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Angela Merkel: Herding Cats Over A Cliff

Fitch, the ratings agency that infuriated Europe yesterday by saying that the continent lacks the political and technical tools to save the euro, is right — at least for now.

The latest European plan to fix the euro is already falling apart, just like all its predecessors have done.  A majority of the French oppose it, and the man likely to be replace Nicolas Sarkozy in the spring 2012 election has said that it needs to be renegotiated. The countries that don’t use the euro are having second thoughts about turning over control of their national budgets to a European authority where they won’t have a veto; worse, they don’t want the Franc0-German bulldozer to use the excuse of the euro crisis to jam through a whole series of laws that would weaken the competitive advantages of countries like Poland, Hungary and Ireland.

The Italians are already demonstrating their immense political gifts of evasion and avoidance; Mussolini wasn’t able to reshape the professional guilds, cozy local alliances and patron-client networks of Italian politics and Angela Merkel won’t get it done either.  Many laws will pass and perhaps even a few treaties will be signed; little will change.  You cannot nail jello to the wall; you cannot turn Italy into Bavaria.

The mismatch between the requirements of the euro and the economic needs and political capabilities of the European Union is almost total.  The euro desperately needs a quick political decision; the European Union cannot produce one.  Countries like Greece, Italy, Spain and even France need significantly cheaper currency to help them manage their debts and launch a reform process.  This the euro cannot provide.

Angela Merkel is doing her best to herd the cats of Europe, but she is all too likely to fail. There are three ways to fail — and no clear way to win.  She can fail by being too slow; at almost any moment a vast firestorm could break out in Europe’s financial markets that would require trillions of dollars in emergency TARP style funding and she and her partners could be unable to get and deploy the money fast enough to prevent the financial equivalent of a nuclear bomb.  She can fail through failure — she can’t herd the cats well enough to get  new set of austerity and discipline measures adopted.  She can also fail through success: the treaties will be signed but they won’t fix the problems.

At Via Meadia we are rooting for her to succeed, less because we admire the German vision for Europe than because we fear the consequences of a euroflop for the rest of the global economy.  Perhaps the prospect of financial apocalypse will slowly recede while a lucky combination of Teutonic righteousness and Latin cleverness will lead to a compromise that splits the difference and gives Europe a workable fiscal union.

Via Meadia advice to readers: hope for success and don’t rule out the possibility that things might all work out for the best, but batten down the hatches against rough seas and wild winds.

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  • werbaz neutron

    Perhaps one cannot herd all the different animals, reptiles, birds in the zoo into a single cage and expect them all to survive.

    Mother advised that “three can’t play.”

  • Sam

    So, Walt, you’re buying European soverign debt now?

  • Snorri Godhi

    “The latest European plan to fix the euro is already falling apart, just like all its predecessors have done.”

    There is no question that it is falling apart, but am I the only non-German speaker who thinks that this latest plan, in spite of the hype, was never meant to fix the euro, but only to reassure Germans that the money they are spending is not wasted?

    “Countries like Greece, Italy, Spain and even France need significantly cheaper currency to help them manage their debts and launch a reform process.”

    Maybe it’s my anti-Keynesian instincts, but I think that these countries would be better off with a currency *stronger* than the euro: they should return to a gold standard.

    Anyway, people in Greece and Italy do not want to leave the eurozone, and I suspect that’s because they, unlike Dr. Mead, know what “competitive” devaluation means in practice.

  • dearieme

    What is your reason for believing that Bismerckel is disinterestedly acting for the benefit of all Europe? It’s pretty unlikely.

  • Jake Peachey

    Note the broad similarities of the 2008 financial crisis in the US and the current dilemma in Europe. A large part of Western economies is the financial system, which at its very core is a pyramid scheme known as fractional reserve banking. Through the process of debt formation, the multiplying and renting of money can be a very profitable business. But the pressure for bank profitability tends to cause excess risk-taking in the pursuit of income-producing assets — dicey loans. This feature of vulnerability for the banking industry is aided and abetted by politicians for their political ends.
    The banks in America were pressured to make real estate loans to people who couldn’t afford it, and the European politicians encouraged lending to states becoming insolvent by waiving loan reserve requirements for sovereign debt to keep in obviously unsustainable problem from blowing up while they are in office or seeking reelection.
    The problem in the Europe has nothing to do with European Union per se — any more than the housing crunch has anything to do with the federal system of United States of America. If one of the states in America goes broke, due to feckless management of public policy by the leftist/ progressive/ socialist politicians, does that mean the federal system of America should also dissolve?
    What is needed is a central bank system with a charter that has ability of enforcing good discipline on all the banks and the independence to resist the pressures of politicians to either inflate the currency or push the banking industry to ruinous lending policies.
    The idea here is that, at some point early in the game, the independent central bank would’ve stopped continued loans to Greece until the Greeks get their financial house in order. The situation should never been allowed to deteriorate to the current state.

  • teapartydoc

    Herding cats? No, like any other parricide, the Euro should be bagged up with a dog, a monkey, a chicken, and a snake and thrown into the Tiber. And the sooner the better. A well-worked-out divorce is better than cleaning up after a murder-suicide.

  • SenatorMark4

    It’s funny how almost everybody can diagnose a host of ways for their system to fail but nobody, even their leaders, can really pin a spin that sounds like success. And our potential harm? Where is Congress demanding to know how many banks hold Greek sovereign debt. We’re not a part of it but the elites are making sure we own part of it because the entire goal from the beginning was total integration. This is going to be berry berry messy. Learn to appreciate the sun rising in our new Third World.

  • LarryD

    Our central banking system didn’t prevent several state from getting into serious financial trouble, California being the example of one that is deep, deep in a hole.

    The Feds response to our current depression is to print money, we’re on what, the third round? The inflation index was redefined to exclude the most sensitive product classes, food and fuel, so the official inflation rate is understated.

  • DH

    The euro will be fine as long as Draghi holds the line and continues to ignore calls to debase it. And a debased currency is not what the PIIGS need. What they need is to default on their current debts, reduce government spending, face the resulting recession, and move on. Debased currency (whether euro or homegrown) will not fix their problems, but will only postpone and worsen the inevitable collapse. Better to face it now and get it over with.

  • richard40

    Since pretty much everybody in the Euro wants a devaluation and inflation, except for Germany, maybe the smartest thing is for Germany to leave the Euro. Then the rest can inflate away their debts as they please, while Germany is spared either hyperinflation, or future Euro bailouts. Of course Germany would suffer from no longer having the trading advantages of being in the Eurozone, but they would be spared either hyperinflation, or endless bailouts, both of which the Germans seem to fear far more than any loss of trade or disruption from leaving the Euro.

    By the way, I agree that it wouold be better for the weak Euro partners to not inflate, but just default, cut their budgets, and take their medicine, but it does not look to me like they have the political wisdom to do that. That is essentially what Iceland did do, and they seem to be better for it now.

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