News & Analysis
The Euro Was a Terrible Idea: Let Us Salvage It and Make It Worse
Only Mario Draghi's ECB can avert global calamity before the year is out ... Mario Draghi has promised the moon. The European Central Bank's council had better deliver on his pledge this week. If it does not, the crisis will surely escalate out of control in August or soon after. – UK Telegraph
Dominant Social Theme: Inflate or die.
Free-Market Analysis: Ambrose Evans-Pritchard is growing grimmer and grimmer. Only Mario Draghi's ECB can avert global calamity before the year is out, he writes in this remarkably gloomy article.
It may be one of the strongest articles ever penned about the EU's apparently impending demise. And yet in a sense it perfectly tracks a larger dominant social theme of the power elite – that sluggish money circulation is responsible for recessions and depressions.
Evans-Pritchard likes to pretend that he is not a Keynesian but his approach has shifted to pure Keynesianism in the past few months.
As a journalist with a prominent following in Britain and indeed around the English-speaking world, Evans-Pritchard's sudden conversion to strident support for money printing is disconcerting. Here's some more from the article:
We are beyond the point where a quarter point rate cut will achieve anything. Nor will it help to launch a fresh round of "temporary and limited" bond purchases - to use the self-defeating language that Mr Draghi is forced to utter.
The only issue that matters at this late stage is whether Germany is willing to let the ECB step up to its responsibility as a global central bank after two years of ideological posturing and take all risk of sovereign default in Spain and Italy off the table - which it can do easily enough once it stops playing politics and obeys the "financial stability" clause (Article 127) of the Lisbon Treaty ...
Nomura says the combined needs of Spain and Italy amount to €1.1 trillion over three years. The money does not exist. Any attempt to raise such sums on the open market would expose the bluff behind the bail-out machinery.
Mr Cailloux expects the two countries to require sovereign rescues "within weeks". Citigroup's Willem Buiter thinks both will be in full EU-IMF Troika rescues by the end of the year.
If so, brace for trouble, because demands on this scale will push bail-out fatigue in Germany, Holland and Finland to breaking point. Only the ECB has the firepower and speed to halt a catastrophic replay of 1931 before the year is out.
Mr Draghi threw down the gauntlet last week. Action is coming - he vowed - "believe me, it will be enough". History will hold you to it, Signore.
Evans-Pritchard seems quite serious here. He is demanding that Draghi purchase massive amounts of PIGS government debt on an ongoing basis in order to sustain the failing euro.
His biggest concern, he writes, is that "Latin states" don't seem willing to force Germany to abide by the EU's financial stability clause. A new one on us!
We recently wrote an article in which we alluded to this clause but as we pointed out then, any clause that allows the ECB to redistribute wealth renders the larger union suspect.
Surely given all that has been written and said about German antipathy to a transfer union, Germans would NOT have joined the EU without assurances that their hard-won prosperity would remain in their control. The idea of a "transfer union" has loomed large in the German psyche for years, and not in a good way.
It is really difficult to believe that all that's standing between Germany and a massive attack on German wealth is the interpretation of a specific clause.
Evans-Pritchard has advanced other arguments in the past for how EU leaders might salvage the solvency of the union. The one he seemed most positive about was a plan to back a huge bailout fund with a percentage of gold guaranteed by member states.
As Evans-Pritchard has some of the best sources in the business and he is not writing about this vast fund anymore, it would seem that it has been placed in abeyance as a serious alternative.
Instead, as always, we find the conversation returning to the tremendous power that central banks have to print money. This is essentially a blunt instrument, and we would argue it is the only instrument that central bankers really possess.
The idea of sterilization, withdrawing money from economies, is often mentioned by central bankers, but it is rarely if ever an option. It is true that Paul Volcker once managed the trick of slowing the volume and velocity of money but he had to virtually paralyze the larger Western economy to do it.
In any event, this is not the problem that Europe is currently facing. As Evans-Pritchard points out, "Failure to halt a full-blown debt debacle in Spain and Italy at this delicate juncture – with China, India and Brazil by now in the grip of a broken credit cycle and the US on the cusp of fresh recession even before the 'fiscal cliff' hits – would tip the entire global system into a downward spin."
But having stated the obvious, he leaves us back at the beginning. The various "funds" set up to guarantee PIGS bank solvency have not been taken seriously by the markets and are not even fully funded.
The idea of backing a fund by gold seems to have gone a-glimmering. The certainty that "austerity" – properly applied – could bring about a Euro-recovery has actually made things worse. Greece is afire and Spain is on the verge of chaos. Italy and Portugal are on the way to similar social fractures.
The chances that Draghi will be able to print enough money to rescue the PIGS from their plight are slim to none. This is because German public opinion is set against it, and Germany has a great deal of power in the EU.
With a slowdown coming in the German economy, it would seem somewhat optimistic to believe that Germans would welcome a wealth transfer via inflation. In fact, there are surveys showing that a majority of Germans are now apt to prefer a leave-taking from the EU to an open-ended bailout.
This, however, is what's being proposed – and not just by Evans-Pritchard. We'd argue that if Draghi really is inclined to open the floodgates, he'll eventually see the same kind of unrest on his Northern flank as his Southern one.
Evans-Pritchard should not be arguing on this head. It is a dominant social theme of sorts, that there is no other option for the Europeans than central banking monopoly money stimulation.
There is another option ... the UKIP way. Let the damn thing go bust! Evans-Pritchard, carrying the water of the elites in this regard, seems to believe the world will end if the EU fractures.
Fracture it probably will, one way or another. One can argue whether or not this is part of a larger nefarious plan by elites to create a chaotic environment that will lead eventually to a world currency (out of chaos, order) but one is increasingly hard-pressed to argue there are no viable alternatives.
The EU is a monstrous, authoritarian entity. Why Evans-Pritchard, long a primary Euro-skeptic, has turned to writing impassioned articles supporting its salvation is something only he can answer. As for ourselves, we will we conclude by observing that there is too much of this sort of thing taking place in the power-elite controlled press.
Conclusion: The trust built up between reader and hard-hitting journalist is apt to be eradicated when the scribe inexplicably goes off the rails. Being cynical types, we think we understand both the mechanism and causation. Still, it's sad to see.