Monday, 7 November 2011
The EU uses smoke and mirrors to give the impression of substantive action -
Sunday Express October 30,2011 -
By Neil Hamilton
EURO-politicians live in a crazy, Alice in Wonderland world. Like Lewis Carroll‚s White Queen, they can believe six impossible things before breakfast. While claiming to solve the eurozone crisis, they have done nothing to deal with its root causes. Their "solution" is threefold. First, sign taxpayer-backed IOUs amounting to nearly £1trillion to replace banks‚ loans to profligate governments such as Greece when their bonds mature and no one else will refinance them.
We all know what happens when you give a guarantee to someone who promises it will never be needed. Second, browbeat banks into writing off £85billion of dud loans to Greece. As banks routinely lend £12 for every £1 they hold in such assets, that would cause a £1trillion contraction in lending to businesses and individuals, turning recession into a depression. That is politically impossible, so eurozone governments will have to replace the dud loans with £85billion of taxpayers‚ money, just as Britain did with insolvent banks such as Lloyds and RBS.
Third, persuade countries such as Brazil, Russia, India and China (the BRICs) to lend another £700billion to Portugal, Ireland, Greece and Spain (the PIGS) via a new, so-called special purpose investment vehicle.
Its initials spell SPIV so, clearly, EU leaders haven‚t lost their sense of humour. PIGS might fly but I doubt the BRICs will find the joke so funny.
Idiotically, Merkel and Sarkozy believe they can borrow their way out of such indebtedness yet hours after Thursday‚s all-night summit of Euro-leaders, their "grand and comprehensive" solution to the debt crisis began to unravel. Jens Weidmann, president of Germany‚s central bank, expressed fears that the 1trillion plan resembles the dodgy finance methods that triggered the banking crisis of 2008.
There is no new money in the pot, only IOUs. So Weidmann warns that the scheme could be hit by market turbulence, with taxpayers left holding the bill for risky investments in Italian and Spanish bonds. For "could", read "definitely will". The upshot is that French and German taxpayers are now guaranteeing the debts of hopeless profligates such as Greece and Italy.
The problem is that the deal does not solve the euro‚s fundamental problems, which are the 30 per cent gap in competitiveness between North and South and Germany‚s colossal trade surplus at the expense of the Club Med deficit countries. They cannot close the gap by devaluing because they gave up their own currencies to join the euro so they are now locked in a deflationary vortex of austerity, cutting wages and spending to repay debt, a disastrous repeat of the Gold Standard before 1931.
This policy conjures up the very demons Frau Merkel warned against. That said, the spending cuts are unlikely to be fully realised. Even if achieved, they will merely reduce Greece‚s debt to GDP ratio from 160 per cent to 120 per cent by 2020; still impossible to finance. The country's economy is shrinking rapidly, while its austerity measures lag far behind. Berlusconi's Italian reform measures are risible, too. Even a modest proposal to raise the pension age from 65 to 67 was rejected last week by his coalition partners. The Italian economy has not grown for 10 years. If lenders withdraw support, Italy is bust and the new guarantees will be hopelessly inadequate.
The elephant in the room is France, whose banks are heavily exposed to both Greek and Italian bad debt, hence Sarkozy's desperation to get the Germans on the hook. He is gambling the country‚s financial future in an attempt to preserve its AA rating. Given the mindboggling sums involved, without economic growth it is doomed.
As always, the EU uses smoke and mirrors to give the impression of substantive action. The eurozone plan is to pour more taxpayers‚ money down the drain and borrow more from the BRICs to buy time to repay money unwisely borrowed elsewhere. As Karl Marx said: "History repeats itself, first as tragedy, second as farce." Unfortunately, this is no laughing matter. There are only two possible solutions. Best would be to abandon the flawed euro-project and revert to national currencies. As reality is not Euro-leaders‚ strong suit, they prefer the alternative, to evolve the eurozone into a fiscal union with centralised decisions on taxation and government spending. Yet that is undemocratic because there cannot be a genuine European government and Parliament. The Eurocrats‚ planned supranational union cannot be truly democratic because there is no European demos (cohesive people with shared loyalties). Their "solution" would castrate national parliaments and lead to an authoritarian regime. That is what they propose for Greece, with Brussels sending the bailiffs to bludgeon the Greeks into submission.
In a real Greek tragedy, the birthplace of democracy is now succumbing to an EU bureaucratic oligarchy. Athens is already in a permanent state of riot so how long before it leads to revolution?
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