Now that Greece has given in to pressure from its peers for a more austere budget, the euro zone's policy brass suddenly seems more sympathetic towards its most troubled member. On reflection, perhaps the fault with Greece's parlous public finances lay not just with its budgetary profligacy but also elsewhere: in the absence of a central euro- zone authority for helping out cash-strapped countries; or with the credit-rating agencies that had unhelpfully downgraded Greek government bonds; or with the amoral speculators who had bet against those bonds and helped drive up borrowing costs. It was mildly surprising that some of the messages of support came from Germany, where fiscal indiscipline is least tolerated. On March 7th the finance minister, Wolfgang Schäuble, floated the idea of a European Monetary Fund (EMF) to act as a lender of last resort to euro-zone countries that could not raise funds in capital markets on tolerable terms. He offered few details about how an EMF would be financed or how it would operate. … Progress on such a scheme is always likely to stall because euro-zone countries are reluctant to cede any control of their public finances. That makes agreement on financing a common fund tricky. It also means it is hard to punish countries that run slack fiscal policies. In any case, a safety net big enough to persuade investors that all euro-zone sovereign bonds were safe would leave lax countries with little incentive to control their budgets. – The Economist
Dominant Social Theme: It's an idea whose time has come?
Free-Market Analysis: In this article, we're not going to deal with the EMF issue right away, because we want to provide a larger frame of reference first. By doing so, we think we can put the EMF idea into a better perspective than many news articles are doing, especially mainstream news stories. So bear with us, dear reader, as we first speak to the social compact that the EU offered its nation-states and why as that collapses, the larger issues the EU faces become more onerous, while other innovative ideas (a European IMF?) become ever less compelling.
Let us begin, then (briefly), at the beginning. The EU, as we've often pointed out, was conceived in stealth and implemented gradually through a series of lies. The outward manifestation of the EU was always presented as a free-trade agreement, but events have moved well past that now. The old political game of implementing a partial policy, developing a constituency and then expanding as necessary when circumstances overtake it, is in full-effect now, but not working so well for numerous reasons, many of them unexpected.
The trouble is, at least partially, that too many are aware of just what the EU is, and its bully-boy tactics such as making Ireland revote in order to pass the Lisbon Treaty (which gave the EU significant additional nation-like powers) have been in evidence for some time and surprisingly well-publicized (thanks of course to the Internet). Additionally, as the financial crisis continues to gather force (and we think in many ways it will) more European countries will experience difficulties.
The trouble as we see it is that Europeans in general made a trade-off between socialism and the welfare state. The idea was that people would be willing to give up some freedoms so long as they could be assured of financial security for themselves and their families. This is how the EU was put into place. For at least a decade now, many Europeans have enjoyed a fairly low-rate stable fiat currency that their countries would not have been able to achieve without the larger EU umbrella in place. (And yes, even within this context, there have been drawbacks, but that's an article for another day.)
But what happens when the party comes to an end? It's one thing to accept personal and professional security as a byproduct of a regulatory state. It's quite another to accept high taxes, inflation and a hyper-regulatory democracy within the context of a decade-long great recession/depression. Sooner or later, the social compact is likely to unravel. It will become clear to the suffering masses that they have been sold a pig in a poke. They have neither freedom nor security, only the prospect of slaving away at whatever low paying employment they can scrounge up within the context of a continually more repressive police state, replete with high taxes, central banking inflation, etc.
We don't think this sort of situation can last. Greece is already on fire and when the further ramifications sink in, we wonder if the Greeks will simply choose to repudiate debts and remove themselves from a bad deal (the euro). Certainly, there are many who will continue to make the point that the Greeks are profligate and their public sector was corrupt. But this was the DEAL. The idea was that the Greeks would go along with a centralized state (the EU) and in return they would get a comfortable living and a fairly adequate retirement package. Remove the latter, but retain the former and you are going to generate a lot of Hellenic irritation.
People will put up with a lot if their basic needs are secured. But people will put up with a lot LESS if they are given to understand that they are on their own and cannot depend on social largesse. If the state, in addition to imposing austerity measures, continues to impose various measures that are seen as financially punitive and unreasonable in light of a shattered social compact, then people will become increasingly upset. This is the dilemma that those running the EU – and those running basically bankrupt nations within the EU umbrella – will face.
The EU has not been able to come to a consensus so far about how to bail out the Greeks. Instead, the Greek government has embarked on an austerity program that is causing public and private sector agitation. What German politicians have found in the meanwhile is that the idea of asking Germany to pay for Greek public profligacy is something near a non-starter, in addition likely to being illegal under current EU law.
And now, finally, we come to the issue of an European IMF. The idea is that if Germany won't pay for a bailout of Greece, then every country will. We STILL don't think this addresses the central question. An EMF – even were it legal, or made legal – will still insist on "austerity." These would include higher taxes, "privatizations," abrogation of pension benefits, etc., and would be seen as the fruit of the EU obligations. In other words, the EU would still be held responsible.
And that's the real issue as we've tried to show. The problem the EU has is that it sold its greater union to Europe's clannish and jealous tribes as a net-positive economically and financially. But if the EU cannot deliver on these promises then what good is it? The idea was that the EU would eventually hit a wall and then its clever authoritarian leadership would move the process forward by stealth and "any means necessary."
Unfortunately for the elites, the latest and deepest crisis is playing out in full view of the public and is being scrutinized by thousands of blogs and alternative news sites. These don't matter much in the good times, but in the bad times it doesn't take much before people get the idea that maybe they've been duped. Of course, there is the argument that the European tribes, after decades of socialism and consciousness-raising, are better and more pacified entities now, and won't mind the duping. Good luck with that.
The idea that a couple of generations has somehow changed the essential nature of these vehemently clannish tribes is at least questionable in our opinion. Just wait until the EU tries to push the Spanish Basques around. They've lived in the same places for 20,000 years, probably far longer than the Pashtuns of Afghanistan, who are an equally stiff-necked people.
It may be that the top-notch minds running the EU will figure out a way to finesse the upcoming EU unraveling. Italy, Spain, Portugal, even Ireland are all potential trouble spots, however, and there is no way to continue forward with the euro (as it is, anyway) without imposing a good deal of pain and privation on these countries. It is possible of course that the euro will not survive and the EU will. Or it is possible that neither will. But it will certainly take some imaginative thinking to ensure that both will make it in their current forms. From a hypothetical standpoint, it will be interesting to see what happens next. Always optimistic, we suggest that the EU brain-trust consider a free-market gold and silver standard.