11/11/11 Paris, France – You say Papandreou
I say Papademos
Let’s call the whole thing off!
How many dear readers have any idea what that little ditty is about? You have to be a certain age to remember… You have to recall Louis Armstrong…
But heck, who cares about song lyrics?
Europe is falling apart. “Italy’s days in the eurozone may be numbered,” writes Nouriel Roubini in The Financial Times.
“France plots eurozone breakaway group,” adds The Daily Telegraph.
And here’s Ambrose Evans-Pritchard, at the Telegraph: “Europe’s debt crisis is threatening to push large parts of the world into recession.”
The Wall Street Journal elaborates:
BRUSSELS — The European Union slashed its growth forecast for the coming year and said it can’t exclude the possibility of a “deep and prolonged recession.”
The European Commission, the EU’s executive arm, said Thursday in its semiannual forecast that the 27-nation bloc’s economy is struggling amid weak confidence, financial turmoil, government austerity packages and slowdowns in Europe’s main trading partners.
The EU’s gross domestic product, adjusted for inflation, is expected to grow just 0.6% in 2012, the commission said, sharply down from its forecast only six months ago of 1.9%.
The commission’s forecast for the 17-nation euro zone is 0.5% growth in 2012, also short of the May outlook for 1.8% growth.
Since May, the euro-zone sovereign-debt crisis has intensified, undermining investment and consumer confidence, the commission said. Austerity packages have suppressed growth across the bloc. Domestic private-sector demand, which economists had hoped would drive recovery, has failed to pick up the slack.
“The probability of a more protracted period of stagnation is high,” said Marco Buti, head of the commission’s economics division. “Given the unusually high uncertainty around key policy decisions, a deep and prolonged recession complemented by continued market turmoil cannot be excluded.”
Despite the wave of austerity sweeping Europe, public debt as a percentage of GDP is expected to peak in 2013 at 90.9% of GDP. Greek debt is expected to soar to 198% of GDP next year. Six months ago, forecasters had predicted Greek debt at 166% of GDP.
Many Europeans are ready to call the whole thing off. Many would rather leave the EU than face a “deep and prolonged’ recession. They know that inflation would cure a lot of their troubles. They could quickly reduce the real price of their own labor, for example, rendering their economies more competitive again. They could reduce employment. They could go back to the good ol’ days. Back to the days when they could listen to Louis Armstrong on the radio…while drinking coffee in a local bar…and ripping off the tourists with their funny money.
How can they bring those good ol’ days back? Say goodbye to the EU…shuck the euro…return to the lira or the drachma…and inflate the hell out of it. Will they do it? Who knows? But while the forces of the last 300 years pushed people together. Now, they pull them apart. World trade slows. Doors are closed. Long-festering wounds and resentments burst out into the open. Old scores, like unpaid bills, wait to be settled…
Meanwhile, a slump in Europe probably means a slump in the US too. Statistically, and historically, that’s what happens. But at least we don’t have the euro! And there’s no danger of Mississippi or Montana going its own way…yet. Abraham Lincoln solved that problem!
“You want independence? You want to go your own way?” he said, or words to that effect. “It’ll be over my dead body.”
Lincoln was dead soon after. But by then, the freedom proclaimed by Jefferson and Hancock were dead issues too. No more right to self-determination. No more sovereign states. Instead, we’ve got the Californians and the New Yorkers in the same union, whether we like it or not.
We’ve also got the dollar. It is managed by Americans, not Germans. Its managers fear depression, not hyperinflation. They don’t mind a little money-printing if it is for a good cause.
The crisis faced by the Italians and the Greeks seems far away. After all, these sunny places always had shady finances. The cause of their problems now is too much debt. And on that point, you may be surprised to find out that there is not much difference between Greeks, Italians and Americans. We all have around 3 times as much debt as GDP to support it. The Greeks a little less. The Italians a little more. We are all the same…all living under the same Vesuvius of debt…and all screwed in the same way.
Right now, it’s the Greeks and the Italians who are having trouble financing their debts and deficits. Eventually, Americans will have the same problem.
Perhaps sooner, rather than later.
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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Thomas Friedman believes the story of the economic crisis in Greece is a story about values.
“They know that inflation would cure a lot of their troubles. They could quickly reduce the real price of their own labor, for example, rendering their economies more competitive again. They could reduce employment. They could go back to the good ol’ days.”
Or so they think. Beggar-thy-neighbor, mercantilistic practices will not work for anyone if everyone is doing it.
What the myopic, self-preserving European now see as the only answer, a highly leveraged European Financial Stability Facility is not the solution for Europe, but another step in exacerbating the crisis – according to macro-research shop, Wainwright Economics. Piling on new sovereign debt in the European Union plays a causal role in slowing down the whole of the European economy. Increased government debt simply implies higher future taxes, and that drives capital away. In any case, the very purpose of debt markets is to discriminate between good and bad borrowers. Collectivization of distressed debt hampers the markets from pricing debt properly. In effect, European leaders are at war with the markets and they are quite open about that in their rhetoric.
Willem Buiter, a Cambridge economist who served on the Bank of England’s monetary policy committee, advocates a completely different approach. A sound, but politically unpalatable policy, would be to permit transparent default by Greece and other individual governments
that have mismanaged themselves. Buiter suggests a “You Break it You Own It” policy whereby insolvency of a sovereign is settled between the taxpayers of that sovereign and its creditors, leaving the European Union out of it.
According to Wainwright, default would temporarily cut the governments of Greece and others from the bond markets and force them to balance their budgets. It would also relieve the pressure on other countries that are sinking into the same morass, but which are obliged to pay their share of the costs of rescuing their weaker fellows. Default followed by spending curbs has a good track record. It is the route by which Argentina achieved its current success, with a real growth rate of 7½ % last year according to the CIA.
Wainwright does add that a balanced budget cannot be accomplished with higher taxes, only with reduced spending. Unfortunately, government policymakers and most of the media deny these insights. Realistically, governments will always be as self-interested collectively as any other operator in the world economy, and governments are too politically-driven to learn inconvenient lessons. Even in Argentina, where the regime of Cristina Kirchner is extremely popular, it is already dissipating its success by vigorously expanding entitlement programs all over again.
Luis de Agustin
“And on that point, you may be surprised to find out that there is not much difference between Greeks, Italians and Americans. We all have around 3 times as much debt as GDP to support it.”
Interestingly, the countries most in the crosshairs are not the worst, once all the off-balance-sheet gimmickry is accounted for.
Albert Edwards at Societe Generale put together the following chart (via Pater Tenebrarum at actingman.com). Note than Spain and Italy are actually the best of this particular lot.
http://www.acting-man.com/blog/media/2011/11/Pubic-Debt-Comparison.png
Who is Thomas Friedman?
Is he a Nobel winner or something?
The EU was founded based on the needs of the past, not the future. In the past, germany and france were both powerful countries, and the possibility of warfare and violence between the two was great.
But time has changed the situation beyond recognition. Germany and france are two non-dynamic countries with dying populations.
Both peoples fail to reproduce.
Their populations are shrinking and they will become increasingly increasingly irrelevant on the international stage. They are sick and dying countries….sick with a lack of confidence and pride, and dying because they don’t even breed at
replacement levels. In fact, in two hundred years, france won’t probably be even french anymore. It will be algerian-nigerian-moroccan-chinese-haitian-etc, with an evaporating tiny minority of native french people.
Most of europe is in the same boat,they are sick and dying populations. Demographics is destiny, and europeans are doomed to be a tiny percentage of the world population. In this context, one can see how silly it is to “expect” some significant violence between france and germany, with OR without a european union. The need for a european union to prevent war between france and germany was after world war one, not now. After WWI, both countries still had decent reproduction levels, and both were relatively dynamic and confident in their histories and abilities.
Having a “european union” now to prevent an intra-european war today and in the future is like having twenty security guards to prevent two hundred-year-old arthritic boxers from “getting violent”.
Neither germany nor france will be a “threat” to anyone for the foreseeable future future. The EU is not necessary in the least. The EU has hasn’t outlived its usefulness. It wasn’t useful to begin with.
“Let’s Call the Whole Thing Off” was written by the Gershwin brothers for the film Shall We Dance (Fred Astaire and Ginger Rogers), 1937. I love Satchmo, and maybe he did the song well, but it belongs to Fred and Ginger!
theSceptic sounds mentally ill. But if he isn’t, and is rational, he should know the European Union is essential as a counter-weight to China, who are in a position to impoverish the rest of the world, and who don’t do so because they would never get their money back, and for that reason only. But as regards Bill’s view that Italy leaving the Euro will be fine, and help Italy, it won’t. The Euro will not survive Italy leaving, and neither will many banks. There will be a prolonged and massive recession and the dollar will crash too.
Right on Jay,i’m in my mid 20′ies and i remember my grand-dad b’in a big GG fan. They were like the “Beatles of there day. “What a “Prolific song writer” along with his brother Ira,they were. In his very short stay on this planet he must have penned bout a thousand songs b4 die’in at the very young age of 38…
RedQueen is right. Inflation is no good if everyone does it, and in Europe, if Germany stumps up the necessary, there will be inflation all over the continent. That will mean an impoverished continent unable to buy exports. China hates that whole idea, especially if America goes the same way. And of course, as is well known, China pretty well owns America. If America is worth nothing so is China. Perhaps China should have helped solve the Euro crisis, as it could have done. It would have protected its markets, its assets, and its political sensitivities.
The problem with inflating your way out of debt is that you run a race to the bottom.
When will they wake up and realize fractional reserve banking has to be carefully managed or it eventually destroys economies that run on it. It is too late to “fix” the Euro or any fiat money system. The only cure would be massive default of the debt and politics won’t allow it to happen.
France plotting a Eurozone breakaway reminds me of the cold war when France was caught trying to make a seperate deal with Russia while at the same time pretending solidarity with NATO.
Old habits are hard to break I suppose.
Thanks for the kind words Wiz. I may be mentally ill, but they haven’t caught up with me yet. I’m still on the loose
I don’t know where you get the idea that the EU was set up as a “counter weight” to china? Can you please provide some documentation to back this up?
The EU began with the european coal and steel community way back in 1951 before china was anything economically. So I don’t understand where you are getting your info. I may be mentally ill, but you are clearly delusional. Wanna go see a movie together? We sound like a match made in heaven.
Furthermore, from wikipedia:
“After World War II, moves towards European integration were seen by many as an escape from the extreme forms of nationalism which had devastated the continent. One such attempt to unite Europeans was the European Coal and Steel Community, which was declared to be “a first step in the federation of Europe”, starting with the aim of eliminating the possibility of further wars between its member states by means of pooling the national heavy industries.”
In addition, “In 1946, war-time British Prime Minister Winston Churchill spoke at the University of Zurich on “The tragedy of Europe”; in which he called for a “United States of Europe”. Again to counter-act euro nationalism.
Lastly, “On 9 May 1950, the French Foreign Minister Robert Schuman made his Schuman declaration at the Quai d’Orsay. He proposed that: “Franco-German production of coal and steel as a whole be placed under a common High Authority, within the framework of an organisation open to the participation of the other countries of Europe.” Such an act was intended to help economic growth and cement peace between France and Germany, who had previously been long time enemies. Coal and steel were particular symbolic as they were the resources necessary to wage war. It would also be a first step to a “European federation”.”(again from wikipedia)
So there you have it hot shot. Where’s your evidence for your claims about china smart azz?