2010 May 11 Tuesday
Felix Salmon On Rising Resentment In Europe
The debtors and creditors will resent each other more in the future. This does not bode well for the euro.
So while the EU’s trillion dollars is surely sufficient to prevent any country from having to default in the next few years, I fear that its enormity will only exacerbate tensions between the euro zone countries over the long term. They’re not all partners together anymore: now they’re bifurcating into the rich lenders, on the one hand, and the formerly-profligate debtors, on the other. The mind-boggling sums involved are only going to increase resentments both of the south in the north and of the north in the south.
I expect the latest "shock and awe" bail-out of the PIIGS in Europe will just set up for bigger sovereign defaults further on down the road. This bail-out does not address root causes. It just stops a market stampede.
Charles Hugh Smith points out that net exporting powerhouses and net importers do not fit well together in the same currency zone.
While Germany's exports rose an astonishing 65% from 2000 to 2008, its domestic demand flatlined near zero. Without strong export growth, Germany's economy would have been at a standstill. The Netherlands is also a big exporter (trade surplus of $33 billion) even though its population is relatively tiny, at only 16 million. The "consumer" countries, on the other hand, run large current-account (trade) deficits and large government deficits. Italy, for instance, has a $55 billion trade deficit and a budget deficit of about $110 billion. Total public debt is a whopping 115.2% of GDP.
Spain, with about half the population of Germany, has a $69 billion annual trade deficit and a staggering $151 billion budget deficit. Fully 23% of the government's budget is borrowed.
Although the euro was supposed to create efficiencies by removing the costs of multiple currencies, it has had a subtly pernicious disregard for the underlying efficiencies of each eurozone economy.
The next round of financial disasters will matter more than the most recent crisis of the last few years because the next round will come on top of existing economic weakness. Watch the price of oil. If it goes above $100 then expect another recession, sovereign defaults, and more bank failures.
Did anyone else notice the Greek-protesters draping that huge banner over the Parthenon's Acropolis saying "People of Europe.....yada, yada, etc"?
All I could think of was, "the gall of those Greek-Commies!". It was like they were pleading with the peopl's of Europe to presssure their politicians (meaning the Germans, Dutch, and French) to offer Greece a more generous bailout with very mild austerity measures (if any at all). In other words......"Peoples of Europe, please keep paying your high taxes, and higher taxes if necessary, so we Greeks can keep mooching off of you without any cuts to our standard of living or generous retirement packages even though we are going to be getting more expensive as the years go on (Demography)."
I thought it was really pathetic. You bet the Germans/Scandinavians/French wont like the Greeks, its like bailing out a screwed-up family member who keeps getting arrested and refuses to hold a steady job while he is still "finding himself" in his 30's. You want to say, "Hey man, you have some grey in that head now.....time to be independent, off your mom's couch, and posting your own bail."
"While Germany's exports rose an astonishing 65% from 2000 to 2008, its domestic demand flatlined near zero."
When Germany entered the Euro their money when converted in to new Euros was undervalued against PIIGS' money. As a result prices of many imported goods rose. In fact the Germans coined the nick name "Teuro" for the Euro. You see: "teuer" means expensive.
It was even worse in The Netherlands. The Dutch Guilder had been tied to the D-Mark for two decades. When in fact in the last 5-7 years before EU-countries established the Euro the Dutch economy showed more growth than the German economy. The latter was bogged down by a hefty "solidarity tax" to pay for infrastructural projects and welfare in the six new states that were added after reunification of West-Germany with the German Democratic Republic. Prices in The Netherlands rose quickly after 2001. Gerrit Zalm, the Dutch Minister of Finance at the time, defended the devaluation of all Dutch assets by pointing out its positive effect on competitiveness and employment. So The Netherlands and Germany put a premium on employment in their deliberations on joining the European Monetary Union (EMU). Correspondingly the southern EU member states put a premium on public spending and greater privileges for state employees, as explained in the article by Charles Hugh Smith you linked. There are differences of policy priorities between member state institutions. These difference are a rift in the foundation of the Euro. Events will cause the EMU to tear asunder along the the rift in its foundation.
It is a matter of time.
Putting such disparate countries into a single currency zone and doing this with so many countries at the same time was an act of madness.
I expect Peak Oil will provide the final twist of the sword that'll cut down the euro zone. The Mandarins in Brussels suffer from something akin to imperial overreach. So does the US government. We've witnessed a high point in expansion of government reach in the West. I expect the ranks of government workers to suffer attrition and lay-offs and salary cuts for years to come.