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Europe Slips As Greece Falls

The early morning news from the financial markets is even more alarming than usual.  Asian markets dove on fears of a European meltdown, the euro plunged, and European stock markets opened down as well.  US stock futures fell and the yield on ten year treasury notes was one basis point (one one hundredth of one percent or .0001) above its record low.  Prices for commodities also swooned; European bank stocks are now trading at levels last seen at the height of the post-Lehman Brothers panic back in 2008.

What is worrying investors worldwide is the evident intellectual and political bankruptcy of Europe.  The Europeans are not stupider than other people, but they face deep structural economic and political problems that their institutions are hopelessly inadequate to solve.  Creating a monetary union without a true federal government is looking more and more like the biggest European policy mistake since Britain and France let Hitler have the Sudetenland.

The current crisis is the result of a decade of policy failure.  Greece should never have been allowed into the euro; prudent leaders would have checked its statistics, discovered the blatant frauds with which the Greeks sought to conceal the true state of their affairs, and told the country politely but firmly to come back when it was ready.  Following that initial blunder, Europe failed to take note in any serious way of the serious distortions that were caused by suddenly reducing interest rates in Greece and other peripherals to near-German levels.  Beyond that, alarm bells should have been ringing as it became clear that Greece and a number of other countries were treating their suddenly lower interest costs as found money.  They were spending the windfall rather than taking advantage of the once in a lifetime opportunity to reform their economies in preparation for life under a monetary union with countries like Germany.  If Europe’s institutions were up to the job, the warning signs would have been noticed and corrective steps taken years ago.

Europe has failed test after test since the crisis began.  None of its bailout plans have been adequate to the circumstances; none have done more than bought a few months or even weeks of peace on financial markets at an eye-popping cost.  National governments have repeatedly put short term and parochial interests ahead of any true solutions to the growing problem.  The complex and expensive nest of EU institutions and procedures has failed the test; the euro crisis continually gains on the slow and confused gaggle of bureaucrats and politicians endlessly debating among themselves.

What makes all this so urgent now is a growing sense that time has run out.  The latest European bailout of Greece has unraveled so fast, and Greece’s economic and political situation has worsened so dramatically, that the smart money increasingly discounts the possibility that Europe can keep the crisis under control.

Optimists have always said that when the crisis was bad enough, Europe would get its act together.  We will soon find out if they are right; hold on tight as history is made before our eyes.

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  • Ecker

    Lets find some Greeks and beat them up.

  • Richard F. Miller

    To quote Henry Kissinger, “Europe? Show me an address.”

    And in a sense, there it is. If Europe’s half-baked EU spawned institutions that are “hopelessly inadequate” to the task, take note: the last EU Constitution was rejected in several countries, and then adopted by Brussels on an “Elites Only; Voters Need Not Apply” basis.

    Any system where the rulers are so terrified of the ruled that they act without popular consent is one whose life is, as the actuaries say, “uninsurable.” The first duty of elites anywhere is to genuinely persuade those they lead that a given course of action is worth the cost. If they can’t do it, then it’s time to move on. If they do something without making their case, well… Got Obamacare?

    A bit too late, Germany is listening to its own public opinion surveys, and guess what? Support for EU bailouts is an inch wide and an inch deep. Had the current form of EU been legitimated by genuine democratic process, all of those “hopelessly inadequate” institutions would now be passing the test.

  • Bonfire of the Idiocies

    Coulda, shoulda, woulda… didn’t. This is a perfect example of how “leaders” (in this case, the EU of late 1990s) drew their curve first then plotted their data. Why was it so important to them that a 3rd-tier economy like Greece become part of the EU? Maybe they just wanted to vacation there without having to change their Euros to Drachmas. And despite all the wishful thinking bailouts of the last few years, there is almost no more road to kick the can down. Welcome to Act II of the Great Deleveraging….

  • Constitution First

    Europe ran out of other peoples money, and we’re next.

    Are you paying attention Øbama? or are you intentionally spiking the Republic?

    “Any sufficiently advanced incompetence is indistinguishable from malice.” -Gray’s Law

  • crypticguise

    There is NOTHING we can do about the EU situation. We can, however, turn this country around once we throw this Socialist President and his Socialist-Democrats overboard. November 2012 is going to be CRITICAL to the survival and rebirth of our Nation. God help us survive until then.

  • Naif Mabat

    Maybe this is an American-centric reaction on my part, but remembering those gleeful years gone by of muscular Euro-expansion triumphalism, I can’t help thinking that the key reason the Euro-planners so completely ignored all those fatal warning signs was that they were too giddy with the prospects of rapidly building up a “United States of Europe” to displace that other United States…

  • Rob Mandel


    “the biggest European policy mistake since Britain and France let Hitler have the Sudetenland”

    By 1938, it was a done deal. The real year was (end of 1935 into) 1936. Britain failed to stop Mussolini at the Suez, and let him have Abyssinia. Hitler learned then what he faced. Then the gravest error was the Rhineland. From that point on Hitler had the defensive protection on the border, the political support at home, and the allies already pre-defeated (cf. France in a purely defensive posture). While everyone likes to look back at 1938 as some decisive moment, in reality, GB and F couldn’t have acted, wouldn’t have acted, and Hitler knew both. Not that the Sudetenland wasn’t important, it’s just that it often overshadows the real events of 1936.

    Most ironic of all is that the Euros have tried to do in the 2000’s what the Kaiser was trying to do in the 1900’s: create a common European union.

    More ironic is that Germany is at the center of the EU, strongest and most wealthy. I smell a problem brewing 🙂 🙂

  • Kelly Haughton

    The bond markets have figured out that Greece can not and will not be able to repay its debts. Modern day Rothschilds have already sold their Greek debt. The question is how long will the German government be willing to keep loaning the Greeks money, when the Greeks have repeatedly shown no desire or ability to repay. One must hope that the Germans and the French wise up before they too go down the drain.

  • Sean

    You focus too heavily on Greece. Perhaps Europe should have denied Greece entrance to EMU. Should they also have denied Ireland? Portugal? Spain? Italy? Could they still have called it a “European” monetary union? 🙂

    Again, you are too concerned with Greece. Whenever someone foolishly borrows money which they cannot repay, there is necessarily a foolish lender to make the loan. We have seen this clearly in the US.

    The root problem is the moral hazards associated with bailouts. Banks lent to Greece because they expected a public backstop, and so far, they have gotten it. Just as have Citi, BAC, MS, GS, Fannie and Freddie, etc.

  • Mark Michael

    WRM’s comments represent leftist cw on the euro. It automatically assumes that government institutions must manage the banking system. There is an alternative: the free market. Adopting a common currency doesn’t automatically mean you must have a US-style unified national government. Much of the West was on the gold standard from the early 1800s until WWI and they did not have a U.S. of Europe with the institutions to guarantee the deposits of savers, an ECB as the lender of last resort, etc. Rather, private money center banks provided whatever insurance and back-stopping of the banking system available.

    Let’s give a little thought to how the EU could have handled Greece, Portugal, Ireland using more free-market ideas. Greece could have been warned earlier that there would be no ECB or other EU government bailouts if they couldn’t pay their bills & interest on their debt. They’ll just have to go into default and work it out with their bankers. No different than any non-EU non-euro country, such as Iceland had to a few years earlier.

    Now, German and French banks had loaned big bucks to Greece and would take a bath. But is that so terrible? Worst case, would it really bring down the whole EU banking system? (Like we thought Lehman Brothers might when they went into bankruptcy?) Not really. Greece & those bankers would have worked something out, both sacrificing a lot more than they have so far. (Which, btw, is almost nothing, truth be told. Greece has not really cut spending much at all so far. It’s mostly words. The banks have not suffered any losses at all over Greece that I’m aware of.)

    Now, you say, “Well, won’t private investors panic over the money they have in Spain, Portugal, Italy, too?” Well, maybe – and then the ECB would have to step in and keep the major European banks from having to close their doors. They could have done that and also insisted that those banks (their owners, shareholders) take serious haircuts in the process, too. Insist that they bear as much of the burden as they can while still keeping them functioning as banks. As it was, no sacrifice (that I can tell) has been paid by the banks – only the taxpayers are on the hook thruout the EU more prudent countries (Germany, Netherlands, Finland, etc.).

    Bottom line: What needs to be rethought is this unthinking devotion to government institutions to manage our banking system. We need to figure out prudent ways to slowly turning over some of those functions to the private sector.

  • MaxMBJ

    What Europe lacks is not intelligence but courage. Their leaders need to get in front of the new reality, that the old democratic/socialist paradigm cannot work long term. The money it requires is gone.

    Merkel may have what it takes. Cameron, alas, does not appear to. Sarkozy is Sarkozy, a true dissembling Frenchman. But even he shows some signs of getting it.

    In the U.S. Only Rick Perry and Sarah Palin see clearly and understand the time for honesty has come. Romney has shown his true colors … An opportunist without a backbone. For him to go after Perry the way he has on Social Security is a big mistake. He will realize this too late. He’s toast.

    The world in general is slowly awakening from a drug-induced slumber. The leaders who most quickly recognize this and act with courage in the face of demagoguery will succeed. Obama will certainly not be one of them.

  • megapotamus

    Beware of Greek bonds bearing 4%. No one inside the EU community was fooled by Greece’s farago of happy talk back in the ’90s. They colluded. And not only with Greece. The whole common currency was based on the notion that Germany’s fiscal probity could be exported to a thirsty continent. It was always a farce, naught but a power grab for the oldest of reasons: to line the pockets of a particular class. In this case the term is quite literal as the beneficiaries come from the Lycee or its equivalents outside of France.

  • renminbi

    This was a political agenda-they didn’t want to know that Euro was an unsound project, because that would have delayed the “ever closer bonds”.

  • Rifle308

    If anyone, in or out of any government in Europe, had seriously tried to do anything about the issues listed in the 3rd paragraph that person would have called “mean” and/or “anti-Europe”, and so on, and hounded into silence. Kinda like what has happened to people in the US who pointed out that Social Security, and Medi-care/caid were not sustainable in their current state.

    The US is the “lagging indicator” of the Western nations as we all go down the economic sinkhole. I hope and pray we will eventually climb out, but it will not be quick or easy.

  • JorgXMcKie

    Rule by bureaucrats never really seems to work, does it. Especially when the bureaucrats never, ever get punished for stupid decisions.

  • Robert

    Wish it were as “simple” as Greece leaving the EU. But Greece is just the most flagrant example of bad fiscal & poltical policies. Right behind are the others in the acronym: Portugal, Italy, Ireland, and Spain.

    Or consider this scenario: One fine Sunday morning, we hear that Germany has reinstituted the Deutschmark.

  • Mike T

    “The Europeans are not stupider than other people…”

    As that great philosopher, Forrest Gump, said: “stupid is as stupid does, ma’am”

    After years of living in Europe and decades of watching it, I have not seen much evidence of intelligent life in their political or economic policies. Merely a never-ending attempt to grab whatever they can before someone else grabs it before them. Not even a continent, Europe seems to be just a region of thieves.

  • Joe

    I think they’ve run out of time to excercise other options. Greece is going to have to default on some obligations, just as some of the others are.

    By the way, France’s debt situation is extremely shaky too, as is it’s banking sector that is in up to its’ neck in debt that wouldn’t be immune to bonds not paid out on. By the way, Germany would too.

    So if the prior is inevitable, the member state governments will rally around their own banks and not be that generous to whatever resolution fund is used to structure the collapse.

    But it brings to mind a place like Belgium that only has one immense bank, Fortis. Recalling phrases like “too big to fail”, it might be ‘too big to save’, and end up being nationalized in whole. (At present it’s part owned by both the Netherlands and Belgium, which also means a bust-up of the bank.)

    Either way, it’s going to be bumpy. But to look on the bright side, the year of sporadic THREATS of “the lights going out in Europe,” which will drag us down with it, will finally stop. The lights really will have gone out to the extent that it would in a financial crisis.

    And what exactly does that mean? Possible on the misery index, not as much as people fear, butr it certainly includes years of nagging rebuilding of the financial system, and a pop in the misery index.

  • Kris

    Bonfire: “And despite all the wishful thinking bailouts of the last few years, there is almost no more road to kick the can down.”

    Well that’s the purpose of the stimulus’ infrastructure projects: pave more road…

  • teapartydoc

    How long did Germany think she could get away with loaning the money to trading partners so that they could buy Germany’s products? Perhaps they should have asked that nation of shopkeepers they went to war with not so long ago if they thought this would work in the long term.

  • WigWag

    Anyone who wants to laugh at how preternaturally dumb American foreign policy elites can be should read this article from April 19, 2004 by Charles Kupchan.

    In the article Kupchan argues that America’s best days are behind it and Europe’s best days are ahead of it.

    Kupchan suggests that Europe and the United States would soon be parting ways like Rome and Constantinople.

    He thought the evidence was clear that Europe’s economic and financial model was better than that of the United States and he suggested that it was only a matter of time before the European colossus replaced the United States as the world’s hegemonic power.

    And this guy is supposed to be one of the intellectual giants of the foreign policy community

    Pathetic, don’t you think?

  • Eurydice

    The reason Greece got away with cheating on its economic numbers is that all the other countries were cheating, too. Not even Germany had the required debt levels. And the reason Greece and the poorer countries were desirable members is because they were desirable markets. The EU knew quite well that their subsidies to Greece were going down a political rat hole, but they preferred to bolster a corrupt socialist government in exchange for special deals for EU-member banks and corporations.

    And with a book full of rules that nobody wanted to enforce, somehow they thought that countries would evolve into all behaving like Germany. I don’t suppose it occurred to them that Germany might meet them in the middle.

  • Toni

    In retrospect, the euro project was perhaps based too much on trade and too little on democracy.

    Never mind the banks. The euro was created in order to promote economic integration. Businesses could invest across countries’ borders in a common currency. Businesspeople and, importantly, tourists could travel more simply in the euro sphere. Now cross-border investments have integrated European economies; outsiders from the US and elsewhere have also invested across European borders and depend on doing business in the common currency.

    Now let’s say Greece, Italy and Portugal, having failed to get their fiscal houses in order, are forced out of the euro and back to their native currencies. Wouldn’t this create havoc in international trade, as businesses and other investors have to cope with the old plethora of currency exchange rates?

    One truism in Europe, America and around the world is that bureaucracies never stand still. They seek to enhance their power, budgets and importance. Which is how the EU got into the complicated fix it’s in now. The Merkels and Sarkozys must answer to their voters, but European voters never got much say in how the EU was organized and run.

    Dutch and French voters balked at the proposed European Constitution in 2005. Eurocrats regrouped, and the similarly overarching Treaty of Lisbon went into force Nov. 1, 2009 — just in time for the euro crisis. Did European voters understand how much power they had handed over? Doubtful

    I don’t pretend to understand all of Wikipedia on the Lisbon Treaty. But clearly the Eurocrats moved swiftly to take more control of the EU project.

    “The exact impact of the treaty on the functioning of the EU was not fully foreseen (uncertainties which have led to calls for another new treaty in response to the economic crisis in the late 2000s[22]). When its impact is assessed, the biggest winners from Lisbon have been [the European] Parliament, with its increase in power, and the European Council. The first months under Lisbon have seen a shift in power and leadership from the Commission, the traditional motor of integration, to the European Council with its new President and budget…

    “Parliament used its greater powers over the appointment of the Commission to gain further privileges…and it used its budgetary powers as a veto… It also applied its new power over international agreements…

    “Like the Commission, the Council of Ministers has, relatively, lost power due to Lisbon. Its dynamic has also changed as member states have lost their veto in a number of areas…”

    Short version: Eurocrats saw their chance and grabbed more power. Like the US Code of Federal Regulations, or the US Tax Code for that matter, the laws and regulations which govern Europe are far too numerous and complicated for mere voters to parse.

    There’s no moral to these observations, except that the trade and voter-vs.-government conflicts have existed as long as the euro has. What a fine mess the Europeans have gotten themselves into.

    The British must go to bed every night thanking God they still have the pound, not the euro.

  • megapotamus

    Whoa there, teapartydoc. I hope you are not holding up the Britains as the model. Yes, the UK is in a superior position to France to a limited extent and not much worse than Germany (joe has it right above) but the Brits did not need the single currency to encourage their own Gumpian stupidity. The Monty Python riots, not so funny really, are the leading edge. EVERY EU country is in the rut the UK has prospected. And it is not NEAR being over over there or elsewhere. Every mother’s son must take a haircut in our international game of hot potato; every nation, every people, every institution that trades in currency. The Chinese, frankly, seem to have largely taken theirs voluntarily but it isn’t one to a customer, no no. Greece must be dropped NOW! Delay only costs, it does not benefit anyone. Of course this means that drachmae will again be printed as will kroner, francs and zloties. Elsewise the IDEA of Europe will destroy the reality of Europe in disastrously literal terms. Who yearns for Merkel’s battalions to tromp off in search of their pilfered deutschemarks? Not I, said the pig. Not I.

  • Glenzo

    I do not necessarily agree with this. Adopting a currency is not the issue. Panama, Ecuador, El Salvador and a host of other use the US$ as their official currency, a bunch such as Hong Kong are pegged to the US$ and even Cuba use the US$ for transactions. It wasn’t just the lower interest rates but also the regulatory issues that allowed for European banks to buy and hold way too much of the less creditworthy nation’s paper. “Nevertheless, this CRD annex also stipulates that exposures to the European Central
    Bank and to Member States’ sovereign debt in domestic currency shall have a risk weight of
    0% – i.e. not taking into account other risk determining factors. Thus, banks using the
    standardised approach currently have no incentive via the regulatory set-up to differentiate between the sovereign debts (in local currency) of different EU Member States.

    Additionally, the modern world has become one where we now rely upon government to hyper regulate and all financial institutions fall in line behind that regulatory framework. This also creates very very large moral hazard issues like we saw during the US subprime crisis where multitudes of financial institutions got bailed out, and even gigantic ones such as Fannie Mae and Freddie Mac since this was the environment that government created.

  • Jacksonian Libertarian

    This whole situation reminds me of the breakup of the Soviet Union and the Warsaw Pact. I think every nation in the EU and Euro is going to go its own way. It should be recognized that the EU isn’t just suffering from a monetary point of view; it is also suffering from an onerous bureaucratic and unfair trade regime. And what the US should be doing is conducting trade negotiations with each of those nations in order to preserve the global trade, and reduce the expensive dislocation which will be caused by the coming break up. If each of those nations has a bilateral trade agreement with the US to hang on to when the EU monetary and trade regime crashes, they will have a structure upon which to build bilateral trade with their trading partners including the former EU nations.

  • Russ Wood

    “Creating a monetary union without a true federal government is looking more and more like the biggest European policy mistake since Britain and France let Hitler have the Sudetenland.”

    It wasn’t a mistake: it was the design. Leaders who structured the common currency knew of this problem — they were explicitly warned about it by many economists. Yet they not only went ahead, they didn’t provide any mechanism for a troubled country to leave the currency union.

    The only plausible inference is that those founders intended the failure of their currency union to lead to a fiscal union: a federal government, which is what some of them publicly admitted was their goal. (Never let a crisis go to waste.)

    This crisis will fundamentally be resolved by Germany: either contraction of the Eurozone, or fiscal consolidation in some form of a federal government.

    Based on the overreach by Brussels bureaucrats in the current, loose EU structure, a federal government would be horrible for individual rights.

    So, the best case scenario seems to be a restructured, smaller currency union among Germany and some north European states, on the theory that such a group’s shared attitudes toward public finance could allow the union to survive without fiscal consolidation.

    In that case, it will be interesting to see what happens to the excluded Euro countries, particularly France.

  • whitehall

    Looks like the Finns are demanding collateral for any future bailout contribution.

    Smart people!

    However, I would predict that a vacation next summer in Greece will be VERY cheap for those holding USD, pounds, or perhaps Der Neue Deutschmarks.

  • richard40

    As Europe goes, so will go the US if Obama and the dems win in 2012. They are doing the exact same things this article criticises the Europeans for, running up spending, debt, and taxes with no thought of any consequences. Fortunately I think the people in the US are capable of reform, unlike Europe, but I can’t be sure of that until after 2012. The dems have definitely proved that they are not capable of reform. The repubs still have a chance, provided they continue to listen to the Tea Party.

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