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Official: Panic Time in Europe

Olli Rehn, the European Union’s Commissioner for Financial and Monetary Affairs, has a level head and has occupied the hottest seat in Europe during the long financial crisis; Via Meadia therefore takes him seriously.  Reuters reports him saying earlier today that:

“We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union.”

It is crunch time in Europe.  By Christmas and perhaps much sooner we may know the fate of the single currency.

The lies and the half truths on which the euro has been based are quickly dissolving.  The much praised European Financial Stability Fund has turned into a bust as investors turn up their noses at its debt offerings.  Heinz the Ant is unwilling to pay the bills for Zorba the Grasshopper; after so many tricks and so many lies, nobody believes that Zorba will ever reform.

The euro is failing for technical as well as moral reasons; for years observers pointed out that ECB interest rate policies set to cope with conditions in Germany and France were causing credit bubbles in countries like Ireland and Spain.  Those bubbles, and the aftermath when they burst, have as much to do with the euro’s dire straits as the endemic chicanery in Greece.

Ultimately, the euro is in trouble because the peoples of Europe are not a single nation.  West Germans grumbled, but they paid the bills to integrate the former East Germany when unification came because when all was said and done it was a family affair.  They grumble and resist paying the bills for Greece, Italy, Portugal and Spain because those people are just neighbors.

The euro is not dead yet.  Indeed, if the pressures of the financial crisis are felt strongly enough, this could still work out the way the euro’s architects imagined it would.  Many of those who backed the euro understood very well that a monetary union without a political union would sooner or later fall into a crisis.  They assumed and expected that when that crisis came, the various countries in Europe would choose political union to save the currency.

We are going to see very soon whether this trillion dollar bet works out.  The signs now are not good, but this is only the eleventh hour.  Not until the twelfth stroke of midnight will we know whether the pressures of the crisis can force the Europeans into a political union that most of them still want to resist.

At Via Meadia we are coming to believe that even a full fiscal union of the eurozone countries would ultimately fail.  The differences between South Carolina and Massachusetts led to a civil war in the American union; the differences among France, Germany, Italy, Spain, Finland, the Netherlands, Ireland and Greece are much deeper and more fundamental than the differences between northern and southern states in the early US.  Fiscal union among the eurozone countries would be as unhappy as their monetary union has been; in the end, the Italians simply cannot and will not live the way the Germans want them to.

We keep thinking of Abraham Lincoln’s riddle: how many legs does a sheep have if you count the tail as a leg?

The answer is four, because calling a tail a leg doesn’t make it one.

At the end of the day, facts speak.  All human institutions must be built on what is real.  Clever compromise, technical skill and sophisticated institution building are all very well, but the foundations must be solid or the building will fall.

Jesus of Nazareth warned about what happened to people failed to ground their construction on solid rock, pointing to the example of a foolish man who built his house on the sand:

And the rain descended, and the floods came, and the winds blew, and beat upon that house; and it fell: and great was the fall of it.

Mt. 7:27

If the euro is built upon sand, the time of its fall is at hand — and great will be its fall.

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  • Kenny

    ” … in the end, the Italians simply cannot and will not live the way the Germans want them to.”

    Ah, but that’s the problems, isn’t it?

    Citizens in the PIIG countries want the high standard of living that the German work ethic produces, but they do not want to do the work that makes it possible. Hence, they become parasits relative to the productive.

    And say, I’d be remiss if I did not note that the PIGGS (and France, another pseudo- dead beat) are mostly Catholic while Germany, etc. tend to be Protestant.

    Do you think the translation of the theology of those religions into everyday life has something to do the one group being productive ants and the other being parasitic grasshoppers? I’m just asking.

  • Luke Lea

    I foresee the American Fed stepping in as the lender of last resort for the Euro countries and banks, fulfilling the role of the European Central Bank, if only such a bank existed. Germany will have to ante up too, of course, but the Fed’s action are bound to provoke a tremendous political backlash in this country — think Tarp II squared — just as we head into the 2012 elections. Whether Obama survives or is replaced by Romni will make little difference: the Fed is an independent agency, mercifully, and Ben Bernanke understands what he is doing.

    This is the short-run. Medium term expect global inflation, as the Eurozone, Dollar zone, and China zone all inflate their currencies together. There is no other way out of the crisis, which is essentially a crisis of indebtedness caused by irrerponsible private lending to sub-prime borrowers, whether unqualified home-buyers in the U.S. or unqualified sovereign countries in southern Europe.

    Long-term all creditors will take a hair-cut — that is what inflation does — and real wages will decline still further here in the U.S. as well as in southern Europe. Germany will get a taste of real inflation for the first time in 80 years.

    As for China, who knows? That centrally planned economy seems ill positioned to do anything real, so any collapse in exports is likelty to be followed by domestic collapse as well (internal domenstic consumption of manufactured products are not in the cards: no markets means no markets). She will print money like mad as the bank run of all bank runs proceeds apace. Parallels with Germany pre-WWII are scary.

    If in ten years all this turns out to have been right you may conclude that I knew what I was talking about. Small comfort. Thus let us pray I’m just one more crank in the crowd.

  • Corlyss

    “after so many tricks and so many lies, nobody believes that Zorba will ever reform.”

    How many times did they confess their indebtedness? 4? Each time I heard it, the figure had doubled. Why would any sane person believe them? Corruption is the glue of their society and their government. David Goldman, a frequent contributor to Larry Kudlow’s CNBC program, left this on his blog at Microstrategy showing how pernicious corruption is and how it affects the southern tier Eurozone nations. It’s endemic, ancient, intractable, and IMO puts paid to the assinine notion of a United Europe functioning as the US.

  • Mikinvt

    The Fed will cover the European loss. They will print up a trillion dollars and buy all that bad debt. Rewarding bad behavior is what they do best. And let’s not forget that the banks are the Fed. Confusion results when you start referring to them as separate entities. Thus the Fed will cover it’s losses in Europe by printing money for itself. Brilliant!

  • Kris

    Luke@2: “I foresee the American Fed stepping in as the lender of last resort for the Euro countries and banks … bound to provoke a tremendous political backlash in this country”

    You don’t say. The only GOP candidate I’d find it almost impossible to pull the lever for over Obama is Ron Paul. Your scenario could be just the thing to twitch my arm.

    “essentially a crisis of indebtedness caused by irrerponsible private lending to … unqualified sovereign countries in southern Europe.”

    You f’ed up… you trusted us!

  • Luke Lea

    Europe, America, and China: three hostages roped together at the top of a cliff.

  • Alex Scipio

    The Civil War analogy might be good, but pehaps a more current one would be Red v. Blue America. People moving to TX are doing so because they are tired of living under MI or CA laws and regs. A Californian moving to TX to increase their prospects of a decent living would not vote for Jerry Brown, nor accept being governed by the CA legislature – any more than a German would vote for – or accept living under – a Greek president; or an Italian agreeing to live under rules imposed by a German legislature.

    Europe thought that their economies would be increased by integrating their finances. It seems instead that the overall costs were increased rather than decreased by subtracting sovereignty (are you listening, Mr Obama, Ms Pelosi?) Hard to argue at this point that this integration was a good idea.

    And if the idea was to keep a resurgent Germany down after the fall of the Warsaw Pact and decline of NATO (the only 45-yr period of peace in Europe since before 1648), this:

  • Jacksonian Libertarian

    Wow, I have been saying here for months that the forces tearing the EU apart are far stronger than those holding it together. And now that I think you are coming to agree with me.
    I have also noticed you have turned negative on the Green establishment, if not on Global Warming yet. I think eventually you will realize that the Science of Global Warming is fraudulent, and is the greatest scientific hoax in human history.
    That you have come so far while being immersed in the leftist education establishment echo chamber, is a credit to the quality of your Truthdar and your BS Detector, and possibly in part (I like to think) to your exposure to contrary views on this blog.

  • PacRim Jim

    After 60 years of Eurosocialist anti-Americanism, I’m indulging in deeply satisfying Schadenfreude.
    Couldn’t happen to a more deserving aggregation of saps.

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