Thinking the unthinkable: Let the euro-chips fall
French and German banks hold nearly a trillion euros worth of other European nations' debt: Ireland, Spain, Portugal, Italy, France, Greece. What would happen if they were allowed to collapse?
European Central Bank (ECB) President Jean-Claude Trichet testifies during the European Parliament's Committee on Economic and Monetary Affairs in Brussels in this 2007 file photo. Monetary and fiscal policy has manipulated the world's economies for decades. Does the current crisis mean that there needs to be more manipulation, or less?
Ezequiel Scagnetti / Reuters / File
This week, like the last one, was dominated by euro babel. Speaking in their various tongues, all at once, Europeans were talking nonsense. Especially Jose-Ignacio Torreblanca. The senior fellow at the European Council of Foreign Relations begins: “in an ideal world,” he says it is “fair and rational” for people to get what they’ve got coming… referring to the people who lent money to Irish banks. He even quotes the old Latin maxim: fiat iustitia, pereat mundus (follow the rules, even if the world should perish).
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Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning (dailyreckoning.com).
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He should have stopped there. Instead, he misses the point he has just made. This time it’s different, he says. Why? Because “there is a good chance that in real life the eurozone could be killed…”
When the financial crisis hit in ’08, Europe might have let the chips fall where they may. But for nearly a century, elected officials have thought they could keep the chips from falling at all. Instead of merely consuming and redistributing the fruits of the economy; they pretended, by enlightened management, to increase them. Few people noticed the audacity of it. But in a downturn, government no longer lets wealth perish. It counteracts corrections with “stimulus.” And it doesn’t merely provide a stable currency, it manages a “flexible” currency system to help guarantee full employment and prevent debt crises.
By the 21st century, diddling the economy has become second nature…but much less effective. In the US, the fiscal and monetary stimulus of the early ’30s – equal to about 8% of GDP – had a powerful effect. One year later the US economy was growing at an 11% rate. Nearly four score years later, a combined stimulus effort of about 30% of GDP produced a response of barely 2% GDP growth. As for last week’s 85 billion euro Irish bailout, the market rally was over by tea time the following day.
The trouble with trying to get the outcome you want is that you end up getting the outcome you deserve anyway. Ireland guaranteed bank assets nearly 6 times greater than the nation’s GDP. Now, with unemployment at 20% and GDP down nearly 15% over the last two years, investors wonder how Ireland can possibly be good for the money. And they are beginning to wonder about Spain, Portugal, Italy and even France. Between them, French and German banks hold nearly a trillion euros worth of peripheral European nations’ debt. How long will it be before they go down too? The Irish bailout may cost about 100 million euros. Spain is ten times as big. These were “unthinkable” thoughts, said former Italian Prime Minister, Romano Prodi.
