2010 May 02 Sunday
EU-IMF Greece Bail-Out Delays Reckoning

The 110 billion Euro IMF/EU bail-out for Greece will keep it from defaulting on its debt for 3 years. But The Economist sees the bail-out as an attempt by the EU to convince the market that there's no point in dumping the debt of Spain, Portugal and other financially shaky EU members.

The pattern of the past three months has been a series of gambles by EU leaders. Their bet, each time, has been that a fierce enough political declaration will intimidate markets into backing away from a weak member of the club. This latest announcement looks different but it is not: it is just the biggest and fiercest declaration yet that markets should leave the eurozone alone. The idea is to shock and awe markets with a big number, so that Greece and its toxic public finances are ringfenced behind a wall of European political will. But this, too is a gamble. If markets lose confidence in other members of the club, such as Portugal, the whole scramble for solidarity will begin again.

I do not think the market will be convinced by this move. Why should it? Spain and Portugal need to take more aggressive austerity steps before the market forces them to do it. If they wait too long then the market will insist on an EU bail-out.

Spain has a GDP 3 times the size of Greece and so a bail-out for Spain would cost much more. If the markets decide Spain is too risky then the EU would need to come up with 1 trillion or more Euros and the political will does not exist inside the Euro zone to come up with that amount of money.

Both Greece and Portugal are rather small, moreover. If the markets find good reasons to doubt the long-term sustainability of a much bigger economy, Spain, the cumulative bailout bill for other EU governments quickly reaches a very big number indeed (in Brussels, figures of a trillion euros or more are talked of in queasy tones). In the words of one Brussels official tonight: “the EU can’t afford Spain.”

Greece is a pretty corrupt place. That alone makes me doubt that it will put its financial house in order. When the EU and IMF loans run out in 3 years unless it is enormously improved the market might force it into bankruptcy then. The EU has basically kicked the ball down the court for 3 years - and only for Greece. The sovereign debt crisis will continue.

Since I expect declining oil production due to diminishing returns from drilling for oil which is a result of using up most of the extractable oil reserves (great interview with petroleum geologist Colin Campbell) economic growth will not allow Greece to cut its debt burden. Ditto Spain, Portugal, Ireland, and Iceland. So the Euro zone leaders are either going to have to allow sovereign defaults within the Euro zone or eject some current Euro zone members.

Parenthetically, the US Congress should pass legislation that creates a mechanism for state governments to default on debt.

Share |      By Randall Parker at 2010 May 02 11:18 PM  Economics Sovereign Crises


Comments
Stephen said at May 3, 2010 1:06 AM:

Keep in mind that the 'market' are the same scum who happily sucked at the tax payer's breast after having gambled and lost last year. Hypocrites. Every one of them.

Should have dragged into the street the worst performing 10% of money market dealers and executed them. Then we'd see if the remainder continue to happily piss away other peoples savings.

If that sounds too harsh, then maybe we can content ourselves by merely stopping their cocaine supply.

A.Prole said at May 3, 2010 2:20 AM:

Randall,
You must realise that the Euro is a purely political currency.It's sole intent is to force a federalist Europe on its member states by eventual economic union and then political union.That's all there is to it - and that was the intention from the word 'go'.The Euro has ABSOLUTELY NOTHING WHATSOEVER to do with economic efficiency, no matter how much the Eurocrats lie through their teeth about it.
In fact the harsh fiscal conditions imposed on the EU states in the 20 year run-up to the Euro stagnated most of the big European economies in mass unemployment and slow growth for decades.

Randall Parker said at May 3, 2010 7:59 PM:

A.Prole, I think the Germans are rethinking the value of a large Euro zone. Christopher Noble hits correct notes on Germany here:

Through her self-serving handling of the crisis over Greece's debt, the German chancellor has almost single-handedly brought Franco-German relations to a low not seen in 20 years, widened an existing divide between southern and northern European Union member states, and exposed a worrying weakness in E.U. institutions.

By publicly contradicting its president at a critical moment in the crisis, she played a decisive part in undermining the European Central Bank's role as a unifying force for the euro zone.

By putting domestic political interests -- the German public is strongly opposed to helping Greece -- ahead of the common good of the euro zone, she weakened the E.U. as a player on the international stage, showing the world once again that there is little hope of the bloc's developing into a reliable partner any time soon.

By attempting at one point to create a mechanism to eject euro-zone members, she has taken away an incentive for nonmembers to make the often-painful economic reforms needed to prepare them to join the common currency.

And that was just for starters.

The most worrying thing is that with her blatantly go-it-alone approach to the crisis, she has made it possible for the world -- and speculators in the markets -- to imagine a future without the euro. Yes, thanks to Merkel, it is now glaringly obvious that the euro is not the irrevocable construct that its architects hoped for when they launched the currency a little more than a decade ago.

I think Merkel is actually being sensible. The Euro members are too disparate. The French pushed the Euro too far. The Germans are right to push back.

Europe is headed for bigger member state crises. I think there's a decent chance of an ejection of a few Euro members or possibly state defaults on debt while remaining in the Euro. It is one or the other or both.

NotProgressive said at May 4, 2010 9:51 PM:

If Greece had their own money system, then poor management of their economy would drop the value of their currency. In other words, money value should mirror actual wealth production. You can not have this mirroring mechanism with the Euro, and hence it is an economically false construct. Sovereign states with ethnocentric populations are not going to move to where the jobs are. Greek citizens will not leave a depressed economy and move to Germany. Greeks want to stay in Greece and be among their kin. By contrast, in America if there is a depressed region, people will move to where the jobs are.

So, either the money needs to shift in value, or people need to move. Either way, there is no free lunch, and there are consequences to poor economic management. But, Greece had a fixed Euro, defined in value by the big powers, France and Germany. This straightjacket of the Euro allowed Greek politicians to pretend that all is well because there was no currency devaluation feedback.

The Euro and below replacement birth rates in Europe will doom the Continent to third class status. A population can increase rapidly with high birthrates, and it can collapse rapidly with low birthrates. It is not unusual to see 4 Grandparents in Germany, with two Children, and one Grandchild. No economy can withstand that sort of decline.

Debt has to be payed off with productive citizens. Wealth creation is typically by entrepreneurial young people who are vigorous and willing to take chances.
Europe does not have the conditions on the ground to produce real wealth. Expect the situation in Europe to get worse not better as these trends unfold.


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