I spent many nights fine tuning this monster and ‘getting up to speed’ with this technology. Remember the sounds? tcheeep tcheeeeeeeeep, dadadadada, tsheeeep tsheeeeeeeeeep, the unforgettable melodies of the dial up age. – grins -
    Ever since Hubble, the internet is nothing but a giant library to me and as such I think it is one of the wonders of the world.

    Of course, you can buy a couple of marvel comics and then go to the Harvard-Smithsonian Library for Astrophysics in Cambridge, MA, sit there all day reading that shit, leave again and go home, and I would guess, that is a fair description of the average consumer Internet usage these days, besides social networking sites or gaming. – Mind you, I love a really good game. Want a challenge to your logic and combination skills, even play with a buddy together to solve the at times brain bending puzzles? Check out Portal 2, one of the best games I ever came across, highly recommended! Grins! -

    x x x x

    The markets no longer are the pillars of society, and of course, we discussed that as well when I shared my opinion that I believe we need to shut them down to be able to tackle this situation. Since years, I expressed it many times, we need to shut down the markets for a period, close insolvent banks and break up the monster banks that are destroying societies and democracy for short term gambling profits, this never stopped!

    We need to send home the Troika and their representatives, they failed and caused more damage than anything else!

    The markets are a metastasized tumor in this globalized financial world, they are endangering civilization as we know it. The parasitic economy is this tumor, and it is not in it’s early stages, it has to be removed to give the patient a fighting chance, if we do not do this, all that is left is Morphine, managing pain in a dying patient. It is that bad!

    Now imagine you do not have a first class educated oncologist treating the patient, but a Witness of Jehovah instead, I give you…. Politicians!

    x x x x

    This morning at 10:30AM Italian bonds passed 7.30%, yesterday it was 6.30%, it is a debt avalanche, and Jehovah’s witnesses tell you that The rates go up because the markets believe it is all about Berlusconi, and he should resign., or another one Euro chief Juncker is going to call the markets to consult with them., yeah right, like Constantin mentioned cynically, dial 1800-MARKETS. What a ridiculous notion and prime examples how the public is being taken for a fool by an incompetent and fanatic political class!

    From the total circulation of 355 billion Euro Greek bonds, roughly 90 billion are in EU banks, 80 billion in international hedge funds and insurance companies, the Rest is ECB and IMF.

    Major banks in Europe, such as French BNP or German Commerzbank are selling governments bonds and take losses to get rid of the bonds from EU countries, so in essence they do increase the speed of the downwards spiral. Barclays sold Irish, Greek, Spanish, Italian and Portuguese government bonds and reduced their total exposure by 31 %. They did that within three month! BNP reduced already 23 %.

    On a global scale:

    Shut down the markets
    Close all insolvent banks
    Break up private banks with asset portfolios >500 billion, kill parasitic economy

    In Ireland:

    Send the Troika home!

    Then we can talk! The longer they wait, and this is the only thing they are doing, kicking the can, the greater the pain they induce, and the evidence is on the table of results from the past three years. The markets no longer are a pillar of society, they are the engineered and controlled explosions, the C4 that brings down a skyscraper.

    x x x x

    Congratulations to Pius Heinz, a student of economic psychology, and a fellow citizen from Cologne, he won the pot of 8,7 million USD and is now the new world poker champion, we should offer him Oli – Lala – Rehn’s job.


    • Julia

      Excellent post Georg. I can relate to your friend. And I just love the Jehovah’s Witnesses. Looking forward to more from you later.

    • Alphalar

      Beautiful wish list, Georg, if only it could be so simple.
      However we are fast approaching critical mass and inevitably decisive action will have to be taken, likely on multiple fronts.
      It will not be pretty but hopefully not too ugly either.
      We are being scammed, and they should be punished…..
      Decisive Democratic Action, let’s look to Iceland for inspiration.
      … and yes the wonderful gift of the internet came at just the right time……. let’s not waste it’s potential.

      And thanks for the links

  6. Adam Byrne


  7. Alf

    David, You are correct again. However, it must be getting clearer that the guarantee was not ‘botched’. Ignoring the Greek voters is not just undemocratic, it is an increasing totalitarian trend within the EU in general. Perhaps we should be more concerned with the destruction of sovereignty and this deliberate move for more corporate control of nation states. It is good to be concerned about the economy but I fear we really have bigger problems. If we allow this to continue, what kind of system are we going to have when the dust settles? One that respects democracy? I really doubt it.

  8. Lord Jimbo

    Rotten core at the heart of the neoliberal system is being exposed, States unravelling, everything has its time but as you say, the tragedy in this is that the average, struggling person is being made to struggle more but then that is how power and systems as currently constructed actually work.

    As George Monbiot correctly pointed out recently in the Guardian, we don’t have wealth creators, we have wealth destroyers, their greed and ineptitude has consumed them and they are trying to bring us all with them. Banks not passing on cuts speaks volumes of where power rests in the business run society. Not giving anyone a break despite all being bailed out. Just one word: SHAMELESS. The boycott campaign of yesteryear should be reactivated immediately.

    Monbiot – “The 1% are the very best destroyers of wealth the world has ever seenOur common treasury in the last 30 years has been captured by industrial psychopaths. That’s why we’re nearly bankrupt.”

    • Deco

      Actually, I think we have sophisticated scam artists pretending to be wealth creators, and peddling lies about how much wealth they are creating.

      They are creating illusions, not wealth.

  9. Deco

    Why should a referendum threaten anyone?

    Good question.

    Because it might reveal the level of pretence that exists in the media concerning Greece, and indeed the other PIGIS.

    Maybe because the EU has gone imperial, and imperial constructs tend to have contempt for the people, and regard them as some sort of statistical measurement in the race to prove themselves as per the Freudian size complex.

    Or maybe because the market is being manipulated, by state institutions that are officially designed to serve the public interest, but who always put the interests of the rich first.

    Maybe the biggest threat is the open declaration that the entire EU institutional structure is on a trajectory that has nothing to do with the interests of the ordinary people living everyday lives away from the power structure ?

    We have now reached the point that democracy is a threat to the market. Surely this is as clear an indication as any, that the market itself is not the functioning economic mechanism of the citizenry, but a controlled and manipulated mechanism that is continually distorted by the rich and their stooges – like Sarkozy.

    The real problem is the market. The market has been twisted and turned into a belief system, rather than a functioning entity. This project has been well implemented. With the result that the market is no longer a functioning entity, but instead is an entity that is cruelly struggling to punish the rich for trying to have everything their own way.

    Last week was “Kicking the Cannes down la rue”…..With Sarko in the specially designed shoes that prevent him from looking smaller than Merkel, as the chief kicker.

    The EU has gone imperial folks. I said it in advance of Lisbon, and now it is becomming abundantly clear.

    Whatever would dear old Sigmund Freud have made of it all. The urge for bigness.

  10. ex_pat_northerner

    Barosso says everyone has a “legal obligation” to join the Euro.

  11. History’s echoes;

    Many moons ago (including wobbly ones) at this time of year I used to “sense” Christmas. My childhood was not idyllic nevertheless November’s starry skies still managed to herald the approach and existence of a “peaceful magic”. Later as an adolescent I became fascinated by the Great War 1914-’18 and quite frankly that fascination has never left me. The above sentences may seem totally unconnected but bear with me.
    In imagining Ypres, Verdun, Somme or Flanders etc. I guess I could easily relate to a young man entrenched in hell and gazing up at a starry hope! Later at 18 I joined the Army and served a term in the Lebanon. During that time I learned much about the very bright and very dark sides of all our human natures.

    Now this DmcW blog is an informative place where there are many things to be learned. There is debate, commonality, difference of opinion, reflection, education, entertainment, criticism and speculation. For three years now my observations and opinion of the Global Financial Crisis has been affected by my association with this blog and many of its subscribers.
    Todays article poses the question “Who is threatened by democracy?”

    When Generals are threatened by peace;

    Christmas Eve 1914 – a spontaneous truce of humanity broke out in many trenches. Tens of thousands of men saw themselves and their so called enemies for what they truly were; Ordinary peaceful folk seperated only by the poison of politicians and the economics of conflict. After Christmas Day the Generals had some difficulty in getting the “volunteers” to re-engage the enemy. More poison/propaganda/artillery and trickery was required in order to get the lads to re – hate Fritz or Tommy respectively.
    But that can’t really happen to those who see the truth and many men kept that night and that truth in their hearts until their dying day.
    You see it’s a universal truth and amazingly in this world somebody is always trying to cloud it. And those that try to cloud tend to have everything to gain from it in a Halliburton sort of way. The blindfolded are thus led “TO LIBERATE” while those with vision are the only ones who notice the anagram of “OBLITERATE”.
    The other truth is that everybody concerned knew the complete insanity of war that Christmas Eve ’14. The tragedy is that the “leaders” denied it, ignored it and made sure there was a bloody offensive planned for the following Christmas Eve ’15.
    Humans are history’s lemmings who never allow facts to detract us from our cyclical horrific plunges into insanity.
    Fact is Sarkozy, Merkel, Obama, Enda, Ollie, ECB, G20 etc. etc. know its all wrong — but they just cannot fight their nature! They’re caught up in the madness. They fear personal ridicule more than economic meltdown or maybe they have something to gain in a Halliburton sort of way!

    WWI produced at least one magical hopefilled night — Yet WWI also gave us WWII

    I hereby endeth tonights lesson with

    I do hope you enjoy!

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