Sunday, May 9, 2010

Evil Taking Root in Europe

Last week I speculated on the practical wisdom contained in the Bible verse "For the love of money is a root of all kinds of evil....." Since then, events in Europe have conspired to reinforce the Biblical warnings about the inordinate focus upon money, as the $146 Billion bailout of Greece announced on 3 May 2010 failed to soothe global bond markets, producing a pan-European debt crisis by midweek:
Yields on German two-year debt reached a record low, falling to 0.71pc on safe-haven demand in echoes of credit stress at the height of the financial crisis. This is below the European Central Bank's short-term rate of 1pc. "This is very unusual and indicates concern about systemic risk from sovereign debt," said Stephen Lewis from Monument Securities.
The response of European finance ministers was to blame the bond markets themselves, laying the need for a fresh bailout of the Euro currency itself squarely on the bond markets:
“In the night, when the markets are opening, we cannot afford a disappointment,” said Finance Minister Anders Borg of Sweden, one of 11 EU nations not in the euro. “We now see herd behavior in the markets that are really pack behavior, wolfpack behavior.”
The solution to the Euro crisis?  Pile on still more money--this time on a scale to rival the US Treasury's TARP program in 2008:
European policy makers unveiled an unprecedented loan package worth nearly $1 trillion and a program of securities purchases as they spearheaded a drive to stop a sovereign-debt crisis that threatened to shatter confidence in the euro.  Jolted into action by last week’s slide in the currency to a 14-month low and soaring bond yields in Portugal and Spain, governments of the 16 euro nations agreed to make loans of as much as 750 billion euros ($962 billion) available to countries under attack from speculators.
Or is that really a solution, when every nation in Europe has external debt in excess of one hundred percent of GDP?
  • Greece' external debt is 170% of GDP
  • Italy's external debt is 147% of GDP
  • Germany's external debt is 182% of GDP
European nations are all highly leveraged--far more so than the United States is (external debt is 96% of GDP)--which begs the question of from where do the EU countries presume to get these billions of euros?

Further, how does the creation of still more debt by nations already drowning in debt lend strength and credibility to the euro?  This latest rescue package is still little more than a series of preferential loans to distressed nations--cheaper than what those nations could borrow on the open market, but borrowing nevertheless.  This past week's currency crisis is a debt crisis on steroids, and the European Union's solution is to just borrow more, albeit at more "friendly" rates.  Given that the debt crisis is predicated upon the grave doubt that Greece and other nations will be able to pay off their external debts, further borrowing does not deliver any new assurance that the new debt will be easier to repay than the old debt.

Finally, the bailout mechanism is laden with its own potential instabilities, for it empowers the European Union to reach deeper into the governance of member states than any ratified treaty envisions:
"It is an absolute general mobilization: we have decided to give the eurozone a veritable economic government," said French president Nicolas Sarkozy, once again basking as Europe's action man. "Today we have an attack on the whole of the eurozone. This is a systemic crisis: the response must be systemic. When the markets open on Monday morning we will be ready to defend the euro." 
In the space of a weekend, the EU has determined to arrogate to itself powers well in excess of those contained within the Lisbon Treaty:
But if the early reports are near true, the accord profoundly alters the character of the European Union. The walls of fiscal and economic sovereignty are being breached. The creation of an EU rescue mechanism with powers to issue bonds with Europe's AAA rating to help eurozone states in trouble -- apparently €60bn, with a separate facility that may be able to lever up to €600bn -- is to go far beyond the Lisbon Treaty. This new agency is an EU Treasury in all but name, managing an EU fiscal union where liabilities become shared. A European state is being created before our eyes.
Perhaps this is an inevitable evolution, but it is worth noting that the United States Constitution was hammered out over a summer in 1787, and that the Constitutional Convention was only called after some years of ineffective central government under the Articles of Confederation; similarly, the Treaty of Lisbon--analogous in many ways to the US Constitution--took the better part of a year to craft.  Is zealous defense of a particular currency sufficient impetus to accomplish in a weekend what otherwise would (and, arguably, should) take far longer?

Very likely, the answer will turn out to be "No."  Already, there are consequences to the bailout strategy which reach beyond Athens and Brussels, and even Berlin.  Regional elections in Germany have produced a rejection of German Chancellor Angela Merkel's acceptance of a Euro-centric response to the ongoing financial crisis and with it her control of the Bundesrat, the upper house of the German parliament.
According to a poll on Saturday, 21 % of voters said their decision would be influenced by the bailout.

And the next day they voted the regional coalition of Mrs Merkel's Christian-Democrats (CDU) and their liberal Free Democrat allies (FDP) out of office.
Such are the "sorrows" generated by making currency--money--the center of everyone's attention.  Such are the "sorrows" cautioned against by the Apostle Paul in his letter to Timothy.

The nations of Europe have lived beyond their means for many years--Greece in particular although not exclusively.  For years they have consoled themselves with a conceit that a common currency meant money would always be in abundance.  For years they have ignored the fundamental economic nature of money:
It's time to get back to basic economics. Money--both the paper and electronic varieties--is, in and of itself, worth nothing; it has no intrinsic value. It is a means--and a profoundly important one--of enabling people to more easily conduct transactions without having to go through the clumsy and utterly inefficient barter process.
What the governments of Europe refuse to acknowledge is that the current debt crisis within the Eurozone is not "wolfpack behavior" but a vote of no-confidence by bond markets in those governments' fiscal policies.  There is no denying that is the fiscal policies of European nations that have brought them to this point--the decision to run a deficit is a fiscal decision, after all--and therefore it will be within the realm of fiscal policy that ultimate resolution to the debt crisis will be found.  

This, of course, is the crux of the problem, for no nation wants to take on the hard choices necessary to bring their debts under control.  As Bill Fleckenstein observed in his "Contrarian Chronicles" column:
The ending is not clear, but here's something that is: There's virtually no chance that the Greeks (who have defaulted on debt often in the past) will be willing to adhere to austerity measures just so they can use a colored piece of paper -- the euro. Especially since government workers, the folks who would probably have to give up the most, are the most entrenched.
 Nor is a nation such as Great Britain any more amenable to such policies:
Mervyn King is warning that the victor in next week's election will be forced into austerity measures that will keep the party out of power for a generation, according to the US economist David Hale.
Instead of tackling these issues head-on, the nations of Europe have opted to merely shovel more money on top of the pile, digging themselves deeper into a financial hole, in hope that stabilizing the euro will make all these distasteful duties disappear.

When at last the money runs out, Europe may find itself so deep in a financial hole that not a single one of the institutions it has built up since WWII will survive intact.  Such is the destruction that comes when the evil that is a love of money and currency takes root on a national scale.