Tuesday, August 23, 2011
- The End Of The Euro
Let me break this down very simply for those who don’t follow the perturbations of Europe.
We all know that Greece, Spain, Italy, Portugal and Ireland have been spending money like drunken Democrats (not to insult any sailors) and have been borrowing heavily to make up the difference. They have borrowed so much that they cannot hope to ever pay it all back under the current monetary regime. So either the bond holders must take a haircut, or the currency must devalue.
Regrettably, the bond holders aren’t in a position to take a haircut because if they do, their own balance sheets will leave them insolvent. So that’s out. But the euro can’t be devalued either because the Germans live in mortal fear of inflation, and will flay alive any politician who brings it to them. So that’s out too. that means that something structural about European governance will need to change in order to address this issue.
One option that’s been proposed is that the European Union will strengthen its constitutional charter, and structure its own debt to ‘buy out’ the debt of the troubled countries, spreading the loss. (A Euro driven 'Tarp' program) But the Euro was of dubious democratic charter in the first place (remember all those votes where if the people voted no, they would simply hold another vote?) And strengthening the union's charter is probably not going to be possible if it requires the participation of the people. Certainly not in anything like a timely fashion.
So this limits the possible options greatly. Choice one is that the European political elite tell ‘the people’ to get stuffed, and impose upon them a Belgian seated European superstate which is dominated by the Germans. This will be monumentally unpopular, but it might not matter. I think there is a legitimate question as to whether the European people still have the will to push back when their elites command them.
Choice two is that the ‘the people’ get their way (probably by tossing out the current crop of political leaders) and the Euro subsequently breaks in two. The way that works best is if Germany leaves the Euro, brings back the Deutschemark and allows Greece, Spain, Italy, Portugal, and Ireland to devalue the Euro to a level that allows them to pay their debts. This is wildly unpopular with European political elites who each imagine themselves as a sort of bureaucratic Charlemagne, with nothing standing in the way of that but the unwashed masses.
This will likely all play out by the end of the year (some key moments come mid September), and the way it falls will tell the story of the future of Europe for the next several decades.
My bet… it’s a close one, but I think the Euro breaks. I can’t see the Germans surrendering even partial sovereignty to the Mediterranean countries especially since it’s the latter’s unwillingness to cope with reality that caused all this trouble in the first place. for me, the cultural difference is simply too great to reconcile. The cultural difference between Texas and Illinois is much less than the one between Germany and Greece. How much do you think Texas would pay to bail out Illinois? How about surrendering control over local tax policy in the process? How do you think folks in Lubbock would take to Rahm Emanuel and Blago setting local tax policy?
And keep in mind, even though they are all but insolvent, the Greeks, Spanish and Italians won’t be so terribly thrilled about surrendering their sovereignty to German domination under the Euro either. I'm quite sure there is someone right now saying that he'd prefer an Italian (Greek/Spanish/Irish/Portuguese) failure to a German success. The question is, do they feel strongly enough about to compel their politicians to obey them?
The political elite want greater centralization, but I believe its greater distribution of authority that will best keep the peace.
I’d bet that the tribe still matters in Europe, but I’ve got to tell you I’m not thoroughly convinced. In fact, I’m as close to the line about it as any call I’ve ever made. It all revolves around whether the common European still has the will to command their politicians, or if they are no more than cannon fodder for the political elite. It may just be wishful thinking on my part to hope for the former.
I’d be very interested in any informed input on this.
I've consulted with my brother who lived in Germany for two years with the US Second Cavalry, speaks the language fluently (or at least did once - with a slight Nuremberg accent) and has an excellent sense of the people and their politics. He qualified his comments by saying that he hasn't been there in some time, and they may be more 'socialized' now than they were back then.
In his view, there is a 65/35 chance that they will accept what the political elites tell them to, and allow the PIIGs to be bailed out, saving the Euro, and taking the inflation on the chin.
He also said that there is a 100% chance that most German bar conversation for the next year will revolve around why they should have gone the other way.