RR Phantom
Location : Wasted Space
Job/hobbies : Cayman Islands Actuary
 |  Subject: Bond of debt could end the European union  Mon Dec 13, 2010 9:51 pm | |
| THE European Union's Franco-German ''Directoire'' and the European Central Bank have ruled out all plausible solutions to Europe's debt crisis, leaving Spain and Portugal nakedly exposed before a funding crunch next month.
Angela Merkel and Nicolas Sarkozy were quick to shoot down last week's ''eurobond'' proposal, warning that they will not accept ''a bundling together of all Europe's debts''.
How can Germany or France agree lightly to plans that amount to a debt union of the European Union, with a common treasury and tax system - the stuff of civil wars over the ages? To do so is to dismantle the ancient nation states of Europe.
Even if Chancellor Merkel agreed, the scheme would still be torn to pieces by Germany's constitutional court, unless legitimised by radical EU treaty changes, which would, in turn, take years and face populist revolt.
The German people are being asked to pay open-ended transfers to southern Europe, taking on a burden up to six times the cost of reunification with East Germany.
''If we pool the debts of the countries in the south-west periphery of Europe, we are blighting our children: the debt levels are astronomic,'' said Hans-Werner Sinn, head of Germany's Ifo institute.
Any attempt to prop up the status quo will cement the current account imbalances of the north and south of the European Monetary Union. ''I doubt that the leaders of Europe fully understand the economic implications of their decisions. They are repeating the German mistakes over reunification,'' he said.
Transfers to the East are still running at €60 billion ($A80.6 billion) a year two decades after the fall of the Berlin Wall. Convergence stopped 15 years ago.
It is no surprise to Eurosceptics that Europe should have reached this fateful point at which leaders must choose between the traumas of EMU break-up or giving up their countries. But it is a surprise to Europe's leaders, and they do not know what to do. Merkel and France's President Sarkozy seem unwilling even to beef up Europe's €440 billion rescue fund, perhaps rightly so.
A Fitch report said the EU's new rescue fund ''could result in lower ratings'' on risky sovereigns because the EU would have debt seniority, leaving private bondholders exposed to bigger haircuts. The rescue machinery itself is feeding the crisis.
So, as EU leaders flounder, the task of saving monetary union falls to the ECB. Yet it, too, has declined the burden, refusing to launch mass purchases of Spanish bonds.
''We could easily cross the line and lose everything we have, lose independence, and basically violate the treaty,'' said Mario Draghi, Italy's governor and candidate for ECB chief.
Indeed. The Maastricht treaty forbids the ECB from buying euro-zone debt, except for liquidity management. But this is no longer about liquidity. Southern Europe faces a solvency crisis.
The ECB has limited itself to tactical strikes in the illiquid debt markets of Ireland and Portugal, buying enough bonds to ram down yields and burn a few hedge funds.
The effect has faded within days. It had little impact on Spanish bonds in any case. Spanish 10-year yields reached 5.45 per cent last week, far above the danger level of 5 per cent. Debtors still have to persuade investors to buy their bonds at bearable rates. Credit Agricole said it would hold back from auctions of Spanish debt until the ECB steps up to the plate. ''The risk is simply too large,'' it said.
So we drift on with rising yields into 2011, when Portugal must raise €38 billion, Belgium €85 billion, Spain €210 billion and Italy €374 billion, according to Goldman Sachs.
Europe's leaders hope that global growth will lift everybody off the reefs. That, too, is wishful thinking. Recovery may make tensions worse.
Germany will hit the inflation buffers and force the ECB to raise interest rates before the trickle-down benefits of trade have made any difference in the south. The reflex of the EU elites is to blame this mess on lack of statesmanship.
''Leaders grudgingly do what is needed to prevent disaster in the last minute before it is too late, and the next minute they go back to the behaviour that brought them against the wall in the first place. The euro zone is in bad need of a psychiatrist,'' wrote the College of Europe's Stefano Micossi at VoxEU.
Perhaps, but is today's crisis really a failure of leadership? Was the EMU not dysfunctional from day one? Did it not inflict negative real interest rates on Club Med and Ireland in the boom years, and lock in chronic imbalances?
Has it not left victim states trapped in slumps from which there is no escape on terms acceptable to Germany?
If the project itself is rotten, what the euro zone needs most is an undertaker.
ANCAPS: ANARCHO-CAPITALISTS |
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