Tuesday, 24 July 2012


The Eurozone dilemma:
Are the choices before the Eurozone between 1. a devalued euro currency or the real possibility of dissolving the common market/currency bloc, 2. a northern euro-currency versus a southern one,
3. a euro-currency for international trade and national currencies for domestic consumption, 4. other options such as a return to national currencies but retaining the trading bloc? That the accrediting agency Moody's has placed Germany among other EU creditor nations on watch for a downgrade of their triple A rating is very significant in so far as it forced Germany to defend the eurozone; but doing so proves the point that Moody's was making about the reality of an inevitable downgrade. Exactly what does all of this mean economically at the national, regional and global level? Who is propagating to exacerbate the crisis and who is profiting in this speculative market? Can the words of well-paid Nobel prize winners in economics be taken seriously, unless they have full disclosure as to their personal financial interests?

1. SPAIN: Banking, Fiscal and Social Crisis
Spain has agreed to an one-hundred billion euro bailout for its banks. That may sound like a lot, but it is not sufficient for Spain to recover, for it turns out that Spain, like Greece, has a crisis that is not merely confined to banking but impacts the state budget and real economy currently in severe recessionary more and 25% unemployment. After looking at various figures from different sources, I have concluded that Spain will have to have a haircut of its debt and additional money to service past debt, as well as operational expenses to meet budgetary needs, all of it amounting to around half a trillion euros, or one-quarter of the European Central Bank reserves.

This may sound like an astounding figure, but if one considers that Greece has already absorbed a quarter of trillion between 2010 and 2012, the figure for Spain may actually be very low. The 10-year bond is trading at extremely high levels (7.5%) that cannot be supported from domestic assets. Speculators are waiting in the wings to make money from the Spanish crisis, assuming that the IMF, European Central Bank, US, and Germany allow for such a scenario to unfold unchecked. If these funds (roughly half-a-trillion) are not made available, Spain will have to revert to a national currency, thus taking down with it all of the eurozone; to say nothing of the fact that Spain may have explosive social unrest that could trigger a European-wide movement against the austerity regime that the banks, IMF and Germany are imposing on the rest of Europe. Does this mean that the EU must come up with half-a-trillion euros, otherwise there is a chronic problem? Only an announcement is needed that the EU stands behind Spain to meet its monetary needs, and that will calm the markets.

The situation in Italy is even worse than Spain, partly because Italy is in the G-8, enjoying one-quarter of the eurozone's GDP, wish sufficient leverage to bring down the entire eurozone, if it does not secure EU cooperation on how to fix its fiscal problems. Italy's economy is even more integrated into the EU than Spain and while it may not be at the boiling point like Spain in terms of a banking and social crisis, it is not far behind. Because it has a two-trillion euro economy and sovereign debt that cannot be supported without massive austerity measures and foreign injections of capital, Italy will need twice the bailout money that Spain will. In short, between Italy, Spain, Portugal, Greece and Ireland, the entire reserve fund of the European Central bank estimated at two trillion euros will be gone in a single day.

How can Germany save Italy to preserve the eurozone, other than to make money much cheaper, with the exchange rate well below one euro to the dollar? Growth for the balance of the decade will be slow, so the only other option within the eurozone model is to let the printing presses work overtime -  the current exchange rate reflects this is where things are headed, but we have a long way to go with another 10 to 30 percent devaluation of the euro. Does Italy have a choice but to force Germany to devalue the euro? When the US, followed by France and UK withdrew money from Germany on the eve of the Great Depression, the result of such retrenchment was a worsening of the crisis. Can Germany afford to disengage just because it wants to make greater profits from a higher exchange rate?

3. GREECE: Apocalypse Now!
We come to the poster-child of the eurozone crisis, Greece that has a debt of 365 billion euros, a GDP of around 200 billion, and no chance in hell of reducing its debt, mostly foreign-held, down to 120% of GDP by 2020. Currently, Greece is hoping to sell assets to make some headway, but even if it sold everything the public sector owns and that is profitable, it would still have a problem with the public debt, which cannot come below 120% of GDP by 2020. Contrary to what the IMF has been promising in the past two years, Greece has been sinking into deeper debt, deeper economic and social crisis and political polarization where the middle class sees no solution but in leftist and extreme right wing political parties. Former IMF official, currently bank executive Panayiotis Roumeliotis, stated that: "We knew at the Fund that this program (austerity program) was impossible to be implemented because we don't have any successful example." The IMF went ahead with the EU in implementing a program that was doomed to fail from the start, and the question is why? The former IMF official went on to state that the IMF was prepared to argue that if the program failed it was the fault of the government receiving IMF-EU advice, not of the program.

The amazing thing about the failure of the IMF austerity program in Greece is that it is a repeat of what the IMF has been doing in the past six decades around the world with equally disastrous results for the real economy, but with resounding success in securing national integration into the global corporate system. The situation in Greece has served as the canary in the coal mine, though clearly the real explosion will come from Spain and Italy, while Greece remains rather insignificant with just 2% of the eurozone's GDP. If there is a social uprising in Spain, Greece will certainly follow; all of this may take place by winter 2012-2013 as tourism season will come to an end and unemployment rises across Southern Europe.

4. Conclusions
The stock and bond markets along with social and political developments prove on a daily basis that the situation in EU is very serious. Is it serious enough to bring down the eurozone and sink the world economy into another recession. On the payroll of companies that a speculating on currencies and 'shorting' securities, some economists constantly argue that a double-dip recession is upon us. I have stated in the past that I have no argument with any analysis on the part of economists like Roubini and others, as long as they disclose their sources of income and the percentage that comes from companies shorting the market. Scaring investors because they are paid and hiding behind academic credentials is more than highly unethical. It is true that all of Southern Europe and most of Eastern Europe have very serious fiscal, economic and social problems. Trying to analyze those problems and proposing possible solution is one things; trying to cash in on those problems as a propagandist is unethical and condemnatory. The eurozone needs a liberal monetary policy for the decade to lift itself out of crisis, and the sooner political and financial elites realize it the better for all concerned.

No comments: