(This is an hidden threat from UK: change the system and we will react with nukes...)
Europe prepares nuclear response to save monetary
union
By Ambrose
Evans-Pritchard
The Telegraph, London
Sunday, May 9, 2010
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/77......
Are Europe's leaders grasping the
nettle at last? Faced with the imminent disintegration of monetary
union, they appear poised to create the beginnings of an EU debt union
and authorize the European Central Bank to step in immediately to
stabilize the eurozone bond markets. "It is an absolute general mobilization: we have decided to give
the eurozone a veritable economic government," said French president
Nicolas Sarkozy, once again basking as Europe's action man. "Today we
have an attack on the wh*** of the eurozone. This is a systemic crisis:
the response must be systemic. When the markets open on Monday morning
we will be ready to defend the euro."Great caution is in order. German Chancellor Angela Merkel
has so far said little. The descriptions of the deal agreed by EU
leaders in the early hours of Saturday are coming from the French bloc
and EU bureaucrats. How many times during the Greek saga of the last
four months have we heard claims from Brussels that turned out to be a
distortion of what Germany had actually agreed, causing each relief
rally to falter within days? They had better get it right this time. But if the early reports are near
true, the accord profoundly alters the character of the European Union.
The walls of fiscal and economic sovereignty are being breached. The
creation of an EU rescue mechanism with powers to issue bonds with
Europe's AAA rating to help eurozone states in trouble -- apparently
E60 billion, with a separate facility that may be able to lever up to
€600bn -- is to go far beyond the Lisbon Treaty. This new agency is an
EU Treasury in all but name, managing an EU fiscal union where
liabilities become shared. A European state is being created before our
eyes. No EMU country will be
allowed to default, whatever the moral hazard. Mrs Merkel seems to have
bowed to extreme pressure as contagion spread to Portugal, Ireland,
and -- the two clinchers -- Spain and Italy. "We have a serious
situation, not just in one country but in several," she said. The euro's founding fathers have for
now won their strategic bet that monetary union would one day force EU
states to create the machinery needed to make it work, or put another
way that Germany would go along rather than squander its half-century
investment in Europe's power-war order. Whether the German nation will acquiesce for long is another
matter. Popular fury over the Greek rescue has already cost Mrs Merkel
control over North Rhine-Westphalia and with it the Bundesrat, dooming
her reform agenda. The result was a rout.Events are getting out of
hand, and not just on the streets of Athens. For now, the world has avoided a financial cataclysm
that would have been as serious and far-reaching as the collapse of
Lehman Brothers, AIG, Fannie and Freddie in September 2008, and perhaps
worse given the already depleted capital ratios of banks and the
growing aversion to sovereign debt Bond risk on European banks as measured by the iTraxx financial
index reached even higher levels late last week than in the worst
moments of the Lehman crisis. The safe-haven flight into two-year
German Schatz was flashing the most extreme stress warnings since the
instruments where created forty years ago."We're seeing herd behavior
in the markets that are really wolfpack behavior," said Anders Borg,
Sweden's Finance Minister. Credit
specialists in Frankfurt, London, and New York feared a blow-up by
Thursday afternoon, when ECB president Jean-Claude Trichet said the
bank's council had not even discussed the `nuclear option' of buying
Club Med bonds. The ECB seemed to be on another planet. It was the fall-out from that press
conference -- at a moment when markets were losing all confidence in EU
leadership -- that had much to do with the DOW's 1000 point drop in
New York hours later. This is not to blame Mr Trichet. He did not have a
mandate to go further at that stage. The Bundesbank had blocked him,
knowing full-well that ECB purchases of bonds is the end of monetary
discipline and the start of a Primrose Path to Hell. As they say in
Frankfurt, a central bank should be like pudding: "the more you beat
it, the harder it gets". It is
pointless to fault either camp is this clash of Latin and Teutonic
mores. The euro was never an "optimal currency area", which is to say
it was never an "optimal legal and cultural area". It was a late 20th
Century version of the same Hegelian reflex of imposing ideas from
above -- making facts fit the theory -- that has so cursed Europe.
Schopenhauer said Hegel had "completely disorganized and ruined the
minds of a wh*** generation". Little did he know how long the spell
would last. But I digress.
There is a difference between quantitative easing by the US Federal
Reserve and the Bank of England for liquidity purposes, and use of this
policy to soak up the debt of governments dependent on external
finance to cover structural deficits. The lines are of course blurred.
One purpose can leak into the other. But whatever the objections of the Bundesbank, it seems that
Europe's elected leaders pulled rank this weekend -- and high time too
says the French Left. The reaction in Germany already been fierce. "The
ECB is going crank up the printing presses," said Anton Borner, head
of Germany's export federation. "In five to ten yeas we will have a
weak currency, with rising inflation and higher rates of inflation that
will act as a break on growth." I don't agree with Mr Borner. The M3 money supply is contracting in
the eurozone, pointing to the risk of a Japan-style slide into
deflationary perma-slump, although the panic response to that down the
road may well be to call in the printers. But there is no doubt that Mr
Borner represents German opinion. The EU is invoking the "exceptional circ**stances" clause of
Article 122 of the Lisbon Treaty, arguing that the euro is subject to
an "organized worldwide attack". This is a legal minefield. A group of
professors has already filed a case at Germany's Constitutional Court,
claiming that the Greek bailout is illegal and that the EMU is
degenerating into a zone of monetary disorder. The judges have denied an immediate injunction on aid
to Greece, saying that it would to be too "dangerous" to take such a
step on limited facts, but it has not yet decided whether to hear the
case. The battle has escalated in any case. The new EU rescue mechanism
is to be permanent and no longer just bilateral help, if Mr Sarkozy is
right. The professors have been given an open goal. One almost
suspects that the Kanzleramt in Berlin is so weary of this dispute that
it has given up worrying about lawsuits. If the judges block an EU
debt union, be it on their heads. Nor is this rescue fund any more than chemotherapy for the cancer
eating away at the foundations of monetary union. It is not a cure. The
rot set it when the South joined EMU before it was ready to cope with
ultra-low interest rates or match German wage-bargaining. The ECB made
matters worse by gunning M3 at an 11pc rate during the bubble. Club Med
lurched from credit boom to bust. It is now trapped in debt deflation
at an over-valued exchange rate, like Argentina with its dollar peg in
2001 until air force helicopters rescued President De La Rua from the
roof of the Rosada. The answer
to this -- if the objective is to save EMU -- is for Germany to boost
its growth and tolerate higher `relative' inflation. This would allow
the South to close the gap without tipping into a 1930s Fisherite death
spiral. Yet Europe will have none of it. The weekend deal demands yet
more belt-tightening from the South. Portugal is to shelve its public
works projects. Spain has pledged further cuts. As for Germany, it is
preparing fiscal tightening to comply with the new balanced budget
amendment in its Grundgesetz. While each component makes sense in its own narrow terms, the EU
policy as a wh*** is madness for a currency union. Stephen Lewis from
Monument Securities says Europe's leaders have forgotten the lesson of
the "Gold Bloc" in the second phase of the Great Depression, when a
reactionary and over-proud Continent ground itself into slump by
clinging to deflationary totemism long after the circ**stances had
rendered this policy suicidal. We all know how it ended.
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