STAFF NEWS & ANALYSIS
Monetary Union Has Left Half of Europe Trapped in Depression
By - January 19, 2009

Events are moving fast in Europe. The worst riots since the fall of Communism have swept the Baltics and the south Balkans. An incipient crisis is taking shape in the Club Med bond markets. S&P has cut Greek debt to near junk. Spanish, Portuguese, and Irish bonds are on negative watch. Dublin has nationalized Anglo Irish Bank with its half-built folly on North Wall Quay and €73bn (£65bn) of liabilities, moving a step nearer the line where markets probe the solvency of the Irish state. A great ring of EU states stretching from Eastern Europe down across Mare Nostrum to the Celtic fringe are either in a 1930s depression already or soon will be. Greece's social fabric is unraveling before the pain begins, which bodes ill. Each is a victim of ill-judged economic policies foisted upon them by elites in thrall to Europe's monetary project – either in EMU or preparing to join – and each is trapped. – Telegraph

Dominant Social Theme: Another politically incorrect article by the Telegraph's Evans-Pritchard.

Free-Market Analysis: The Daily Telegraph is one of Britain's major media properties, and his brand of conservatism has a home there – at least currently. When it comes to the European Union, Evans-Pritchard is certainly "anti." He would like to see the UK disentangled. One should read him knowing he is reporting from a certain perspective. But that's OK. We agree with him.

We've seen how the EU is evolving. Its socialist leaders seem to want a USSR-lite. They just sued Microsoft again and they haven't given up on the idea of a full-fledged constitution, a standing army, etc. Brussels, the supposed example for how Europe's tribes can live together is falling apart, the EU central bank is headed toward a zero interest rate and the idea that in a half century, a broad-based international state could be created from Europe's fractious entities looks to be increasingly fantastical. But that doesn't stop arrogant people from trying to make it happen. The world and history books are full of this kind of manipulation. Things may not go well, but those who are behind the mess often make a good deal of money in the process, even while things are unraveling. But, please note, unraveling is a democratic process. Even the monetary elite of the day eventually unravels if it over-reaches long enough and hard enough.

The collapse of Western currencies and economies is widespread and deepening. We await various upcoming, globalist monetary meetings and wonder if their participants will propose a fundamental shift in money-media. But we wonder, too, whether even the most radical proposals will be too little too late. Is an expansion of the EU model to be received with open arms – especially, by those who are seeing that bigger does not mean better or more stable?

Those who would propose new and even more ambitious fiat-money (non asset-backed) systems have their work cut out for them in 2009. The Internet itself, plus a history of failed "top-down" monetary plans make this an inopportune time to introduce a new and even more global system. Of course it can be done, but one wonders how practical the new systems will prove. At some level, somehow, there has to be a cultural buy-in by hundreds of millions. Certainly that can be managed, but how effectively given current realities? Here is more about what Evans-Pritchard has to say about the current state of affairs in the EU:

Spain lost a million jobs in 2008. Madrid is bracing for 16% unemployment by year's end. Private economists fear 25% before it is over. Spain's wage inflation has priced the workforce out of Europe's markets. EMU logic is wage deflation for year after year. With Spain's high debt levels, this is impossible. Either Mr. Zapatero stops the madness, or Spanish democracy will stop him. The left wing of his PSOE party is already peeling off, just as the French left is peeling off to fight "l'euro dictature capitaliste". Italy's treasury awaits each bond auction with dread, wondering if can offload €200bn of debt this year. Spreads reached a fresh post-EMU high of 149 last week. The debt compound noose is tightening around Rome's throat. Italian journalists have begun to talk of Europe's "Tequila Crisis" – a new twist. They mean that capital flight from Club Med could set off an unstoppable process. Mexico's Tequila drama in 1994 was triggered by a combination of the Chiapas uprising, a current account hemorrhage, and bond jitters. The dollar-peso peg snapped when elites began moving money to US banks. The game was up within days. Fixed exchange systems – and EMU is just a glorified version – rupture suddenly. Things can seem eerily calm for a long time. Politicians swear by the parity. Remember John Major's "soft-option" defiance days before the ERM blew apart in 1992? Or Philip Snowden's defense of sterling before a Royal Navy mutiny forced Britain off the Gold Standard in 1931. Don't expect tremors before an earthquake – and there is no fault line of greater historic violence than the crunching plates where Latin Europe meets Teutonia.

After Thoughts

Let's try to boil this down. Evans-Pritchard and others like him would prefer some sort of asset-based money standard. So would we. But even accepting the ongoing implementation of fiat money, the euro has made the non-asset-based standards of its member countries even worse. By federalizing regional differences in potential monetization, EU monetary policy has compressed the speed of failure. It might have taken Italy, France and Germany a longer time to get where they are headed, but courtesy of the EU and the euro, they are going to get there a great deal faster. And Evans-Pritchard thinks that the euro will be blamed for the mess, and that the standard will suddenly crack. Along with Evans-Pritchard, we're fairly certain of one thing: the system as it stands now in both Europe and North America is in trouble and will get worse before it gets better.

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