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Friday
Dec212012

The EU Bailout Oligarchy Issues A Report About Itself

On Friday before Christmas when nobody was paying attention, when people were elbowing their way through department stores or heading out for vacation, the European Commission issued its report on bank bailouts in the European Union—a dry document with mind-boggling numbers that left out the most important fact.

The misnamed “2012 State Aid Scoreboard“ provided a sobering number—misnamed because it covered the period from October 2008 through December 2011, and not 2012. It had taken the Commission bureaucracy a year to add up all the numbers, and there were a lot of them to add up. Turns out, the amount that the governments of all 27 EU states had handed to their banks to prop them up or bail them out amounted to €1.616 trillion ($2.1 trillion).

It does not include the bank bailouts of 2012, such as Spain, whose banks are getting their first installment of €39 billion, or Greece  [The Price Of “Collective Trauma”: Greece At The Brink of Civil War], or tiny Cyprus whose banks alone require at least €10 billion  [The Bailout Of Russian “Black Money” In Cyprus]. Nor does it include any of the ECB’s bailout operations.

Nevertheless, €1.616 trillion is a big number: 13% of European Union GDP. Of that, €1.174 trillion was for “liquidity support,” and €442 billion was for “bank solvency” support, such as recapitalizations and dumping “impaired assets.”

The usual suspects? Um....

In third position, Germany, whose banks received 16% of the total.

In second position, Ireland, whose banks also got 16% of the total. Time and again, we can only shake our heads at the act of insanity committed by the Irish government at the time when it decided to condemn its citizens and taxpayers, current and future, to bail out and make whole the investors in Irish banks—a decision that bankrupted the entire country though it had had its fiscal house in order, until then.

And in first position, drumroll.... the UK, whose rotten banks, now coddled and protected in the City, received 19% of the total.

The Scorecard is short and dry. Nowhere does it say that the citizens and taxpayers of these countries paid not for the bailout of the banks, but for the bailout of their investors, including stockholders, bondholders, counter parties, and other investors and speculators. Guaranteeing deposit or transaction accounts is one thing. But bailing out investors and speculators who’d taken risks and had been compensated for them through yield or the lure of capital gains is quite another.

Socializing the losses and risks that certain privileged investors have incurred—and then allowing them to profit from the bailouts—is of course the purpose of all bailouts. It’s not the bank per se that is important, but its investors. A topic that the bailout oligarchy wraps in silence.

Eurozone banks cause an additional wrinkle: a big bank bailout can take down the entire country, as we have seen, because it cannot print the bailout money itself. So, to keep countries from going bankrupt, the bailout oligarchy shanghaied taxpayers in other countries—even in the US through the IMF. And the bailout of bank investors became transnational.

This is the spirit of further Eurozone and EU integration, advanced by the fiscal union pact, the banking union, and other measures. They’re designed to facilitate these transfers and investor bailouts, to bake them into the system, and make them part of the ordinary procedures buried in a flood of boring press releases. At some point, the people are no longer able to care.

Integration would make it easier to centralize the bailouts on the ECB—and it can print money! Regardless of what the treaties say. But Bundesbank President Jens Weidmann wasn’t enthusiastic. He didn’t “see the big leap into the fiscal union,” he told the Wirtschafts Woche, because it would require the surrender of certain aspects of national sovereignty, for which there was little political will and support from the population.

And he resisted the idea that politically unsolved problems, such as budget deficits, would be shuffled to the ECB. “As guardian of the currency, we must make clear that we’re committed exclusively to our primary goal: monetary stability,” he said. “We’re not the clean-up crew for political failure.”

France’s ability to attract massive amounts of foreign investment has been called a paradox. Because it shouldn’t be able to. Investors should be scared off by labor laws, tax rates, and the threats of nationalizations. Turns out, for multinational corporations, France is a tax haven. But in the era of austerity, it has reached the boiling point. Read.... The French Revolt Against Corporate Welfare Programs For Multinationals.

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Reader Comments (8)

Another mismanaged sector.
The financial sector is substantially too big. Not only because of the deleverage but even before that it was taking a too big slice of GDP. It is a sector that only adds because it makes thing run smooth, it had however become and still is a sector that has monopolised certain tasks and complicated stuff enormously and used this to get a big slice of the cake.
Next to these two issues (too big as a sector plus deleverage), especially in Europe there are a lot simply mismanaged banks (basically fully going according to the biased/prejudice principles, more non-AngloSaxon relatively, more Southern, more with substantial state intervention).

These 3 problems are hardly attacked all is focussed on bad loans. Not the way to solve the systemproblems. All are still there. They might get away with needless complexity, but the other 2 not. If the sector is not cleaned up because of deleveraging it will simply become even more costly and an even bigger drag on the real economy.

I simply donot see a bankingunion being established that actually will work. Never mind solve the present crisis. For both essential elements: winding down fund and depositor guarantee there is no political support. It simply would be another rescue measure and costng as much.
It could be a General Custer measure (if everything else has failed), but with the banking union as added complication that the essential ponts will most likley be put on hold and a real crisis doesnot give enough time to do the necessary thing (basically need a treatychange, technically very complicated matter and it can only work after it has been implemented). As a creditor of a bank you are not leaving your money there for another year or likley more if you were planning to have a bankrun (just because some uncredible EZ leaders agreed on some measures), it simply doesnot work that way.
My guess we will see a General Custer but not in the form of a bankingunion (and likley it will be as dead as the General afterwards anyway).

Bankingunion is only relevant (next to Gen Custer aspect) imho for make the set up work in the future. With 2 big ifs. Useless if you donot solve this crisis. And again it is a political compromise (if it will happen) hardly fit for purpose like the Euro set up now.

You miss one point. Normally voters get bored. Here very unlikely. It is cutting entitlements period (with the exception of Germany) all transfers will be linked automatically with cuts. By far the worst time to sell extra expenditure for politicians. No or negative growth and naturally rising costs because of unemployment and aging.
December 22, 2012 | Unregistered CommenterRik
@author
You concentrate a lot of your fire power on the EU, EU integration and the like. Your caustic style makes me wonder if you really know how the EU has come to where it is today, because if you knew my bet is you would employ a different style.To help you with the background I suggest you try to understand this presentation:
http://www.u-p-r.fr/videos/conferences-en-ligne/pourquoi-leurope-est-elle-comme-elle-est
December 23, 2012 | Unregistered CommenterTon
@Ton
As somebody who grew up with the thing I have not a clue what you are talking about.
December 24, 2012 | Unregistered CommenterRik
@Rik
Actually my comment was addressed to the author of this article and NOT to yourself. I believe his pen name is Wolf Richter.
December 24, 2012 | Unregistered CommenterTon
Ton – thanks for reading my blog! Rik and I, we don’t always agree on everything, but I must say that I totally agree with his comment.

BTW, “Wolf Richter” is my pen name like “Bill Clinton” is Bill Clinton’s pen name.
December 24, 2012 | Registered CommenterWolf Richter
@Ton (and Wolf)
The main problem that a lot of not European (mainly financial sector) people have with the EU is that a lot of aspects simply look unaffordable and therefor unsustainable or simply alone unsustainable (for several non financial issues).

Things mentioned are overlapping each other partially):

1. French (and other Southeners) business model. It is simply hard to see that they will be able to keep paying for it the way it is now. Economic sense says simply they cannot.
The judge is still out on Germany, Holland, Austria and the Skandinavians (my guess would be more likley not than well), but anyway reforms are needed if it were only to avoid Southern drama with no one to back it up.

2. The European banking sector is seriously ill (much worse than the UK or US or the Asians). Which would not be such a problem if the countries of residence would be a proper backstop when needed. There the problem starts, the South is clearly not. France/Belgium most likley not. And the rest has the problem that very unlikley they will be able to keep both the South and their own bamks up when both would be required. Simply a very unstable and risky situation.

3. Rise of populism, because people feel let down by politics. This is a serious issue and European main stream parties seem not to have a clue how to properly deal with it. Trust in/ credibility of politics in general is very low.

4. The EU is losing more and more of its platform and basically by the minute. A majority of Germans, Dutch, Finns simply donot support any new bail out measures. How that will work out is a big ??, but it is hardly sustainable. Especially as the problem is in the centre of public attention, long term top of the agenda. Meaning some times you will have to face an election with Europe as the main subject. So pushing it through against the will of the population (and with populists at the gate) is not without politcal risk (to say it mildly).
The politicl situation as far as a platform with the populations is concerned is simply highly unstable and could move in all sorts of directions.

5. The European (Western) welfarestate simply looks unaffordable. Even if Europeans want a sort of welfarestate (they likley want one) it needs to be substantially reformed to keep it affordable. You see very little movement in that direction.

6. The European economic model was overall based on borrowing money and via transfers and consumption leading to growth. No borrowing money looks to have come to an end. Basically meaning that there is simply no growth potential under the current businessmodel. Which is basically the old businessmodel without being able to over-borrow.
Overall that is in Germany and Finland there is potential of course, but in the South the only way looks to be down.
At the same time for half of the EZ new competitors have come to the market. And for the other half they look not that far.
Europe especially the South needs a new businessmodel, but we see very little of it.

In general European people and politicians want things that look basically unaffordable. And there is no answer to the question how to solve it. The question itself isnot even asked.
'Solutions' are mainly more taxation.

Overseeing the above Europe is under great pressure and will have to change.
Economically to get at least some growth.
Socially, how to deal with a smaller welfarestate (they most oikely will want to keep one).
Financially how to deal with old debt that most likley will not be repaid (at all levels) and a terminally ill financial sector.
Politically how to generate a new platform for local parties.
EU how generate a platform in the population that can carry the EU/EZ to do all these things and not only solve the present crisis but also make the continent ready for the future.

We see very little of it, only can kicking. So best bet is several things will go wrong, probably terribly wrong.

In a nutshell when the house is any moment coming down you are interested in getting out or make repares so it can be prevented not how the house was originally built.
December 26, 2012 | Unregistered CommenterRik
@Wolf
All points taken. I do recommend that you try to watch and understand that video. I would be very interested in your comments thereon. If some help with the language is required I am glad to offer it. On the same site (u-p-r.fr) you will find a lot of other background on the EU.
December 27, 2012 | Unregistered CommenterTon
Ton - thanks for getting back to me. I did check out UPR and find them interesting. Their main goal is to pull France out of the Eurozone, out of the EU, out of NATO.... It's good to speak up on these issues. Marine le Pen (I'm not a fan of the FN) has been pushing in a similar direction. I think that having that debate is essential ... but I don't actually see that much of it. Mainstream media in France (as elsewhere) is very much pro-euro.

But you're right. I should check out the UPR more carefully and write about it, as I've written about other political parties in Europe. My readers might be interested in it.

The video is 2.5 hours long, and I haven't had the time yet to listen to it in its entirety. But it's on my list of things to do.

If you have other interesting materials or links on them, you can email me via the "Contact" function (if you try to post them here they might get caught in the spam filter).
December 29, 2012 | Registered CommenterWolf Richter

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