The rescue package is greater than advertised earlier. It looks like €30bn in funds from eurozone taxpayers, and a further €15bn waiting in the wings from US, UK, Japanese, Chinese, Saudi and other taxpayers through the IMF. This is more than a bazooka, says Stephen Jen from BlueGold Capital. It is the nuclear option. The sums of money are starting to look serious. Such funding is certainly enough to deal with Greece's immediate liquidity crisis, and therefore to buy valuable time for Credit Agricole, German Landesbanken, as well as Swiss and UK banks exposed to Greek debt. Whether it can deal with Greece's deeper solvency crisis is another matter. What Greece needs is less external debt, not more. Simon Johnson, former chief economist for the IMF, says Greece's public debt may rocket to 150% of GDP by 2012. A deep slump caused by draconian austerity measures risks tipping the country into a self-feeding downward spiral. That is how debt dynamics metastasize. IMF chief Dominique Strauss-Kahn said candidly, "the only effective remedy that remains is deflation. That will be painful. That means falling wages, and falling prices. There is no other way for Greece to become competitive. Greece has lost 20% to 25% competitiveness against Germany in recent years". Can he really mean it? The Greek Left is likely to conclude that a better remedy is a controlled default (pre-emptive debt restructuring) along the lines carried out successfully by the IMF in Uruguay and the Dominican Republic, and so will many Greek citizens when they discover that the EU-IMF policy entails transfers to foreign creditors equal to 8% of GDP in perpetuity – much more than German war reparations after WW1, which could never be collected in full in any case. – UK Telegraph
Dominant Social Theme: Thank goodness it's over. Greece will thrive.
Free-Market Analysis: We marvel at the announcement of the latest "deal" supporting Greece, the latest in a long line of such pronouncements, though the market itself rallied on the news. Now, apparently, the IMF and the EU stand side-by-side, ready to hand over massive sums of money to Greece, so long as Greece continues down the path of austerity. What does this really mean? According to the Telegraph article, excerpted above, "the EU-IMF policy entails transfers to foreign creditors equal to 8% of GDP in perpetuity."
Are the Greek people going to stand for that? How about those in Iceland faced with much the same situation? Even were prosperity to return to the EU the sums are too vast and the entrenched indebtedness too great. After Greece comes Spain, Portugal, Italy, etc. These countries have not yet tried to raise large sums in the markets – post financial crash, but their time is coming. And the EU crisis will continue, in our estimation, no matter what Mr. Market says.
The crisis has been educational in so many ways. It has teased out the real power-positions of many European players. It has shown that France has a strong though not overwhelming voice in the EU experiment. Brussels has power, but not it seems the final word. Germany is a key player, yet its own citizens are ambivalent about its newfound kingdom.
In fact, Germany was long said to be the driver of the EU experiment. We've written that the EU has, in a sense, evolved into a kind of peaceful German empire. But that is different than maintaining, as some do, that the EU is a German creation. The EU seems, as we suspected, an Anglo-America invention, a stepping-stone to further global currency combinations. Germany and France signed on for various reasons of national self-interest and also because after World War II, neither Germany nor France were in a position to resist Anglo-American schemes.
The EU-zone has been good to Germany, increasing the markets for its efficient industries and small- to medium-sized companies. But Germany dithers about Greece nonetheless, as it should. The German leadership may be ambitious for pan-socialism, but the German industrial sector obviously is not so hot on that failing ideology. The socialists in Brussels, too, may have believed that the predictable crisis of the eurozone would have a happy ending simply because of the EU's unstoppable impetus. But the unstoppable force seems to be hitting the immovable object of German manufacturing – and their constitutional allies. Here's some more from the article:
The voices that matter are those of German Chancellor Angela Merkel, the Bundesbank, the finance committee of the Bundestag, and ultimately the Verfassungsgericht, or German constitutional court. This is a fast moving story. Details may become clearer by the hour. We are already hearing talk of possible "conditions" from Berlin. Mrs. Merkel is being castigated by Free Democrats and Bavarian Social Christians — both coalition allies — for what looks at first sight to be a capitulation to French demands. "We are standing on very thin ice, legally, economically," said Frank Schäffler, deputy finance spokesman for the Free Democrats. Die Welt reports that he is pushing for Greece's exit from the eurozone.
"The German government buckled," said Karl Heinz Däke, head of the German taxpayers association. The headlines have switched from Iron Chancellor to Frau Mouse. She will not like that. Direct loans to Greece will require the endorsement of Bundestag, Holland's Tweede Kamer, and the Irish Dail — which will have to vote for fresh debt of €450m under Ireland's burden-sharing quota that it can ill afford. This will be no cake-walk.
The rescue has not yet been activated. It has become firmer, but remains talk. The moment it is activated, it is likely to face a court challenge from the eurosceptic professors in Germany for breaching the 'no-bailout' clause of Article 125 of the EU Treaties. Germany's man at the European Central Bank, Jurgen Stark, has already paved the way for this by stating that Greece does not qualify for an emergency waiver of this clause because the country spent itself recklessly into its current predicament. This crisis was not an earthquake, an Act of God, or the result of an asymmetric shock. It was home-grown, long-coming, and long-predicted.
Why are we re-examining this madness? In fact, the contretemps of the EU constitutes a very good example of power-elite investing in the 21st century – and the description of that mechanism provides the Bell's singular and basic brief. We started this modest newspaper with the idea that the Internet was colliding with each of the elite's dominant social themes and the promotion of the EU is one of the largest. The concept of an ever-more globalized and financially congruent world is dear to the heart of the elite. This is the nearly unquestioned path of the Western world. Yet, somewhere, somehow, momentum dissipated.
Yes, we blame it on the Internet, which has thoroughly punctured the inevitability of these power elite promotions. While the Internet's impact is not quite so visible as it is in, say, the United States, we detect its influence in various kinds of resistance to EU plans. And as resistance has increased, the Brussels bureaucrats have pushed harder, jamming through a virtual EU "constitution" without the decency to request even a vote from the 300 million affected.
There are many in the financial community that believe the EU to be a valuable addition to the world's financial community because the euro is a more stable currency than the disparate currencies of individual countries. But in fact the EU is a profoundly anti-democratic invention, the founding principles of which advocate that basic human rights are the bailiwick of the state – to be given and taken away at will. How anyone can support a system that advocates that basics of human survival can be disposed of this way is beyond us. But many in the financial community seem prone to EU boosterism, nonetheless.
From our point of view, the Internet has punctured the inevitability of the EU's ascension, Increased political power, once anticipated as a given (should a crisis arrive) is proving hard to amass. In the 21st century, successful investing depends not on the intrinsic merit of a proposition so much as whether or not elite promotions are able to overcome the inevitable scrutiny and exposure of the new electronic communications methodologies. The EU's fate will be determined by this new paradigm in our estimation.