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APRIL 24, 2012 6:02PM

THE EURO: 52 Card Pick-Up?

Rate: 11 Flag

In Money

Bullish sentiments in the worldwide stock market were taken for a rude awakening by a double clap of thunder emanating from France and the Netherlands over the weekend. First, the defeat of French President Nicholas Sarkozy seems almost certain. He's the first French president in history to fall behind in the first round of voting. While the French electoral system has its own set of complications, the constellation of political parties in France almost guarantees that Francoise Hollande, the Socialist candidate, will be Sarkozy's replacement in two weeks.

The second clap of thunder occurred in the Netherlands, which was totally unanticipated.  Mark Rutte,  the Dutch prime minister, announced on Monday that his governing coalition had been handed a vote of no confidence in parliament.  Geert Wilders, head of the Freedom Party, broke publicly with his coalition, saying that the Dutch government's policies of  imposing forced austerity to comply with European Union demands was totally unaceptable.

 What makes the Dutch situation so significant is that up until now, the Netherlands was regarded as one of Germany's closest and strongest allies in its drive for imposing austerity on Greece, Italy, Spain, Portugal, and Ireland (AKA the PIIGS).  To world financial markets, the incredibly weak showing of Sarkozy to Hollande was expected.  France, is of course, Germany's major partner in dictating PIIGS' debt reduction, and Monsiuer Hollande will  most likely take a more skeptical approach towards imposing austerity on the European Union's weaker cousins .

What both the Netherlands and France have in common besides a newfound opposition to the German approaches toward stressing repayment of individual country national debt and an austere internal budget, is the fact that in both countries there appears to be a direct rebellion by both left and right wingers against the center.  For example, Marie Le Pen, of the fascistic National Front Party in France received a record high of almost 17% of the national vote.  And at the same time Jean Luc Melachon, of the  hard left Left Front party,  also did quite well, receiving about 11% of the vote.

In Holland, Geert Wilders of the Freedom Party last achieved worldwide fame by inciting Islamophobia in that country.  And now the Freedom Party has broken the coalition it's in, by complaining about the overly restrictive measures imposed by the EU from Brussels.

Dmitri Papadmitriou, an seasoned observer of the European debt crisis observed yesterday that these and other events clearly show the long term instability of the euro as a viable world currency under the present circumstances.  He's labeled the tyranny dictated by Berlin and Brussels on the PIIGS as being similar in its structure to the gold standard that ruled the world economy all through the 1800s up until the Great Depression.

One of the things driving the current Euro crisis is the fact that if individual countries like Italy or Greece had their own liras and drachmas, they could merely devalue their national currencies. Then their internal economic problems would correct themselves automatically.  However, as in the world gold standard of yore, since there is an external standard of money outside their countries (i.e. the euro), then imposing harsher standards on the PIIGS inevitably results in a vicious circle of greater and greater poverty. 

While the bankers of Brussels and Berlin fixate on inflation indexes and the repayment of such things as Spanish or Greek debt, the southern tier of European countries wallows in greater and greater economic despair, with less and less chance of  making good on the required debt payments. The European Union coalition has up to this point succeeded at increasing debt payments for Greek and other debt through ever increasing rounds of creative accounting.  The problem now is that the looming potential crisis of funding Italian, Spanish, and Portugese debt is now well beyond the capacity of the European Union to do any more magic tricks as far as the world financial market is concerned.  And major outside players, like the US and China, have informed the Europeans that they're pretty much on their own.

Alan Greenspan himself was reported to have said at a J.P. Morgan Stanley party that he felt that the euro as a viable currency has a limited shelf life.  He  joins an increasingly large gathering  of economic thinkers who say the same thing.  Interestingly enough,  Papadmitriou has suggested that the new political realities in Europe will not force the southern tier of European countries out of the EU.  With an emerging majority of European citizens and governments rebelling against the forced austerity programs,  he thinks that Germany may ultimately take steps to abandon the euro on its own, leaving  the PIIGS, France, and whoever else to populate a reconfigured euro without German participation.

Papadmitriou agrees with George Soros that this is a dangerous situation politically, as it could lead to even more extreme and powerful right wing movements on the continent.  Whether Germany stays in the euro, or whether Greece, Spain, etc. continue on their present course in the face of growing domestic opposition --  it's obvious that the European debt crisis may now be entering its third act.  

Whether the climax of this play works itself out later in the year or in 2013 and beyond is impossible to say at this time.  However, for the short run, the crisis shows all indications of dramatically pushing the entire world economy significantly lower in the next six months.

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The best way for Europe to find it's way back to the "good old days" of 1932, is to allow the Euro to collapse. The racism, ultra-nationalism and the violence and demagoguery that's sure to follow will make the Wiemar Republic look like a Sunday picnic.
Separate currencies make sense. Germany's needs are too different from those of Greece, and if Germany is stronger at influencing currency policy for its own needs, Greece is in trouble because, as you said, the normal way to fix this it to devalue currency.

Austerity, as Keynes and Paul Krugman say, is exactly the wrong way to go about this. These countries don't need to get out of their deficits so much as they need to develop the mechanisms to get out of deficits, which is to say mechanisms to develop economic growth. Generating jobs, which results in more taxpayers and business customers, is what fixes the problem in the long run. Any policy that goes in another direction at the expense of generating jobs will fail and bring its country with it.
It's hard to believe that scrapping the Euro would be the best option. True, with national currencies governments could pay for the deficits by creating more money with a resulting devaluation. But with so much inter-linked trade the administration and transaction costs of multiple currencies adds up.

I wonder if the cost of letting Greece go bankrupt would have been so much worse than constant bailouts. And doesn't the wage illusion figure in here? If you're paid in drachmas you don't take a pay cut but your currency is now worth 40% less than it was. Use the Euro and your pay gets reduced by 40%. Big OUCH and the poorly charted territory of deflation.

Maybe a common currency is too difficult to manage without full, or fuller political integration. But didn't panama for years use the U.S. dollar as its currency? Had it gone full Argentina there wouldn't have been much consequence for the USA. I'll stop rambling now.
I can see France--and may be others in Europe with follow--moving to the right only in foreign policy and only if the new President is more to the left domestically. Great article, lefty. R
Abrawang, the crux of the matter appears to lie in Germany. If the EU were to pursue a political integration similar to what happened to the Continential Congress' evolution into the United States, it would be possible for Germany to subsidize Greece as easily as California subsidizes Mississippi. But the differences between nationalities may prevent more complete political integration.

While the Greeks up until now have grudgingly accepted the concept of an EU, Papadrimitiou is probably right about the major complainers being the Germans. It will be interesting to see what a change in leadership in The Hague and Paris will have on Berlin. But both of these countries (with the PIIGS) have no doubt lobbed the ball back into the Germans' court.

And yes, you're certainly right about the horrible problem of holding drachmas that used to be on parity with euros. For any scheme like this to work for any period of time, the drachma would have to be sterilized, perhaps permanently.
kosher, that's why Papadmitriou's observation is so apt in my opinion.
Thoth, I think France's current foreign policy is pretty right wing right now. Look at Sarkozy's policy on Libya, the Roma, and immigrants. I really don't know what a Socialist foreign policy would be like, although I'd hope it would be more facilitative in brokering some rapprochement between the US and Iran.
Very nice article. The mainstream US media should be covering European elections and the fragility of the Euro and the Eurozone - it could have a devastating effect on the US economy and the lives of thousands of Americans. But they don't and won't. Based on my daughter's experience, I gather they no longer teach European geography or history in high school.
"Bullish sentiments in the worldwide stock market were taken for a rude awakening by a double clap of thunder emanating from France and the Netherlands over the weekend."

what a powerful intro ~ loved this line. Plus I am uninformed about the world economic system in general, and even moreso lately. Thanks for the interesting catch up...sounds like more bad news for us in WI though, if this is all true....
The Euro situation is just the same as the USofA. Just substitute Mississippi for Greece and Alabama for Portugal, and so forth. The reason it sorta, kinda works here is that there is a unified (to some extent) fiscal regime. Germany is adamant against that.

My mother was a devotee of Edgar Cayce, a "prophet" who predicted that Germany would be in three world wars, and lose two. Hmmm.
For a long time, the Europeans looked down their noses at America, particularly at our racial divide. But now that they have their own ethnic and religious divides, they have been exposed as not as enlightened and accommodating as they once thought themselves. Indeed, the lands that once exported the tired, the poor, the huddled masses yearning to breathe free are not so welcoming now that the shoe is on the other foot.

By all appearances, Europa as a "nation" is doomed (and thus so is the euro), brought down by greed -- not socialism. Indeed, some of the most socialistic of European nations -- Sweden, Norway -- appear to be doing quite well. If Europa falls, it will be the fault of bankers, not workers.
And not by the way, you are quite right in making the comparison to fledgling America. It was only by the slimmest of margins, and a retrofit after the Articles of Confederation, and an embrace of slavery -- to say nothing of a Civil War -- that United States remained united. Indeed, that some very public persons dare to speak openly of secession and "states rights" suggests strongly that the jury is still out on the "united" states.

In hindsight, I suggest -- tongue only half-in-cheek -- that we should have let the South secede. I strongly suspect most if not all of those states would have been begging to get back in the Union in a very short while. Indeed, most of those states even today survive on the Federal dole.
@Tom:
Indeed, most of those states even today survive on the Federal dole.

And they are such ingrates, yes?
Robert
And it's not just in the South -- it's Red states in general. The worst of the lot is North Dakota, which prides itself on it's "independence and conservatism" while extracting nearly $2 from DC for every dollar it sends there. And it isn't just the Repugnants barking there -- Senator Kent Conrad (D) is as hypocritical on the matter as any Deep South redneck politician.
I finally accessed Martin Wolfe of the Financial Times, whom I trust very much. He states that the concept of a European Union is so important to the elites that they will try to hash things out no matter what for the foreseeable future. He sees some compromise between the current German position, and the position of debtor countries.

If this is to happen sovereignty issues will be high priorities, as will devising yet more ingenious financial accounting tricks for sustaining the ever growing debt burden of the southern tier countries.
An amazing and well-researched post. It is amazing what is happening DAILY with the euro! Well done on a multi-faceted issue!!