THE BEAR'S
LAIR Euro
breaks up the hard way By
Martin Hutchinson
The eurozone appears to
be trying to do things the hard way. It has
softened conditions on Greece, while promising an
unlimited fund to buy debt of the other PIGGY
governments and supporting the creation of a
supranational banking regulator. In the short
term, this has quieted market speculation. In the
long term it has increased the probability of a
break-up of not only the eurozone but the European
Union itself.
Growth in the eurozone has
run just below the flatline this year, with The
Economist team of forecasters expecting 0.5%
shrinkage of the eurozone economy in 2012 and a
tiny 0.1% growth in 2013. Only inflation is
creeping up, expected to reach 3% this year as the
European Central Bank's various monetary
"stimulus" policies have
their inevitable side-effects.
Euro M3
money supply rose only 2.7% in the year to
September, a reasonable rate, but in the same year
credit to government rose by 8.3% while credit
granted to the private sector declined by 1.3%. In
other words, the eurozone monetary crisis is
squeezing the private sector while its banks
contribute further to the perpetual aggrandization
of government.
The real problems are
arising in the countries being bailed out. Greece
is being given an additional 16-18 billion euros
(US$21-$23 billion) through 2016, and in return
will be expected to allow direct EU "advisory"
interference in its tax collection and budgeting.
Good luck with selling that on the streets of
Athens!
Italy faces an election in March
in which neither Silvio Berlusconi, the most
important figure of the past two decades, nor
Mario Monti, the darling of the EU technocrats,
will officially run. The country ranks 92nd on the
Heritage Foundation's Index of Economic Freedom,
just below Azerbaijan, while public spending runs
at 52% of gross domestic product (GDP) and debt
above 100% of GDP. The country's relatively lavish
living standards are now wholly incompatible with
its third-world economic policies.
Spain
is relatively well run under Mariano Rajoy, but
its task has been made harder by the previous
socialist government's outrageous overspending,
which led to a public sector deficit of 9.2% of
GDP in 2011, a year in which the country already
claimed to be undergoing austerity. More
worryingly, its largest and most productive
province, Catalonia, has called an election and
threatened to seek independence, thus greatly
increasing the market's doubts about Spain's
future.
I am more optimistic about Spain
than about either Italy or France, but much could
certainly go wrong. Certainly the market thinks
so; the international bond market just allowed
Bolivia, a very poor country run by a Marxist
fruitcake, to do a 10-year deal at 4.875% while
requiring a 5.5% yield on Spanish debt.
As
for France, with its current policy mix it is
committing economic suicide. The increase in the
top marginal rate of income tax to 75%, combined
with a substantial wealth tax, makes the effective
tax rate on wealthy Frenchmen well over 100%.
Britain tried this in 1968, with a 135% rate of
tax on high incomes, and the result was not
pretty.
Similarly France with free
movement of labor within the EU will find most of
its best and brightest decamping - not just the
famous ones like LVMH chairman Bernard Arnault,
and mostly not to Belgium, but leaving
nonetheless.
The Economist forecasters
predict 0.4% growth for France in 2013; I would
regard that as much too high, with the real
outcome likely to be a 3-4% decline in GDP. That
in turn will make France's fiscal and debt
problems insoluble, and lead it straight to the
indigents' line for a handout at the European
Central Bank. At some point pretty soon, the
markets will realize this, and will raise the
yield on French government 10-year debt from its
current ridiculously low 2.26% to the 5% (more in
crises) of Spain, Italy and Bolivia.
The
new plans for central regulation of EU banks will
in the long run make matters worse if they are
implemented. We have seen from the Basel
regulations that unaccountable government
regulators use the regulatory system to favor
outrageously the demands of the public sector,
allowing banks to lend unlimited amounts to
government borrowers without being required to put
up any capital against those loans.
A
central EU regulator will similarly be in hock to
the demands of EU politicians; it will allow the
banks to make unwarranted loans to the public
sectors of EU countries in difficulty, while
maintaining tight prudential controls on
private-sector lending.
We have seen where
this turns out in the current ECB figures quoted
above. More than 100% of credit creation is
devoted to the public sector, while the private
sector is put on a strict diet. Needless to say,
the sector that is able to obtain resources
effectively for free (since interest rates are
below zero in real terms) will grow
uncontrollably, while the sector that is put on
tightly rationed credit will scale back expansion
plans, lay off workers and build up cash balances
for use in emergencies.
If Germany allows
the ECB to buy French, Spanish and Italian
government debt ad infinitum, and provides modest
bailouts as required to Greece (and if necessary
to the problematic but small countries of
Portugal, Ireland, Cyprus and probably Slovenia)
the system can muddle on for a while.
However 2013 is an election year in
Germany, and it seems unimaginable that the German
electorate will allow itself to be quietly
impoverished by the gigantic liabilities run up
through this system. After all, the Bundesbank
already has 695 billion euros in "Target 2"
balances owed to it by the dodgier credits of
southern Europe - admittedly down from 751 billion
the previous month. The latest economic figures
suggest that even the German economic engine is
slowing to a standstill, not surprising when it is
being expected to pull all the deadweight of the
eurozone behind it.
In the long run, the
German electorate's reaction will not matter. A
system cannot last that allows the least
productive countries in a union to build up debt
uncontrollably, that controls centrally the
union's banking system, forcing it to subsidize
this buildup and that allows foolish governments
in the debtor countries to raise taxes so far that
their most productive citizens flee to safer
climes.
With German acquiescence in money
printing and central control of the banking
system, the eurozone may last four or five years,
but its economic growth will be minimal during
that period (since massive resources are being
extracted from the productive and devoted to the
useless) and by 2017-18 the system will be in
total collapse, with no way out.
If you've
seen Atlas Shrugged 2 (released just this
month), you will have seen a foretaste of the
eurozone, even Germany, in five years' time - only
alas there are no redeemers hidden in Alpine or
Carpathian hideouts waiting to emerge and sort the
continent out.
Given the normal bureaucrat
response to difficulties, there will no doubt be a
number of Ayn Rand-villain attempts by the EU
bureaucracy to shift costs to non-eurozone members
of the EU or roll back the economic tides in some
other way. For competently run non-eurozone
members, this will be the time at which it becomes
obvious that exit from the EU itself is the only
viable option.
Needless to say, there is a
better way. Eliminate the malinvestment, as
Austrian economists would say. Cut Greece free to
sink or swim on her own (albeit remaining a member
of the EU as a whole). Split the remaining euro
countries into two, with Germany, Finland, Estonia
and those northern countries subjecting themselves
to fiscal monetary and economic discipline
remaining in a "northern euro" while France,
Spain, Italy, Slovenia, Portugal and Ireland
either form a southern euro of their own or became
entirely independent. (In my view it would be a
foolish country that wanted to link itself to the
indiscipline, corruption and leftist theorizing of
France or Italy, but that would be their choice.)
Abandon all thought of a centrally controlled
banking union as a bureaucratic, politicized
nightmare that would subsidize all the wrong
things. In such a situation, at least part of the
current eurozone countries would remain prosperous
and would pull up with them the non-eurozone
countries like Sweden and Britain which had
competitive economies.
That better future
is still available, but it is directly contrary to
the interests of the EU bureaucracy, of ECB
centralizers like Mario Draghi and, for political
reasons, of the foolish German Chancellor Angela
Merkel. The EU has taken too many decisions in
areas as disparate as trade, economic intervention
and global warming in which political or
sentimental considerations have been allowed to
trump scientific and economic reality. The costs
of this foolishness are about to come due.
Martin Hutchinson is the author
of Great Conservatives (Academica Press,
2005) - details can be found on the website
www.greatconservatives.com - and co-author with
Professor Kevin Dowd of Alchemists of Loss
(Wiley, 2010). Both are now available on
Amazon.com, Great Conservatives only in a
Kindle edition, Alchemists of Loss in both
Kindle and print editions.
(Republished
with permission from PrudentBear.com.
Copyright 2005-12 David W Tice &
Associates.)
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