Friday, November 12, 2010

The Tidal Forces Ripping Europe Apart

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. 

Comet Shoemaker-Levy,
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. 

Comet Shoemaker-Levy,
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. 

60 comments:

  1. Nice One Again GL. Do you not see this as the precursor to the soon-to-come American Experience?

    I mean look at the dynamics. The ECB could have refused to bailout the Greeks several cycles ago and hence they would have defaulted, BK, reorg, and started anew. But instead the ECB allowed the cancer to spread to the whole of the EU and now the pain will be much greater and the participants wider and often unfairly involved / punished (Germany).

    How is that any different than the US bailing out the banks both directly and indirectly numerous times now and allowing the spread of their greed to the country as a whole. We have massive speculation in my biz, Oil and Gas, and everyone knows the potential exists (as in any flight to safety speculative scenario) to cause much harm to many.

    Should the US not wise up and recognize we are the EU and our come-uppance is coming - right after theirs plays out?

    Best.....

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  2. You have several good points in your article, Gonzalo.

    My personal opinion is that EU, as an area of free travel and working place between the member countries, has been a success, but the monetary and political union between the countries has been otherwise an utter failure.

    The ideas that come out of the central "politbureau" of the EU are nightmarish and out of control.

    The highest ranks of the EU decision making are not elected by the people, as you may know, which has led to bypassing the people's will, including the passing of the EU constitution, even though it was rejected by several countries in direct voting, including Ireland.

    I hope that the individual countries wake up before it is too late, and disconnect themselves from the EU political and monetary union, going back to the free-trade area situation that is in place with Switzerland and Norway (which works beautifully for everybody).

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  3. IT'S TIME TO BRING TBTF BANKS DOWN:
    http://www.zerohedge.com/article/max-keiser-buy-silver-coin-destroy-jp-morgan

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  4. Nice post GL. Of course your analysis is right. However I think you must also consider the reason the EU, led by Ireland, did not let the PIIGS default. In the default, there is no doubt that much of the European Banking community would be wiped out, which would have had grave economic consequences. EU policy in my view is less motivated by maintaining the non-default status of the EU project than by the fear of wide spread credit collapse. Not that those consequences should have allowed the PIIGS not to default; I think it is just whether one wnats to pay now or pay later. It is the same problem in a nutshell in the US with TBTF banks.

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  5. GL,

    I've read, from other sources, that debt is endimec of Westernized monetary policies and not so much a reflection of a nations gluttony.

    Is it not the case that Western monetary policies all require new, and larger, principle to pay previous principle and interest?

    If you have a chance could you shed light on this. I would love to hear your opinion on this matter.

    Cheers

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  6. Gonzalo

    Yes, tidal forces will tear apart Europe.

    And I suspect that you're right - that the weaker PIIGS nations will be given the boot. The bottom line is that this is a solvency crisis, and those who have managed their finances conservatively are not going to throw away their future for others who spent lavishly.

    In the USA, it is difficult to tell. Very clearly some US states correspond to the PIIGS - especially California. Ironically, California's economy used to be one of the strongest in thwe world. But as a resident of California, I foresee only more gidlock and little potential for serious reform. Nobody has the stomach to implement the austerity that is really required. The ship of state of California will go underwater - with Jerry Brown at the helm. Does this mean that some US states will actually be divorced from the rest of America? I tend to doubt it. Apparently the Fed and the US Gov't are actually willing to print whatever amount of money it takes to placate everyone. Which is unbelievable .. but that is our sad reality.

    On the grand scale, the whole global framework is being torn apart by tidal forces. Look for the Asian cental banks to be more unified in their actions, while the G20 falls apart. The Chinese will take a leading role in Asia. This won't sit well with Korea, Japan and Taiwan ... but what can they do? They are being squeezed by China's merciless grip of its currency (the remnimbi pegged to the dollar). The Japanese face a risk of their own economic depression if they don't take drastic actions.

    Will the USA go into hyperinflation? It's a definite possibility - but only when the world soundly rejects the dollar and US assets in general, and when other countries devise an alternate currency that is workable.

    Too many real solutions required ... far too little action to achieve any of them!

    Another Great Depression? It's certainly a distinct possibility - especially for the USA and Europe.

    We will see what the future holds.
    Keep speaking out!

    PeteCA
    California

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  7. I completely agree with this whole article, as politically incorrect as it may be in some spots... (that's actually, most likely WHY i like it) The EU is doomed in it's current form. The question is how long will it take for this realization?

    Next up, The USA - a currency that once dominated, is now at par with Canadian currency... Devaluation? I think so.

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  8. logical article but unable to analyse properly the EU situation and prospects because of superficial knowledge about what is the EU in the first place.

    you seem to subscribe to the simplistic -allow me to say- view that EU serves the purpose of France having a manageable Germany. Indeed, during the period of EU birth -after WWII- the idea of a union that will make conflict in the continent difficult if not impossible was nicely served.

    Anyway, even if we accept that one of the main functions of EU is to enable the french to maintain a manageable germany, could you please tell me how the germans feel about been 'managed' by the french 65 years after end of the last war? How would you feel if you were german?

    One may believe this facade of the EU birth as an anti-war organisation. I just want to note that even the 3rd Reich would have been an anti-war continental organisation if it had succeeded materializing its -meagre- visions.

    Anyhow, personally i have my doubts about the anti-war nature of EU or its function as tool managing germany.

    Which brings the question: Who is really behind the so called european and so called union?

    Winston Churchill certainly pushed for it when he was amongst the first to float the idea of the United States of Europe in 1946. Why did he do it?

    Who has been driving the EU expansion since its birth and why? You think it is the people of europe via their elected representatives? it does not look like this to me. Then who?

    Who brought the meditteranean countries in the EU? (yes the ones you call PIIGS or 'marginal' members... phraseology you and others use which imply a lot more, think about it). More importantly, why they were admitted in this union of the best intentions? may be like criminal cases we need to ask, who benefit the most by the presence of the 'marginals' in the 'elite union of the stars' (allow me this name). Who do you think?

    Even harder to answer is the question: who is driving the candidacy of the 70 million muslim population - Turkey as a member of the so called european union? Why take on more 'marginal' countries?

    Without knowing who is really behind EU (and so unable to answer convincingly such questions), makes making comments on the EU and its prospects/scenarios a pure waste of bytes in cyberspace.

    GK

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  9. GK, you are perfectly right.
    That's why I see the artlicle of GL as "stupid".

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  10. All right, here are a couple of quick points for you:

    1) Fernand Braudel once said that the real opposition in Europe is, has been, and always will be, between France and England -- between a continental power and a maritime power -- he even added: "everything else fades into insignificance". Food for thought. Before the unification of Germany, most German "nations" were actually very much francophiles.

    2) Weakening the Euro is bad for Europe -- but it is very very good for exporting nations, such as Germany and, yes, Spain and Italy and France and the rest of the EU, Ireland included. I strongly suspect that, whenever the Euro is a bit too "strong" (US$ 1.4 for 1 Euro certainly is too strong), European leaders -- France & Germany -- like to draw attention to all the problems that beset the smaller nations of Europe. Sure, it puts these countries in a very bad situation, but, boy, does it help those exports!

    3) I am also very sure that the USA and the UK like nothing better than to draw attention away from their own problems. The fact is, while Greece and Ireland are pretty much small fry when it comes to the global economy, I find it very worrying that the state of California, an economic giant, is bankrupt. And the rest of the USA don't look too good, if you see what I mean.

    4) You point out -- correctly in my opinion -- that the real solution would be to nationalize all banks and put them under government control, I can't help but note that this option is still more or less "open" for the European Union. After all, Europeans are a lot more relaxed about naionalization and are not as attached to so-called "free enterprise" (or is it "corporate welfare"?) as the American citizens. In the USA, the Federal Reserve is now just a small part of JP Morgan and Goldman Sachs and will do nothing of the sort.

    If the EU decides to nationalize all the banks in the Euro-zone, refuse to reimburse all CDS and other derivatives, and give a nice, short, haircut to all their creditors, it is highly possible it will be able to restructure its banking sector... At the expense of the rest of the world. I suspect that kind of thing is, at the very least, being discussed between France & Germany. But they would need to do it fast, and the would need to do it first.

    Again, food for thought. Make of that what you will.

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  11. Only one problem with your thesis...

    The ECB marks its gold to market.

    Assuming gold is allowed to trade freely, that could save the EU.

    How much pain they put themselves through before they come to this conclusion is another matter.

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  12. THANK YOU for posting this! I love your blog!

    Steve
    common cents
    http://www.commoncts.blogspot.com

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  13. TenThousandMileMarginNovember 13, 2010 at 2:41 AM

    You seem to be confusing EMU and EU.
    The EU existed before the Euro, and it can exist afterwards. The UK never joined the EMU but is a member of the EU.
    The reintroduction of separate national currencies does not preclude a common market,free travel etc and will not end the "European Project".

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  14. Europeans are more adaptable to having their standard of living reduced. We are more used to using small cars, eating less, living in smaller houses etc.

    American citizens are not used to this way of life, if US citizens were suddenly forced to pay $5 a gallon or drive a Ford Ka or Fiesta, or eat the same size portions as Europeans, they could not adjust.

    European social structures are very old and well versed in coping with adversity being that economic or conflicts.

    Just look what happened to the USA after 9-11.

    The UK has terrorism for years, and still does; the citizens became used to it.
    France, Germany, Spain, and a host of other European countries have had their fair share of adversity over the last 1000 years, but came through it.

    The USA will also come through this great recession, but the question is: How will the US population handle it, because as we all know, it is hard to have been affluent/rich/middle class and be faced with a new normal poor standard of living. Whereas in Europe it is easier to adapt, as the social system is more geared to protect all classes.

    Take healthcare insurance, in the USA for a family of 4 this can cost approximately $1000 per month, whereas in Europe it is a fraction of this cost, and much better in quality and care.
    Insurance can also be easily obtained through your local supermarket, if you doubt this, then go get a quote online at www.tescofinance.com/personal/finance/insurance/healthins/adult-plans.jsp#

    Just make up a name and address in the UK, and see how much less it would cost.

    Additionally food is cheaper in Europe, cars do more MPG, Schools, College, Childcare are free, and so all in all it is easier to adjust when the economy is bad.

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  15. Amazing,
    oh this article was yet another good one from you, however I am referring now to your ability to present a discourse so clearly. Mind you, it's not "dumbed down" by any means, and yet, your articles are head & shoulders above others in their clarity and the way you present issues.

    While I just happen to be in agreement with your stances, even if I wasn't I would still have to (grudgingly) acknowledge your talents in writing style.


    GL ... you set the bar.

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  16. GL is right: when talking about the EU, it all comes down to France.
    But GL misses a very important point.

    True, the EU was built on fear, fear of the past, fear of bloody wars.
    But, there was, and still is, a second major factor: compete with the US!

    Compete with the US, both in geographic and economic size.

    Here lies the answer to the question: why include the PIIGS in the Union?

    Because, their GDP numbers are needed, so that the cumulated eurozone GDP can be larger than the US GDP!

    And behind these ambitions lies... France!

    France, from De Gaulle to Sarkozy, never admitted to be pushed into the background. All its presidents have pursued dreams of greatness. Just look at Sarkozy, who already think he is going to change the world, because he holds the G20 presidency from now on.

    Thus, France pushed for the EU's extension and, at one point, Giscard d'Estaing (France 'royalist' president, from 1974 to 1981) cherished the idea to become the first European president. Unfortunately for him, the political process took an awful lot of time, as everything else in the EU, and he was totally out of the loop when Van Rompuy (who?) was nominated.

    Back to the present.

    I think GL is dreaming if he thinks that France will play the role of a catalyst in breaking of the EU. Actually, France is busy pushing the admission of new members in the crumbling union.

    And by the way, France holds more than 500 billion euros (you read me correctly: 500) of Italian public debt! And Italy is a proud member of the PIIGS. Quite a potential loss of money, if the PIIGS were to split up from the union...

    Finally, there is the rather strange Turkey issue. Turkey wants in, probably thinking they will enjoy a party "a la Greek". But why does the EU want Turkey in?

    This is only conjecture, but one should keep in mind that some EU countries, France in the lead, have a large Muslim population. So much so, in fact, that France will become a Muslim country by 2020. At that time, more than 50% of its population will be Muslim. (which is one of the reasons why I sought asylum in Thailand 10 years ago).

    Therefore, one can imagine that, given their very large numbers, Muslims now have a say in the EU political life, and support Turkey's application.

    Click on my name to visit my blog.

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  17. The EU is a big mistake. Free trade is one thing, but the EU is politically achieving, what Germany tried to achieve in the second world war.
    It is a conglomerate where the top is trying to move as far away from the voters as possible, with the implications of corruption and graft.
    Let it die!

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  18. Listen..Do you hear the drums of war in the distance?

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  19. The solution is to stop issuing national government bonds and only issue Euro bonds. When national bonds mature and needs to be rolled over by the PIIGS and others they need to do it through issuance of Euro bonds. There should be a Euro treasury as issuer and countries are only allowed to issue bonds through the Euro treasury, which can be funded through a margin on bond yield. This way they can easily implement monitoring and policing of the 3% rule.

    Of course Germany and other countries with very low yield on their bonds might have to pay slightly more interest on their national debt as it rolls over, or when they need to fund their deficit, but those countries are also those with the lowest deficit.

    The thing is the Euro area as a whole is very much solvent and has a debt to GDP ratio that still looks very good in the western world. So Euro countries should have no problem with getting good ratings if they were only rated as a whole.

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  20. economically OK for me: good article!
    you should add at least Finnland and Luxemburg to your list of key-Euro-countries.
    as to german and french people: I do not see hatred between them. being a german I can say: the germans in general like the french. I do not know about the other way around, but it I think it is not bad. what both cultures really hate is a) muslims and b) their own politicians.

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  21. This article is mostly very good. Especially the analysis of the possible outcomes for the EU.

    There are, however, several aspects Mr Lira does not take into account, and many simplifications that are no doubt due to the fact that Mr Lira has not had "boots on the ground". As a French who lives in Germany, let me point some of the shortcomings :

    - Germany is a paper tiger. Why ? Because, demographically, Germany is in a catastrophic position. With the current demographic trends, in 2050, half of Germany's population will be of Turkish/Arabic descent. The ethnic Germans, and with them the core qualities and defaults of Germany, will disappear, and most probably the racial tensions will be extremely high.

    - Same goes for France. Foreigners don't seem to understand this, but the ethnic composition of France is very different now than 50 years ago. Our Muslim and African minorities are more numerous and more violent than in Germany. Our economy is constantly declining, as is our education level and our culture. Racial tensions have been constantly rising since the 80s, and that in a context of relative economic prosperity. I leave to your imagination what will happen if France had a really serious economic crisis.

    France and Germany are not the future, and they live on the remnants of past glory. They're not alone. Almost all European countries are sheared apart by the combined forces of an rapidly aging population and young minorities. The only glue holding all of this together are our generous welfare state nets

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  22. GL is right on the analysis but too early dismisses socialism as the root cause of the problem. As {anonimo3:05} points out the EEC was a huge success as the free market zone and a trading block. It was the creation of pan-european empire of European Union, grand socialist vision of a giant welfare state and a pure political project that did us in. The financial debacle now is only the result of that grandstanding.

    Second, one has to be careful with statements like "the Germans won’t go for this". I remind you the Germans were supposed never to go for the euro to start with, ditching their beloved deutschemark, the symbol of post-war prosperity. Yet despite overwhelming majority against it they went because were told to shut up by the ruling elite. If that elite shows similar wisdom in this case nothing will be safe.

    Third, one other outcome i see possible - the Germans let the EC go to hell and turn east forging some sort of link with Russia. It has been historically a love-hate relationship and as improbable as it may look now, it makes some good sense.

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  23. The EU needs "adult supervision"!
    If they keep their union, they need a single body at the top with the power to keep the various nations from reckless financial activities and overspending. Clear rules and the power to enforce them.

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  24. @ anonymous 6.00 AM and Vincent...
    I don't know if you read my comment above, but I think that we (French and German) agree on everything, at least on this blog...

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  25. What impact will the following two scenarios have on the US Dollar and the general markets in the US?

    -Bailout of PIIGS
    -Secession of PIIGS from the EU

    Thanks,
    Ty

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  26. GL: Please consider the current state of municipal bonds as your next topic. They've been hammered in the past few days (illustrated below); yet, have received little play in the media.

    http://stockcharts.com/h-sc/ui?c=cmf,uu[w,a]daoayiay[pb10!b20][vc60][iub14!la12,26,9

    http://stockcharts.com/h-sc/ui?c=pza,uu[w,a]daoayiay[pb10!b20][vc60][iub14!la12,26,9

    Thanks!
    Ty

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  27. Uhh ... "The Franks" were a German tribe who migrated out of Southern Germany into France AFTER the Roman collapse :)

    They became Romanized and started the French language (Roman with German influences). They became the dominant tribe in Northern France, they founded Paris, and eventually their system of tribes became the state of France.

    In other words, France was founded by Germans !

    Just details .

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  28. As a world leader in exports, why would Germany be so opposed to a weakened currency? Wouldn't that help their exports outside the Eurozone?

    Piker dummy

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  29. @brunolem

    Yes. Without false modesty, let's say that intelligent French, German, and also American people mostly agree on the problems at hand, whether they be financial or societal.

    @cyniko

    You are very well inspired to point out another thing that Mr Lira, despite his sharp mind, does not really perceive : the sometimes vast gap between the German and French populations and their respective elites. Examples are numerous : the Afghanistan war (80% of the population against, 90% of the elite in favour of it), the EU bailouts, recently the mega-train station Stuttgart 21 in Germany... For each issue, you have to ask two questions : what do the German and French people think about it, what do their respective elites think about it. Results may vary.

    What I want to say is, in the end, that the EU may very well weaken the Euro and bailout everyone, no matter what the average German wants.

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  30. From your article:
    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

    Wrong. The first country to seriously attack its deficit, and it was loudly and widely praised for its resolve, was.....Ireland.
    It's a Catch 22. Austerity =default. Continued spending = default (but later).
    Choose your poison.

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  31. Let's start with a quibble - you had better look up "redux".

    You also appear to think that France is a marginal PIIG. That's not the case.

    Otherwise, much of your analysis is good. The EU has consistently turned a blind eye to its foreseeable problems and has forced the will of its corporate and political masters upon unwilling populations, most recently, the Lisbon Treaty, which as everybody knows is but a thinly disguised version of the rejected European Constitution. And no sooner do they ram it down everyone's throat, than Merkel (perhaps the only real political leader in Europe) finds that it has to be changed.

    Outlook not good; but the EU will be kept going in its unreduced form, whatever the cost. Bet on it.

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  32. GL , you are wrong about the fear of some countries of a possible continental war in which germany would (again) play the key role.In fact I would be glad if people in charge were so clever and would be planning so far ahead

    but they are not , they are just playing a game in which multiple teams are trying to get the biggest possible piece of the pie and germany just happens to be the strongest player in this game which does not have the slightest intention to give his piece of pie to the other players as the leadership of the german team fears a mutiny after which it could be completely replaced

    The root of all evil here is that as soon as the pieces of the pie become too small some players will be tempted to leave the game and go home to cook their own pie.There were times when the pie was big and there was enough for everyone so that new players were invited to join the game but now there is not much pie left for them

    in general you are right about the possible outcomes of the game but you are wrong about this "depth of thinking" of these people.There is no long term plan , no conspiracy , there is just a pie and a hungry stomach which tells them what to do...

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  33. Nice shot- but overshot, sorry. You have mentioned Poland as one of more solvent and reliable parts of UE. And that's true. But polish high structural budget deficit, insane housing bubble and already low and decreasing freedom of trade means collapse at near future. Situation here seems to be much worse that you described. I think there is no way to avoid pan-european collapse. But- France does have no matter. Germay have matter, as industry matters. Still- only Germany (means polical elite with or with out democratic legitimation) can decide. And German industry is dependenent on chinese (as industrial machines, etc.)- so european future somehow depends on chinese indusrty boom. When China slow down, EU (and eurozone in particular) will collapse. No sooner, no later.

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  34. You don't address the problem of what happens to the French and German Banks if you cut the PIIGS adrift and create a "leaner and meaner" EU out of still nominally solvent Northern European countries.

    Cutting these folks off and hanging them out to dry would completely wipe out the French and German Banks, they are the Bond Holders. The Germans would have like ZERO export market, since nobody on the rest of the continent would have any worthwhile money to buy their products with.

    I don't think this solution will work too well. It still ends up in another pan-European War.

    RE

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  35. Chancellor Adenaeur of Germany and Miterrand of France having witnessed two bloodbaths in 40 years decided that close trade relations would reduce the chances of another conflagration within fifty years. So far it has worked. The world is made up of trading blocs and the EU is by far the largest and most influential. America peaked around 1950 and has been in decline ver since. Japan peaked around 1990 and has not grown since. China, Latin America and India growing rapidly. The PIIGS are necessary in the EU because they add mass. Turkey would be even more useful not alone would they add mass but they could police their fellow religionists down to Yemen as they did under the Ottoman Empire. The solution to American aggression in the Middle East. Every country in the EU needs it and would be worse off without it. The EMU is a different story in that the PIIGS need a sound currency more than the French or Germans.

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  36. What about the introduction of a paralel gold backed "euromark"?

    Both the euro and the euromark would be legal tender.

    With the slow introduction of the euromark, the euro would slowly, controlled, depreciate.

    People would have enough time to convert their euro's, and euro based debts would over time become worthless and easily paid off.

    It's not an official default, but in practice it would be.

    The main advantage, the economic system would not collapse because there is an alternative currency.

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  37. I am reading "When Money Dies" (search amazon.com kindle store).

    If I read it well, there was a parallel goldmark before WWI, similar to what you suggest here.

    I haven't brainstormed about it yet, but the idea sound interesting.

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  38. Doesn't China and Cuba have parallel currencies? I know that Cuba has tourists money which locals are not allowed to use.

    ReplyDelete
  39. Great post, with only one question ...don't the German and French banks hold a large percentage of PIIGS debt? Seems they get hammered through either currency devaluation or default ...at least they can choose their poison.

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  40. Very well written analysis but you focus too much on the past and on finances.

    You talk about hate between France and Germany, it does not exist anymore. In the Netherlands we were occupied by Germans, bombarded, Rotterdam destroyed, a lot of Dutch killed. Nobody remembers or thinks about it, we talk about how Germans drive too fast, a lot of Germans have holiday in the Netherlands, we have holiday in Germany.

    BUT......... there is a totally different problem where I can not say too much about because we have 'hate'laws, politically correct left wing fascist laws that prohibit free speech. You are not to say anything bad in public about 'certain' groups in society or you get arrested.

    So we come to fascism, this is much more important than the finances..

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  41. Hi its really very nice blog,very useful information..Mobiles

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  42. About the banks ... No one forced them to take on PIIGS debt.

    If they get hammered, it's their own fault. This is called taking Risk.

    If too many banks fail, governments can set up new banks with clean sheets.

    The TARP money would have been much better spent on the creation of new banks rather than "saving" old banks who made stupid decissions.

    Let the stock holders pay for the collapse of failed banks, and not the tax payers.

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  43. I hope GL will write an article about the idea of the slow introduction of a parallel gold backed currency to deflate debt balloons slowly rather than with big bangs.

    The introduction of a "euro mark" should only be allowed by the European Bank, and not by individual countries.

    It should be targeted, that is, introduce it through wages only and not through loans to avoid speculations by banks.

    Only introduce it in countries with less than 5% deficits. Soon populations will demand cost cuts rather than protest them.

    I think if an euro mark would be introduced, it would be a German / Dutch / Finish etc initiative, rather than an EU initiative.

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  44. Dude,

    Your analysis is completely flawed. In order to understand the situation better, it is best to ask a few thought provoking questions:
    1. Who benefits from a bailout?
    2. Who loses?
    3. When Greece was bailed-out, what exactly happened?
    4. Do the Greeks owe less money after the bailout than they did before it?
    5. When the bailout of Greece occured, who was it that got the bailout?


    I believe your friend and fellow blogger, Mish Shedlock, has a much better understanding of the situation:

    http://globaleconomicanalysis.blogspot.com/2010/11/imf-ready-to-help-ireland-can-imf-help.html

    It should be clear that when a bailout occurs, it is really a compromise between the debtor and the creditor. Specifically, the debtor agrees not to default, outright, if the creditor will make a few concessions in order to make payback possible. Therefor, that which you said could not happen has already happened with the bailout of Greece. Specifically, the Germans have gained more control of the EU purse strings in exchange for better loan terms for the debtor
    countries and more printing of money by the ECB (in order to take on the debt of the PIIGS).

    Alas, the EU will not break apart, as you predict. Instead the Germans will agree to allow the ECB to print more money and allow the PIIGS to pay back the debt that they owe the Germans.
    The alternative for the Germans is to leave the EU (or to force others to leave) and NOT get paid back. Not gtting paided back is what is unacceptable to the Germans.

    The PIGGS will agree to pay back the debt under more favorable terms because the alternative for them is to leave the EU and suffer a prolonged depression and all that it entails. This is what is unacceptable for the PIIGS.

    So, your analysis is completely fucked-up because you failed to take into account the "real motivations" of all the interested patries.

    ReplyDelete
  45. Do you get the feeling that perhaps this is a manufactured debt crisis? Perhaps it's part of a plan for a one world government with total control over the planet and resources. Maybe 9/11 and the "Muslim" threat is a dry-run for the clamp-down and control of citizens. Maybe the next step is a fake alien invasion used to justify a complete take-over?....I'm just sayin' is all

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  46. Rejectamenta, maybe it's time to seek some professional help?

    Isn't clear that because the baby boomers started to retire they
    1. Are spending much less, and
    2. They started to cost a lot more to the health care system.
    3. They have less income while on retirement benefits.

    That alone would cause a long term recession.

    Add on top of that peak oil and the Fed's idiotic policies, and you get a depression.

    Add on top of that globalization and the sell out of jobs to Asia, and you get a total disaster.

    The only way to reverse all of this is $200+ oil prices which would make globalization too expensive, would therefore bring back most of the jobs we lost, and would allow us to pay off some debts.

    How can you believe this one world government crap. The policians we have are way too stupid to even come up with such a plan, let alone find a way to execute it.

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  47. Surely you forget the reason all the Piigs got into trouble was
    because of negative interest rates, introduced to pay for german unification...

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  48. Some comments are so stupid.. Piigs are in trouble because of low interest rates because of German reunification............... Tuut tuut.. to the asylum center.

    Greece people are lazy and like fraud.
    Irish lent too much.
    Spain build too many houses.

    Everybody lent too much.
    Banks speculated too much.

    Taxes are too high.

    Governments in Europe are too big, can be cut easily by 75%.

    Babyboomers retiring.

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  49. Actually, I think - EU project at the beginning was not as the competitor to US - it was necessary for US as counterparty on Europe's ground as a tool for countering growth of political and economic influence of Russia. NATO is it's enforcement tool.

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  50. This makes a good deal of sense, so I wonder why PIIGS debt is not even lower in the market. Buy Ireland, Portugal or Spain and you are buying a haircut. Kicking out Italy may be much more complex, being a founding memeber...Treaty of Rome and all that.

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  51. I've rarely seen so much ignorance and incompetence in a single article... Let's see:

    1) Euro debasement doesn't hurt the Germans. They are against inflationary measures as a matter of principle, because they have a hyperinflation phobia pretty much like the Americans have a deflation phobia. But a weaker actually *helps* Germany, which is one of the biggest exporting countries in the world.

    2) Your "EU-redux" idea is a fantasy that will never come to pass. Just the opposite - *more* countries are likely to be accepted as EU members in the near future.

    3) The only way the EU can come apart is if the Germans unilaterally leave it - but this is extremely unlikely to happen, for political reasons. (Although it's the economically reasonable thing for them to do.)

    4) The reason why the Greek crisis made so much noise world-wide is because the world was looking at Greece but was thinking of Spain and Italy. By themselves, Greece and Ireland are insignificant. When the crisis finally hits Spain in earnest, the market would have already discounted it.

    5) France can't put even its own house in order, let alone "save the EU".

    Pretty much the same kind of ignorance can be seen in your other articles. The US dollar will not "collapse". There will be no hyperinflation in the USA. The EU won't fall apart. The euro won't collapse, either. There will be just many years of high inflation world-wide. The middle class will suffer a lot, the savers will be wiped out (but so will be the debt), the old and socially weak people will be hit the hardest. There will be riots here and there, like there were in Greece. But, in the end, the world will survive and the rich will become even richer.

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  52. The EU is here to stay. It will deepen, as ordered by France and Germany two weeks ago. As, and too few of the commenters have pointed it out, a new (yes!) European constitution is on the way.
    The bank crisis is not solved. But the UK has nationalized of few of its large financial institutions, and France and Germany will not hesitate if they have to.

    Now that Salafism (Muslim fundamentalism) has clearly run out of control, so the acerbic criticism against France about integrating Muslims has now changed. Thus the Muslims will be integrated. France has integrated Muslims for 13 centuries, As Merkel said a month ago:"Multikulti is dead!".
    http://patriceayme.wordpress.com/

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  53. Gonzalo,

    I'm afraid this was a very weak article. Two aspects which were clearly not understood by you (and had already been pointed out by other commentators).

    1) EU and EMU are not the same. The EU has been broadly a success as an economic project, probably less so as a political one. On EMU the jury is out. The EU would be hurt of EMU would fail, but would not necessarily break apart.

    2) German and French relationship. Except for the 1850 - 1950 period with three wars, German - French relationship has been historically good (obviously Germany as a nation state is quite a recent concept anyway). As pointed out Charlemagne was of Frankish origin (a Germanic tribe). Probably France relationship arch-enemies if there exist something like that were England (100 year war etc) and the Austrian-Spanish Habsburg family. Comparison to tribal warfare are utterly ridiculous and indicate a profound lack of exposure to European people.

    Sorry about being so critical.

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  54. Dear Gonzalo,

    As some have mentioned above, your political analysis has, this time, followed too closely the shores of the mainstream. The EU as anti-war project is extremely politically correct, but is probably not, in "times of universal deceit", the correct version of the European reality.

    Just take a look at the map of the American military bases in Europe and you realize that the notion of European sovereignty is a joke. Right from the end of WWII, Europe became an Anglo-American project structured around a military kernel, NATO. Remember Gladio, the colonels regime in Greece etc.., everything that happened in Europe since then bears the fingerprints of the CIA.

    It can't be a mere coincidence that the integration of new East-Europe countries into the EU has happened just when NATO was expanding its influence into that area. By the way who is pushing, against the will of the main Europeans countries, for the integration of NATO Turkey into the EU? Before it was Bush, now it is Obama. On the other hand, the European Commission is headed by a neo-con sympathizer: Manuel Barroso, a fervent supporter of the Iraq war. All main European leaders are also pro-NATO, pro-empire and pro-Zionists. How could it be otherwise? Where is Europe in all this?

    As a block, the EU is a handy thing to have for the Anglo-American empire, as all its different national entities are easily being handled from one unique control center in Brussels.

    It's also no coincidence if the US and EU have the same financial problems: they share the same "values", in all senses of the word.

    For info: http://www.horizons-et-debats.ch/index.php?id=2343

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  55. Gonzalo, you really don't understand much of European politics and should refrain from commenting on it. This article is a big pile of non-sense.

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  56. Thank youi for a concise presentation on the European experience.
    It seems clear that we here in the US have a similar mechanism where a foreigh government (that in the district of Columbia, outside and foreign to the government of our state) and its currency (the dollar) has positioned itself in much the same manner over the once independant states. The early years of this monitary domination (the days before the civil war) are reminiscent of the experiment in Europe now and, of course, our own PIIGS. Central planning and the loss of freedom necessary are the achilles heel of these social systems.
    Thanks again.

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  57. Gonzalo,
    I generally like your blog. But to consider that only Germans remember the hyperinflationary or devaluation haircut to their savings is simply silly.
    It may be presumptuous of me to assume that you neither speak French or are not current with their economic history over the past 100 years, but let me assure you that well after De Gaulle's revaluation of the Franc, people were still speaking of Francs in the millions and billions. Essentially, what De Gaulle did was to recognize reality--a legacy of the corrupt war years, and reformers of various stripes prior to that--and shave two zeros off the Franc of the day. De Gaulle had been steadily accumulating dollars (convertible to gold) in the French Treasury since his return to power during the Algerian Revolution. [Disclaimer: I am not French, but lived there many years.]

    At that point, the Franc became magically the equivalent of roughly the US silver quarter dollar. This made trading easier, but drove the locals nuts. It also sparked his desire to challenge (for foreigners only, then) the gold-linked dollar, which he succeeded in doing in 1971; he played Nixon in a financial game of chicken, and De Gaulle won.

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  58. After WWI, Weimar hyperinflation, and WWII and the holocaust, europeans were horrified at where blind knee-jerk nationalism had taken them. So the EU is at its core a trans-national, anti-nationaistic construct. To reduce it solely to a mechanism preventing Germany from picking on France is too simplistic.

    In particular, after WWII Europe also found itself, after centuries of dominating the world scene, second politically, militarily and economically to the US and USSR. The british empire all but disappeared by 1950, and France's attempt to reclaim Vietnam ended in total catastrophe. The EU was an obvious way to reclaim relevance and influence. Even Germany would have to think twice about going it alone, its power would be greatly reduced.

    We also forget how threatening the USSR was, and how easily they might have swept into Europe claiming it all for themselves. We now know that was a baseless fear, but at the time it was very real. The EU promised a unified front against any such aggression.

    So far so good, but embedded within the EU movement was a distinct political and economic philosophy. The EU movement, grew out of a same impulses that formed the UN, the idea that the world would be a better place with one world government.

    This is remarkable because in the 20th century for every Churchill there was a Hitler, a Stalin for every FDR a Mao for every Ghandi. Caesar, Atilla the Hun, Napoleon, Mussolini, the list of tyrants is longer than the list of great benevolent leaders. Yet, somehow there was a belief that a world government would be immune to such abuse. For many of the founders of the EU, it was a step towards a new world government, a world free of corruption, war and poverty. This, of course, is colossally naive.

    So the EU is also represents a philosophy an attempt to prove leftist principles to be the superior way of managing mankind's affairs. In the USA we call this socialism, which is meant to convey a kind of watered down, less pernicious communism.

    Although, the EMU is distinct from the EU in some respects, the failure of the EMU, portends the failure of the whole edifice.

    The USA went to horrific extremes to prevent the secession of even one state. The American Civil War killed 5% of the population in assuring the permanence of the union. There is the the very real possibility that if even one of the weaker states leave it will open the door for the unravelling of the entire union.

    My only point is that this is complicated by many issues.

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  59. This is an interesting article with good points but the author's insistence that the EU needs to be preserved so that France can continue "managing" Germany to avoid any more Franco-German wars is incorrect. True enough both countries have a history of conflict going back to Charlemagne. But does anybody today (2010) honestly think either country has the desire to go back to their days of military glory? As an American observer who majored in history in college and who has studied military history all his life (I'm 56), I don't. France hasn't won a major battle without British or American help since the Battle of the Marne in 1914. As for the more historically militaristic of the two countries, Germany, even its time honored fighting spirit is long gone. Like the rest of Europe, the Germans have been corrupted by 60 years of easy living in a socialist welfare state under American military protection. Here's one anecdotal but telling example to support my point about the Germans. I was sitting on the outside veranda next to the Help disco in Rio de Janiero in 2009 waiting for it open so we could all go in and chase the good looking whores there. A friendly German man about 25 years old was sitting next to me at our table.To impress him with my knowledge of German history I rattled off a string of names: Otto Von Bismarck, Helmut von Moltke, Kaiser Wilhelm and so on. The German guy had no idea who I was talking about! So, next I asked him had he ever heard of Erwin Rommel? No, he said. I pressed on. I said "You know, the general in charge of the Africa Korp in North Africa during the war. You know him, right?" The German guy looked dumbfounded and admitted he had no idea who I was talking about. This would be like an American never having heard of Dwight Eisenhower or George Patton. Very shocking and sad that a 25 year old German man has no knowledge of his history and culture prior to the time he was born. Take it from me. The Germans or the French don't pose a threat to each other or anybody else.

    Lewis Forro
    Virginia Beach, VA

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  60. Yes, the PIIGS were certainly irresponsible but let's not forget that their financial woes were already known to Germany BEFORE they were allowed into the EU. This seemed to be a case of the glory of Germany and France lauding it all over the smaller countries outweighing practicalities. Did they honestly believe that the fowl would not come back home to roost? Meanwhile, the ten Central and East European countries were gritting their teeth, well aware of this history while THEY had to jump through hoop after hoop before being allowed into the club.

    You are right. Kick out the PIIGS. And, while Poland does have its own problems, please remember that the Central European economies are robust and their central banks are exceedingly conservative. They might be that way because they weren't allowed to "couple" with the US investment banks and thus, in addition to their sound foundations, did not have to suffer from the 2008 economic fallout as much as ... heh heh ... Switzerland, say. But the bottom line is, they are still the hope for the EU because of their strong policies. Sophistication of the West, indeed! I hope the time will come when the pretentious Westerners will be moving to the Centre to look for work. That might bring some much-needed balance back to European relations.

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