The Eurozone deal laid bare the fact that national sovereignty in Europe is a thing of the past. But if that was the price paid for a stronger Europe, a safe currency union and a stronger economy, maybe we could have a reasonable argument about the costs and benefits. But the countries on the periphery, like Italy, Spain, Portugal and Greece, who gave up the ability for their governments to make certain decisions in the interests of the people they represent, in favor of unelected bureaucrats led by the nose of the markets, don’t even get the exchange of greater economic opportunity. The truth is that the financial crisis, and the three years of sloth spent failing to respond to clear imbalances caused by the adoption of the euro, have put the continent on a course for recession, a long and grinding one to match the recession of just a couple years before:
Our economists believe the sovereign debt and banking crises are causing a renewed recession in the Euro Area. Beginning in 4Q 2012 [Sic], they forecast real GDP to contract for 6 consecutive quarters. It is expected to be an especially protracted recession. Not even in Japan, during its lost decades, did real GDP decline for 6 consecutive quarters. Our economists’ Euro Zone forecasts imply real GDP will be some way below the trend established during the first 10 years of Euro inception (Figure 3) and not get back to previous peak levels for many years to come.
That analysis comes from Citigroup, and it comes off a recession of about that size in 2008-09, from which the Eurozone did not recover with any catch-up growth. So the crisis, and more important, the austerity measures implemented as a result, will put Europe in an incredibly deep hole, out of which it will take the rest of the decade to make up, if they’re lucky.
And add to that the fact that the banking system is also a wreck. That’s really the proximate cause of this crisis, by the way, not sovereign debt but an inability for the banks in the region to absorb any losses. They made the bad bets, and now they need hundreds of billions in order to survive.
European Union banks must raise 114.7 billion euros ($152.8 billion) in fresh capital as part of measures introduced to respond to the euro area’s sovereign-debt crisis.
German banks need to raise an additional 13.1 billion euros, Italian banks 15.4 billion euros, and Spanish lenders 26.2 billion euros in core tier 1 capital, the European Banking Authority in London said yesterday. The capital shortfalls include 15.3 billion euros for Spain’s Banco Santander SA (SAN) and 7.97 billion euros for Italy’s UniCredit SpA. (UCG)
European leaders are demanding the region’s banks bolster capital to withstand writedowns after they agreed to take losses on Greek bonds. The EBA estimated two months ago that the region’s financial institutions needed 106 billion euros to increase their core Tier 1 capital to a target of 9 percent of risk-weighted assets by mid-2012, after marking their sovereign bonds to match market prices.
The capital requirements keep rising for the European banks. It wasn’t so long ago – just last year – that Eurobanks were told they needed just €3.5 billion in capital. Now we’re at a number 33 times that amount. And it’s completely unclear how the banks will raise this much capital:
And even with this overdue recognition that the Eurobanks need more equity, pray tell where are they gonna get it? Sovereign wealth funds have been cool on bank equity since they were burned in 2007 when they were asked to be the fillup of near last resort. Bank stock prices are sufficiently low that banks will be loath to issue shares even under duress (and will the investors even take up shares on the scale needed? When I was a kid, you could do tech IPOs only two or three years out of five, the market simply was not there otherwise. There may not be a price at which, say, Unicredit could sell €8 billion worth of shares in the next two or three months) [...]
The big banks have threatened to shrink their balance sheets to reach target equity levels, but that seems questionable in the current environment. Who exactly is gonna buy their riskier assets now (unloading riskier assets would have the biggest effect on reducing capital needs)? Even if there was some appetite among institutional investors for this trade, there isn’t enough in aggregate.
The one country which refused to submit to this loss of sovereignty, Britain, could see its ruling coalition crack apart over the decision. So what, in the end, did any of these countries gain? They did not solve the core problems of bank insolvency and sluggish growth – in fact these have been extended. They did not solve their debt crises, since they are tied to growth. They didn’t even coax the European Central Bank out of its shell to lend freely. They did nothing but sign themselves over to Germany, as playthings to keep the euro value sufficiently low so the Germans can sell their exports.
Once everybody figures this out, I predict the markets will begin their cycle anew. Give it a week or two.





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Someone should start a mutual fund based on
the prognostications of Paul Krugman and David Dayen.
Angela Merkel may accomplish what Hitler only dreamed of. And David Cameron is no Winston Churchill.
I think the Brits were smart to stay out of this cauldron, at least for the time being. The merits seem not to matter anymore.
It’ll all be about angst going forward.
And what’s the world’s reaction to all these financial crises?
Unemployment is world’s fastest-rising fear – survey
“Unemployment is the world’s fastest-rising worry, a BBC World Service survey covering 11,000 people in 23 countries suggests.
. . .
“Corruption and poverty still ranked the highest, but unemployment was mentioned by 18% – six times the rate citing it in the first survey in 2009.”
LINK.
Isn’t it interesting how corruption, poverty, and unemployment are all intertwined. Enough of the first pretty much guarantees too much of the other two.
A number of economists, e.g. Martin Wolf, argue that the fundamental flaw is the absence of mechanisms to reallocate wealth that gets shifted from south to north because of inherent trade balances. All the countries in most trouble had large trade deficits against Germany and other northern Euro-nations. Those deficits had to be financed via borrow money. In some countries that came from housing bubbles, but eventually, even countries with budget surpluses or near balances were forced to incur large deficit spending once the bubbles burst. Austerity and financial collapse closed off lending and led to recession, and their response — more austerity, has just made matters worse. There was no means for a central authority to transfer wealth from trade surplus nations to trade deficit nations — or for the central authority to do what we did (Partly), which is have the feds cover Medicaid, unemployment insurance, food stamps, etc — which effectively collects from rich states and pays to poorer states. There’s no equivalent in the Euro zone.
Finally getting their revenge for Versailles?
Meanwhile, Germany is poised to dominate another new market.
Why think that this is a recession?
A recession is a cyclical contraction. As the bottom of the cycle is approached, the negative feedback of bargain shopping kicks in. Assets are priced low, and since everyone expects the contraction in demand to be temporary, that demand will return, people start buying the assets cheap that will be needed to cash in on the expected rise in demand.
But what this crisis has shown is how shockingly generalized the complete oblivion towards the demand side has become. The PTB see only threats to the supply side, and their actions are all designed to shore up the supply side while completely ignoring the demand side, which would actually seem to be where the real crisis is now, the rate-limiting step to growing out of it.
In an intellectual environment in which austerity is seen as the panacea, why would anyone think that demand is going to return? And if people don’t think that demand will return, they won’t start buying up assets in expectation of the return of demand, and we don’t have a cyclic contraction, we have a secular trend. There’s no negative feedback, all we have is the positive feedback of ever less demand feeding on itself in a vicious cycle.
Unless the thinking changes and the PTB start to deal with this crisis by protecting and fostering demand, even if that means letting quite a bit of excess wealth burn off, this isn’t going to be just another business cycle, not even an unusually bad or prolonged business cycle. It’s going to be a contraction that will just get worse and worse until we decide to change PTB. It would be a lot nicer for all concerned if we don’t let the contraction go so far that the first green shoots of upturn occur in the market for tumbril and guillotine futures.
The only Q is whether the solution helped the 0.1%ers to loot European economies.
As messy as all this is it really is quite simple. The real question, the only question, is whether financial markets serve the People or the People serve the financial markets. Britain and the U.S. are the primary proponents of the bankster shadow economy. Germany believes that the bankster economy is ruining the real economies of most western nations and that austerity will check the debt-credit villainy at the core of the bankster economy. Germany is mistaken, however. Austerity cannot work now because the banksters have ALREADY ruined the real economies. The entire global financial system is bankrupt, not illiquid, but bankrupt. ANd until the western democracies come to grips with that fact, until the western democracies declare the system irreversibly damaged, then dismantle it and erect a new one that works for the 99%, then the western democracies will slip further into fascism. Because that is where we are headed.
Some might argue the U.S. is already there.
Revenge for Versailles?
That’s a war out of date, and involving damage several orders of magnitude lower than more recent events. What about revenge for Dresden, and Hamburg, and Berlin, and every other city bombed contrary to every rule of civilized warfare? What about revenge for provinces stolen and Germans ethnically cleansed from them? What about revenge for the Morgenthau Plan?
Versailles is Sunday School in comparison.
Excellent and concise explanation. Why don’t the PTB’s “get it”?
No argument from me on those points.
Add to the sour grapes the fact that a certain group of foreign interests profited handsomely from the German armament buildup prior to WWII.
There is no need to “get it” if the goal is depopulation of the planet.
I don’t see any solution to EU’s problems that doesn’t involve a common Euro bond. Merkel is resisting this, but in the end she either gives in or watches the EU and Germany go up in flames.
Germany beat the drum for the Euro and benefitted greatly from its establishment. Now the bill is due and the Germans don’t want to pay the price. In the end, they will have to. The only question is how much pain and turmoil the rest of us have to endure.
One jackbooted foot on our throats and other one coming down fast. Buckle up, the ride is going to get rough.
Very wrong. Rooting for Germany to bail out the banksters is like cheering for fascism.
Not to worry. Obama is a man of the people.
It has to be a matter of axioms, of an inability to see events through any but a limited perspective because the starting assumptions filter out realities that contradict the structure built from the axioms.
There certainly is a competing structure of thought out there, a sort of non-Euclidean geometry if you will, that they could use to understand these events. Keynes has been around a while.
And it isn’t enough to invoke self-interest. A secular contraction would devastate business interests, and if it gets to the guillotine stage, is a direct existential threat to the PTB.
The only sense I can make of it is that the internal perspective of a business enterprise has taken complete and exclusive hold of the decision-makers. They can’t think macro, they can’t think in terms of the health of the whole economy, in which demand has to rise in balance with supply if there is to be growth, because demand side considerations are not the concern of the individual business enterprise, but only of the whole system. The folks running a business enterpise see obstacles and hindrances to cheap production as the only obstacles to growth. When that mindset tries to think in terms of the whole, it falls naturally into the trap of thinking of the whole nation, or even the whole transnational economy, as if it were just one big business enterprise. The only barriers to growth become anything, including paying labor more than subsistence, that makes production more expensive. It’s natural, perhaps inevitable, for that mindset to see Keynes’ contributions as, at best, marginal in their application, and, at worst, simply wrong and long-since refuted.
It’s “Frankfurt”, Germany. “Frankfort” is the capital of Kentucky.
They did nothing but sign themselves over to
Germanybanksters.There that typo is fixed.
Let’s see a massive bailout or a possible world depression lasting for maybe 20 years. I think I’ll eat some of my principles and go for the bailout.
The question is what is done after the bailout? If the world takes the US approach, then no strings attached and it’s business as usual. That’s the real problem.
“… really the proximate cause of this crisis, by the way, not sovereign debt but an inability for the banks in the region to absorb any losses. They made the bad bets, and now they need hundreds of billions in order to survive….”
Well said.
“Once everybody figures this out, I predict the markets will begin their cycle anew.” And still, the DOW’s @ 12,000 & the euro’s worth $1.32. So much for free markets.
“They
madecontinue to make bad bets, and now they need hundreds of billions in order to survive.” The derivatives action has grown about 15% over the last year to 700 trillion.Not sure where you get this. The conventional history is that Germany agreed to the Euro in return for unification. Do you have a link?
“The question is what is done after the bailout? If the world takes the US approach, then no strings attached and it’s business as usual. That’s the real problem.”
Those are not different problems, they are the flip sides of the same problem. If the U.S./Britain and the Global Financial Elite succeed in forcing Germany to bail out the banksters there will, by definition, be no meaningful strings attached. That’s what a bailout means. In any event, there are no meaningful strings possible any longer because the Global Financial System is kaput. All new cash infusions accomplish is making a good-looking corpse at dire expense to the wealth of the People in the Western democracies. Been there and done that in 2008. Germany won’t and shouldn’t do the same.
I agree with the thrust of this. The only thing is you need to include Deutsche Bank and most of the other German banks in with the banksters. And this relates to my comment above at 27. What the banks are doing increasingly just to have cash flow is selling credit default swaps. So DB will sell a CDS as insurance against a PIIG default, buy a CDS from some other banks to hedge the one they sold or alternatively, just leave themselves more exposed, and use the spread or the whole payment to maintain cash flow for operations. So the derivative action swells and the cost of default to the system swells. It is an ever increasing daisy chain of promises and the tax payers of the world are the only ones on the hook for it.
http://www.efinancialnews.com/story/2011-12-12/banks-sit-in-a-tangled-web
In the US banks are more prudent when lending to individual State governments. They obviously lend more money to New York than Wyoming. Even so, even if Wyoming were on the verge of bankruptcy, New York would have no problem with the Fed bailing them out because they know all the Fed has to do is turn on the printing press. Wyoming doesn’t care because nobody is going to force austerity on them. The banks don’t care because they get paid. Austerity is surreptitiously forced on the rest of the country via the devaluation of the dollar and most are none the wiser. The problem with the EU is not that they don’t have an effective central bank, or an effective central government. The problem is they don’t have a central printing machine!
wow, thx.
Yeah, that’s what Sarkozy would say. Not sure how much snark you intended. But here is a great interview with the brilliant Satyajit Das where he explains exactly why that is no long term solution at all but in fact just a way of destroying every sensible incentive. Basically, there would be no reason to do anything except spend all your money today, saving and investing being for fools. Guy is damned sharp.
http://maxkeiser.com/2011/12/10/kr221-keiser-report-gold-for-bonds-debts-for-what/
The headline sounds like something right out of The Onion. Too bad it isn’t.
Germany has benefitted greatly from the EU. The banks lent to the weaker economies on the assumption that EU insulated them from default. German exports surged and German’s profited at the expense of its neighbors. Now Germany is seeing the flip side and it doesn’t like it. The austerity that Germany is trying to force down the throats of the weaker nations is going to backfire. All austerity is going to do is force these countries into a severe recession making the situation worse.
To all the posters who believe that Germany should hold its ground and that the banksters should be punished, watch what you wish for. We’re vulnerable to what goes on in Europe since they account for 50% of our exports. We don’t have the political will or the resources to combat another severe downturn in our economy.
You said Germany “beat the drum for the Euro,” and I asked you to back that up with a link. Do you retract it? Or do you have a link?
Here’s a link for you.
Dr. Heiner Flassbeck (Director, Division on Globalization and Development Strategies, UNCTAD) talks about the mechanics of the Euro Crisis.
Hope this helps.
This will sound completely foolish coming at the tail end of all these economic prognostications, and no doubt it is since I’m no economist, but I would take issue with the statement that The Eurozone deal laid bare the fact that national sovereignty in Europe is a thing of the past.”
All that has happened is that a bunch of neoliberals are now setting the agenda for the Eurozone, while as you are all reporting, the financial future of this cobbled together deal looks murky if not completely dark. I will give you the possible consequence that this holds together, but I don’t see the death of national sovereignty as the result should conditions not immediately improve. Nations are at and going over the breaking point as far as acquiescence to austerity is concerned. They just can’t take it any more. Even in Russia now.
I would instead say that the financial oligarchy is reaching the breaking point, and the only light with respect to this I could see was that Britain stepped back from the brink.
I cast my memory back to when German unification took place. That was a very tricky situation, and right, they did eventually unify. But that was a nation and they had national priorities. Very hard to see each separate national group even having accepted one currency being willing to give up nationhood for the sake of that currency. They didn’t have to do it up to this point and I would say given impoverished times, the center established on these dubious premises, won’t hold.
Looks like I am in the minority here, and I would love to be wrong, but isn’t this just more neoliberal guff masquerading as European unity?
Well, you’re a different person. I asked him to back up something he said. And so no, it doesn’t directly address the issue of his assertion that “Germany beat the drum for the Euro.” I’ll check out the video when I have time. Unless you want to tell me the relevant place in the video.
I’m not retracting anything I said. Right now Gemany is running around like a chicken without a head trying to keep the EU together with little committment from them. Looks like a losing proposition to me.
BTW why do I have to provide a link for something that is obvious? Can you provide a link that Germany was dragged kicking and screaming into the EU? I’m waiting for the first country that wants out and is willing to go back to its own currency. My bet is on Greece. Then we’ll see how smug Merkel is. She’s sitting on a house of cards.
Cameron stepped back because the City of London, financial fraud capital of the world, money laundering capital of the world, operations base for AIG and Madoff, and place where JPMorgan took the baton hand off from MFGlobal to avoid tougher US regulations (yes you read that right), told him that there was no way that they would agree to a tax on financial transactions. In light of OccupyLondon and the riots, I don’t think that Brits are going to fall for the City’s blatant playing of the patriotism card. Brussels is obviously a joke. The City is downright evil.
France and the UK were opposed to German reunification, and attempted to influence the Soviet Union to stop it.[7] However, in late 1989 France extracted German commitment to the Monetary Union in return for support for German reunification.[8]
http://en.wikipedia.org/wiki/History_of_the_euro#cite_note-DW-world2009.11.08-7
Ball is in your court. Sorry, I know making up history is all the rage, but I don’t go for it.
You got a link?
Watch the whole thing. You might learn something.
I’m thinkin’ Spain will be among the first to bail on the Euro.
Well, from my perspective Germany didn’t exactly “beat the drum for the euro”, true, but OTOH, they have used the framework under which it was adopted to their singular benefit.
So, far from what I’ve read, I’d say the Euro was an effort to restrain German economic power, and it has not worked.
That said, I’ll always be suspicious of the origins of a system whose benefits are so tilted to one party.
If a prolonged recession went on in Europe, and both UK and US maintained their positions as makers of their own soverign currencies, and if both the US and UK did nothing but support their own financial houses–
would these financial houses start buying up European assets at firesale prices?
Just asking. Macro-econ is not my specialty.
@Watt4Bob
Well, a lot of people are comfortable with humongous counterfactuals, but I’m not one of them. I am happy to entertain your line of thought. The only thing I don’t like about it is it is exactly the line that the banksters greedy to get their fingers on the German tax payer are using. There seems to be a struggle between the banksters and Merkel. How else to explain the failure of the German bond auction? Italy’s bonds selling better than Germany’s? Naomi Prins I believe takes that line. Germany’s wanting a financial transaction tax is the bright spot here if there is one. One French diplomat had a good quip: The British are like a guy who wants to go to a wife swapping party and yet leave their wife home.
I said I would watch it. Looks good. Let us know when you have something specific to say rather than just some backhanded insult.
If and when I chose to insult you, you’ll know it. I didn’t care for your snippy response to watt4bob.
Funny, Watt4Bob didn’t seem to have a problem with it. It’s called disagreement. My response was because he was addressing a question that was addressed to someone else. Whatever. But you storm in here and start talking down to people and you’re not even taking part in the discussion. But I forgot, different rules apply to you, don’t they? You get to have the last word. Isn’t that so? And now you have poisoned the thread. Good job. Good day. I got better things to do and better blogs to read.
A perfect diagnosis and statement of why you can’t let the intuition of businessmen determine macro policy. They are walking fallacies of composition. The problem is that the fallacy has invaded a large part of the economics profession over the past 40 years. It’s maddening.
I know all that and it changes nothing. The Global Financial System must be dismantled. I would prefer an orderly restructuring but doubt it is practicable bc the Global Financial Elite will never voluntarily cede their power. Like all autocrats and dictators the GFE must be crushed. Instead we persist in coddling them, or to put it otherwise, the People have so far permitted the GFE to steal the People’s money to prop up a dead system. It is beyond foolish and unlikely to continue much longer.
Agreed. What is happening is the greatest ponzi scheme in history. I did not mean to exempt the German banksters who are just as craven as the Wall Street goons who devised the schemes.
Somebody woke up on the wrong side of the bed this morning. Or got kicked out of it.
They should enjoy it while they can, it will soon be illegal to wake on anything but the ‘right’ side of the bed.
Any side I wake up on is the right side. It’s just good to wake up lol.
Got that right.
Of course YOU agree, you’re even older than me lol.
Object of the exercise, my friend. *g*
;-)
That’s a false choice. I’m not sure just who it is you think the bailouts are for, but they are not for the people or the nations. And the cost of the bailouts is more austerity. In other words, you have it exactly backwards.
What part of having an unelected group in Brussels have power over the budgets of nations (and therefore the lives of those nation’s people) seems as if it is anything other than a loss of sovereignty to you?