Angela Merkel has shocked the bien pensants of the Daily Telegraph. A couple of days ago, they were confidently predicting that she would roll over and let the ECB issue “eurobonds” to bail out the bankrupt Eurozone countries.
Mrs Merkel, it seems, is made of sterner stuff. At the latest summit, she ignored all the pressure and simply said, “No.” The Italians are apparently calling her “La Signora No”. Perhaps we should start calling her “The New Iron Lady”.
Mrs Merkel, amongst all the debt-loving Keynesian nonsense of the EU (and indeed of the US) seems to be a lone voice of sanity.
No, the answer is not for Germany to write a cheque and pay all the debts of Europe.
“The Germans are blackmailing the ECB,” said one official. “They have more or less threatened to withdraw from the euro if the ECB puts one foot out of line.”
Sounds good to me. Although it would be even better if the ECB did step out of line, and the Germans made good on the threat.
Never mind. So far Mrs Merkel has been splendid. Eventually perhaps the Germans may come to understand that the whole European project was set up to control and suppress Germany.
They may realise that, as a modern, democratic and successful state, it is time to throw off those shackles and be Germany, and not just a part of a United States of Europe.
Germans should be proud of their Chancellor, and of their country. And those of us elsewhere who despise the European Union should be cheering her on.
The Daily Telegraph today is full of breathless speculation that Germany has agreed to a new deal under which the European Stability Mechanism and the European Financial Stability Fund will be used to buy up Spanish and Italian debt.
In other words, the speculation is that Germany has agreed to pooling the debts of Eurozone member states.
The confident headlines in the Telegraph are belied by the detail in the text, which makes it clear that Germany has NOT yet agreed to the deal.
Even Francios Hollande, the Socialist French President, says
At the moment it is just an idea, not a decision. It is part of the discussion.
The article itself appears to be part of sustained and co-ordinated pressure on Germany to pay the debts of the Southern countries.
David Cameron welcomed the assurances given by eurozone leaders.
He said: “What I’ve sensed at this summit is that there is a fresh impetus – using all the mechanisms, institutions, firepower they have.”
He added that European leaders would put the future of the euro “beyond doubt”. White House sources indicated that a “new framework” to shore up the single currency would be unveiled at next week’s summit in Brussels.
Timothy Geithner, the US Treasury Secretary, said the new deal would help Spain and Italy to borrow money at lower rates.
“Welcomed the assurances”, eh? And those assurance specifically are … that he has “sensed a fresh impetus”. White House sources, as well as Tim Geithner, talk about a “new framework” and a “new deal” that “will be unveiled next week”.
Mr Hollande is not so sure:
“Italy has launched an idea which is worth looking at,” he said. The proposal will be discussed at a meeting in Rome on Friday between him, Mrs Merkel, Spain’s Mariano Rajoy and Italy’s Mario Monti.
The truth is that all the mad Keynesians from Mr Geithner to Mr Cameron are trying to twist Germany’s arm to save the Euro. They are committed to it themselves.
Even just suppose Germany really were to agree to this new deal. Would it work? Would it heck. It would just allow Spain and Italy to borrow some more money. It would not address the reasons for the problem.
The cause of the difficulty is the Euro itself – because the Euro unites countries in a common currency that do not have converged economies.
The only long term solution to all the problems is for the Euro to be dismantled, and for the indebted countries to devalue. Sure, that would mean the foolish banks in France and Germany that lent the money to them would lose their shirts and probably need bailing out.
But that bailout, unlike the ridiculous one being suggested by Mr Geithner and Mr Cameron, would at least be paying for a proper, permanent solution as opposed to paying to kick the can down the road.
Make no mistake as well: even Germany cannot afford to underwrite the entire Eurozone. It already has government debts over 80% of its GDP – which itself contravenes the limits in the Maastricht Treaty that set up the Euro.
There are horrible echoes of the aftermath of the First World War. Germany is again being asked to pay reparations by her neighbours, and the huge size of the likely bill is no more affordable for Germany now than those reparations were in the 1930s.
Germany absolutely must stand firm on this. She has a duty to herself and to the whole of Europe.
Mrs Merkel would do well to borrow one of the phrases of Lady Thatcher and say, “Nein, nein, nein”.
“No” to Germany paying other people’s debts.
“No” to Germany being brought to its knees to save the European Project.
And “No” to a re-run of the 1930s. The end of the Euro is surely preferable to that.
A single EU regulator to oversee banks across the whole of the EU.
A new bank bailout fund, financed by a tax on financial institutions.
An EU-wide deposit guarantee scheme to protect savers.
The BBC says
But the UK government has indicated its reluctance to sign up to closer EU ties.
It prefers a body that only covers banks in the 17-member eurozone.
Yeah right. “Reluctance.” The negotiations have already begun:
However [the UK government] would support a strengthened single market in financial services for all 27 EU states.
A “strengthened single market”. I guess that means more European regulation of our banks.
The BBC fatuously comments that
This would also remove the possibility of one set of taxpayers, for example, in Germany, having to bail out savers in another country such as Spain.
which is completely untrue, since for example if the new fund has to bail out banks in Spain, then the banks in Germany would in effect be paying via that levy. The only difference would be that the bailout would be co-ordinated by European bureaucrats instead of European politicians.
In any case, none of this would explain how to stop a systematic debt problem that afflicts all countries.
The problem is DEBT. And that means the problem is our politicians. The answer though, is not to take power from them and give it to the likes of European Commission President Jose Manuel Barroso. The answer is instead to change the politicians.
No matter. This is all light relief. This whole proposal is so far off into fantasy-land as to call into question the sanity of the European Commissioners.
The pressure on the Euro itself is not abating. The latest bailout, of the banks in Spain, ended up being as much as €100 billion. It unravelled within hours, with Spanish 10-year bond yields reaching 6.8%. In other words, the markets believe there is a high risk that loans to the Spanish government will not be repaid – or not in Euros, anyway.
The whole Southern part of Europe – Greece, Italy, Spain, Portugal – is right now where Britain stood just before “Black Wednesday”, when the country fell out of the Exchange Rate Mechanism. Remember Chancellor Norman Lamont telling everyone that Britain’s commitment to continuing in the ERM was unshakeable? Remember his telling us all how essential it was for the credibility of our country’s economy that we stayed in? Remember all the great and the good loudly telling us that leaving would be a disaster and a humiliation for Britain?
Remember Mr Lamont’s bumping up interest rates on Black Wednesday to 12% and then within hours to 15%, to try and defend the pound against the wall of market speculation that Britain would leave the ERM?
And remember that just hours later he was forced to capitulate and announce Britain’s withdrawal anyway?
The UK’s prime minister and cabinet members tried vehemently to prop up a sinking pound, and withdrawal from the monetary system the country had joined two years prior was the last resort. [John] Major raised interest rates to 10 percent and authorised the spending of billions of pounds to buy up the sterling being frantically sold on the currency markets but the measures failed to prevent the pound falling lower than its minimum level in the ERM.
The Treasury took the decision to defend Sterling’s position, believing that to devalue would be to promote inflation. On 16 September the British government announced a rise in the base interest rate from an already high 10 to 12 percent in order to tempt speculators to buy pounds. Despite this and a promise later the same day to raise base rates again to 15 percent, dealers kept selling pounds, convinced that the government would not stick with its promise. By 19:00 that evening, Norman Lamont, then Chancellor, announced Britain would leave the ERM and rates would remain at the new level of 12 percent (however, on the next day interest rate was back on 10%). It was later revealed that the decision to withdraw had been agreed at an emergency meeting during the day between Norman Lamont, Prime Minister John Major, Foreign Secretary Douglas Hurd, President of the Board of Trade Michael Heseltine and Home Secretary Kenneth Clarke (the latter three all being strong pro-Europeans as well as senior Cabinet Ministers), and that the interest rate hike to 15 percent had only been a temporary measure to prevent a rout in the pound that afternoon.
Disaster! Calamity! Er – no. That day was followed by a surge of economic growth and the resolution of the economic slump that had afflicted the country for a couple of years.
If the Southern European countries whose economies are being destroyed by the Euro – Spain, Italy, Portugal, Greece – don’t leave the Euro, then Europe itself will face a bleak future. Their leaders ought to understand that this isn’t going to stop. This is not a question of getting through the next week, or the next month. The financial and economic pressure will be as great or greater in a week, or a month, or a year, or a decade. Sooner or later their citizens will decide they’ve had enough and hang them from the nearest lamp-posts.
Of course Britain could have a referendum and withdraw from the whole sorry business of the EU. In fact, that scenario is looking increasingly possible. We could watch from the sidelines as Europe rips itself apart. But we are intimately involved – partly just for historic and geographical reasons, and partly due to the disastrous misjudgements of a series of British leaders. Even though we might escape the worst of the pain, collapse in Europe would hurt us very badly.
Some leadership from David Cameron would not go amiss. He ought to be urging those Southern European leaders to go for broke and make plans to leave the Euro. But of course he won’t. Leadership and Mr Cameron do not go together. He and his mate George Osborne will just sit on the sidelines hoping it’s all going to go away. After all, they might get a kicking from their European masters if they do otherwise.
He wants, first of all, Eurobonds to be issued. In other words, he wants the whole Eurozone to assume the government debts of countries like Greece. He wants the EU superstate to come into being.
Second, he wants monetary policy to “do more”. He wants quantitative easing (money printing). He wants government indemnities to cover mortgages for first time buyers. He wants guarantees for new infrastructure projects.
And third, he wants the EU to become more competitive.
It seems that Mr Cameron has no clue about the real nature of the EU. It is all about big government and social democracy. In fact, it is like Mr Cameron himself.
So what of his big ideas? Put them together and they make for a pretty rum picture.
Mr Cameron wants a more closely united EU to deliberately create more inflation and … er … make itself more competitive. As in Germany should learn lessons from Britain about exporting, presumably.
This man’s waffling is becoming embarrassing. He is not saying the things that need to be said – like this problem has been caused by the nature of the EU itself. Like the problem has been caused by the buffoons in the political elite right across Europe spending too much of other people’s money. Like the welfarism and big government of the last 50 years is the problem, not the solution.
Mr Cameron won’t say these things because he himself is part of that failed elite, and he is personally committed to all the things that are wrong with Europe.
And that is why Mr Cameron is about to be swept away by the tide of events. I am becoming ever more convinced that the Tories are heading not just for defeat at the next election, but for electoral humiliation.
Can Greece deliver on the fiscal/austerity pact? Or will it crash out of the Euro?
If it crashes out, will Spain and Italy be able to stay in?
Or will Germany agree to fund more State spending in Greece?
Even, will there be civil war in Greece?
It seems to me that there are a few things going unsaid in all of this.
First of all, the immediate issue for Greece is what the papers like to call “sovereign debt”. In other words, the debts of the Greek government. The phrase “sovereign debt” is used to hint that the whole country stands behind the debts of its government.
The Greek government has in the past run huge deficits. Every year its debts have gone up, up and up. As a result, it is now effectively bankrupt. It is being kept afloat by loans from the European Central Bank, in exchange for agreeing to big cuts in its spending.
If you look at the Greek deficit, you will see that the Greek government has already made very large cuts. Almost all the deficit is now accounted for by interest payments on that huge national debt. Because of the overspending in the past, the Greek government owes unsustainable amounts, and cannot afford its interest payments.
The papers talk in panicky terms about a Greek “default-and-exit-from-the-Euro” as though these are inextricably linked. They are not.
The Greek government could theoretically default its debts and continue using the Euro. Certainly, other European countries especially Germany might not stand for that. But it is theoretically possible.
Imagine then that Greece were to default its debts completely. Clearly, it would immediately be cut off from international money markets and would therefore have to balance spending and income. Without those interest payments on the debts, that would mean some quite small cuts.
The key point is that the cuts that would be needed for Greece to pay its way without its debts, would be a lot less than the cuts being demanded by Germany and the Eurozone.
But of course the debtors would suffer. The debtors are mainly German and French banks.
So here is the real situation: Germany and France are blackmailing Greece along these lines: “If you default your debts, we will throw you out of the Euro.”
Entirely separate from this is a currency issue. It is said that Greece is “uncompetitive within the Euro”. That is clear nonsense. Within a single market and a single currency, uncompetitive countries would be forced to cut their prices. In other words, Greek wages would fall. This would happen over time, by a process of Greek wages rising more slowly than those elsewhere in the Eurozone.
Ultimately you would end up with Adam Smith’s comparative advantage playing itself out – so that Greece would lumber on in a sustainable and stable way, albeit with lower living standards than say Germany. Smith’s analysis was based on a world in which there was, almost, a single currency – based on gold and silver. That law of comparative advantage explains why even a country that has a competitive disadvantage in every single sphere of industry could continue to fund itself!
The Euro destroys Greek sovereignty, but there is no reason why it should destroy the Greek economy.
The Greek crisis is a political crisis, not an economic one. The Greek government has borrowed too much, and is now facing the consequences. German and French banks have lent too much, and are facing the consequences.
Let us remember, though, that the Spanish, Italian, French and German governments also have enormous State debts – as, of course, does Britain. The governments of all those countries are guilty of spending too much of their people’s money. They have justified that by appeals to John Maynard Keynes, or by “stimulus for growth”, or by fanciful theories that State borrowing doesn’t matter because it never needs to be repayed.
Across Europe it is, ultimately, Governments that are the problem. They are too big. They spend too much, and interfere too much. Greece is an extreme case – but the other European governments have nothing to boast about. They typically spend 40%, 50%, 60% or even more of their country’s income (compared with 30% or under in more successful economies like the US). Facing resistance from their citizens to the taxes needed to pay for their spending, they have turned to borrowing to hide their profligacy. (Yes, of course the US too has huge government debt – because the phenomenon of the bureaucracy wanting to spend more than it can raise in taxes applies there too.)
It is not just on the spending side that European governments have let their citizens down. By grossly excessive regulation and interference, governments across Europe have hampered the performance of their businesses. They have meddled in and sought to control every aspect of their people’s lives. That has destroyed their sense of individual responsibility, and their confidence in their capability to run their own lives.
Greece is just an extreme case of a problem afflicting the whole of Europe. That problem is nearly a century old. It is called Socialism. If it is not fought back right across the continent, then the rest of the continent will follow Greece down that very dark path towards financial ruin.
There will be a €107 billion write-down of Greek debt, together with €130 billion of new loans.
This will certainly tide Greece over in the very short term – or rather tide over the banks who recklessly lent the money to Greece in the first place.
But now the pain starts for Greece. Or more accurately, now the pain continues and gets even worse.
Greeks could be forgiven for wondering when it will ever stop. The Greek government enacted spending cuts and tax rises in December 2010 as a condition of the last bailout. That bailout was €110 billion. It lasted just a few short months before Greece was once more in crisis, once more unable to pay its debts.
As a condition of the latest financial restructuring, the Greek government, this time led by an EU-imposed “technocrat” Prime Minister, has agreed to further cuts and tax rises, designed to reduce Greek indebtedness to 120.5% of GDP – by the year 2020.
We all know they won’t achieve that. The Greek economy is already deep in crisis, and the crisis is not going to stop. The plan assumes the Greek economy will grow by 2.5% next year. In truth, they will be lucky if it does not shrink by that amount.
But let’s agree to live in the EU’s cloud cuckoo-land for a moment. Let’s assume that everything goes according to plan.
In that case, by 2020 – eight long, grinding years from now – Greek debt will still be 120.5% of GDP. When this crisis all began, earnest commentators used a “rule of thumb” that countries who went over 100% had unsustainable debt. Greece will still be way over even in 2020. The pain won’t stop even then. Greece will need yet more “austerity”. Yet more cuts, yet more taxes. And every time the taxes go up, the Greek people will ask ever louder why they should pay.
What this means is more bailouts, more pain, more economic destruction.
By the time this is over, Greece will be an economic wasteland. And it will also be ungovernable.
Do the EU leaders imagine that the chaos in Greece will be confined within the Greek borders? Do they think that surrounding countries will be unaffected? How will Italy, or indeed Germany, cope with an influx of economic refugees, seeking to escape the economic disaster in Greece?
In the meantime, Greece will hold elections in April. The parties that support this deal are likely to lose their majority in parliament.
The EU has thought of that too. Part of the new bailout deal is that Greece’s economic management will be “monitored” by EU experts – permanently. In other words, the EU has no intention of letting a democratic Greek government manage the Greek economy.
Remember the good old days before the Euro? Before Greece’s foolish leaders took their country into that world of pain? Sure, Greece was never an economic powerhouse. But it was muddling along, was pretty peaceful and had generally a reasonable quality of life for its people.
Now Greece faces a black future of economic disintegration, political turmoil and foreign rule. No matter how much the leaders of the EU may shut their eyes to it, the disaster in Greece will affect them all. Right now, they comfort themselves with the thought that according to opinion polls, most Greeks want their country to stay in the Euro. As the austeerity grinds on, month after month and year after year, that will change.
What’s more, the same debt issues afflict Portugal, certainly, and perhaps also Spain and Italy. Will they get the same jackboot treatment from the EU as Greece? Will they, too, be expected to sit back quietly while their democracy is dismantled and their countries’ economies are torn apart?
Like the High Priests of some awful barbaric religion, none of this matters to the EU leaders. They will pay any price in blood or treasure to keep hold of their lunatic dreams.
Angela Merkel and Nicholas Sarkozy – Boxing David Cameron Into a Corner
Details are beginning to emerge of the new European deal which will be imposed by Germany and France on the rest of the EU (or at least the Eurozone) on Friday.
The measures are:
Automatic sanctions (fines) for countries that run a deficit of more than 3% of GDP.
A “golden rule” forcing a balanced budget to be built into member states budgets.
Private investors never again to be asked to take losses – i.e. no more partial or full defaults on debt allowed by any member state.
European Stability Mechanism (a permanent bailout fund) brought forward to 2012.
Eurozone leaders to meet every month until the crisis is over.
The golden rule will be policed by the European Court of Justice – a quite astonishing provision that shows clearly how undemocratic forces have hijacked the mechanisms of the EU. There will come a time, in the future, when judges in that court order a member state to spend less.
Germany and France have also completely rejected the idea of “Eurobonds” (i.e. debt issued directly by the European Central Bank). Therefore any future bailouts will have to be paid by member states themselves, including France and Germany.
It is clear that France and Germany are proceding full speed ahead with ever closer union, as is being widely reported. It is not clear that even the French and German people are happy about this. The deal could well become mired in legal proceedings in Germany, for example – or the markets might just decide that the whole Eurozone is too risky and bail out en masse, leaving the Euro facing collapse.
What about Britain?
Germany and France have made it clear that they will go ahead with these changes within the Eurozone, regardless of whether the non-Eurozone countries sign up.
If Mr Cameron wants to go along with these changes, it is absolutely clear in his own European Union Act that he will, legally, require a referendum to do so. Even granting a referendum would be a U-turn for Mr Cameron, and massively weaken his position domestically, because he has so stubbornly and publically set his face against one.
So presumably Mr Cameron will not sign up to the new treaty, which means the rest of the EU will go ahead without him. And not just the Eurozone countries – most or possibly all of the non-Eurozone countries will probably go along with these changes, as they have been cleverly framed to ensure they could be acceptable to the others. Britain will potentially be left as the only EU country that is not in the new pact.
That is fine providing the Eurozone countries don’t act as a “caucus”, meeting separately and agreeing the position they will take in full EU meetings. Woops. Remember that final provision of the Franco-German proposal? “Eurozone leaders to meet every month until the crisis is over.”
Mr Cameron is damned if he goes along with this, and damned if he doesn’t.
Mr Cameron is now completely boxed into a corner. What’s more, it is his own stubborn refusal to take any kind of leadership position on this issue that has left him boxed in. That “in Europe but not run by Europe” fudge that has been so beloved of Conservative politicians for so many years will not work any more.
The “in or out” choice is becoming more and more inevitable. The game is up. Mr Cameron cannot duck and dive around this any longer.
That EU meeting on friday is High Noon at the OK Corral. Unfortunately Mr Cameron’s pistol is empty. Maybe he ought to think about walking away?