Greek prime minister GeorgePapandreou cancelled the referendum. Angela Merkel and Nicolas Sarkozy called Papandreou back to the “shed”Wednesday for a tongue-lashing…and worse…to set him straight on the marchingorders he had been given.
And, the Greek prime ministerbacked down.
It seems as if Merkel andSarkozy believe that there are only two choices in the current debate. The first is that the European Union staytogether and maintain the single currency zone.
The alternative is that theEU split up with some countries maintaining the single currency zone.
To Merkel and Sarkozy therereally is no choice…the EU stays together and supports the euro.
If the EU stays together andsupports the euro…then the bailouts will continue.
It seems to me that there aretwo most likely outcomes to following this path. Of course, there are more but they are allderivatives of these two in my mind.
First, financial markets willcontinue to reject the solution and there will be further “summits” down theroad with more bailouts and more distress. The ultimate result of following this path will be when the EU finallydecides that the fiscal policies of all countries in the union will have to becoordinated and there will be fiscal and political union as well as monetaryunion.
Some have seen thisconclusion as the missing component of the efforts to achieve the monetaryunion right from the start. Others, likemyself, have seen this possibility as the ultimate end to the financial crisisas we now know it. And, a politicalunion may have been the goal of some EU “leaders” throughout the turmoil.
If there is going to be areal “coming together” of the nations in the EU, the “strong” will be thedrivers (Germany and France and who else) but in order to achieve the finalunion the solvency of the laggards (Greece, Italy, Spain, Portugal and whoelse) will have to be resolved. Thatis, there will have to be some kind of central “Treasury” that will aggregateall debts and pay off those nations still in the union that are insolvent.
One can look at the Americanafter its Revolutionary War where Alexander Hamilton opted for a strong central”Treasury” and the assumption of all of the debts of the states that were thena part of the United States.
The problem with thissolution
The problem lies with thepeople of the nations within the EU. Some of these people’s may not want to come under the regime of the”strong” nations that will be the driving force in a strong, centralized fiscalEU.
There have been riots andprotests in Greece…and in Spain…and in Portugal…and in Italy…indicatingresistance to the fiscal austerity being imposed on them by especially Germanyand France.
And, the resistance is evengetting more personal. For example, aGreek newspaper has a cartoon with a German general manipulating twopuppets…the two puppet being the Greek prime minister and another Greekofficial. The underlying theme: “TheGermans didn’t succeed in occupying Greece through arms because the Greekpeople resisted. They try now to occupyGreece through the economy.”
Pretty heavy stuff.
The Merkel/Sarkozy path tofiscal/political union may be a desirable goal but the question that stillneeds to be asked is whether or not this goal is consistent with what thepeople in these countries want. Europeanofficials have often been accused of being an “elite” that wishes to impose itswill upon the people of Europe. Whetheror not the “elites” can pull off this union without too great of a popularupheaval is a question that no one can answer at this moment.
The other alternative is thatthe financial markets may not allow the “leaders” of Europe to get too muchfarther along this path.
Just today, 10-year Greekbonds were trading to yield almost 34 percent, almost 3,200 basis points abovethe yield on 10-Year German bonds. Thebonds of the Italian government have been trading at the largest spreads abovethe German bonds in the euro era. Andthe same with the bonds of Portugal.
If these governments have topay these kinds of yields on their debt there is no way that they will be ableto get their fiscal budgets under control. If these governments cannot issue bonds or can only issue them to theEuropean Central Bank then the fundamental reality of their insolvency willbecome more and more of a problem.
Add to this a Europeanrecession, where tax revenues take a further nose-dive, and you only exacerbatethe problem.
I should add that “SuperMario” Draghi, the new head of the ECB oversaw a reduction in the centralbank’s main policy interest rate in his third day in the new job. The reason for this reduction is to combatweaknesses being experienced in European economies.
Over-shadowing all of this isthe fear of the European officials of financial “contagion”. The spectre of Lehman Brothers hovers overEurope. The fear is that if these “officials” let Greece go “insolvent” in a”disorderly default” kicking off the use of Credit Default Swaps, that therewill be a “spill over” effect moving from the sovereign debt of Italy…and ofSpain…and of Portugal. Then, the concernspreads to the commercial banks in Europe…remember the stress tests conductedon these banks did not include a write down of the sovereign debt on theirbalance sheets.
The problem Europe is facingis a solvency problem. This is whatEuropean officials have been trying to deny for the last four years. And, many are still in denial!
Solvency problems do not justgo away! Denying they exist only causesthe problems to get worse!
