Sunday 9 September 2012
This is an edited version of my Eurowatch column in Friday's Irish Daily Mail --
Here, in just one line, is Mario Draghi’s latest plan to save the euro, as announced yesterday in Frankfurt: the ECB will buy lots of Spanish and Italian bonds once their governments promise to embrace eurozone-approved austerity.
There were some garnishes added, but that was about it.
If you are thinking the plan sounds familiar, you are right. In May 2010 and in August 2011 the ECB also started bond-buying programmes, meant to do exactly what this new plan is meant to do: let the markets know the euro is irreversible, let investors know that the ECB will not let the cost of Spanish and Italian sovereign debt rise to impossible levels, and tell the markets to back off.
The plan didn’t work in May 1010.
It didn’t work in August 2011.
But Mr Draghi thinks it will work this time, because this time it’s going to be different.
At which one can only say the same thing to Mr Draghi one would say to any contrite alcoholic: ‘Sure, this time it’s always going to be different.’
I will give the markets until the middle of next week to figure out how underwhelming Mr Draghi’s latest plan to ‘save the euro’ is, and not least because the terms of the plan are half-baked.
The essential part of the programme is that any country wanting support from the ECB must first turn to the EFSF (the temporary bail-out fund) or the new permanent ESM for help.
If a country fails to sign a so-called Memorandum of Understanding with one of these bail-out funds, the ECB will not buy its bonds.
The first problem with that is that next week the German constitutional court is to deliver a ruling as to whether the ESM is compatible with Germany’s constitution. If the court says it’s not, then that is the end of the eurozone permanent bail-out fund, and the end of Mr Draghi’s plan to save the euro
But let’s say the justices at the court say the ESM can go ahead. What happens then?
Start with Spain. Imagine Prime Minister Rajoy is finally forced to go for an official bail-out. He has been resisting it, apparently because bail-outs are for little people like the Portuguese and the Greeks, not for important Spain.
But Rajoy gets strong-armed. The EU-ECB-IMF troika designs a plan (which may or may not include IMF money). He has to sign.
Then the ECB piles in to buy up Spanish bonds the market wants to dump. Under the new plan, the ECB will buy only bonds which will mature in three years or less, not the significant 10-year bonds by which most sovereign debt is judged.
First thing that happens: some sharp manipulators in the Madrid state treasury management agency will shift their financing to lots more three-year bonds, and far fewer ten year bonds, so that the ECB is in effect financing most of the Spanish government debt, and doing it endlessly.
I say ‘endlessly’ because the one thing we know about any bail-out Memorandum is that it will inflict an ever-more shrinking economy on Spain.
The desperate economy of Spain will go on getting worse, and for years.
Already Spain is in a voluntary austerity programme, and capital is flooding out of the country.
On Monday the New York Times reported that ‘there is no doubt that many of those in a position to do so are taking their money – and in some cases themselves – out of Spain.’
‘In July, Spaniards withdrew a record €75bn [£60bn], or $94bn, from their banks – an amount equal to 7 percent of the country’s overall economic output – as doubt grew about the durability of Spain’s financial system. The deposit outflow in Spain reflects a broader capital flight problem that is by far the most serious in the euro zone.’
This despite an EU commitment to pump up to €100bn, or £80bn, into the Spanish banking system.
At some point, the Spanish people – certainly that 50 percent of young people who are unemployed -- will be out in the streets like the Greeks, roaring to their government to ease up.
The government will, because the ECB is buying their debt. The government will have no need to fear the markets.
Mr Draghi of course said yesterday that if a country in a bail-out programme ceased to abide by that programme, then the ECB would stop buying its bonds.
Really? I don’t think so.
That would mean the markets would rip the country right into default. And a disorderly Spanish default would catastrophic for the single currency.
What Mr Draghi either won’t admit, or doesn’t grasp, is that getting yourself into an unlimited bond-buying obligation with a big distressed country such as Spain is like invading Ho Chi Minh's Vietnam: you are mad to go in unless you have a plan to get out.
Mr Draghi has no plan to get out. He just assumes that the vast unemployed millions in Spain will go on taking the pain for years to come so that the ECB can go on financing their debt for years to come, loading up their balance sheet with bonds that are heading towards worthless.
Mr Draghi wants to launch a land war in Asia. It never ends well.
Generally the midday press briefing at the European Commission passes in a blur of questions about such things as Gazprom, Bulgaria, Greece, the Dutch elections ('no comment') and just where the ex-Maoist president of the commission might be flying first class today.
And then something particularly enlightening happens. As it happened today.
At the start of the session the chief spokesman welcomed a new spokesman to their ranks, 'someone I'm sure you all know from her work at the BBC.'
Huh?
Yes, indeed, Shirin Wheeler, former expert on EU affairs for the BBC (for which work the European Parliament gave her a prize in 2008), has left journalism and joined the fab-u-lous low tax, high pay, fat pension, free Christmas (and more)travel life of a eurocrat. She is now the official spokesman for Commissioner Johannes Hahn, the Austrian in charge of regional policy.
Regional policy: that, for example, is the policy that produced the infamous map of all of the borders between European countries dissolved, with a 'new Europe' made of of regions which ignored national history and territory.
Anyway, Miss BBC Wheeler has landed with her bum in the butter.
PS I almost forgot to tell you. Shirin Wheeler is the sister of Marina Wheeler, the wife of Boris Johnson.
This just in, from the analysts at Roger Bootle's Capital Economics:
'Recent indicators have supported the view that the euro-zone is now firmly in recession.'
'GDP fell by 0.2% in Q2 after stagnating in Q1 and falling by 0.3% in Q4. And the business surveys so far point to a second consecutive contraction in Q3.'
'Despite rising slightly in August, the composite PMI is consistent with quarterly falls in GDP of about 0.4% (see Chart), while the EC Survey paints a gloomier picture still.'
'We continue to expect euro-zone GDP to contract by 0.7% this year overall.'
And yet every eurocrat still insists the single currency is a great success.
Much more of this 'success' and the rest of us will be joining the Portuguese masses who've been forced to emigrate to Angola to find work.
This is an edited version of my column in Monday's Irish Daily Mail --
On Thursday, Mario Draghi, president of the European Central Bank, will hold his monthly press conference in Frankfurt. For those of us who train-spot the single currency, this is always an important gig. However, this month it is very important indeed.
The reason is that Mr Draghi made a promise during the summer that ‘the ECB is ready to do whatever it takes to preserve the euro. And believe me,’ he growled, ‘it will be enough.’
The way many European politicians and global investors have interpreted Mr Draghi’s statement is that he has finally decided the only thing that can ‘save the euro’ is for the ECB to start an unlimited programme of buying up the bonds of weak eurozone countries.
Politicians and investors have convinced themselves that the ECB will start buying up bonds in amounts vast enough to drive down the borrowing costs of the bankrupt eurozone countries such as Italy and Spain and keep them down.
Thursday, in short, is being trailed as the announcement of the Big Solution.
Certainly throughout August, rumours were going around that the ECB may put a cap on bond yields, in other words, would guarantee to buy Italian or Spanish bonds if the markets again drive the price to a level which Italy or Spain cannot afford.
The idea is that such a move by the ECB would demonstrate to the market that bond spreads for the bust countries would never again be allowed to get to must-default levels.
Then (the theory goes) the markets would have confidence again in bonds from weak eurozone countries. Investors would go on buying Spanish and Italian bonds – that is, financing their debt – because they could never lose their money: the ECB would always buy the bonds from them.
Keep dreaming, Herr Mario.
If this unlimited bond buying were to happen – and I’m not saying it will, in fact I am certain it won’t – then here is what in fact would follow. Many investors now holding bonds from eurozone countries, and I mean all eurozone countries, not just bonds from the distressed economies, would sell them to the ECB.
You may ask, how could the ECB afford to buy up multi-billions in bonds all of a sudden? Answer, by creating money. Printing the stuff. This is why one conservative German politician last month accused Mr Draghi of being a ‘currency forger.’
Here’s what would happen then, but it’s not part of the plan: investors would dump their bonds on the ECB, take their freshly-forged money and get out of the EU. Out totally.
They would take these newly-printed euros and change them for dollars or sterling or gold and put them anywhere except into new EU area investments. Because investors didn’t get rich by being stupid.
Yet the euro-fanatics who have dreamt up this ECB bond buying scheme imagine that such will be the power of the new ‘confidence’ created by the ECB move that the investors’ money will be returned to eurozone investments.
Which demonstrates that the euro-fanatics are well out of touch with reality.
If the pressure on Italian and Spanish bond spreads is removed by the ECB, investors know that the first the Italian and Spanish politicians will do is ease up on the austerity and national debt levels will go on rising.
But more: even if the ECB gets the all-clear from Germany (please tell me you have realised by now that the ECB is not an independent central bank) to go ahead with this bond-buying, and that is a big if, it still won’t solve the eurozone crisis
All that will happen is that the ECB will be left holding sovereign debt from countries that are bust, and are going to stay that way.
And when the Mediterranean and other weak countries can’t repay the bonds when the bonds fall due, it will be the Germans, the biggest shareholders in the ECB, who will take the biggest hit.
Result? One more blow to the German economy which has already been badly weakened because of its membership of the single currency.
That fact is wildly important not just for the Germans, but for the rest of us. Reason: every ‘save the euro’ scheme that has been proposed since this crisis started has at bottom the assumption that, in the end, the Germans will pay.
What is never considered is this: what if the euro drives the Germans to the point where they cannot pay?
One might ask the euro-elite who promise to do ‘whatever it takes’ to save the single currency exactly that. But they have no answer. Or, rather, the answer they have is so appalling that they don’t want you to know about it yet.
The answer is that the euro-elite plan the creation of a centralised EU government. The dress rehearsal for this can be found in an announcement due from the European Commission on September 12th.
The plan is to put all 6,000 banks in the eurozone under ‘direct, ultimate-decision making authority’ of a new EU institution.
This became clear at the midday press briefing at the commission last Friday. One of the spokesmen insisted from the official podium that: ‘There is a clear need to cover all banks through a single supervisory mechanism for all 6,000 banks in the euro-area.’
That means the commission intends there will be eurocrat fingers directly into every bank in every eurozone country, unanswerable to either the national central bank, the national regulators, or the national parliament.
It is the start of full permanent occupation by Brussels of the member states.
Expanding the occupation from banking into every other part of the finances, taxes, spending, and investments of every eurozone member states will follow – and into the rest of the EU states afterwards, no one gets out of this with his freedom intact -- is what the euro-ideologues have planned when the eurocrisis goes on, as it must, to final disaster.
That will come when Germany is so damaged by the single currency that it can no longer pay for the eurocrisis.
Here is how German strength has already been sapped. I will rely on a 35-page paper published last Friday by the economist Charles Dumas of Lombard Street Research, an independent London firm of economic analysts.
Mr Dumas writes: ‘Germany has moved into an increasingly dominant position in Europe, yet by past (and current global) standards its economic performance has been weakened sharply, and its ordinary citizens’ welfare has been substantially damaged by the euro.’
‘Ordinary Germans have not had much economic joy over the past 13 years, despite the drum-beat of propaganda about Germany’s economic success, financial strength, etc. The reason is simple: such success and strength as there is, they have paid for, and continue to do so. This has been done not just without reward, but with substantial penalty, compared to other countries’ citizens.’
Mr Dumas then shows a chart illustrating increases in real personal disposable income per capital since 1998 for citizens of Britain, America, Germany, France, Italy and Spain. The Germans are second from the bottom. Only the Italians (whose per capital disposable income has actually fallen in this time) have gained less than the Germans. ‘It does not require a long look at the chart to see that ordinary Germans have plenty to complain about.’
Mr Dumas sums up his findings this way: ‘It is a myth that the Germany economy has gained from euro membership. Its growth has decelerated. Its growth of productivity has halved. Its citizens have accepted severe wage restraint without the former benefit of a rising currency, leading to negligible gains in consumer welfare. The undervaluation granted by their wage restraint has benefited producers artificially, and weakened the incentive to cut out waste – hence lower productivity growth.’
‘It is a myth that Germany can hold the euro together simply by subsidising Club Med, while the Mediterranean countries adjust their finances. Their savage fiscal deflation is slashing spending and income, and hence tax revenues, so that budget deficits scarcely improve.’
‘Only with reversal of their excessive relative cost build-up vis-Ã -vis Germany can growth return. But without depression in Club Med that can only occur within the euro if Germany accepts a wage/price inflationary spiral, as well as prolonged subsidy payments.’
‘Alongside major understatement of the unavoidable disasters of [Germany] keeping the current euro membership goes the myth that leaving the euro would make Germany seriously uncompetitive and unable to grow. German consumers need the lower import costs that a rising currency would bring, to raise their spending power without wage inflation, and German businesses need the discipline of a higher real exchange rate to enforce productivity gains.’
‘Without euro-exit, Germany will soon be in big trouble.’
Which brings us back to the appalling solution the euro-elite have planned once this bond-buying scheme, and every other ‘save the euro’ scheme, fails: the German Chancellor and euro-fanatic Angela Merkel has already announced she wants the European Council to agree at their meeting in December to a new treaty, one that will ‘prepare a new legal basis for the EU.’
Some are surprised that the Chancellor has suddenly called for such a treaty. I am not.
I suspect Mrs Merkel knows the German people are beginning to grasp how much damage the euro has done to them. She is in a hurry to get this new centralised form of EU government underway and unstoppable before the voters realise what her euro-fanaticism has done to them.
And to the rest of us. Yet we, like the Germans, have so little time left to make an escape.
Posted by Britannia Radio at 09:27