Britannia Radio

TELEGRAPH 4.3.09
1, EU pledges eurozone rescue
Europe's financial authorities have revealed the existence of a 
contingency plan to rescue eurozone states at risk of default, giving 
the first clear assurance that the EU will mount a defence if 
monetary union comes under speculative attack.

By Ambrose Evans-Pritchard

Joaquin Almunia, the economics commissioner, said EMU economies in 
distress can count on EU solidarity if they get into trouble, rather 
than having to go cap in hand to the International Monetary Fund.

"It is clear that there are serious problems in certain countries. If 
a crisis emerges in one eurozone country, there is a solution before 
visiting the IMF. We are equipped intellectually, politically and 
economically to face this crisis scenario. It's not clever to tell 
you in public. [I've earlier drawn attention to this crass example of 
how not to build confidence -cs]  But the solution exists," he said.

Mr Almunia said the probability of a eurozone break-up is "zero", 
despite the surge in interest spreads on Greek, Irish, Austrian, and 
Italian 10-year bonds above German Bunds. "Who is crazy enough to 
leave the euro area? Nobody. The number of candidates to join is 
growing," he said. [Balderdash!  The number is precisely those new 
countries which have joined the EU and have to join the euro as a 
result ! -cs]

Officials are keeping a close eye on renewed stress in Europe's 
credit markets. The iTraxx Crossover index measuring default risk on 
low-grade corporate bonds jumped above 1,100 yesterday, nearing the 
panic levels after the Lehman collapse last year.

Hans Redeker, currency chief at BNP Paribas, said the "real" yield on 
'AAA' corporate bonds has crept up to 5.3pc over recent weeks, the 
highest in seven years. "There is an urgent need for credit easing by 
the European Central Bank to bring down yields. The eurozone's 
peripheral economies are sliding into depression," he said. Spain's 
unemployment rose 154,000 to almost 3.5m in February.

The ECB is expected to cut rates from 2pc to 1.5pc on Thursday, and 
is exploring options for "quantitative easing" along US, British, and 
Japanese lines.

Christian Noyer, the Bank of France's governor, said the ECB was 
"studying the whole panoply of measures", including the direct 
purchase of commercial paper to help unclog the credit markets. While 
the ECB has lent freely, it has held back from buying assets outright.

Jacques Cailloux, Europe economist at RBS, said the ECB is wise to 
move cautiously before taking on credit risk. "Everybody is pleading 
for something to be done, but they have not [done]  their homework to 
find out what really works," he said.

Mr Almunia's promise of a eurozone bail-out is certain to anger East 
European leaders. They were denied backing for Hungary's ?190bn plan 
to prop up the region's financial system at an EU summit over the 
weekend. They were advised to look to the IMF instead for external 
support.

Hungary's premier Ferenc Gyurcsany said the contrasting treatment of 
East and West was denegerating into the "greatest crisis in the 
history of European integration. We do not want any new dividing 
lines. We should not allow a new Iron Curtain to be set up," he said, 
warning of an eruption of political unrest across East Europe.

Klaus Schmidt-Hebbel, the chief economist of the OECD club of rich 
states, said fast-track euro membership was no magic cure for a 
region that built up huge imbalances during the bubble years. "Some 
of these countries are facing a big crisis. This is not only a 
balance-or-payments crisis, it is also financial crisis with a risk 
of default on debt," he said.

The "massive accumulation of foreign debt" creates the risk of 
repeating the Mexican and Asian blow-ups in the 1990s.
===============AND -------->
2. It's the Europhiles versus reality, and reality is going to win
Milton Friedman was right to predict that the euro might not survive 
a recession, notes Simon Heffer.

Simon Heffer

During the current crisis we have several times heard invoked the 
wisdom of Milton Friedman about the unfeasibility of the euro as a 
currency surviving a recession. In an interview not long before his 
death three years ago, Friedman said: "The euro is going to be a big 
source of problems, not a source of help. The euro has no precedent. 
To the best of my knowledge, there has never been a monetary union, 
putting out a fiat currency, composed of independent states. There 
have been unions based on gold or silver, but not on fiat money - 
money tempted to inflate - put out by politically independent entities."

It is what lies below the surface of this observation that is putting 
not just the euro, but the entire confection of the European Union, 
under such intense pressure. Any recession would bring into play 
tensions between idealism and nationalism: the desire by those who 
pilot the European project to maintain the confection for as long as 
possible and as intact as possible, that it might come out on the 
other side of this economic horror bloodied but unbowed; and the 
inevitable identification of hundreds of millions who stand outside 
the fantasy world of the political class with their own nation state, 
their own nationals and their own national interest. Without a degree 
of coercion beyond what even this undemocratic, Sovietised swindle 
has attempted in the recent past, the national interest will in the 
end prevail.

There have been auguries of this for some months, while we have 
waited for the breakdown of the condition of denial in which Europe's 
political class finds itself. We recall last September's banking 
summit, at which the Germans decided to go freelance to shore up 
their own banking system, not least because it appeared that theirs 
was in far better shape than that of almost any other European 
country. Then about a month ago one of the most pro-European 
newspapers in the EU, Le Figaro, carried an article by one of its 
economics experts that for the first time took the paper's readership 
into its confidence about the gravity of the situation: it admitted 
that a country could drop out of the euro.

Last week Jean-Claude Trichet, head of the European Central Bank 
(ECB), said much the same; and Joschka Fischer, the former German 
foreign minister, followed that with a hint of Germany's 
unwillingness to continue to bankroll the more economically 
delinquent nations of the 27 and implying, for good measure, that 
Franco-German relations had probably not been so bad as this since 
Monty and Eisenhower chased the Wehrmacht over the Rhine in 1944.

The truth is that Europe has never had so dire a crisis since the 
Treaty of Rome was signed in 1957. Sauve qui peut is the watchword. 
President Sarkozy has entered a familiarly Gaullist phase, ignoring 
EU competition policy and pushing through a ?6 billion support for 
the French car industry; other manufacturers, notably in eastern 
Europe, have protested to no avail.

Mr Sarkozy's assertion that he is not a protectionist is purely 
rhetorical. When a German minister says that "now is not the time" to 
let workers from the EU's former eastern bloc countries have full 
immigration rights in Germany, he is saying the same thing. Gordon 
Brown may not be able to ensure British jobs for British workers, but 
the Germans are determined to keep their jobs for German ones.

This bending of the rules - or rather this wholesale disregard of 
them - is the surest sign of a currency, and quite possibly an 
empire, in terminal decline. Mr Trichet went to Dublin last Friday to 
try to calm the Irish, whose own crisis brought 100,000 protesters on 
to the city's streets 10 days ago. He said the usual stuff about 
Ireland's being able to come out "well placed" to take economic 
opportunities after the slump. He was less able to square the 
political point about how Brian Cowen, the Irish prime minister, will 
win an election if he swallows the medicine the ECB is forcing down 
his throat: spending cuts, public sector wage cuts and eye-watering 
tax rises to bring Ireland's deficit down to the levels demanded of a 
member of the eurozone.

But the dishonesty with which all this is being addressed is 
breathtaking. Joaquin Almunia, the EU's economy commissioner, has 
initiated "disciplinary action" against France, Spain, Malta, Greece, 
Latvia and Ireland for breaking the fiscal rules by running excessive 
deficits. The offenders could be fined. It would be pointless. Both 
Greece and Portugal have been fined in recent years and have never 
paid a penny.

There have already been riots in Greece. The government in Latvia has 
been thrown out, and the Latvian people are now aware that whatever 
replaces it will have no scope to pursue anything other than an even 
more unpleasant economic policy. The danger of civil disorder is 
already spooking Mr Sarkozy, whose intelligence services have told 
him that it is not just the banlieues that are at risk of going up in 
smoke. Imposition of the strict rules on these six countries could 
lead to revolutions in some of them, Ireland not excluded. How would 
any fines be paid? With a loan from the Germans? Forget it.

Tomorrow the ECB is meeting to discuss the interest rate, and it is 
predicted that it will be cut from two to 1.5 per cent. That would 
make little odds in countries that, like Latvia, have literally run 
out of money. The IMF is trying to build up a special new fund to 
bail out countries in distress. It may soon become apparent that this 
attempt at a currency for disparate nations is about to disappear 
under the weight of reality - nationalist reality - and the big boys 
are going to have to come in and sort some nations out. For some 
countries there will be only three means of staying in the euro. One 
is to impose the discipline, and risk rioting and the fall of 
governments. The second is to persuade the ECB to bend the rules to 
such an extent that the illusion of the euro's strength (it is still, 
as I write, at an incomprehensible 90p against sterling) is forcibly 
broken and the speculators have their own field day with it, at last. 
The third is to get the lender of last resort - the Germans - to bail 
out countries in trouble.

The Germans have, quite commendably, refused already to do that. When 
Ferenc Gyurcsany, the Hungarian prime minister, asked them for a ?190 
billion handout last weekend to prevent a new economic Iron Curtain 
from going up across the continent, Angela Merkel [At the beginning 
of an election campaign ! -cs] told him to get lost. She has the 
German people and, more to the point, German business behind her: why 
should they pay for the unregenerate behaviour of others? Why should 
they worry about the collapse of the zloty and the forint? Why should 
it bother them that Latvia's debt now has junk rating, or that the 
Irish are almost broke? If Mrs Merkel wants to stay in power, and 
German workers wish to keep the fruits of their own labours, they 
must harden their hearts.

As for the rest of Europe, it must choose either to devalue and end 
the pretence of economic strength, or persist and risk the breakdown 
of individual governments. Either way, it is never glad confident 
morning again for the EU and its bastard currency.

Milton was right.