walter russell mead peter berger lilia shevtsova adam garfinkle andrew a. michta
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Is the European Fiscal Treaty DOA?

Germany has been pushing a fiscal treaty as the solution to the problems of the eurozone, but the pact, signed by European leaders at a summit in Brussels on March 2, is hitting roadblocks at every turn. First Francois Hollande announced he would trash this treaty if he were elected (something that looks likelier every day). Now, opposition is coming from within the German parliament itself. The culprit is Germany’s main opposition party, which is refusing to pass the treaty without significant changes to the document — and since the treaty needs a 2/3 vote in the Bundestag, the SPD can block ratification unless its demands are met.

Unless Hollande loses and the SPD is bluffing, the European fiscal treaty is going to change. And once the amending process begins, who knows where it will end?

The reality is that Europe still has no realistic plan for dealing with its currency crisis. The world’s largest economic union is up a well known creek without a paddle.

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  • Kenny

    Which is probably why the DJIA was down over 200 points today.

    Prediction: Panic will set in and QEs will be set loose both here and in Europe.

  • Toni

    I say again, what’s wrong with letting euro countries return to their original currencies? Then every country’s citizens could live and do as they like with their own budgets — be as profligate as France and as prudent as Germany.

    One of the downsides of the Blue Social Model on both continents is that people individually and collectively don’t have to correct their own mistakes. The euro rescue project and bailouts have been trying to accomplish the opposite: saving Greeks, Italians, Spaniards, etc. from their own mistakes.

    Who I pity are the Poles and other Eastern European newbies who will suffer if the fiscal union dies.

  • Mark Michael

    The best plan would have been to have NO government plan – other than to let the free market work. Let Greece go into default and let the banks deal with the write-downs of the Greek sovereign debt. The bunch of them would have figured it out. By now, all of the major players have taken steps to insulate themselves from their Greek debt. They can handle it okay.

    When we alleged lovers of freedom and free markets pick up on ideas like “the euro is the problem” we’re buying into the statist’ ideas of government-centric economies. Ideally, currencies properly maintained, have no sustained impact on the “real” economy. Only “real actors” in the economy should determine if there is prosperity or when the economy goes into recession, not monetary policy.

    It’s not the fault of the euro if northern European banks decided that Greece’s, Portugal’s, Spain’s, Italy’s sovereign debt should be considered risk-free! It’s the fault of the risk management officers in those banks! (Yes, the “rules” written for risk management did allow that, but the banks could have been savvier than that! “Hey, we know those Greeks are faking their books. If they don’t stop, they’re in trouble!”)

    In America we had a big financial crisis in the 1830s to 1840s when our states borrowed lots of money to build canals and then railroads. Several states had to declare bankruptcy. European banks had loaned them lots of money. There was a hue and cry for the federal government to bail out the states – like the federal government did after the Constitution was adopted in 1789. Alexander Hamilton redeemed the “Continental” currency plus the various state debts at face value.

    But in the 1840s, Congress decided, “We’re not going to do it this time.” It would create moral hazard. Plus, it would lead to a more dominant federal government. “He who has the gold, makes the rules.”

    The states then passed balanced budget amendments – once they got passed their problems.

    European countries need to adopt balanced budget amendments too – once they get over begging the EU authorities to bail them out. IF they want to maintain a reasonable level of freedom.

  • f1guyus

    “People get the Government they deserve” Exactly the government they deserve.

  • constitution First

    A most frightening aspect of this reality is that a third of this nation thinks Europe has absolutely no worries, in fact, Europe is still the model America should be pursuing. Worse, these are the same folks back and vote Democrat. The fight against such ignorance and ideology is an uphill, against the wind battle.

  • gooch mango

    “The reality is that Europe still has no realistic plan for dealing with its currency crisis.”

    That’s because, at its root, it is NOT a currency crisis… that is a mere symptom. Nor is it a liquidity problem, as it is often treated.

    It is a debt problem. The cumulative debt, public and private combined, is more than the pan-European economy can bear. This makes it an “end of the post-WWII debt supercycle” problem, and the only real way to fix that is to spend a decade de-leveraging. In other words have a depression.

    The mature economies of the world are all approaching this end point, some quicker than others, and we’re not going to trick our way out of it. You cannot “out clever” math for very long… it always wins in the end.

  • Meremortal

    Talking about this and that option is a waste of time. Europeans don’t act until the crisis is at hand. It’s not quite at hand yet. And predictions on when it arrives are difficult. The solution for private citizens is to prepare for a fiscal crisis as Europe will delay it but not avoid it. America’s path is different. The PTB in America know they can debase the dollar for as long as needed, and the math indicates they can get away with this if the public does not rebel at losing about 40% of its wealth over the next 7-10 years.

  • Rich K

    Sit back, relax and grab sopme popcorn, this is gonna be intersting.The meltdown that is.

  • mark l.

    it’s stage 4 cancer time for govt bonds.
    at present, each solution that is floated is an attempt to alleviate pain, not produce a cure.

    greece hasn’t descended into it’s death throes, largely because the europeans have been softening the theoretical blows that will inevitably come.

    the cure is massive amputation of every limb…devaluing the greek debt by more than 50%, and there a several patients in the waiting room, spain and italy, who watch and wait…

    even france and the uk have developed a cough that is distinctly not benign in sound.

    ‘how much longer?’ is the objective question. the problem is that no one is objective. everyone who is watching is smoking the same brand of cigarettes in varying quantities.

    there is irony in the fact that the ‘surgeons’ of greece will inevitably become the patients.

    we are circling the black hole of a ‘bond run’. since it has never occurred before, on this pending scale, no one has the ability to explain it-no previous pictures or words.

    my long view on metals is very positive. my short view is that nations, given no other means of purchasing, once their currency becomes worthless, will liquidate the only thing they have left that holds value, for a few more weeks of survival. I’d storngly advise individuals not to panic buy-as the eu has failed at almost every level, with the exception of quelling fear-for the general populace.

    consider churchhill:

    “The Americans will always do the right thing… after they’ve exhausted all the alternatives.”

    no plan tha the eu submits can fail, UNTIL it is put in place. this could go on for several more months, probably years, as a theoretical solution is always available.

    if the eu is just playing for time, then choosing not to take action, and just talking about it, buys significantly more time than ANY action that is committed to.

    there is no solution, but until it becomes as clear to those involved, this travesty will continue.

    it compares well with our housing bubble-
    the effects were obvious in hindsight, but until lehman goes down-an outcome-the bubble continued.

    those with the foresight to see the bubble as it broke found tremendous opportunity in making more money off of the decline. the people who are charged with solving the crisis are already calculating their parachute size, and folding accordingly.

    earlier poster lamented the fate of the eastern bloc countries…

    their ‘poor-ness’ limited their ability to borrow, and their inability to borrow led them to focus on domestic production of essentials.

    poland and estonia are two example of the countries that inherit the next world, largely because they were deprived of participating in the old world.

  • EvilBuzzard

    Why is this a problem? If you need to get rid of socialism and disband a Free [creatively disguised profanity deleted -ed] army that makes up an electoral majority, failure is the only regulatory means at your disposal.

  • mark l.

    my biggest chuckle…

    the eu’s foray into the the attempt to save us from global warming, 100 years from now.

    while weather is almost impossible to predict, given the number of variables, the enviros quickly flew past a very ‘dismal science’, with far fewer variables, with complete and correct equations, and feared for our uncertain future, long past their own death.

    if one is less than 65 years of age, now, compare the imagined horrors of global warming to the world of the future to the world one wakes up to in less than 10 years.

    if you can’t crack a smile now, that could change sooner than one thinks.

  • http://senatormark4.org SenatorMark4

    The BLUE model requires that government take money and give it to people without any centralized accounting. Just the opposite of what they demand in EVERY other endeavor! If the city gives you heating support in the winter, the county gives you free water, the state gives you Medicaid and food stamps, and the Feds give you section 8 housing support….How many 1099-GOVs do you have to claim on your IRS 1040? Until we know where money is going we’ll continue to read stories about lottery winners on food stamps…again.

  • Tom

    Gov’t spending is the problem — because gov’t doesn’t spend, people do. People/ politicians and bureaucrats, in the name of “government” decide how to spend Other People’s Money.

    And these gov’t spenders get voted in to do the spending by the voters (who thus get the gov’t they elect, whether they deserve it or not.)

    The media and intellectuals who support gov’t spending are to blame for helping normal folk be fooled into thinking excess gov’t spending is anything other than:

    UNSUSTAINABLE.

    Unsustainable gov’t spending must stop … and it will.

  • richard40

    To Mark Michael.
    You make a good point that the Euro is not the real problem. The real problem is Greece borrowed more money than they could pay back. You are also right that the best solution is to just let the market work. Greece will default, and the Greek government wil have to learn to live without borrowing money, and the bondholders will lose some money, but then the crisis will be over. Of course there may be other countries that default too, but let the market work there too.

    These bailouts just prolong things, and prevent all the toxic assets from finally hitting bottom and being cleared. The other good reason to let the market work is maybe bond buyers will finally learn that they cant count on future bailouts, and will be more careful in who they buy bonds from, which is the only real way to stop these types of bubbles in the future.

    There is one respect that the Euro is part of Greece’s problem though. Being on the Euro takes away one option that insolvent countries often use, hyperinflating their currency. But I view hyperinflation as being so destructive that even a default is a much better solution. Default make it much harder for the government, but hyperinflation screws everybody, especially businesses and middle class people that have prudently saved money for the future. So in that respect, I think being stuck in the Euro is actually good for Greece, because it forces them to do the right thing, default and then live within their means, rather than taking the tin horn despots way out with hyperinflation.

  • Mark Michael

    Re: richard40 Comment #14

    Thanks for lending support to the free market position. I visited Mexico in 1986 for a couple weeks (a niece had worked there & planned to marry someone she met; went to meet the family, sightsee, etc.). Mexico was experiencing substantial inflation at the time. It thoroughly distorted how those middle-class Mexicans lived.

    My niece’s future husband’s older brother, a veterinarian, was building a new house. He would buy material immediately with his income and add rooms to it as he could. He did that because inflation ate away the value of his income so quickly, if he saved it, it would devalue so fast, he’d never get the house built.

    I never had to exchange dollars for pesos, because people would see I was American and ask, “Do you have dollars? Need pesos? Let me trade you some!” They’d go to a safe in their house, add my dollars to a big stash they already had, and give me the proper number of pesos. I think it was illegal for them to hold US currency back then, but everyone did it. It was the easiest way to preserve their income.

    In 1994, the Mexican central bank goosed the money supply to avoid/delay a recession before the presidential election that fall. IMO it was understandable, since a near-Marxist was a leading contender against a centrist PRI candidate that Carlos Salinas had picked as his successor. After the election, the peso crashed as you may recall and Mexico was in big trouble.

    Bill Clinton was prez, of course, Robert Rubin, Alan Greenspan, Larry Summers (with Wall Street) arranged a “rescue” for Mexico. It resulted in a large devaluation of the peso against the dollar. It (actually IMO) was a bailout of our Wall Street financial institutions of their Mexican debt. They made a tidy profit on it after all was said and done. It came at the expense of the general Mexican population. The Mexican standard of living dropped 25%, thanks to that devaluation.

    Those average Mexicans did nothing to deserve that. It was the fault of a tiny elite who controlled the Mexican central bank, the politicians who colluded to keep the economy humming until the election was over, and the Americans who drove such a hard bargain – for our fin. institutions on the hook for that Mexican debt.

    Mexico, since then, has maintained prudent monetary policy and the central government has not run fiscal deficits (I think that’s the case – haven’t checked it closely). They learned their “lesson” via the school of firsthand experience.

    The standard of living in Mexico came back to the 1994 level after maybe 4 or 5 years, and is somewhat higher today. Unfortunately, there are still lots of government-created problems in the Mexican economy, yet, today.

    The lesson I learned was that the idea of devaluing a nation’s currency as a good cure for a financial crisis was a bad idea for the general population. It “socialized” the mistakes of a tiny elite in the banking community and political community at the expense of the rest of everyone else.

    Ideally, currencies should have a fixed value across all countries. It’s interesting how conventional wisdom (cw) can turn on a dime. I suspect the gold standard, which provides that, was considered cw for a century and a half while Great Britain and the US both were on it (1800 roughly until the Great Depression when we devalued the dollar from $20.67 to $35 a Troy ounce). If you advocated floating rate exchanges with fiat currencies, you’d be considered a crackpot!

    Yet, within a few years of Nixon closing the gold window in 1971 for good, the cw was that fiat currencies and floating rate exchanges were totally superior and anyone advocating a fixed-exchange rate backed by a commodity was considered out of the mainstream and holding extremist ideas. A goldbug.

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