STAFF NEWS & ANALYSIS
Euro Leaders … Be Careful What You Wish For
By Staff News & Analysis - March 19, 2013

S&P warns of socially explosive situation in euro zone … Standard and Poor's sees a high risk that Spain, Italy, Portugal and France will not be able to carry through necessary reforms as the unemployed become less willing to put up with austerity, S&P's Germany head Torsten Hinrichs told a newspaper. "The high unemployment in Spain, Italy and France is socially explosive," Hinrichs was quoted as saying in Monday's Neue Osnabrücker Zeitung. – Reuters

Dominant Social Theme: It's going to get ugly in the Eurozone but eventually things will work out.

Free-Market Analysis: An article of ours – "Do EU Wonks Really Have Endless Time to Get It Right?" – ran yesterday when, unknown to us, this article (excerpted above) posted as well.

It makes the same point, generally, that we were making, and though we are not big fans of ratings agencies like S&P, we believe they're making a good point here. If Eurocrats keep pushing Europe, there are going to be increasing social explosions.

These have already happened in Greece and Spain, and Iceland, too. Italy is teetering when it comes to social unrest and perhaps the big question is how the French are going to react when faced with an economic situation that is increasingly similar to that of Southern Europe

Here's some more from the article:

Hinrichs said the people of Spain and Portugal had already proven they were willing to bear with austerity measures, but "this cannot continue forever".

In Italy, there was the further danger that "a new government may not be strong enough for the still necessary reforms to strengthen growth," he said.

Hinrichs said S&P still rated Germany as a triple A with stable outlook and did not see any reason for concern: "It is one of the few AAA and stable countries that we still have in Europe".

Hinrichs is merely reciting what anyone following the current and increasingly chaotic situation in Europe already knows, that the measures put in place in the past five years to put a halt to the European crisis are not doing so.

The blow-up in Cyprus – still not resolved – is just a symptom of the larger disease. European governments spend more than they take in and all the bailouts and austerity measures are not going to solve the problem any time soon.

Devaluation would be the easiest way to deal with fiscal and monetary difficulties but Europe cannot devalue, except as a whole, because most European countries are participating in the euro.

The result is a kind of miserable stalemate and as Hinrichs says above, it cannot go on forever. What Hinrichs does not say is that there are potentially two solutions.

The first, as S&P warns, is increasing social unrest based on an IMF-style recipe of higher taxes, lower government benefits, cuts in services and monopoly privatization.

The second is an increasing and deepening political and economic union. Ironically, as we have pointed out many times, various top EU leaders are on record over the past decades as predicting it would take a deep crisis to force a deeper union.

Given this sentiment it is not out of the question that those running the EU actually want to see some sort of social explosion across the Eurozone and are provoking the crisis in order to ensure that they can then provide a solution to it.

The solution, of course, will be an expansive and increasingly powerful EU state.

After Thoughts

Be careful what you wish for.

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