February 21, 2012

The Bell Tolls for Europe, Who Will listen?

By Glenn

No man is an island, entire of itself…any man’s death diminishes me, because I am involved in mankind; and therefore never send to know for whom the bell tolls; it tolls for thee.

John Donne (1572-1631)

Europe is slowly committing suicide.  After 50 years of seeking a common path forward, nationalism is dividing Europe once again.  Unlike pre-World War Two nationalism, which drew upon raw emotion, today’s nationalism draws upon a “sophisticated” moral superiority.

Frugal Germans lecture their lazy Southern neighbors about the values of thrift and industry, driving a wedge between the righteous and the wicked.  Because no nation is an island, the economic death of Greece is causing the bell to toll for all of Europe.

Shockingly, German leaders are calling for the dismantling of the Greek democracy.  At one time Europeans demanded an end to dictatorships as the price for entering the Union.  Now, the return of a dictatorship is the price for staying in the Union.

“When Wolfgang Schäuble proposed that Greece should postpone its elections as a condition for further help, I knew that the game would soon be up. We are at the point where success is no longer compatible with democracy. The German finance minister wants to prevent a ‘wrong’ democratic choice.”

Wolfgang Schäuble is the German Finance Minister and no small player in the drama.  Does he truly believe Germany can kill democracy in Greece and not kill democracy in Europe?

What is even more absurd is Mr. Schäuble’s definition of “success.”  Success doesn’t mean putting the Greek economy back on the path to growth or even enhancing it’s ability to pay its debt.  Success means satisfy a need to discipline bad behavior.  A secret report prepared for European finance ministers clearly lays out the likely failure of the latest round “reforms”.

The report warns that the balance of risks is to the downside — if Greek primary balance does not rise above 2.5 percent of GDP, from -1 percent in 2012, debt would be on an ever increasing trajectory.

If revenues from privatisation are only 10 billion euros rather than 46 billion by 2020, Greek debt would be 148 percent of GDP in eight years.

If Greek economic growth is permanently higher than 1 percent a year, debt would fall to 116 percent of GDP by 2020, but if it is permanently lower, debt would rise to 143 percent.

Because Greece will be financing itself mainly through the EFSF, a rise in the borrowing costs for the fund of 100 basis points would mean Greek debt at 135 percent in 2020.

Where is the “success” here?  More pain, but no gain.  No wonder these changes will require the end of Greek democracy.

There are, however, two real paths to success.   One would require Greece to leave the EURO, while the other would allow it to keep the EURO.  Only the second path allows “Europe” to live.

Greece could leave the EURO and follow the path craved out by Icelanders.  Iceland was not part of the EURO zone when the banking system collapsed.  Average citizens rejected their political leader advice and refused to take responsibility for high flying bankers.  Unlike the rest of Europe, Iceland is growing again.  What did they do?

Iceland’s approach to dealing with the meltdown has put the needs of its population ahead of the markets at every turn.

Once it became clear back in October 2008 that the island’s banks were beyond saving, the government stepped in, ring-fenced the domestic accounts, and left international creditors in the lurch. The central bank imposed capital controls to halt the ensuing sell-off of the krona and new state-controlled banks were created from the remnants of the lenders that failed.

Putting the welfare of the people first.  What a remarkable concept.  Would this decision  have been made in an undemocratic system?  Is it any wonder that Germans are afraid of Greek democracy.  If Greece retains its democracy how long will German banks pull the strings?

What is the other path?  The creation of a truly federal Europe. In the United States, the federal government has the ability to use both fiscal policy and monetary policy to stabilize the economy.   Instead of having 51 states driving in different directions, the federal government can rally the nation around a common goal.  Europe, on the other hand, is acting as if state is an island.

Hans Humes, President and CEO, Greylock Capital Management, has a more modern analogy.

“I was thinking as I came in this morning, when you start getting a traffic jam, if every car in the traffic jam had its priorities as the ultimate priority, you’d have a smashup pretty quickly…You’ve got sort of 17, 18 cars driving along in the Greek restructuring, and to some extent I feel that everybody’s priorities, the decision makers are for their institutions and they’re kind of losing sight of what the real mission should be here.”

Hume gets it.  If one car crashes, it really doesn’t matter whose at fault.  Everybody gets hurt.

Europe can’t do what the US did at the start of the crisis–provide direct aid to states and use the FED to prevent default.  The European  individual states can’t do what Iceland did without leaving the Euro.  European leaders have been lying to themselves and their people. Either Europe breaks apart or it creates a federal system.

Instead, they have been following a suicide pact which forces Europe slowing to bleed to death.  Worse, “responsible” leaders are calling for the end of Greece democracy.  If the bankers can do it to one European state, would it be easier or harder the next time?

Ask not for whom the bell tolls Europe; it tolls for you.


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