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Thursday
Nov152012

The Curse Of The “Irreversible” Euro

Young educated Greeks are facing an insurmountable wall of unemployment [Merkel Has A Dream]. With little chance of finding a job in their field, they’re competing for any kind of job. Wages have plummeted. Benefits have disappeared. The economy has shriveled by 19.4% from the third quarter of 2007. Promises that education would open doors to a better future have evaporated.

Yet, Parliament passed another austerity plan that the Troika, the bailout gang from the EU, the ECB, and the IMF, is now loudly praising. It includes a provision to cut public sector employees by 80,000 over the next few years, starting with 2,000 employees this year. And it has to please the Germans who will foot a big chunk of the bill.

In the spirit of helping Greece improve the productivity of its public service, Hans-Joachim Fuchtel, German Deputy Labor Minister and special envoy to Greece, shared some Teutonic thoughts. “Studies have shown that 1000 workers in Germany perform the same amount of work as 3,000 workers in Greece,” he explained. “The partner countries that finance this Greek practice want to hear answers on how the efficiency of public sector workers in Greece can be raised.”

That was on Wednesday. Municipal workers were already furious; apparently, local authorities had been asked to come up with a list of redundant positions to be axed. On Thursday, they were ready for Fuchtel.

A German delegation that included him was supposed to arrive for a propitious conference of German and Greek mayors in Thessaloniki. Starting early morning, protesters gathered by the entrance of the conference center. As they waited for Fuchtel, they shouted, “Throw the Nazis out,” or more generically, “Capitalists should pay for the crisis.” They held up mock grave stones. “Fight to the end” was written on some banners.

But Fuchtel wasn’t born yesterday. He entered through a side entrance. So when Wolfgang Hoelscher-Obermaier, the German Consul in Thessaloniki, showed up at the conference center, all heck broke lose. Perhaps on the basis that all Germans looked alike, the protesters pushed and shoved him, ripped off his glasses, and threw cups of coffee and bottles of water on him. He was able to escape to the inside under police escort—shook-up, coffee-stained, and bedraggled but otherwise uninjured.

So the conference commenced. Outside, anger boiled over. Protesters pried open some shutters, stormed the conference center, and tried to force their way into the conference hall where the meeting was taking place, though they were stopped by riot police.

Inside the conference hall, the atmosphere was warm and friendly, once again pointing at the undercurrent of all “bailouts” anywhere: the people on the street suffer the consequence of decisions made in cushy conference rooms by privileged participants who take care of their own and tighten the belts of other people.

Yet Germany has become a Promised Land for young Greeks. Net migration to Germany (those moving in, minus those moving out) during the first half of 2012 jumped 35% over last year. Particularly strong were the movements from the southern austerity belt where the vision of a future has become a mirage: 53% more Portuguese, 53% more Spaniards, and 78% more Greeks moved to Germany.

Before the euro debt crisis, there was little tension between Germany and Greece. The gravy train of cheap euro debt dramatically elevated the Greek standard of living. But the money is now gone, some of it in offshore bank accounts. Germany, at the time “the sick man of Europe,” restructured. Real wages sank, benefits and pensions were cut, housing stagnated. In 2005, fed-up Germans kicked out Chancellor Gerhard Schröder, the architect of these reforms.

But with the debt crisis came the absurdities. Now a bunch of empowered Germans march around Greece, telling Greeks how to run their country down to the last municipal detail. And the Greek government is demanding hundreds of billions of euros from taxpayers in Germany (and elsewhere). Instead of being able to spend it on its citizenry, the government has to send most of it back to the ECB and the national central banks that had bought its old debt from the banks to bail them out [ Unintended Consequences Of Bailouts: Greece Gets Slammed].

This is playing out across the Eurozone. In their effort to keep the Eurozone intact, politicians, elected or not, are beginning to sacrifice the fabric of the European Union, the colorful family of 27 nations that used to wage war on each other. The euro is creating artificial problems between peoples. And by being “irreversible,” as ECB President Mario Draghi had said, it has become a curse—and a religious dictum that must not be questioned regardless of how much havoc it may ultimately wreak.

France, with its private-sector jobs fiasco, has become the new fulcrum of the debt crisis. But now the government lashed out against the media for pointing at the miserable results of its economic policies. Read... French Minister Whines: “Le French Bashing” Is Terrible.

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Reader Comments (8)

The Euro problem is imho mainly in the set up of it.
The structure simply doesnot work (and that was foreseeable) properly. That is as a mutual currency. And there was no political platform to create a structure that would work. Say keep the South out, problems were always expected to be happening there, but was for political reasons unacceptable). Create an independent FED like structure (the transfer of powers plus the transferunion potentially coming with it was unacceptable politically). Leaving the Euro basically with a structure that lacked management (not because of incompetence but simpoly because it wasnot there). Several essential functions simply do not have a manager attributed to it. Mainly the day to day large issues. These often have to be dealt with by year to year decisionmaking (council of 17 countries with in each basically parlementarian approval).

This is the structural mistake all over the board in the present EU set up. It got more and more involved in daily affairs but doesnot have a manager appointed to deal with daily affairs. It has the Commision but that one doesnot have the powers to do things, next to being pretty incompetent anyway.
Combined with the fact that getting approval for more powers is extremely difficult as there is not enough platform for more Europe in nearly all countries imvolved. And you need the voter most likley somewhere in the proces.
It worked on not day-to-day stuff pushing forward and adjusting if you bump into a problem, but it doesnot work anymore. If you need daily management now it cannot wait 5 years. Combined with if you mess in peoples daily lives it gets on the election agenda and you need support there and then and cannot again take time till the voter is ready.

Bringing us to Draghi and Merkel. They have to state and communicate to the rest of the world the Euro is irreversible. Otherwise any rescue is hopeless. It doesnot fully do the job. A lot of people see that the ECB is not the FED and basically at the end of the day depnds on the will of the German people. If they force their politicians to get tough, these will force the Buba (or otherwise) and it is bye bye ECB. Totally unlikley with the FED.
However at the same time the South will associate such statement with more austerity, the North as more transfers (and ultimately cuts in their own goodies) and the rest of the world (at least part of it) as being braindead.
In a nutshell the stronger you make the structure look the more you erode the platform for it.
November 16, 2012 | Unregistered CommenterRik
Rik - Agree totally that management and structural problems make the system dysfunctional.

Your point that the southern states should not have been included alludes to another and I think more damaging issue: disparate countries with different needs and different monetary cultures and vastly different economies are locked into the same currency. Some of these countries now have to go through sudden internal devaluations, which are very painful - but rather than blaming their politicians (and themselves) for it, they get to blame other countries, such as Germany. And that whole theater has now become absurd and threatens the larger harmony between nations.

The solution should be "default and devalue." Bondholders need to pay the price for their reckless lending (investing in bonds of highly indebted countries without demanding a huge risk premium). But that's hard to do in the euro system.
November 16, 2012 | Registered CommenterWolf Richter
Wolf
A doubt if a relatively quick (as in less than 2 decades) solution is possible without having the PIIGS CS having to pay a considerable riskpremium at market access (or reaccess without support from externals like Germans and the ECB).
Possible scenarios:

They break away and inflate.Which imho will mean a substantial riskpremium (if only for the structurally high inflation that will likely accompany the countries). Assuming they can avoid default at least formal default this way. If they would default riskpremia will go up as well.

They stay and restructure within the EZ. Simply need a high riskpremium because of the relatively recent default. Doubtful if possible you get the huge budget effects in the donor countries and still got stuck with dysfunctionals in the EZ. Whole present set up makes this very difficult. Imho would have been good as an intermediary solution with later an exit, but donot see it happening.

They stay in and get through. Imho very unlikely simply will take too long. Average time for austerity fatigue is 2 years. Will they sit out 10 years, highly unlikely. Even highly popular governments Blair for instance or a few of the German and Dutch hardly ever make it 10 years. And if they do often with changing coalitions. So getting a hugely unpopular one surviving 10 years and through 3 or more elections I simply do not see that happening. Anyway they end up with 120+% debts and that looks hardly acceptable for markets as it will anyway (because of aging be with a very slow growing country). Which also makes this scenario unrealistic. You can not imagine Italy not going bust without foreign assistance with 1% structural growth, 120% debt and 6/7% interest. Difficult to see that happen.

But all scenarios lead to high interest unless there is either foreign assistance or massive arm twisting. Doubtful if either one of those can be done structurally. Difficult to see aplatform in the North for structural assistance and armtwisting in countries famous for its parallel economy, difficult to see.

Most likely they will simply accept austerity go to a primary + (to cover income-loss because of haircuts etc and unexpected stuff). At which time its population will be totally fed up and vote the government out for some populists and that government will stop the austerity. And likely make an even bigger mess of it. I donot have much fiducion in the political parties there, whether they are populists or mainstream, left or right.
Greece won't kill the EZ not by far imho. But doubtful if it would survive Spain.
Probably already now Greece does more harm than good. Bad PR every 3 month that will burn political capital very fast and markets have priced an exit in and there are hardly many non-official foreign investors left.
Rest of the PIIGS will come under attack as I see it anyway (with or without Greece) or needs huge expensive programms. Structural reforms go much too slow to be credible. When there comes political pressure in the North (eg close to an election) and a rescue becomes more unlikely they will come under fire. You can already see it now with Spain.
November 16, 2012 | Unregistered CommenterRik
The Euro, as irreversible as the Berlin Wall.
November 17, 2012 | Unregistered Commentermijj
miji - True. But it took a long time for the "Wall" to come down. Not sure if Europe can handle the euro for that long.
November 17, 2012 | Registered CommenterWolf Richter
What I miss in the present 'Greek' discussion is the following.
Imho Merkel looks to have made a huge strategic mistake. Basically by thinking the IMF would move whatever happens (and solves her problems).

Assuming IMF will stay with 120% and 2020. Not a 100% certainty. But as soon as the issue got so much in the open as now, they can hardly make another move anymore. There might be a tiny move possible but that is it. The IMF has to think of its own credibility and its relation with other shareholders and can not dump its own rules to avoid Germany having to dump theirs.
Assuming as well that non-3.0 measures wont be sufficient to plug the hole, you simply need a new package (including haircuts and). This is a near certainty. The IMF will be the judge, there is probably the little room for the IMF btw, but it is most likley marginal.
They need a haircut or something similar.
Assuming the ECB doesnot move, which looks clearly the biggest if.

This means that Greece simply requires a haircut (OSI). With the loans mainly running directly from donorcountries to Greece this will mean a haircut as well on those loans.

At present Germany has seen less than 1 Bn of official government expenditure on this a Greek OSI will increase that amount substantially.

PROBLEMS: a combination that an OSI runs over the budget and likely requires cuts on other things not only a problem in Germany btw. Combined with the fact that:
a haircut means in Germany the debtor is bust which means subsequently that no new loans can be provided to them (money transferred to them). And this is budget law (a formal law), which would require a complete change thereof (which takes at best months if politically already possible).

Will be great to see what comes out. But strictly going by the rules will make approving an OSI a very timeconsuming issue at best (as the budget law has to be changed). Nowhere fast enough to pay out the next term in time.
Merkel is pretty poor on legal issues in this crisis. And there is heavy opposition to it all, so I would expect there would be enough people that would start a case in Germany (like with the Constitutional issues) if she moves anyway.
Probably they will try to plug the whole in the usual dodgy way, but that won't be easy. Or limit the amount of the 3.0 as much as humanly possible (read acceptable to the IMF) but that will just move the issue one term (3 months plus the following theater forward (and creates problems before next elections are there).

By waiting for the Trika report it looks like she has substantially limited her room to do things, may be even so far that Greece cannoit be saved in time.
November 17, 2012 | Unregistered CommenterRik
Greece's sovereign debt pile is unsustainable. Greece is the linchpin for a New Europe as well as a new global economic order; neoliberalism underwrote debt based prosperity; neoauthoritarianism is underwriting debt servitude austerity. Greece is being absorbed via mandate into a region of economic governance as choice falls to diktat.

Crony Capitalism and Greek socialism are failing; Regionalism is rising to govern mankind’s economic activities. The fiat money system is failing on the financial insolvency and banking insolvency of Greece as a sovereign nation state; and the sovereignty of the Troika as a sovereignty regional body is being established. With this the diktat money system is emerging, where diktat serves as both currency and credit.

Jesus Christ is at the helm of the Economy of God, Ephesians 1:10, administering His Global Administration Plan to complete the fullness of the age of prosperity and debt creation, to introduce the age of austerity and debt servitude.

The Beast Regime of totalitarian collectivism and regional governance is rising from the Mediterranean country of Greece as foretold in Revelation 13:1-4. This will establish the ten toed kingdom of iron diktat and clay democracy as presented in Nebuchadnezzar's Dream that presents the Statue of Empires, Daniel 2:30-33. Eventually ten kings, as presented in Revelation 17:12, will come to rule ten regional blocs or zones.

James G. Neuger of Bloomberg reports that the Troika, not the financial markets, is meeting to discuss providing seigniorage, that is moneyness to Greece, establishing that Greece is not a sovereign nation state, and that the Troika seeks to provide regional security, stability, and sustainability to this country in article Europe leaders face Greek Aid Gap in brinkmanship with IMF. European finance ministers will try to plug a 15 billion-euro ($19 billion) hole in Greece’s finances and win over the International Monetary Fund in the latest installment of three years of debt-crisis brinkmanship. Recycling European Central Bank profits on Greek bonds, charging Greece lower interest rates and extending repayment deadlines are among the options under consideration today for filling the new gap in Greece’s public accounts. European governments tore open the hole last week, by giving Greece two extra years to cut its budget deficit. The required extra financing provoked a clash with the IMF, since it would add to Greece’s debt load instead of reducing it. “Greece is in a mess,” James Mirrlees, a Nobel economics laureate, told Bloomberg Television yesterday. Europe won’t solve the problem by “fiddling around with little bits of extra bailout and allowing them to go a bit slower.”

I relate that with the rise in the US Dollar, the Milton Friedman Free To Choose floating currency regime is being put in the grave, as is seen in this Yahoo chart of the world's major currencies sinking in value; the chart of the US Dollar's 200% ETF, UUP, shows that it has risen to strong resistance at its mid March 2012 trading level. The fiat money system is dying and the diktat money system rising to govern global economics, as the Noble Prize goes to the Eurozone, with it proving to be the monetary authority in Europe. AFP and The Telegraph report Greek companies face annihilation amid debt crisis. Greece's recession-hit businesses face "annihilation", a leading chamber of commerce has warned, as a fatal combination of falling sales and job cuts meant the country was in its worst economic shape for 14 years.

Stocks are unable to leverage higher on the exhaustion of the world central banks' monetary authority. Even Homebuilders, ITB, have fallen from their recent high, as the Los Angeles Times reports Existing-home sales and builder confidence rise. The chart of Mortgage Backed Bond, MBB, shows a steady decline since late September 2012; these and World Government Treasuries, BWX, Emerging Market Bonds, EMB, Junk Bonds, JNK, Leveraged Buyouts, PSP, and Senior Bank Loans, BKLN, together with Distressed Investments, FAGIX, like those acquired by the US Federal Reserve under its TARP and other facilities, are trading lower in value since the US Dollar began to rise and the worlds major currencies and emerging market currencies fell on September 14, 2012. Neoliberal finance is failing to provide seigniorage, that is moneyness, to stocks, as is seen in the chart of mortgage REITS, REM, is trading sharply lower.
November 20, 2012 | Unregistered Commenterthediktatreporter
Greeks have been Gästarbeiten for a long time. When I was in Greece in 1984 I used German as a lingua franca to get round because so many had been working in Germany.
November 20, 2012 | Unregistered CommenterCynic

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