In tomorrow’s Financial Times, one of the major sycophants of ECB and Brussels policy has raised his “voice” in castigating the Germans for being the source of all the EU’s current problems. Martin Wolf’s op-ed piece, “Germany is the Eurozone’s Biggest Problem,” is a criticism of the German export engine. And it seems to be another source for what appears to be a concerted effort to challenge Berlin’s intransigence over the need for budget austerity before fiscal stimulus. Wolf’s opening salvo against the Germans: “The financial crisis has given it a dominant voice in eurozone affairs. This is a matter of might, not right. Creditor’s interests are important. But they are partial, not general interests.”
My response to this is that Mr. Wolf sets up a straw man with this argument. The Germans MIGHT have evolved because without them GUARANTEEING the promises of President Draghi’s “whatever it takes” campaign to maintain the existence of the EURO, the entire EU project would have collapsed under the weight of its highly questionable ability to honor the debt of what at the time was referred to as the PIIGS: Portugal, Italy, Ireland, Greece, Spain.
Yes, a default by the PIIGS would have caused severe stress in the German banks that owned vast amounts of European sovereign debts but Germany would have been able to resolve its banks through it savings, similar to what Japan’s authorities were able to do for the last two decades. Wolf argues that the German’s would rather have deflation then negative rates but, “a deflationary spiral would be a much bigger threat than negative interest rates.” The largest creditors would always desire deflation or very low inflation so as not to debase the assets they own. While negative real yields reward debtors the effects of NIRP has a devastating effect on a creditor. Wolf continues: “Above all, the eurozone will fail if it is run for the benefit of creditors alone.” What Wolf is forced to come to terms with is that the flawed EU system creates an untenable operation for the divergent needs of its members. The only way out is for the German populace to vote on the entire EU project because the confiscatory policies of the ECB result in TAXATION WITHOUT REPRESENTATION.
If the German’s cannot accept the expropriation of its wealth Wolf maintains, “… they should use their exit option. To do so would also entail accepting great short-term disruption.” If Wolf believes that a German exit would result in a short-term disruption he is truly Mister Fantasy for the repricing of European debt without a German guarantee would be a calamity for European debt markets and probably all global financial markets. Especially so as the ECB begins its purchases of corporate bonds next month. A short-term disruption is a pipe dream.
Dear Mister Fantasy, play us a tuneSomething to make us all happyDo anything,take us out of this gloomSing a song, play guitar, make it snappyYou are the one who can make us all laughBut doing that you break out in tearsPlease don’t be sad if it was a straight mind you hadWe wouldn’t have known you all these years. (Traffic)
Tags: EU, Eurozone, Financial Times, Germany, Martin Wolf, PIIGS
May 10, 2016 at 11:40 pm |
Yra,
You write “If Wolf believes that a German exit would result in a short-term disruption he is truly Mister Fantasy for the repricing of European debt without a German guarantee would be a calamity for European debt markets and probably all global financial markets. Especially so as the ECB begins its purchases of corporate bonds next month. A short-term disruption is a pipe dream.”
You seem to be saying that the ECB, BOJ and the FED should keep the current policy of low interest rates, QEs continuing, and just building up more trillions in debt, because otherwise we will have a long term disruption that would be catastrophic and, my words, make the 30s look like a picnic.
So how do you see the end game to the current strategy? Is there really a light at the end of this tunnel that is at least not as bad as the Wolf piece recommends? Is the ultimate result not a destruction of fiat currency, credit and equity markets, and a replay exponentially of the German Papiermark experience of the 1919-23 period globally (which I believe is the subconscious motivation for the German hardball)?
There is no painless solution. Which is the worse of the poisons?
May 11, 2016 at 6:01 am |
Asherz—no I just believe it will not be any type of short-term disruption.The cheerleaders of the EU at all costs have placed a burden upon the good credit of the Bundesbank through the increased balance sheet of the ECB—if Germany left the Euro as Wolf raises the credit markets of the world would suffer a major earthquake as they would have to replace the cost of debt—think back to July ,2012—-this has been the surreptitious plan by the ECB,Brussels,Paris and others to lock Germany into a difficult situation–the Germans have said nein to the Soros promoted European bond but the growth of the ECB balance sheet is to create an EU bond thru the backdoor
May 11, 2016 at 6:17 am |
Wonder if US Treasury might take advantage by issuing vast sums of debt at “uber-low” rates. Being the nice muppets we are,offer the EU our credit card? Assuming you were an insider, you could front-run the entire fiasco.
May 11, 2016 at 7:11 am |
Yra- Of course if Germany withdrew its guarantee the disruption would be long term and be catastrophic. My question to you was that if you were the final financial arbiter in Germany, would you continue to going along with current ECB policy of “whatever it takes”, or would you say, “that’s it.” And in either scenario, is there a good ending anywhere?
May 11, 2016 at 7:54 am |
Asherz–by definition there is no good ending anywhere.The DAVOS crowd senses that and is just trying to lay blame away from them –but as Rabbi Twerski teaches—when you point a finger at others there are three fingers pointing back at you.Academics in pursuit of “truth” have been responsible for the greatest loss of blood and treasure in the world—the question to Yellen at my press conference would be What if you are wrong? and Mario Draghi is a fast talking joke who because he was a high quality salesman at Goldman rendered him to be the President of the ECB over Axel Weber–another major mistake by Chancellor Merkel–as baseball fans ought to know ,Merkel’s Boner indeed
May 11, 2016 at 10:56 am
Goldman Sachs – It’s no coincidence the same actors remain back stage, they’re pulling the strings. Note the FED is in bed.
May 11, 2016 at 11:45 am |
I think if Brexit votes to leave it sets the whole chain in motion for the EU.
Here is an interesting poll tracker
http://www.economist.com/blogs/graphicdetail/2016/05/britain-s-eu-referendum
May 11, 2016 at 12:38 pm |
YRA here someone shares your views http://dimartinobooth.com/latest-weekly-newsletter/http://dimartinobooth.com/latest-weekly-newsletter/
May 11, 2016 at 8:25 pm |
David–thanks.i have been reading Danielle and communicating with her.She is bright and acerbic in her dealing with talking the truth to the davos power elite
May 11, 2016 at 7:58 pm |
Traffic, man…
“The percentage you’re paying is too high-priced
While you’re living beyond all your means
And the man in the suit has just bought a new car
From the profit he’s made on your dreams
But today you just read that the man was shot dead
By a gun that didn’t make any noise
But it wasn’t the bullet that laid him to rest
Was the low spark of high-heeled boys
May 11, 2016 at 8:24 pm |
Johnny–even better thanks tonight’s blog should also get you to turn the turntable on and get the vinyl out