Best of the Week
Most Popular
1.The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - Doug_Wakefieldth
2.Tesco Meltdown Debt Default Risk Could Trigger a Financial Crisis in Early 2015 - Nadeem_Walayat
3.The Trend Every Nation on Earth Is Pouring Money Into - Keith Fitz-Gerald
4.Do Tumbling Buybacks Signal Another Stock Market Crash? - 26Mike_Whitney
5.Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - Nadeem_Walayat
6.Gold And Silver Price - Respect The Trend But Prepare For A Reversal - Michael_Noonan
7.U.S. Economy Faltering Momentum, Debt and Asset Bubbles - Lacy Hunt
8.Bullish Silver Stealth Buying - Zeal_LLC
9.Euro, USD, Gold and Stocks According to Chartology - Rambus_Chartology
10.Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - EWI
Last 5 days
Pretium - Canadian Golden Elephant - 31st Oct 14
What USA Today Got Wrong About the Stock Market Fear Gauge - 31st Oct 14
Election Result - Labour Wins South Yorkshire Police and Crime Commissioner - 31st Oct 14
Gold Price Falls, Stocks Record Highs as Japan Goes ‘Weimar’ - 31st Oct 14
EUR/USD - Double Bottom Or New Lows? - 31st Oct 14
More Downside Ahead for Gold and Silver - 31st Oct 14
QE Is Dead, Now You Tell Me What You Know - 31st Oct 14
Welcome to the World of Volatility - 31st Oct 14
Stocks Bear Market Crash Towards New All Time Highs as QE3 End Awaits QE4 Start - 31st Oct 14
US Mortgages, Risky Bisiness "Easy Money" - 30th Oct 14
Gold, Silver and Currency Wars - 30th Oct 14
How to Recognize a Stock Market “Bear Raid” on Wall Street - 30th Oct 14
U.S. Midterm Elections: Would a Republican Win Be Bullish for the Stock Market? - 30th Oct 14
Stock Market S&P Index MAP Wave Analysis Forecast - 30th Oct 14
Gold Price Declines Once Again As Expected - 30th Oct 14
Depression and the Economy of a Country - 30th Oct 14
Fed Ends QE? Greenspan Says Gold “Measurably” “Higher” In 5 Years - 30th Oct 14
Apocalypse Now Or Nirvana Next Week? - 30th Oct 14
Understanding Gold's Massive Impact on Fed Maneuvering - 30th Oct 14
Europe: Building a Banking Union - 30th Oct 14
The Colder War: How the Global Energy Trade Slipped From America's Grasp - 30th Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VIII) - 29th Oct 14
Flock of Black Swans Points to Imminent Stock Market Crash - 29th Oct 14
Bank of America's Mortgage Headaches - 29th Oct 14
Risk Management - Why I Run “Ultimate Trailing Stops” on All My Investments - 29th Oct 14
As the Eurozone Economy Stalls, China Cuts the Red Tape - 29th Oct 14
Stock Market Bubble Goes Pop - 29th Oct 14
Gold's Obituary - 29th Oct 14
A Medical Breakthrough Creating Stock Profits - 29th Oct 14
Greenspan: Gold Price Will Rise - 29th Oct 14
The Most Important Stock Market Chart on the Planet - 29th Oct 14
Mysterious Death od CEO Who Went Against the Petrodollar - 29th Oct 14
Hillary Clinton Could Be One of the Best U.S. Presidents Ever - 29th Oct 14
The Worst Advice Wall Street Ever Gave - 29th Oct 14
Bitcoin Price Narrow Range, Might Not Be for Long - 29th Oct 14
UKIP South Yorkshire PCC Election Win is Just Not Going to Happen - 29th Oct 14
Evidence of New U.S. Housing Market Real Estate Bust Starting to Appear - 28th Oct 14
Principle, Rigor and Execution Matter in U.S. Foreign Policy - 28th Oct 14
This Little Piggy Bent The Market - 28th Oct 14
Global Housing Markets - Don’t Buy A Home, You’ll Get Burned! - 28th Oct 14
U.S. Economic Snapshot - Strong Dollar Eating into corporate Profits - 28th Oct 14
Oliver Gross Says Peak Gold Is Here to Stay - 28th Oct 14
The Hedge Fund Rich List Infographic - 28th Oct 14
Does Gold Price Always Respond to Real Interest Rates? - 28th Oct 14
When Will Central Bank Morons Ever Learn? asks Albert Edwards at Societe General - 28th Oct 14
Functional Economics - Getting Your House in Order - 28th Oct 14
Humanity Accelerating to What Exactly? - 27th Oct 14
A Scary Story for Emerging Markets - 27th Oct 14
Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - 27th Oct 14
Europe Redefines Bank Stress Tests - 27th Oct 14
Stock Market Intermediate Correction Underway - 27th Oct 14
Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans - 26th Oct 14
Obamacare Is Not a Revolution, It Is Mere Evolution - 26th Oct 14
Do Tumbling Buybacks Signal Another Stock Market Crash? - 26th Oct 14
Has the FTSE Stock Market Index Put in a Major Top? - 26th Oct 14
Christmas In October – Desperate Measures - 26th Oct 14
Stock Market Primary IV Continues - 26th Oct 14
Gold And Silver Price - Respect The Trend But Prepare For A Reversal - 25th Oct 14
Ebola Has Nothing To Do With The Stock Market - 25th Oct 14
The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - 25th Oct 14
Japanese Style Deflation Coming? Where? Fed Falling Behind the Curve? Which Way? - 25th Oct 14
Gold Price Rebounds but Gold Miners Struggle - 25th Oct 14
Stock Market Buy the Dip or Sell the Rally - 25th Oct 14
Get Ready for “Stupid Cheap” Stock Prices - 25th Oct 14
The Trend Every Nation on Earth Is Pouring Money Into - 25th Oct 14 - Keith Fitz-Gerald
Bitcoin Price Decline Stopped, Possibly Temporarily - 25th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stocks Epic Bear Market

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

© 2005-2014 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

Free Report - Financial Markets 2014