Image by Alvi Halderman via FlickrEuro collapse is accelerating.On 7 September, the German Constitutional Court upheld bailouts but put up parliamentary approval as a precondition, effectively tying Chancellor Merkel's hands...as if they needed to be tied! Here's one politician who notoriously hates to take decisions that might alienate supporters.
On 10 September, Mr. Stark, one of the German directors of the European Central Bank resigned, making it clear to all that the German central bank, the Bundesbank, disagreed with the ECB bond buying policy to save Spain and Italy. That makes for additional trouble as the bond buying is carried out by the national central banks participating in the ECB and not by the ECB itself.
On 13 September, Moody's downgraded a couple of French Banks (Crédit Agricole and SocGen), punishing them for holding Greek bonds. On 14 September, Italy barely passed its €54 billion austerity package but while there was a rebound in the market, long term prospects are not good: the bond market views Italy as "too big to bail out" and is likely to demand increasing interest rates (now already close to the 6% level considered unsustainable for Italy).
On September 16 and 17, the Euro Finance Ministers will meet in Poland and Geithner is scheduled to attend the meeting - an unusual appearance and a sure sign of the deep concern Americans have regarding the fate of the Euro.
But what can they do in the gathering storm? Probably not much. The hope is that they will turn the European Financial Stability Facility in a real European bank, able to issue Eurobonds, exactly as a central bank would. A vain hope given the continued German opposition to eurobonds, and small wonder: interest on German bonds is currently around 2% compared to over 15% for Greek bonds.
And it is going to get worse before it gets better: in October, Greece will have to go back to the bond market to raise €8 billion to pay for wages and pensions - and face rising interests that will only achieve one thing: total destruction of the Greek economy. The latest quarterly figures show the Greek economy contracting by more than 7%...
Why Do we Have a Euro Crisis?
How could Europe sink into this mess? Are the economic fundamentals so bad? Of course not! Recession has affected Southern Europe but under normal conditions, you would have expected the German locomotive - with its healthy exports, especially to China - to pull up the whole continent.
Logically, when Germany sells more of its wonderful wares, from luxury cars to sophisticated electronic stuff, its unemployment goes down, its people have more money and start spending. Thanks to the Euro, trade is facilitated, money circulates. Germans buy Italian and French goods and go to Greece and Portugal on vacation, and all is well and good.
That did not happen.
Because the Germans did not start spending more. The average consumer in Germany is afraid. Afraid of losing that job, that anchor to salvation. So the average consumer doesn't consume, he or she is sitting on their money. The recession mentality is widespread, people retreat into their homes, delay expenditures. When Christine Lagarde was Finance Minister in France she repeatedly called on her German counterpart and Chancellor Merkel to try and jump start consumption in Germany - to no avail.
Instead of focusing on consumption, the Germans talked of deficit control. For them, balanced budgets are a matter of ethics. They embedded the concept of balanced budgets into their constitution and now they pretend that the whole of Europe do likewise.
So far, the Spaniards have been the first to follow suit, and some other European countries may soon comply.
This is frightening. Because balancing the budget is not the solution.
Instead of addressing the real problem - recession and a slow-down in consumption - the whole of the European political scene is buzzing with one concept only: deficit control. What's needed are policies to address unemployment and jump start sluggish economies. But politicians never discuss them: stimulus has become a dirty word! God forbid that a government should come in aid of its poor and unemployed!
The Americans have at last put job creation at the center of their political debate. Not so Europe.
The Euro Mess: Whose Fault?
Politicians.
It always boils down to that: the wrong people are in power. Angela Merkel for one. She is only interested in her own political survival - the survival of Europe be damned! She was born in Eastern Germany, brought up under communism, she has no idea what Europe is for. All she hears is that her own party is in trouble and that the right is screaming against bailouts. For the Germans, all Southern Europeans are corrupt lazy bums, rascals and thieves.
Considering that Germany was the main beneficiary of the Euro, this is preposterous.
The other person largely responsible for the mess is Jean-Claude Trichet, the head of the European Central Bank. From the start of the crisis, all he seemed concerned by was...price stability. Fighting inflation rather than defending the Euro. Honestly, the house in on fire, and this guy goes about watering the flowers in the garden! Fortunately he is leaving in October to be replaced by the Italian Draghi but that may be too late for Draghi to do much good.
Actually, the problem is larger than either of those two.
It's the WHOLE EUROPEAN POLITICAL CLASS that has lost not only the voters' confidence but any claim to being responsible and respectable.
They are crooks, no question about it. They are crooks in all of Southern Europe but even Northern Europe is not immune.
Italy: the Sick Man of Europe
In the 19 century, the Ottoman Empire was considered the "sick man of Europe". Today it is Italy.
Italy has suffered for a long time (since the 1970s) from political corruption, and more than Greece (which is but a small part of the Eurozone), it is the situation in Italy that is the key factor precipitating the Euro crisis. Because Italy is not only "too big to bail out", it is actually the biggest European economy after Germany. Yes, you read that right. That's not a mistake: if you factor into the Italian national statistics the "submerged sector" (those entrepreneurs that don't pay taxes and flout work regulations), you find that Italy is larger than either France or the UK. That's because the submerged sector amounts to some 20 to 30 percent of GNP.
So if Italy is in trouble, so is the Euro. So is Europe - and you better believe it, the problem will jump the Atlantic and spread to the US.
The debate about political corruption has been simmering for years in Italy, ever since a couple of journalists came out in 2007 with a hugely successful book La Casta, investigating political excesses. Wikipedia even has a list of Italian political scandals where Berlusconi figures prominently. And now the debate is exploding again. A remarkable email is currently circulating among Italian citizens and has been picked up by several Italian bloggers (see here). Referring to an article published in the Espresso, it points to yet another disgusting political move on the part of Italian parliamentarians. In the middle of this painful recession and amidst the austerity talk and need to pass bills raising taxes and asking for sacrifices from all citizens, our dear Italian Parliamentarians have voted to...raise their monthly salary by €1,135 to a grand total of €19,150. The highest in Europe!!
But it doesn't stop there. Each deputy enjoys an astounding number of additional perks: a personal secretary paid over €4,000 a month; rental subsidy of €2,900 per month; function indemnity (indennità di carica) also raised from some €355 to €6,455; free air, rail and bus travel within the country; use of a free official car with driver; free cell phone, movie card, restaurant, health insurance etc etc plus a full pension after only 35 months of service in Parliament while hapless Italian citizens have to work 35 years on average to obtain a pension...Then, if an Italian deputy manages to be elected to the European Parliament, he or she is allowed to take in the full additional salary, which, not unsurprisingly is the highest among European parliamentarians.
How can people stand it?
Why the Politicians Have Gotten Away with It
The politicians have managed to avoid being booted out simply by distributing "goodies".
Goodies in the form of jobs in government and related institutions - at all levels, from national to regional to small towns and villages (yet another reason why political institutions have multiplied...). Goodies in the form of pensions including pensions for imaginary invalidity. Goodies in the form of a national health system where even the rich can get free treatment.
Citizens have their mouth full of goodies so it's no wonder they cannot cry in protest.
Unfortunately goodies distribution can go on only as long as the economy is growing. And for the moment, it has stalled. Balancing the budget is just applying a band aid to the wound. What's needed is to clean the wound and get Italy back to walking. But the austerity package that has just been passed does nothing of the kind. As Ms. Marcegaglia, the head of the Italian industrial association said to the Sole 24 Ore, this package is nothing but taxes and will only have a "depressive" effect.
How to Get Out of This Mess
The solution is well known and simple. It requires three policies:
(1) cut out the goodies
(2) take away political perks and reduce the number of parliamentarians
(3) adopt measures that will stimulate growth - any measure appropriate to a country's particular situation will do.
The Germans want the first two and never talk about the third. Almost nobody does, except for a few enlightened economists, including Mr. Paul Krugman in America and Mr. Adam Posen in the UK.
Meanwhile we are in the hands of vile, corrupt politicians whose only concern is to save the status quo. That wonderful status quo which enables them to take vacations on yachts and "enjoy" pretty girls (vide Dominique Strauss Kahn and Berlusconi).
What else can you expect but total collapse?
Okay, Italian politicians are among the worst offenders. But I'm sure you can come up with similar stories about your own politicians! Please do so in the comments below, it would be interesting to confront and share data!
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