In July of 1994, a comet named Shoemaker-Levy 9 crashed into Jupiter—it was quite a sight.
According to astronomers, Shoemaker-Levy was a comet that was captured by Jupiter’s gravity twenty or thirty years before it was discovered. As the comet circled Jupiter, at one point it passed the Roche limit—the line around a large mass where its gravity will rip apart a smaller mass by way of tidal forces.
after Jupiter’s tidal forces
ripped it apart.
By the time Shoemaker-Levy crashed into Jupiter, tidal forces had had their way with the comet. As the picture shows, it was no longer a single comet—it was a string of small lumps of rock and ice
Tidal forces are pulling the European Union apart.
On one end, European governments have taken on debt and liabilities—both public and private—which they cannot possibly meet. These debts and liabilities are near-term enough that there is only one way to characterize many of the smaller European states: They are insolvent.
On the other end, Europe is unwilling to carry out sovereign default of any one of its member nations. Indeed, there is a sense that—constant drumbeat of the Germans aside—Brussels is unwilling to even contemplate the very notion of sovereign default and debt restructuring. Brussels and the European Central Bank believes in bailouts, not default, because they believe that the entire European project rests on the non-default status of all the EU members. They believe that all EU debt is backed by the entire EU, no matter how irresponsible the EU country that issued the EU debt.
As we watch Europe get closer and closer to the Global Depression, we are seeing as these two opposing forces—insurmountable debt vs. unwillingness to default and restructure—pull the continent apart as surely and relentlessly as tidal forces.
Let’s first look at the debts and responsibilities the Europeans have taken on, which they cannot fulfill.
American wags claim that its been the socialist policies of the Europeans that insure that the countries will be insolvent—and while the commitments required to fund the European social safety nets are indeed huge, this isn’t even half the story.
Certainly the member states of the Eurozone are over-committed as to pension and medical coverage, especially as the demographic bulge of the post-War baby boom starts to retire en masse, grow old, and require more and more health-care. Countries with demographic time-bombs, like Italy and Spain, are sure to suffer most.
But more than their social programs, it was really the European governments’ willingness to back-stop the private sector banks which did in European sovereign balance sheets.
I’m with the journalist Wolfgang Münchau, who very accurately pinpoints the moment when the Irish government decided to fully back its banks—September 30, 2008—as “the most catastrophic political decision taken in post-War Europe.” As Münchau points out, it wasn’t that just the Irish decided to fully back their insolvent banks—their decision obliged all the European governments to back their insolvent banks too.
Like their American counterparts, the Eurozone bureaucrats lacked the political will to implement the Sweden ‘92 solution: Nationalize the insolvent banks, liquidate the shareholders, give buzzcuts to all the bank bondholders, and clean up the banks’ balance sheets of all the crap debt, before sending them back out into the world, smaller but healthier.
Instead—for perverse political reasons and blinkered short-term-ism—the Irish and then the rest of the Eurozone governments took up as their own the burden of the insolvent European banks.
Take the Irish case: It was bad enough that they went and allowed Allied Irish Bank and Bank of Ireland to grow to be as big as they did—at year’s end 2008, AIB had total liabilities of €172 billion and Bank of Ireland total liabilities of €181 billion, while the total GDP of the Republic of Ireland was €164 billion.
But when the Global Financial Crisis happened in 2008, what did the Irish government go and do? They nationalized the banks’ losses! Prime Minister Brian Cowen in September of ‘08 went and threw a blanket-protection over the Irish banks—banks whose liabilities were twice the gross domestic product of Ireland! Cowen went and guaranteed the private debts of the Irish banks—effectively socializing the bank losses.
And not just the Irish—just about every European government basically did the same thing: All the teetering banks have all been back-stopped by their respective governments.
So what in 2008 was a banking insolvency issue was turned into a sovereign insolvency issue because of terrible decision-making.
Now, two years later, Europe is feeling the pain—should anyone be surprised that European sovereign liabilities are greater than any of them can comfortably pay? Or pay at all?
The UK is the only European nation doing anything serious about the issue of over-indebtedness by really and truly trying to slash spending and raise taxes—but then again, the UK is not in the Eurozone
The rest of Europe? Slashing spending? Raising taxes? Hardly. They’re all making noises in that direction, but in truth, the rest of Europe is counting on the ECB to bail them out—with good reason.
before tidal forces
ripped it apart.
As I write this (Thursday, 11/11/10), 10-year Irish bond spreads over German bunds are at 7.20%—up from 6.47% this morning, and 5.72% yesterday (Wednesday): A crash of Irish debt is imminent.
However, what is Brussels going to do? Why, it’s practically been announced: The ECB is going to save the Irish with “liquidity”—that is, propping up Irish debt by buying it.
First it was Greece last spring, now it’s Ireland. If we go by the spreads over the German bunds, up next is Portugal, then Spain, then Italy—is the European Central Bank going to save all of them with additional bursts of liquidity?
In a word, yes—and herein lies the problem, the basic contradiction of these tidal forces:
The weaker European nations are insolvent—but rather than have these countries default, and then restructure their debt, Jean-Claude Trichet and the European Central Bank want to expand liquidity: A dose of Quantitative Easing, European-style, is what they see as the only way to save all these insolvent countries—
—but the Germans won’t go for this.
Euro debasement hurts the Germans to the same extent that it helps the PIIGS—and Ze Germans are making serious noises about this issue. Just yesterday, Jürgen Stark of the ECB said that European recovery was almost self-sustaining—which is bullshit, of course, but a clear sign that the Germans want higher interest rates, and soon: Something that would kill the Club Med countries, in their current state of insolvency.
The Germans know this. So with that peculiar self-righteous arrogance that does seem to be a national trait, Germans propose that the Club Med countries restructure their debt and have these countries go through austerity measures. You can almost hear the relish, whenever a German political figure raises the issue.
The PIIGS won’t go for those levels of austerity—their economies are already too weak. All of the PIIGS have double-digit unemployment, Spain’s clocking in at 20%: Politically, such austerity measures as the Germans propose are impossible.
So the European Central Bank is caught between “accomodative” money policies and sovereign bailouts on the one hand, and German opposition to a weaker Euro on the other, and instead arguing for debt default and restructuring which Trichet cannot allow, as it would mean that non-German Euro debt would forever be suspect—not to mention impossibly expensive.
These are the tidal forces tearing the European Union apart.
The only way this impasse can be solved and still preserve the status quo of the “big tent” European Union is if the Germans are somehow bribed into letting the ECB devalue the Euro.
What would the cost of such a “bribe” be? Easy—more German control of the EU’s purse strings, up to and including approval of the internal budgets of the EU member states, in exchange for bailing out the other insolvent countries.
This is the price the German electorate would demand, in order to bail out the PIIGS—and it is a cost the other EU nations would never agree to, not in a million years.
So clearly, a political decision is coming up, which has to be answered by the nations of the European Union:
Either preserve the Union at all costs, which would mean having Germany—which will be the one to bail out the rest of the EU—dictate economic policy and controlling member states’ domestic budgets—
—or . . . end the European Union experiment altogether, and have each nation go back to its own currency and its own debt, and sort themselves out as best they can.
—or . . . have an orderly withdrawal of the weaker states from the European Union, and reduce the EU to its key members: Germany, France, Belgium and Holland, with maybe Austria and Poland thrown in for good measure. Call this reduced and streamlined version EU-redux.
If the European Union is to be saved, then this EU-redux that I’m positing would seem to be the only way ahead—and its something everyone who cares about Europe should want: The EU is essential for Europe’s long-term peace and prosperity.
One has to remember the original rationale for the Common Market, which underlines the rationale for the European Union of today: To bind Germany closer to France, and thereby prevent internicine aggression, and the possibility of another continental war.
See, for all their patina of civility, culture and civilization, the French and the Germans are at heart a couple of barbarian tribes who have hated one another since before Roman times. They still hate one another, truth be told. It’s why they have fought one another so relentlessly over the centuries. You see that level of deep-seated hatred bubbling over into periodic, startlingly violent wars in either North, Central or South America? No you do not. But the French and the Germans? No different from African tribesmen—only with nukes and pretentiously refined table manners.
The EU is how France has managed Germany, and therefore how both countries have been able to save on wasteful military spending to protect against one another.
If France wants to continue to have a manageable Germany, then France has to stay married to Germany in the EU. Therefore, the EU cannot be dissolved. The EU has to be saved.
Therefore, the only solution that will preserve the core function of the EU—id est, keep Germans and French from killing each other—is the following:
The marginal Eurozone members—the PIIGS, basically—will have to exit the Euro in an orderly fashion, go back to their own old currencies, and devalue against the Euro. At the same time, their Euro debts will have to be restructured. A likely scenario would be for the PIIGS’s Euro debt to take a haircut, but then be guaranteed by Germany/France/EU-redux in the unlikely case that the PIIGS defaulted on the restructured debt—which would of course happen within five years. This “guarantee” would be the price EU-redux would be willing to pay, if it meant ditching the insolvent Club Med.
If the weaker EU members are not kicked to the curb—if they are allowed to politically overwhelm Germany and use the EU’s political structure to get bailed out scot-free—then Germany will leave the Eurozone unilaterally.
This seems absurd—until you think about it:
The only way European insolvency can be fixed at this point without default or debt restructuring is by currency devaluation—something Germany will not stand, ever. Aside from historic phobias going back to the Weimar Republic, the Germans’ short- and medium-term position would be killed: They would rightly interpret a devaluation of the Euro as a tax on them, to pay for the Club Med spendthrifts.
They wouldn’t stand for it. Politically, the German leadership couldn’t stand for it. If this Euro devaluation were shoved down their throats, then the Germans will leave—guaranteed.
You have to keep in mind: After Ireland, the EU economies that need bailing out are all big. Spain and Italy combined are ten times larger than Greece. Hell, Spain and Italy combined are larger than Germany.
Look at the mess the Greek bailout turned out to be. If and when Spain and Italy go down the tubes, it’ll be a geometrically larger crisis than the one last spring.
Yet the Germans cannot tell Club Med to leave the EU—it’s politically impossible.
Therefore France is the only way to save the EU.
France has to be the member that voices the opinion that ditching the Club Med nations is the only way forward for the EU. France has to join the Germans, in calling for Club Med to leave.
Retrospectively, it’s obvious that such a promiscuous, orgy-like European Union such as the one that exists today was a mistake. The weaker countries benefitted from Germany’s and to a lesser degree France’s credit, and went on a shopping spree. Greece is the prime example, but all the smaller economies to an extent did the same.
Now that the bill has come due, it’s obvious that the PIIGS killed the party: If they hadn’t been this irresponsible, the EU wouldn’t be in the situation that it is in.
Only France can save the EU—and of all the countries on the continent, France has the most to gain, by preserving a smaller but stabler EU-redux. What does it gain? A manageable Germany. Something everyone—and not just the French—very much want and need, long term.
Therefore, the EU must be saved, in spite of the tidal forces pulling it apart. If that means losing the PIIGS and the other smaller countries so as to preserve the Franco-German partnership, then so be it: The short-term prosperity of the marginal European countries would be a small price to pay for long-term European stability.