Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Stock Market Dow Elliott Wave Analysis Forecast - Video - 16th Oct 19
$100 Silver Has Come And Gone - 16th Oct 19
Stock Market Roll Over Risk to New highs in S&P 500 - 16th Oct 19
10 Best Trading Schools and Courses for Students - 16th Oct 19
Dow Stock Market Short-term Trend Analysis - 15th Oct 19
The Many Aligning Signals in Gold - 15th Oct 19
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19
The IPO Market Is Nowhere Near a Bubble - 9th Oct 19
US Stock Markets Trade Sideways – Waiting on News/Guidance  - 9th Oct 19
Amazon Selling Fake Hard Drives - 4tb WD Blue - How to Check Your Drive is Genuine  - 9th Oct 19
Whatever Happened to Philippines Debt Slavery?  - 9th Oct 19
Gold in the Negative Real Interest Rates Environment - 9th Oct 19
The Later United States Empire - 9th Oct 19
Gold It’s All About Real Interest Rates Not the US Dollar - 8th Oct 19
A Trump Impeachment Would Cause The Stock Market To Rally - 8th Oct 19
The Benefits of Applying for Online Loans - 8th Oct 19
Is There Life Left In Cannabis - 8th Oct 19
Yield Curve Inversion Current State - 7th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

Merkel's Savage Blitz through Euroland, Germany Pushing Eurozone To Cliffs Edge

Politics / Euro-Zone May 25, 2010 - 02:59 AM GMT

By: Mike_Whitney

Politics

Best Financial Markets Analysis ArticleAngela Merkel has let a minor brush-fire on the periphery turn into a raging inferno that's sweeping across the continent. Absent Berlin's fumbling diplomatic effort and its ferocious attachment to Hooverian economics, the Greek matter would have been over by now. Instead, the fire continues to burn while the German Chancellor pushes the eurozone closer and closer to the cliff. And what for; to prove that prodigal spending by the member states (Greece) mustn't go unpunished? Is that what this is all about? Is Merkel really willing to break up the EU just to prove her point and to accommodate her towering sense of self righteousness?


There is a fix for the EU's problems, but it will require cooperation, vision and a supra-national government institution capable of implementing fiscal policy. It's all very doable, but not in an atmosphere that is charged with acrimony and divisiveness . As the most powerful member, Germany has a special role to play in maintaining cohesion; it's the glue that holds the EU together. Unfortunately, Merkel and Co. appear to be less interested in building bridges than settling on new ways to punish nations that stray from the 3%-maximum deficit rule. The German Chancellor wants to make sure that countries that exceed the limits will be stripped of E.U. subsidies and voting rights. The Austrian Finance Minister summarized the policy perfectly when he opined, "Countries that are lax with budget planning must be able to be rapped on the knuckles."

None of the countries in the Euro-project joined because they wanted to be lectured by arrogant German/Austrian bureaucrats whose Stone Age grasp of economics has thrust the 16-state confederation to the brink of disaster. Besides, the markets have already voted thumbs down on Merkel's "hair shirts and thin gruel" remedy. They want stimulus, growth and liquidity; none of which are provided in "Frau Nein's" plan for economic contraction.

It's worth reviewing some of the details of the so-called "Greek bailout" to get a handle on how debilitating the EU's austerity measures really are. Here's an excerpt from an article by Polyvios Petropoulos, former economics professor in the US, which outlines some of the harshest cutbacks:

"First of all, the IMF/EU program... is no “help” or “aid” or “rescue”, or even “bailout”, as the IMF, the EU and various commentators are saying. It consists of a series of loans, in fact non-concessional loans...with unprecedented draconian conditionality and the normal interest rate which is charged by the IMF in all cases. As to the EU portion, it is given at an even higher interest rate... Paying 5-6% interest rate, when the country’s GDP growth is -4% p.a., clearly makes the country’s debt problem unsustainable, as has been shown by several economists....

Second, it was not offered to help the “Greek people”. It was offered to help the bondholders, the bankers, the euro, and to avoid contagion with its nasty consequences for the EU and the global economy...

Third, there is absolutely no “protection for the most vulnerable”, as one would have expected from the “socialist” (or “ex-socialist”?) head of the IMF, or the “socialist” Greek government for that matter, and this claim is made several times in both of the documents mentioned above. The opposite is true. A mere listing of some of the austerity measures will suffice to prove my assertion:

-A meager so-called “social solidarity allowance” for destitute people was abolished, despite assurances in the IMF Q&A session that “the targeting of social expenditures will be revised to strengthen the social safety net for the most vulnerable”.

-Despite assurances in the Q&A session that “minimum pensions and family support instruments will not be cut”,all public and private-sector pensions and allowances have been cut, all the way down to meager pensions of 450, 500, 550 euros per month etc., which are well below the poverty line (making it impossible for old pensioners to survive)...

-Reduction of the salaries of even the lowest-paid civil servants....

-Freezing of the lowest salaries and pensions for the next few years, although inflation is already galloping above 4%...

-VAT (value added tax), which was much higher in Greece than in Portugal and Spain, was raised by about 20% on all goods, including basic foodstuffs, which make up the majority of poor people’s purchases.

-Sales taxes were raised on –supposedly- luxury goods…such as gasoline (+50%), cigarettes, beer, wine etc....

To be fair... the reduction of the pitiful pensions of the private sector was not imposed by the IMF officials in Athens, but by the EU officials." ("Truths and myths about the "Greek Crisis", Polyvios Petropoulos, Credit Writedowns)

So the debts of the bankers and speculators are being hoisted onto the backs of the working poor and aged. Where have we heard that before?

Greece's deficits are not the problem anyway. The real problem is the underwater EU banks (that hold Greek debt) that will capsize if Greece doesn't get a lifeline. This is from Reuters:

"European banks have an estimated $2.8 trillion exposure to Greece, Spain, Portugal, Ireland and Italy -- debt-heavy euro zone nations that have worried investors. These banks may be hit with losses ranging from $350 billion to $700 billion, Neela Gollapudi, a Citigroup interest rate strategist wrote....

"The EU stabilization package helps towards refinancing of sovereign debt, but does not address private sector debt," Gollapudi said." (Reuters, "US 3-month Libor seen rising above 1 pct-Citigroup")

So Merkel can stop pretending that the bailout is an act of selfless charity. No one is buying it. Nor are they confused about the $1 trillion pile of euros that the EU gathered together to ward-off speculators. Short-sellers saw through that sham in less than 24 hours and sent the markets plunging again. Do the Euro leaders really think they're smart enough to pull the wool over Wall Street's eyes? Wall Street invented fraud; they're not about to be duped by prissy politicians in tweed suits.

Will someone in the EU at least show that they understand the basic problem? European integration is more than just a common currency and a Treaty. It requires politics, governance and unification. Currency is not politics and treaties are no substitute for government institutions. The charade has gone as far as it can go without more concessions from the individual states to establish a central authority to implement fiscal policy. The Merkel view is that Germany should maintain its sovereign independence--along with its gigantic surpluses--while reaping the benefits of a currency that serves its own economic interests. But the flaws in that plan have already been exposed. The smaller non-export dependent countries (aka--Greece, Portugal, Spain) need fiscal accommodation or be they'll forced from the Union. It's not a matter of profligate Greek spending versus German thriftiness. It's a practical matter of economic reality.

So, how can the EU get ahead of the markets before the euro vaporizes and the economy is pushed back into recession?

First, Brussels needs to change its counterproductive, punitive tone with Athens and strengthen friendly relations. No more condescending talk of "knuckle rapping", please. Greece needs to restructure its debt (everyone agrees on this point) while the ECB initiates a quantitative easing program (purchasing Greek corporate and government debt) to increase liquidity so Greece can grow its way out of the slump. That means that German and French banks (and bondholders) will have to take a haircut which could lead to bankruptcy. If that's the case, then the ECB will have to establish a lending facility to provide a (temporary) backstop to get troubled financial institutions through the rough patch while regulators check to see if they are sufficiently capitalized to stay in business.

The markets are jittery because the proposed remedies are all deflationary and will lead unavoidably to recession. So the EU needs to enact alternative policies that will increase employment, stimulate demand and restore confidence. Here are a few recommendations:

1--The EU needs to show that it's taking steps to become a viable political union with supra-national fiscal policymaking authority.

2--The ECB needs to be willing to spend whatever is needed to avert another meltdown.

3--Policies should be put in place for the orderly withdrawal of countries that don't fit within the EU's economic schema.

4--Regulations on shadow banking, derivatives, and repo transactions should be drawn up to avoid another market crash.

5--The EU should develop a strategy for providing long-term fiscal stimulus throughout the eurozone until unemployment falls, aggregate demand picks up, and household balance sheets show signs of improvement.

The EU's problems can be fixed and the market's can be calmed. It's just a question of solidarity, vision and a lot of money; all of which are available with the right leadership.

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

© 2010 Copyright Mike Whitney - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Mike Whitney Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules