The summit of EU leaders over the weekend was billed as a do or die meeting to save the euro. Given that, to quote one leader the agreement appears to be a blank sheet of paper, I assume that the decision is that the euros now officially dead?
I could make an analogy of this weekends summit as it being like all the European leaders holding a meeting on the bridge of the Titanic. While the Irish and Greeks Able-seamen were pleading for permission to turn hard to port, Captain Merkel and Commodore Sarkozy instead suggested chairing a panel (to meet in 6 months time) to discuss stricter Board of Trade rules limiting the speed of large vessels in ice prone seas as well as mandating more lifeboats on board. Meanwhile Coxswain (or should that be Cocks man) Cameron, shivering at the sight of the icy waters below, says well whatever happens I aint gettin in the life boat with him (pointing at Sarkozy) why I can smell the garlic from here!
We need two things to save the euro, and immediate short term solution (Quantative Easing, Eurobonds, lending from the ECB ) to stabilise things and scare away the market vultures. Then later, when were not in the middle of an economic crisis we need to negotiate a longer term plan to prevent a repeat of these events. But the Germans and French seem to be more interested in doing things ass backwards – or not at all. As I pointed out with regard to the street theatre over the summer where the US came near to default (if you believed the media, the point as I made is that they are already essentially in a state of default) theres a credibility issue here. Nobody in the markets actually feared that Obama was going to come out with the US government piggy bank, smash it open and reveal nothing but a few gum rappers. The problem which that episode laid bare, which eventually led to a downgrade of US sovereign debt, was that it became painfully obvious that the US government lacked the political will and ability to solve its debt problems. Similarly the markets are now of the view that the Eurozone lacks the political will or resolve to save the euro. Im starting to think they may have a point.
The meeting at Brussels far from reassuring me that the euro will be saved did the opposite; it convinced me that the Merkel is quite happy to drive the euro over the cliff purely because of short term political considerations within Germany. Much as is the case with Americas debt problems, nobody neither Republican nor Democrat wants to sign up for the sort of tax rises or deep spending cuts that would rescue the dollar from doom. Similarly the fact that some savers in northern eurozone countries might take a small hit means politicians there wont do what needs to be done, ignoring the possibility of an economic depression that will occur if the euro goes down in which case these voters loose most (if not all) of their savings and pensions (likely then punishing the politicians by voting Merkel out of office and consigning her party to the political wilderness for a generation, as happened to Fianna Fail in Ireland recently).
At the Brussels meeting it seemed to me that many politicians were more interested in engaging in political point scoring than actually trying to save the euro. The French (whove massive debts and could easily be in the same boat as many other eurozone countries if and when their ratings are down graded) used it as an excuse to go after Irelands low corporation tax. Merkel seemed more interested in winning concessions for German industry. And of course Cameron didnt even attempt to negotiate anything but just showed up, gave everyone the two fingers and screaming youre all squares man! as he ran out of the room.
The euro sceptics were dancing with glee over the weekend thanks to Camerons veto. They are now talking about putting together a vote on EU membership. However what they dont realise is that Cameron used the veto in order to stop them getting a vote, not to give them one. Think about, how could Cameron object to “a blank sheet of paper. Obviously because he knows that once theres a new treaty on that piece of paper hed come under intense pressure from the Dads army brigade in his party to give them they’re cherished referendum on EU membership. If he refused, hed likely split his party in two. Of course if he conceded the Lib dems would walk out and the government would fall. In essence Camerons veto was about saving his government from collapse and his party from splitting in two. However, I hope Cameron has learnt this week that appeasement just makes the aggressor more aggressive. Already the euro sceptics are talking about ambushing Cameron in the new year over Europe.
Of course its interesting to note the reactions to Camerons veto, which largely prove all that I said here when I pointed out why England cant leave the EU. Such a move would likely lead to a break up of the UK, it would send many businesses in the city of London scurrying for the channel ports and likely lead to an ending of Britain (sorry Englands!) special relationship with the US. In the wake of Camerons veto, Alex Slamond got very upset about the effect this had on Scotland (he was mumbling on the Today programme about the effect on Scottish fishing rights), likely because he was never consulted in advance. And many of the UKs largest companies were reportedly spooked by the long term prospects of a UK more isolated from the worlds largest economy.
But what now for the euro? Well funnily enough a blank sheet of paper aint going to save anything. Even what they propose to put on the paper, doesnt amount to much. One idea is to have rules enforcing budgetary discipline. Hang on? I thought we already had that? Oh! wait ya everyone ignored that rule! But the new EU treaty will impose financial penalties on countries which disobey it! So youre solution to a government with financial problems is to impose yet more costs and charges on it, isnt that exactly how Greece and Ireland got into trouble in the first place?
Theres also the thorny issue of ratification. In Ireland that will almost certainly mean having a referendum. Now the Germans and French, peeved about past rejections of EU treaties by Ireland have suggested that the terms of any referendum should be a straight in or out referendum, i.e. that the Irish would have the choice of accepting the deal or leaving the EU altogether. Such an attempt to bully the Irish electorate I fear would likely backfire…badly! What if the Irish call the Germans bluff (as weve done twice before) and actually do vote to leave? While Irelands sovereign debts are just 108% of GDP our private debts are a good 1,000% of GDP, a grand total of 1.2 Trillion euros, much of it owed to British (104B ), American (39B ), German (82B ) and French (23B ) banks. The only way Ireland could solve its debt crisis without an IMF/EU bailout would be to reintroduce the Punt and immediately devalue that massively In essence wed be leaving about a Trillion in IOUs on the door steps of various EU countries on our way out. Such a default of debt could easily destabilise much larger countries such as Italy or France and would probably bring down a British or German bank or two (it took just a £37B loss to bring down RBS in the UK). And the Irish wont even need to vote No to do this. Inevitably the public mood in Ireland is very hostile towards the EU (due to the austerity measures and a lack of action by the major EU states) consequently its likely opinion polls will show a likely vote against, which will spook the markets who will panic with each preceding opinion poll. Consequently by the time the Irish vote on the referendum it will scarcely matter which way they vote, the damage will have been already done and the eurozone will be already will into the process of collapse.
And as my little bit of future gazing shows, if they Germans, French and British think that they have the smaller more heavily indebted countries over a barrel and can start extracting concessions out of them, they need to realise that arguably its the other way around. The repercussions of Greece or Ireland or Italy going down would severely harm these economies. To return to my Titanic analogy, if Merkel and Cameron continue to argue about the arrangement of deck chairs on the sinking ship sooner or later the Irish, Greeks and others will tire of this dithering and say feck this for a bottle of Ouzo, hop in the last remaining lifeboat and start paddling away, leaving the Brits, French and Germans to go down with the ship.
As Ive mentioned above and discussed in previous posts (see here and here) there are various ways the Euro could be saved. But there is a strict time limit on these measures. And the clock may have already run out. The recent announcement of possible downgrade of the debt of many EU countries such as France and Germany (which for once seems logical, as Ive pointed out above even if a small fry like Ireland went down it could have massive repercussions for Germany). This means its unlikely the option of ECB lending or Eurobonds will now work in the short term. No, instead the only way to save the euro is likely through a significant policy of Quantative Easing, and I mean much more than the measly Trillion or so the British or Americans have gotten up to. Failing that a straightforward devaluation of the euro might now have to be considered. Of course these are the very measures that German savers fear the most (as it will impact on their savings, note Im a saver too, but Id rather have some savings that see the euro become worthless and have none). German savers have only themselves to blame for this turn of events if it happens, due to their support of spineless and ineffective leader like Merkel.
But even this may not be enough. We could well be in the final phase of a eurozone collapse, indeed if my predictions regarding an Irish EU referendum prove accurate we may even now know how the final act of this Greek Tragedy (or should that be an Irish Tragedy…or a German one!) is going to play out. And it will be the failure of our current generation of politicians who will be responsible for this.
What worries me most about any such collapse is that we were here before in the 1930s. Then, as now, the mainstream politicians were too caught up in their squabbling and trying to be popular with electorates. They led the world into an economic depression. They were of course resolutely punished in the polls by the electorates, which then saw the rise of many populist politicians, such as Franco, Hitler or Mussolini. Already we can see populist politicians on the rise, both in Europe and in the US (with the Tea Party movement). Now while I dont see any of these guys putting on Swastikas well aside from a few in the Tea party and a Tory MP, inevitably some politicians of that persuasion WILL rise to power in some nations, and that is the real danger of a Eurozone collapse we need to worry about.