STAFF NEWS & ANALYSIS
Internal Contradictions at EU's Heart
By Staff News & Analysis - November 05, 2010

Ireland is running out of time … Ireland has been desperately unlucky. The bond crisis is snowballing out of control before the country has had enough time to let its medical, pharma, IT, and financial services industries (don't laugh, some of it is doing well) come to the rescue … The spreads over German Bunds are mimicking the action seen in Greece in the final hours before the dam broke. Once a confidence crisis takes root in this fashion it starts to contaminate everything, as we are seeing in punitive borrowing costs for Irish banks. – UK Telegraph

Dominant Social Theme: Don't look at the lads in green. Look up at the sky. Look anywhere but at the EU and the auld sod.

Free-Market Analysis: The Telegraph's inimitable Ambrose Evans-Pritchard is at it again, pointing out inconvenient facts that the Eurocrats don't want noticed and most of the rest of the mainstream press will not report (until it's too late). In this case, he's pointing out that Irish austerity, while certainly adopted, has done little to assuage Ireland's fiscal position and is gradually leading the Emerald Isle toward a situation similar to the one that Greece has found itself in. Not only that but Pritchard's larger issue is that the place that Ireland is headed to, and the place that Greece has already reached, awaits Portugal sooner or later and perhaps other EU countries as well. This place is bankruptcy.

The problem with EU-style bankruptcy of course is that currencies cannot be devalued. Banks and other investors are not required to take a haircut – or not currently – within the current EU formulations for reconfiguring state debt. This is one of the primary tools for lightening the debt load, as spending less, raising taxes and selling off state enterprises can only do so much. If the money owed is not lessened, all the rest of it may go for naught. Ireland is finding this out. Here's some more from Pritchard's perspective:

The uber-strong euro does not help. Under the IMF's rule of thumb, currencies should fall by 1.1% to offset every 1% of GDP in fiscal tightening, ceteris paribus. Given that Ireland is going through the most wrenching fiscal squeeze ever conducted in a modern economy – though Greece is catching up – it needs a devaluation to match. Instead, the euro has risen by 18% against the dollar since June. (less in trade-weighted terms).

UCD professor Karl Whelan, a former Fed economist, told me this morning that there is a "reasonably high probability" that Ireland will have to turn to the EU-IMF even though this will be resisted until the bitter end as a horrible humiliation … "Yields on government bonds have priced in a high likelihood of default. If this continues, Ireland may not be able to continue borrowing on the sovereign bond market," he said in an article posted on The Irish Economy website, a good source for anybody following this Gaelic tragedy …

Greece was able to borrow from the EU at 5% under its €110bn rescue in April. This rate is no longer available. Prof Whelan said the EU's charge under the newly-created rescue fund (EFSF) would be more like 6%. "It would not be a soft-touch," he said. The trigger for Ireland's bond hell this week was of course the Franco-German deal preparing the way for orderly defaults and bondholder haircuts for eurozone states that get into trouble. This shift in policy changes the game entirely. Why would pension funds step into distressed debt markets after they have been told that the EU will, suddenly, no longer stand behind the debt?

Chancellor Merkel's demands are entirely justified, in the long run. But she is playing with fire by raising the issue of haircuts at this delicate moment when Ireland is battling for its life. If she keeps upping the ante in this way we may find out soon whether Europe's rescue €440bn fund can cope with a fast and dangerous escalation … Contagion would spread … to [Portugal] and Spain.

It is very true that Merkel's proposals include spreading the pain to banks and other institutional investors. But the point of the previous EU "trillion dollar" bailout was to try to close spreads by pointing out to institutions and banks that the EU would not let a default occur to a member country. Now Merkel's proposal has removed that assurance and in the short term anyway, institutions are likely to be less cooperative not more. The proposal has thus aggravated an already delicate fiscal and monetary situation.

Of course as we have written many times (along with others) the real problem with the EU is that it is two separate entities – north and south – with two different kinds of economies. The rigid euro recognizes none of this and the inevitable result has been the current situation – where half of Europe is collapsing and the other half faces the inevitability of paying for it.

The situation is manifesting itself with increasing levels of sociopolitical pathology. The most startling example is Merkel's recent announcement that "Multikulti" does not work, a point raised suddenly in mid-October. According to AFP News, "'Multikulti', the concept that 'we are now living side by side and are happy about it,' does not work, Merkel told a meeting of younger members of her conservative Christian Democratic Union (CDU) party at Potsdam near Berlin."

What is most ironic about this is that the EU itself is built along similar lines. In fact the EU, some have maintained, was inspired by Belgium itself where the Dutch and French live in quasi-linguistic harmony. Of course this harmony has been strained of late with both ethnicities engaged in political warfare of the sort that might be compared to the Shia/Sunni divide in Iraq. And the EU itself these days is not an example of harmony of any kind.

Merkel's message to the Germans must be seen as impossibly conflicted now. On the one hand she has instructed German immigrants to convert to Christianity and learn German. On the other, she is a leading proponent of the polyglot EU empire and a necessary proponent of its further integration. We can't see this going down well in Greece, Portugal, Spain, or Ireland either for that matter.

The EU grows increasingly impossible from our point of view. If Merkel's proposal is jammed through without the proper democratic vote-taking, then it will be seen as further proof of the EU's arrogance and unaccountability at a time when that sentiment has already taken furious root. We have argued (and been borne out by current events) that Europe's bloody tribes were willing to accept the increasing authoritarianism of the EU only so long as it promised (and delivered) greater prosperity.

The idea that lives of the next several generations of EU residents are going to be dedicated to increased privation so that the EU itself and its banking families can prosper is not going down well. While we do see it ethnically, we have also several times presented the idea that what has evolved in Europe by now is a kind of spreading class war that will be very difficult to extinguish. We found an interesting summary of this perspective at Socialworker.org, (source CounterPunch) as follows:

Squeezing the working class in Europe … Background to the wave of strikes and demonstrations in France, Greece, Spain and elsewhere … Europe is seeing some of the largest demonstrations since World War II, with labor agitation being the major trademark. The reasons for this labor unrest are easy to see. Let's look at several facts, starting with unemployment. Europe has always had lower unemployment than the United States. No longer. Since 1982, unemployment (as an average of the EU-15) has been higher in the European Union than in the United States. Actually, unemployment had already started to rise in Europe by the late 1970s, coinciding with the first steps by the EU-15 countries to construct what they later called the European Union. One consequence of forming this Union was higher unemployment, and from that time, unemployment has increased, eventually exceeding that in the United States …

The European Union, and the way it has been constituted, is not "worker friendly." Rather, it is "employer friendly." To summarize: since the late 1970s we've seen a decline in workers' income, an increase in salary inequities, an increase in fiscal regressivity, a decrease in social benefits, and a decrease in social protections. Meanwhile, capital's income has soared. This situation is at the root of the enormous increase in social inequalities in Europe. The percentage of people in the EU-15 who think inequalities are too high has reached an unprecedented level, 78 percent, the highest since World War II. This, then, is the background for understanding the current social agitation in Europe.

The article (written by well know progressive professor Victor Navarro) goes on to tell us that the anger of workers is aimed squarely at the EU (just as we have reported) for not fulfilling its promise regarding job stability and increased prosperity. Not only that, but the article contends that the strikes in Europe have been mercilessly effective and that the mainstream press is soft-peddling in an increasingly degenerative and chaotic social situation.

Navarro concludes: "… more labor action will follow. In Italy, unions have called for a major strike in November 2010, and even in the United Kingdom, the labor union federation, the TUC, has called for major demonstrations in March and April of 2011." We see from this statement that the labor unrest is spreading to Britain, apparently, and we would have to believe that both France and Spain will see continued difficulties from labor (and even from the larger populace).

That these strikes are having an impact provides support for our case that they are actually an expression of a larger dissatisfaction. What this means to us is that no matter what Brussels does as regards "bail outs" of the PIGS, continued social unrest and general dissatisfaction likely will make itself felt. As this Telegraph article indicates, the very financial fabric of certain countries in the EU is beginning to tear. Combine such monetary and fiscal pressures with growing and vocal protests (which we believe will not long be restricted to labour) and you have an unraveling that will reach Brussels itself.

After Thoughts

In the first decade of the 21st century, Brussels ruled Europe with an increasing authoritarianism, rejecting popular participation in even the most important constitutional decisions and imposing euro-wide mandates via secretive votes. In the second decade of the 21st century, we think the Eurocrats may soon come to regret these high-handed tactics, even as they realize more clearly that the EU itself (let alone the euro) is increasingly in jeopardy as a result.

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