Flashpoint Europe: Sig: 05July16

 

”He went like the one that hath been stunned, And is of sense forlorn; A sadder and wiser man, He rose the morrow morn.”
So ends Coleridge’s tale of the lost Ancient Mariner. Might those lines apply to the political and macro economic events of the last week?  One can be excused for being stunned at how quickly events can turn. As for being wiser, well, Man ought not to be tethered as his only teacher to the school of example, and therefore he should be able to recognize that it was all too foreseeable. So much for being wiser! For now it would seem that we are simply left forlorn and sadder on the morn. If we are also lost like that ancient mariner, perhaps it is because the the causes and reasons for our macro economic problems are now so manifold and falsely claimed to be obscure. Let Europe go down and we may go down, an article of faith that can perhaps  be counted on today.
 
Brexit, while an important event, for it set in motion issues that might have lain quiescent for a while longer, yet a far more important event has now arisen in Europe. A number of countries using the Euro have openly declared that Great Britain was one of the sane and reassuring member in the EU, because it always had the correct vision of what the EU must be, or it cannot survive. The notion of the European Union (EU) becoming a United States of Europe was always a delusion; the EU was founded as a free trade area composed of sovereign nation states, and was justified as economically useful and viable, and the institution itself is also a persuasive guarantor of inter European peace. That assessment remains in stark contrast to the competing vision of the EU and of the Eurocrats, inspired by the thinking and dreams of Jean Monet, the first head of Euratom in 1957. It is worth recalling that it all began with the basic notion that if the conducting of modern total warfare could be made impossible for lack of coal and steel, then NEVER AGAIN would Europe have to endure the horrors of a World War II; indeed it could be argued that the idea originally took shape as a result of the indefensible slaughter at the Battle of the Somme in 1916, or as the French would have it, their later costly success at Verdun. Any action including any deceit or anti democratic step taken to prevent a resurrection of the cry of NEVER AGAIN is justified according to this vision of Europe, and the surest way of achieving that goal is a combination of advocacy and deceit to gradually eliminate the principal sovereign nation states of Europe by merging them into a new Unitary European Super State, which would confer the added benefit of becoming the super state of the World. Which of the two visions of Europe will prevail is now the principal drama to be resolved. On the one side are Poland, Denmark, the UK (assuming Brexit is not finalized), Hungary, Slovakia, Czech Republic, Austria and others who support the free trade area version, and on the other side apart from the seemingly vengeful Eurocrats in Brussels, who else? Well as to those “who else”, that depends on many different things!
 
At this point it is appropriate to recognize that the fate of the Euro common currency also gets mixed up with the more fundamental issue of which version of Europe should prevail, the free trade area version or the currently “official” central state version preached by the Eurocrats. Based on the experience so far concerning the southern tier of Europe, it is undeniable that the common currency has, on balance, been destructive. Greece so far is the poster child. It desperately needs control of its own to be a much cheaper currency and accompanying monetary policy just to have a viable national economy left and to permit it to compete. On the other hand Germany greatly benefits from the common currency because it greatly facilitates their vital export machine to the rest of Europe with which it shares the Euro. But what if that currency, and specifically the monetary policy which dictates its characteristics, is now based on sheer economic LUNACY, then it follows that sooner or later the currency itself becomes bad, because for any good currency to remain so, it must exude confidence and to do so it must be a storehouse of value – at the very least for some reasonable period of time! Otherwise the begetting of hyper inflation becomes inevitable, and that must be avoided at all costs. By definition a currency that does not hold its value for some reasonable length of time is unreliable and soon enough becomes a bad currency. Insufficient emphasis is paid to the serious consequences that follows in the wake of bad currencies, hence the present emphasis on destructive monetary policies that in turn engender bad currencies. While prudent monetary policies are a part of of economic prosperity and wellbeing, it is ABSOLUTELY VITAL in turn that it also must rest upon sound fiscal policies of the sovereign nation state (or nation states like the EU) or the whole exercise becomes nonsense. This essential point that cannot be emphasized enough!
 
Essentially we now find the EU in a very bad fix because of totally irresponsible fiscal policies brought about by ignorant and rapacious politicians spurred on by foolish electorates, which in turn begat what now amounts to monstrous destructive debts and the monetary policies to deflect and disguise the bad effects of those debts. If we are honest, which most of the time we most decidedly seek not to be, that fundamental fact is also present as the unspoken chief issue present, and in a sense overshadows the proceedings and issues to be resolved about what kind of Europa will emerge. Right here it should be noted that Germany and its own Central bank, the Bundesbank, and the majority of German politicians understand these truths only too well from  their forefathers. For the sake of their dominant export machine which represents a very large portion of their economy (50% of their GDP) they too are now linked to a bad currency, and events dictates that something must be done to change that situation. The dilemma for the Germans is to reconcile the efficacy of a common currency to encourage the health of their vital export machine with the inherent weakness of an unhealthy Euro shared with the non competitive economies of the other Euro state members. The suffocating accumulated debts now owed by the noncompetitive Euro states are quite simply way too big in relation to the size of the German economy to be mutualized among the EU member states let alone to be guaranteed by Germany. That in turn begs the question whether it is even possible for Germany to share a common currency with their non competitive neighbors. That fundamental question will also have to be addressed quite soon; yet another problem!
 
Indeed there are many misguided economists clinging to the insane monetary policies that now come with a great many currencies, including their common currency, the Euro, and these folks still insist, or more likely use that argument as an excuse, on proclaiming that the non existent dragon of deflation must first of all be slain (which calls for more and more destructive negative interest rates, and more and more printing of electronic “money”, which is deceitfully labeled as some innocent kind of Quantative Easing (QE), something heretofore never heard of, including a further endless manipulation thereof, and therein lies the tale of destructive monetary policies insisted upon by the theories of the modern day neo Keynesians and their so called school of thought which unfortunately holds sway over the world of Central Banks.
 
The spark of serious change in Europe was lit on June 30/16 by the Czech foreign minister after a meeting of the Visegrad group of foreign ministers and the foreign ministers of France and Germany. They demanded the ouster of Jean-Claude Junker (head of the EU executive) for having caused Brexit. The UK referendum on June 23/16 decided upon Brexit of course, and not poor Jean-Claude, of whom it is widely reported that apart from being the most senior, faithful and loyal Eurocrat, he also has the very good sense to begin his day with very solid doses of cognac so that by lunch he is often incoherent. So we now have out in the open, a fundamental dispute about what the EU really should be, and whether the common currency is sound, and specifically whether the monetary policy driving the Euro, and the dictates of the European Central Bank (ECB) in aid thereof can possibly be  justified; at the very least in the thinking of sane people, and by the same token the resulting sad condition of a great many important European commercial and merchant banks.
 
Were that not enough, one might turn to a brief glance of Articles 49 and 50 of the Lisbon Treaty which governs the admittance and exits of members of the EU itself. Article 50 for example instructs that the governing laws of the exiting member shall be the guide of the process on the one hand, yet on the other hand posits that such exit shall be conducted in accordance with the dictates (“Laws”) of the European Council, an unaccountable and an unelected body the composition of which is fluid because its membership is expandable. Article 49 governing the admission of new members into the EU is perhaps a little better defined. Can one be forgiven in suspecting a resulting circus in the making, a total mess in the execution thereof ab initio, and sympathy for those unfortunate souls having to deal with the gravitas of such matters. Are they not also to be forgiven in partaking solid doses of cognac at breakfast in imitation of our hapless Jean-Claude who will no doubt be enmeshed in the process himself. In other words, good luck with the exit/Brexit/Article 50/ process! Finally it should be acknowledged in fairness that there have been very recent rumblings and equivocal statements by some senior EU leaders that the time may have come to be more flexible as to what a future Europe should look like, something like an official acceptance of what each country thinks that Europe should become; for what that’s worth.
 
But once more, wait again! We are far from finished about a determination of the greater Europe vision, because at this moment there remains the pressing matter of the pitiful state of the Italian commercial banks (and Spanish banks for that matter). If 10% of non performing bank loans held by a bank is recognized as indicating such bank to be insolvent, then what about 20% of non performing loans owned by the Italian banks which Prime Minister Rentzi urgently has to contend with. That 20% amounts to a astounding 25% of the Italian economy or GDP. No way is Italy permitted to prop up their banks with state funds according to the dictates of the ECB and the Germans, but without doing it (for no capital infusions for the insolvent banks are available elsewhere), the whole Italian economy effectively collapses. So he is going to try and do it anyway, and by the way how can he resist in pointing to the still operating German Deutsche Bank, of central importance to international trade, which itself is insolvent to the chagrin of its stockholders, which also is sitting on top of $56 Trillion of credit default swaps (concerning their guarantee of mortgages)  as well as their share of derivatives amounting to more than $1.4 Quadrillion, many of which derivatives are interlinked in mysterious ways and which of their own could easily bring the whole interrelated world banking and economic system crashing down on our ears. Clearly something has to change drastically concerning the Italian banking crisis, and yes we can probably count on it happening because it simply must. In passing it is perhaps of interest to note that not only are the stockholders of these Italian banks adversely affected but so are their innocent depositors because by law and regulation of “bank bail ins“ which is in full effect just about everywhere in the western world, bank depositors shall contribute to the failure of their bank to the tune of between 10 to 90 percent of their own deposits in such banks. But it is only right to give the “bankers” due justice that some of the fleeced depositors may be offered relief in the likes of 10 year “co-co bonds” such as presently is proffered by European banks where an “investor” is offered unheard of 6% interest on deposits, but only on the condition that the bank makes any money in accordance with its unique judgment of its own financial condition; and that is never going to happen. Little wonder that Italian depositors are fleeing their own banks. As a quick aside, anyone just about anywhere counting to be made whole again by government backed insurance deposit schemes are living in a fools paradise when things start to get really serious.
 
Now that ought surely to end any more painful considerations, but the genius Central Bankers have plenty more in store, their imaginations are unlimited. Somewhere they forgot Einstein's warning that those who set themselves up as the judges of truth and knowledge (and especially in matters of monetary policy) are shipwrecked by the laughter of the gods; would only that the gods had laughed much sooner! Any set of fools can meet in a new surrealistic $1.7B twin tower skyscraper in east Frankfurt around an imposing  board room table and apply algorithms as long as your arm concocted by hundreds of PhD's to produce economic forecasts and “remedies” that are always wrong and always destructive. What else can be expected from the energetic and desperate application of negative interest monetary policies (NIRP)? That this is sheer economic reckless madness run wild would be the understatement of the century! Yet that the whole European experiment is fatally infected with such policies is undeniable because the actual figures support that sad conclusion. For instance, just a little measure of that; in Switzerland you actually have to go out half a century (maturity) just to find any Swiss government bond giving any kind of positive yield, in fact some $12 Trillion of sovereign bonds now carry negative interest rates. As a result your worst fears imaginable will be visited upon all pension and insurance schemes Europe wide. The very notion that negative interest rates will spur economic revitalization is clearly belied by the results obtained, just go to Japan where this madness is even more energetically applied than in the EU; let’s just say that negative rates does wonders to suppress the velocity of money and to the system of capitalism and the free Market, presumably the very opposite to the effect intended in the first place.
 
There are of course those who would still maintain that with the creation of more new phantom capital, borrowed printed money in effect, then somehow European leaders will pull a rabbit out of the hat, and keep the debt/borrowing/money printing game going until a new European solution is found. Don’t count on it! For very sure, when the debt/borrowing issue falls on France it will be game over for the EU! But then again it may well be that the FN (Front National) and its leader Marine le Pen will decide the fate of the EU next year by executing their French version of Brexit.
 
All of the foregoing will inevitably be part of the considerations to be resolved in determining just what form, if any, the great European project (the EU) will take. And more contentious issues also have to be resolved, such as the failure to mutualize the tremendous costs of the refugee crisis. If the EU can’t afford to share (mutualize) the cost of the debt problem (which would amount to financial suicide for the Germans) then what about the costly refugee problem which in the eyes of many Europeans was basically caused by an idealistic and guilt ridden post WWII Germany in the first place.
 
We may justly ask just what the hell are we talking about? I didn’t do anything foolish, I didn’t cause this unfolding European tragedy, not did my neighbors and friends. And here begins yet another tale that very unfortunately is only too relevant to all of us. This paragraph will be brief and concluding, even if admittedly it ought not and cannot be conclusive! We are, or we certainly should be talking about the cause of all this, and the answer is to be found in our own mirrors. We are the ones who demanded what we could not afford, we elected politicians who would provide what we could not afford or they would not be elected, and most politicians cannot afford not to be reelected. In turn they simply piled on the national debts (much of which we bought ourselves) higher and higher and yet higher to pay for economically unproductive assets that could not produce an income stream to retire such debts before the end of the useful life of such assets, and when that heavenly scheme eventually ran its course, the politicians finally resorted to call upon their Mephistophelean central bankers for magic solutions so that we could continue to satisfy our insatiable thirst of desires which in turn resulted in ever mounting debt and evermore imaginative monetary policies to support our irresponsibility. The party is now soon to come to an end, for you can only have so much misallocation of capital, you can only have so many desperate and fruitless searches for non existing yields which invariably ends up in “investment” bubbles and their costly bursting, before the cry arises that it is all an unbelievable fairy tale and that the Kaiser has no clothes on, followed by a stampede to a blocked exit, which was too narrow in the first place, for there will be insufficient liquidity left to buy whatever financial papers are offered. And those left with fiat paper money will find that such money only amounts to a call upon a bank for a corresponding credit upon a bank that already is insolvent, for it too is build upon a foundation of printed money and worthless debt. That is the reason for the advocacy of gold which in turn is proclaimed to be money. But is it really money in a modern economy as we have today; perhaps, but can you pay for the groceries with it, can you settle your mortgage with it, can you pay your taxes with it? For a sense of orderliness and to dispose of the remaining financial issue; what about all those lovely sovereign bonds? They would make lovely wallpaper in some financial museum as a reminder that they never could be paid, but the trouble is they are just electronically recorded as if they never existed anyway. Remember that earned money, that is money derived from savings earned from productive assets, is very very different conjured up the electronic money based on borrowings from non existing assets which precisely has been the sin of the EU.
 
Democracy and civilized behavior rests in the scale, because the inevitable result from the situation is truly going to become that serious!  Despite everything, can they still pull it off in Europe? One has to be an optimist to suppose that it can be done before the mother of all financial crashes occur. After that can a better and brighter Europe emerge? That must awaits answers from succeeding generations. Will we at least have the consolation to proclaim that we have learned something new and valuable, some basic macro economic lessons that we didn’t know before? I very much doubt it, because these lessons were already learned well before our times.