The Bewilderness

Philip Stephens of the Financial Times is one of the misguided Europhiles on the pink organ. Quite the chronicler of Tory failure, his tome from the nineties: "Politics and the Pound", is a timely reminder, if read today, of the mistakes and misguidance that has afflicted this country. The concluding remarks in his book sum up the erroneous assumptions underlying Europhilia and the ideological compass that underpins their reasoning:

Sterling is a useful indicator and an instrument of economic management but the currency markets can be as destructive as they are powerful. For now there seems only the slightest prospect that Britain will join EMU in 1999. A re-elected Conservative government would not survive such a decision. Tony Blair would almost certainly have more pressing priorities. But if the rest of Europe does create a single currency, sterling's future will look bleak. Once again Britain is likely to follow Monnet's advice.  It will watch from the sidelines to see if the venture works and, if it does, will join. Until then politics and the pound are destined to remain dangerously entangled.

The emphasis is upon British reticence, hesitation and cowardice, not upon the pros and cons of a currency union. When your magnetic north is inverted to Brussels, your reasoning does not look ahead but back, from out of your arse. The 'guilty men', who supported this disastrous venture have found any number of excuses for not amending their opinions.

This does not prevent our pygmies from another failure at the G7 (no Putin, so no G8). Strong leadership would demand the orderly dismantling of the currency union into convergent groups. Instead, isolating Angela Merkel, the Anglo-Saxons called for further integration, the mutualisation of debt and the monetary debasement of the Euro. The only response they can give is their own pisspoor stealth inflation and austerity spin. (The UK government is not on the austerity treadmill).

Why should the Germans pay for the debts of others? Their political elite may subscribe to a 'European Germany' and wish to avoid causing the gimps who gave all of their deposits in bad loans from facing the consequences of their actions. The German government have tried to stop bailing out their own banks. Merkel may have forced this poison on Ireland, Portugal, Greece, Spain and the periphery. Now that poison is being thrust upon her.

From Grexnix to Grexit

In 2000AD lore, a grexnix is a churlish person or an ignoramus. It is not clear if they are lower or higher on the list than nonscrots (redefined as nonscrotes, if drunk): nonreaders of 2000AD. For our purposes, the European political classes, as individuals, can be insulted as grexnixes. Why? Because, through their political decisions, they have ruined the lives of Greek nonscrots and forced them into an inevitable Grexit from the Euro. Their status as Grexnix leads inevitably to Grexit.

The backwash from this event is incalculable. Not in the exaggerated drama of overwhelming damage but a practical observation concerning the vast number of overlapping and contradictory warnings handed out about the Eurozone. Believe the best and prepare for the worst?

A Greek exit will cause economic damage. It will destroy confidence in the currency union and a deep recession in the UK. The greater the contagion and subsequent disruption, the more that we should fear the consequences on these islands.

One can muse at the irony. Greece was a latecomer to the welfare state and, like its peers, used debt to fuel its payments. Now, the crisis of late social democracy has been accelerated by the Greater Depression and the downfall of sovereign debt. Welfare liabilities are no longer possible. It is not possible to discern the new forms of government as yet. We can only chart the downfall of the old. 

They did not even mention the FTT...

On Francois Hollande's first day as French President, his goal was to meet with Chancellor Angela Merkel, reaffirming the relationship between France and Germany underpinning the European Union and the Eurozone. One should emphasize relationship, rather than partnership. The latter is fruitful, the former can be abusive.

The two leaders met for talks and a dinner, holding a press conference on their discussions. It is clear that neither was willing to give ground, politely stating their differences. Hollande made the case for Eurobonds, a lender of last resort and renegotiation of the fiscal treaty. Merkel stood her ground on the figleaf of austerity, already clear that the liabilities will overwhelm Germany if the Eurozone falls.

On the day that economic news highlighted the widening divisions within the currency union, both leaders noted that they would agree to disagree. Their sole point of unity was a plea for Greece to remain within the Eurozone and a plea to provide further support; perhaps this formed the majority of their discussion. Growth and austerity become minor points in the maelstrom that would result if contagion flowed through the markets.

To sum up, the discussions confirmed that Hollande and Markel are now bystanders like the rest of us. They have no solutions and the future of their currency union resides in the Greek electorate. They didn't even mention the financial transactions tax (don't want to piss UK and US off?). 

The stanks bubble away....

The tsunami of liquidity that the European Central Bank released in November and February to stave off an incipient 'credit crunch' no longer hides the inability of Member States to pay back their debt. Greece, Portugal and Ireland all remain mired in depression and austerity with no hope of recovery. Yields have begun to rise precipitously again in Spain and Italy.

There is no map for plotting the duration of this crisis: slow, slow, quick, slow. The gathering pace of European leaders towards the cliff edge will become far quicker when the first of the 'too big to bail' countries enters an antechamber of default. For this will be a moment of decision: integration or disintegration!

As Ken Rogoff again lists, the Eurozone does not meet the basic criteria for an optimal currency union: political legitimacy, labour mobility, a lender of last resort for bates and stanks (bank owned states and state owned banks) and a shared debt. When the crisis reaches its full fury, will some or all of the Eurozone leap headfirst into union?

This is unknowable, though all Eurozone leaders have urged greater rather than lesser integration. The current strategy of austerilty through liquidity runs the risk of political rejection after a period of time (depending upon the tolerance of the countries affected). After that, it is a matter of the Eurozone grappling with its strongest flaw: Germany.

Bank bailout transacted through Greek front

The Telegraph caught up with Euractiv today, reporting that France and Germany would harmonise their corporate taxes on an intergovernmental basis. The pioneering duo hope to provide additional foundations for a Fiscal Union and prevent tax competition. I predict this is one wheeze that will survive a Hollande win, although he may wish to increase taxes against German opposition.

Still, the lunatics remain in charge of the asylum. A second Greek bail-out has been announced alongside some verbiage announcing the transformation of a basket case into a dynamic export driven economy. Potential strengths like tourism are ignored (since they would thrive in devaluation) and emphasis is laid on austerity and privatisation. You know, asset strippers.

Since the economy is now at crisis point, the paper is the final novel in this fantasy trilogy. Their medicine: cut wages, privatise the state and open Greece up to investment. How they will dispel the risk of default, depression and revolution is open to question. 

Such a programme can only be completed with victory for the political elite. Their support is shrivelling by the day. The collapse is priced in, now: duration till the event remains unknowable, but it can't be too long now. Elections in April.

Yet one more vote, one more summit, one more bail-out...

Greek rioters have begun to burn buildings as a torrid backdrop to the parliamentary vote on accepting austerity measures. Parliamentary opposition has coalesced around a question of sovereignty. All of the political parties that used the technocratic government of Papademos to distance themselves from these policies are suffering meltdown in the polls. If nothing else, the destruction of the political class that brought Greece to this pass would be a welcome development.

Even if the parliament votes in favour of Papademos, new elections should remove the tainted parties. Voters are emigrating from the austerity pack and moving towards the far left. Elections are due within a few months, and it is unlikely that any deal will remain unmodified unless Greece suspends its democracy. Watch them deploy the fear card: vote for us or leave the Euro. Except that the buildings are already burning....

It has taken a few years, but we are beginning to see the much predicted resurgence of the Left. 

Waiting for events.....

Record from a recent anecdote on quantitative easing: its effects. One hundred loaves at £1 each and the central bank releases a sum of £100 to combat a lack of growth; one hundred loaves now cost £2. The simple and clear link between money and inflation is not replicated so easily in our economy. Yet, the lack of evidence that QE has helped prevent recession and its distortion of the gilt market has led to cries of anger over its longer term effects.

By depending upon the reliance of aggregated savers for predicatble returns via their pooled funds, the Bank of England and the Tory party have collaborated in grand theft auto by stealth inflation. Frugal Peter has been robbed. But has that helped Profligate Paul? Compared to the United States, our deleveraging process in the private sector has not even commenced. After three years we are further away from making the necessary adjustment. And at what cost? By damaging savings, returns and investment, the Bank of England has crippled the economy and impoverished pensioners. No wonder companies are sitting on cash refusing to invest; who would, with such a government: reward scroungers, penalise thrift!

This may have been designed to erode the public sector deficit, but as a consequence and contra to the majority opinion, QE may have prolonged stagnation. The private sector has been handicapped at the expense of the public domain, accentuating the impact of austerity and dousing animal spirits. 

It is a one time offer from this government. The lack of urgency, the unwillingness to reform, the lack of bite in cutting expenditure, suggests that Osborne's complacency and micromanagement will come back to assault him. None of the political will to deal with this is displayed and the coalition's courage from 2010 is beginning to look like rigid rails, unable to turn aside or reverse if terms of trade worsen.

The coalition will defer to the ghost of Macmillan: events...

 

  

Rebelling against the 'Bruning pruning'

The failure of the troika (European Union Commission, European Central Bank and International Monetary Fund) to obtain agreement from the Greek political classes for further austerity measures was not an unpredictable outcome. The exasperation of the German government with obdurate Greek civil servants and politicians led to demands for an abrogation of their sovereignty last weekend. The proposal received a raspberry that echoed wider than the Aegean.

When we look back on the development of this crisis, Germany's ability to influence the policy of indebted countries may well have reached a peak in January. The demands for a Fiscal Union embedding balanced budgets and austerity are being eroded by the loss of competitiveness in the peripheral countries and the ever Greater Depression. Electorates will not welcome their living standards sacrificed upon the altar of austerity.

It is not easy to predict the denouement of this crisis, though politics has come centre stage. The first defeat of German influence was the redlines of sovereignty that they demanded last week. Without this control, the Fiscal Union is detached from reality: its only chance of success depends upon a shared perspective amongst all of the political elites that signed up to the treaty.

The treaty now faces a number of challenges before it is finally accepted: a French presidential election with a revisionist candidate from the Socialist party; demands for referenda across a number of countries; and, an increasing chorus of critics that blames Germany and the 'Bruning pruning' for the immolation of the Eurozone.

Since Greek political parties are not willing to accede to demands for cuts to their solidarity, a default appears to be on the cards. This is accentuated by German unwillingess to provide further funds, thank God!

If welfare states have to adjust to new measures under the cosh of debt and default, better that it be done now without the additional whimsy of zombie banks living off the ECB teat.

 

Acceleration of integration

The draft compact on fiscal stability is dragging out and is designed to hold existing members hostage who are dependent on bail-outs. Only those who sign up to the compact will be eligible for monetary support from the European Stability Mechanism (ESM). This effectively sends a message to the Irish electorate: vote Yes or forfeit European support.

It has also divided the Czech polity, with Eurosceptic parties favouring a referendum and, no surprise here, Europhile parties preferring a parliamentary solution. The arguments echo former debates in the UK: an intergovernmental treaty does not confer powers to the European Union or the subject is too complex for the simple minded folk who actually voted them into office. This leads to a simple truism: European politicians with a charisma bypass prefer an electoral bypass.

The mischief makers, France and Germany, make life even hotter for the Eurosceptics with a new six point plan for the summit in late January. Get your veto ready, Cameron! They want a common corporate tax base, co-ordination on other taxes, Commission control over regional funds (so they can be redirected to the subsidy junkies on the periphery), a Tobin tax and the lowering of labour taxes. The crisis is accelerating the shift towards a two speed Europe and we are on the outside looking in. Such integration cannot be passed in this Parliament. 

No IMF for €

George Osborne, today, refused to contribute to an IMF rescue fund for the €, alongside other non-euro members. As the contribution would have been thirty billion pounds, the government should be supported in its defence of the British taxpayer. It is a mark of how desperate the Europeans are that they are willing to suck the lifeblood of the poor to save their skins.