Wednesday, December 14, 2011

Waiting for Franz Ferdinand

Wolfgang Münchau thinks it's Summer of 1914 for the eurozone. All that's lacking is the euro-equivalent of the assassination of Archduke Franz Ferdinand. Vergebliche Euro-Rettung.Die Ruhe vor dem großen Knall (The Calm Before the Big Crash) Spiegel Online 14.12.2011.

Both the IMF and the OECD are projected a downturn in the world economy that will heavily affect Europe going into the new year. The EU summit agreement does not empower the European Central Bank (ECB) or the European sovereign bailout fund to act as a borrower of last resort for eurozone countries' bonds. It does not provide the kind of debt relief that Greece and Italy and maybe Spain actually need. It does not create eurobonds whose credit-worthiness would be based on the eurozone as a whole. It does not address the bank crisis in Europe. And it does not create a "fiscal union" (even though German politicians may call it that) or a "transfer union" in which wealthier members systematically subside the less wealthy.

Besides that, the actual treaty language isn't ready yet for the formal changes to be approved by the EU-minus-one nations. And there are real question as to whether the agreements as currently discussed will directly conflict with treaties governing the EU countries, which would require Britain's approval, as well, which will not be forthcoming.

It's a house of cards, in other words. Even the Post Democracy 1.0 regimes in Greece and Italy can't show that they will meet their austerity cuts and revenue targets, which even if they did would only make their debt problem worse. There should be a contest for the euro's goodbye theme song. This is a good possibility:

Münchau writes that no European leader really wants the euro to fail, because the immediate economic consequences are likely to be some degree of really bad. But European leaders also have neither the will, nor the imagination to put through a meaningful solution. As he puts it, "Wir sind also jetzt schon an dem Punkt, wo das, was nötig ist, um die Krise zu lösen, schon längst nicht mehr mit dem überlappt, was politisch und rechtlich möglich ist. ("So we are know at the point where that which is necessary to solve the crisis is no longer overlaps with what is politically and legally possible.")

It could be a default by one of the harder pressed countries that sets of the collapse, Münchau notes. Or a bank crisis, or someone spilling a sack of rice. When it comes, it's likely to move very quickly to a crash of the euro. It's unpredictable enough that it's hard to even speculate about what might be left, e.g., some remaining mini-euro zone of a few countries. But after this, who besides Germany would be interested in such a thing?

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