A Guest Blog: Is The EU Cracking-up?

The “The EU Crackup” guest blog that follows below, reprinted with permission, was published in the wake of the Finnish elections where the True Finns party gained enough votes to become power brokers in a Helsinki where resistance is  strong against further EU bailouts for a deteriorating Euro-zone.

Good News it most certainly is not

Some weeks after the guest blog was first published, an astonishing ‘Ireland’s-Last-Stand’ analysis by Morgan Kelly, professor of economics at University College Dublin, has appeared in the Irish Times. This piece effectively advocates that Ireland walk away from its current ECB/IMF bailout and disengage from its Irish-governnmment-guaranteed-banks. Ireland, the good professor opines, faces economic ruin. “The Irish Government (is) on track to owe a quarter of a trillion euro by 2014, (and) a prolonged and chaotic national bankruptcy is becoming inevitable.”

Given the nature of the eurozone, the impact of such a move would surely bring down the whole house of cards — Greece first, followed by Portugal, Spain, Italy, France and likely Germany.

The EU Crackup by Llewellyn H. Rockwell, Jr.
Political upheaval has hit Finland, and it’s merely a foreshadowing of bigger changes ahead. The core issue is whether Finland ought to be paying for bailouts for other EU states. In reaction to establishment support for the bailout, voters ousted the pro-bailout ruling party and gave an upset victory to the bailout-critical conservative party. Against every expectation, the eternal rule of the social democrats is at an end.

But most striking of all are the gains made by a previously invisible party called True Finns. This is the only party to take a hardcore position: no bailouts at all. It also so happens that this party is predictably nationalist on issues of trade and immigration. But that’s not the source of the appeal. The bailout is what is on everyone’s mind. And you know that the anger must be palpable if it fired up the usually sleepy world of Finnish politics.

In the sweep of history, few issues are as politically volatile as tax-funded bailouts of foreign countries, especially during difficult economic times. It’s a policy that provokes dramatic political change. The 20th century’s most famous case was in interwar Germany, when nationwide resentment against payments to conquering allied nations ushered in National Socialist rule.

It should be no surprise that over-taxed Finns have no interest in sending their tax dollars to bail out the banking industry of Portugal, a country that is 2,500 miles and two days travel away. Even governments should have learned long ago that it is never a good idea to enact these sorts of policies. In this case, however, every EU nation is bound by a political contract to bail out any other; the bailouts are embedded in the very structure of how the political, financial, and monetary sector is currently structured.

The entire EU system is afflicted with the paper money disease. It creates a boom that balloons the banking sector, allows politicians to spend wildly, and encourages private enterprise to expand operations in an unsustainable way. Then the bust comes and everything falls apart. Government revenue crashes, banks are threatened with insolvency, and mass bankruptcies are apparent everywhere.

There is a fork in the road, one branch labeled liquidation and the other bailout. When the fiat money is available—and with their favorite interest group, the banking establishment, warning of the end of the world—guess which way the politicians choose? This is why member states are being told that they must cough up $129 billion (it will be more) to save Portugal from its own problems.

It’s not that politicians all over Europe (and the US) love Portugal so much that they are glad to lavish it with more paper money. The real fear is contagion. If Portugal goes, Spain and Italy are next, and then the whole shaky system comes down, first in Europe, then in the UK, and finally in the US. This is the scenario that allows politicians once again to paper over the problem rather than confront it.

Wasn’t the invention of the European Central Bank supposed to control credit expansion in Europe? Philipp Bagus, in his book The Tragedy of the Euro, identifies a fatal flaw. There is nothing that the ECB can do, even if it wanted to, about sovereign state finances or the fractional-reserve banking system that feeds on government-created debt. The ECB can control money injections, but it can’t stop debt creation or the banks that thrive on it.

This debt creation generates its own unsustainable boom. A country’s finances then correct to reflect reality and the banking system comes under pressure. Then the bailouts begin. What ends up happening is that the (relatively) frugal states in the European Union subsidize the less frugal ones. There is moral hazard embedded in the very structure of the entire system.

Nothing is going to fix it. Bailouts are only temporary aids until the next round of credit-fueled profligacy. And there is absolutely nothing that the ECB can do to stop it. Every profligate country knows that it is too big to fail, and that it enjoys presumed access to the financial resources of every other state in the EU. So the result is ongoing and worsening bailouts, leading to total bankruptcy.

For this reason, everyone knows that there is far more at stake than just Portugal. The entire system of European finance and monetary arrangements is broken. It can’t be repaired with patchwork bailouts. At some point, the flaw in the system will have to be fixed (via a hard currency) or there will be a reversion to sovereign paper currencies and the Euro will be chalked up as yet another failed experiment in monetary and regional planning.

Keep in mind that this is the third country to be bailed out recently. Ireland and Greece came first. And those bailouts barely worked. Once we plough through the smaller countries, we will move on to the larger countries. And there is not enough money, absent hyperinflation, to bail out Spain, much less Italy.

The European Central Bank, which has been less irresponsible than the Fed in recent days, is the first world central bank to do what should have been done three years ago. It is raising rates with the intention of tightening money. The Fed should and must do the same thing. But there is a problem. If real interest rates reflected financial reality – with no presumed bailouts and no power to create new money – they would be sky high.

The Portugal case and the Finnish reaction should serve as a wake-up call. All these bailouts and stimulus packages cannot hide the fact that the governments and banking systems of the US and Europe are fundamentally bankrupt, sustained only by the power to create money out of thin air. Each intervention is working to buy time but not to deal with the fundamental problem. And each time when the problems return, they are worse than before.

It doesn’t take a True Finn to recognize the injustice of bailouts for foreign governments. Neither nationalism nor bailouts will fix the real problem. We will eventually find our way back to sound money. But it is going to be terrible slogging, and real convulsions, along the way.

April 19, 2011

Llewellyn H. Rockwell, Jr. , former editorial assistant to Ludwig von Mises and congressional chief of staff to Ron Paul, is founder and chairman of the Mises Institute, executor for the estate of Murray N. Rothbard, and editor of LewRockwell.com.

Here London-based think tank, Open Europe, summarises  the EU’s ongoing Euro crisis post the True Finns’ spanner-in-the works-threat:

True Finns to enter negotiations about forming a coalition government;
Open Europe: EU leaders’ two-fold eurozone gamble starting to unravel
Finland’s True Finns party said yesterday that they were prepared to take part in talks on forming a new government in Helsinki – following their electoral breakthrough making them the third largest party. However, Timo Soini, the leader of the True Finns, is quoted by Scandinavian newssite E24, identifying Finland’s EU and eurozone policy as the most important issue for him in the negotiations. “This was a referendum on [Finland’s] EU policy”, he said. Yesterday, Soini also said that a softer line on a Portuguese bail-out – which the party has resisted so far – was “unthinkable”, according to Finnish daily Vasabladet.

Open Europe’s Director Mats Persson has an op-ed in today’s Wall Street Journal. He argues that “When European Union leaders forged their monetary union without a full political and economic merger, they gambled on two vital factors: That economic forces could be kept in check, and that national democracies could be managed. Over the past 16 months, we have been reminded time and again exactly how big and how irresponsible those gambles were.” He goes on, “irrespective of what we think of the True Finns, the election does highlight how powerfully a euro-zone crisis can contribute to shaping national politics”, arguing that “Writ large, [the] elections are a rebuke of one of the euro zone’s central, and fatal, conceits: that political ambition can trump economic and democratic realities.”

He concludes, “Will EU politicians’ second gamble turn out as ill-judged as their first? Time will tell. But one thing is clear. The political price that European leaders are paying to keep their flawed project afloat continues to rise.” Mats also appeared on Newsnight, arguing that we are entering “unchartered territory both in terms of the willingness of taxpayers in stronger eurozone economies to underwrite governments in weaker ones, and the extent to which citizens in weaker member states will put up with EU-backed austerity measures.”
WSJ: Persson Newsnight Irish Independent Irish Times Irish Times2 FAZ: Sievers Stern SVD SVD2 IHT Le Monde Jornal de Negócios Diario Económico Europaportalen El Pais: GÓMEZ El Pais El Pais2 FT FT 2 FT Editorial Vasabladet KP24 Yle Yle2 Vasabladet2 Helsingin Sanomat

Officials suggest Greece has already asked for a restructuring;
Bundesbank slams permanent Eurozone bailout fund
FT Alphaville reports that the Greek government has already discussed the possibility of a debt restructuring, particularly the extension of loans, with senior IMF and EU officials. Reuters reports that Germany expects Greece to require some form of debt restructuring before the end of the summer, according to unnamed officials. The Greek cost of borrowing continued to skyrocket, while problems also began to spread to other peripheral eurozone economies, as markets continued to price in the risk of a Greek debt restructuring.

The cost of borrowing on 10yr bonds for Spain also increased significantly to 5.54%, leading to suggestions that it is not as withdrawn from the peripheral crisis as previously thought. Meanwhile, the Irish Independent reports that the ratio of bad loans held by Spanish banks continues to increase, due to the unresolved crisis in the real estate sector.

Handelsblatt reports that the Bundesbank has slammed the agreement on the EU’s permanent bailout fund. The German central bank is not happy with the fact that bondholders will not take write downs on debt with a maturity of less than one year, as well as the fact that the fund does not have a clear limit. It also suggested that the interest rates charged would be lower than the IMF, creating significant moral hazard. Separately, Hans-Werner Sinn, head of the IFO economic institute has estimated Germany’s exposure to the eurozone bailouts is €400bn, reports FAZ, which is more than the size of the German government budget.
FT FT Alphaville Reuters FT 2 WSJ EurActiv Telegraph Welt Reuters Deutschland Elephtherotypia El Pais El Pais 2 El Pais: Ontiveros Público.pt Expresso LUSA Publico.es WSJ: Hannon WSJ 2 WSJ 3 AFP Reuters Analysis Irish Independent IHT Finance Business News Le Monde Irish Times: O’Connell Irish Times: Beesley Irish Independent Times: Leader Telegraph: Warner FT 3 MNI Handelsblatt Borsen Zeitung Bundesbank Monthly Report FAZ

De Standaard reports that the Belgian Constitutional Court has approved a lawsuit challenging the incorporation of the European Financial Stability Facility into Belgian law and will now look into it.

According to Dow Jones, Belgian Finance Minister Didier Reynders has said that imposing capital controls on EU member states is worth debating, as it could prevent foreign investors rushing into peripheral eurozone economies causing inflation and potential overheating. However, Reynders suggestions contravene EU internal market rules which ban the use of such controls.
Dow Jones

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