Europe’s doomed fate

By Felix Salmon
November 3, 2011
This is beginning to feel like 2008, complete with all the rumor and chaos and volatility we saw back then.

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This is beginning to feel like 2008, complete with all the rumor and chaos and volatility we saw back then. MF Global is a bit like those Bear Stearns hedge funds which went bust — an isolated datapoint in one respect, but ominous in many others. And right now the best case scenario is that Greece ends up being Bear Stearns, rescued by an international community petrified of what might happen in the event of a chaotic collapse.

But Greece being Greece, of course, a chaotic collapse has to be pretty much an inevitability at some point.

Of the many ways in which the euro project was fundamentally misguided, this might be the proximate cause of its demise: it was never robust to the messy world of political reality. And in the real world, people — including heads of state — make stupid decisions all the time.

So it’s a bit silly, frankly, second-guessing George Papandreou’s fateful decision to call a referendum on the latest Greece bailout. It might not have been the most statesmanlike thing to do, but the fact is that, judged by the standard of most Greek prime ministers, Papandreou’s pretty much the best that Europe could reasonably hope for. (Just think: Greece could be run right now by someone more like Silvio Berlusconi. Or, for that matter, Jon Corzine.)

In Greek tragedy, humans don’t rise above events to triumph; rather, they are crushed by forces greater than themselves. (It’s one reason why The Wire was such an innovative piece of television: it reached back past that great humanist, Shakespeare, to his Greek antecedents.) The architects of the eurozone displayed classic hubris: they saw the increasing economic ties between the various countries and locked themselves in to a momentum trade where such ties could only ever strengthen and never weaken.

And in the event it took much less time than even the skeptics had anticipated before that hubris resulted in the inexorable nemesis.

There is a decent chance that the G20 summit will somehow muddle through in Cannes. There’s even a possibility that Greece will manage to extract itself from its current political mess, implement the reforms that Merkel and Sarkozy are insisting on, and live to collapse some other day.

But at this point I see no sign of the pan-European unity at the head-of-state level which is needed to preserve the eurozone project over the medium term. Commeth the hour, commeth the backbiting and finger-pointing and recriminating. Greece is going to default and leave the euro; the only question is when. And when it does, the EU will find that its protections against contagion are about as effective as that $1.6 billion tsunami breakwater in Kamaishi.

Greece can fall and the eurozone can still survive. But Italy — which is just as politically dysfunctional as Greece — can’t. Which is why those Olympian forces will ultimately spell the end not only of Greece’s membership in the euro, but also of European monetary union more generally.


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The only “sensible” solution (and what will happen in the end) is to devaluate, default and get on with your life (a la Argentina, but preferably without the Kirchners).
The problem is that this option can only be taken after all other (clearly worse) options are out of the table. They have been delaying this decision for more than one year with no apparent benefit to no one.

Posted by Bernardo_CM | Report as abusive

I’m not as worried about Europe as I am about Prime Minister Boehner unilaterally imposing austerity in the USA. That seems to be the track we’re on. We’ll muddle through till November 2012, but our version of the “left” has taken to the streets and they are *not* there to support a Democratic President or Senate.

Posted by znmeb | Report as abusive

Interesting to note that near the end BSC had a $395 billion balance sheet, which squares up nicely with Greece’s E329 billion of debt at YE2010.

Unfortunately there is no Fed to take a bunch of junk paper in order to sell Greece to a better capitalized competitor.

Posted by johnhhaskell | Report as abusive

Don’t push that antique tragedy comparison too far. An epic tragedy requires a tragic hero, not just a tragic office of eurocrats.

Posted by Greycap | Report as abusive

Anyone remember the movie Weekend at Bernies?

Posted by jpstrikesback | Report as abusive

In the US, Fed/state & local governemnt makes up 40% of US GDP (more than manufacturing & construction combined now), our debt has exceeded 100% of US GDP (10s of Trillions more if you include unfunded entitlements for boomers) and our leaders are struggling to find 30 days worth of deficit cut with deficit spending $4 Billion in the red every day (and a trillion per yr projected for years in deficit)! Also, almost half of us still think spending/gambling our way out is the answer! And you’re worried about Europe? Californias’ economyalone is in the top 10 in the world and many consider them bankrupt! Time for some honesty and transperancy or expect more anarchy!

Posted by DrJJJJ | Report as abusive

“In the US, Fed/state & local governemnt makes up 40% of US GDP.”

Actually, its 28% (close enough! lol).

Besides, is the implication that a dollar spent by government on a pencil is worth less than a dollar spent by the private sector on that pencil? Or is the implication that government spending must be waste (that darn interstate highway system!!!) while private sector spending can’t be (I’ve got a dozen empty houses for sale in Vegas. Brand new! Never lived in!)?

“Also, almost half of us still think spending/gambling our way out is the answer!”

Yes. Generating economic activity (spending) generates economic activity (GDP). It does not so much cause economic growth — it literally is economic growth. Household spending + Business spending + Government spending = GDP. (It’s not that difficult of a formula to remember.) What’s scary is about 25% of the population is too dense or misinformed to grasp this obvious point.

Posted by Jimmmo | Report as abusive

An ECB 4-5% Euro-zone-wide inflation target (which would work out to something like 3% German inflation, and 0% inflation in the PIIGS) would do a huge amount to relieve pressure. It would probably resolve the problems for Spain, and maybe Portugal, Italy, and Ireland as well. Greece would still be troublesome, but even they would be easier to deal with if their debts were shrinking relative to their incomes.

Posted by Auros | Report as abusive

Greece: Help, we’re bleeding badly!

EU: Cut off your arms and legs so that you won’t need as much blood. We’ll give you some bandages.

Greece: Let me get a second opinion.

EU: NO! Either cut off your arms and legs, or we won’t give you any bandages!

Posted by GRRR | Report as abusive

If you loaned billions of dollars to a country that can’t repay, you lose your money. It is just that simple. All the country’s debt should be erased and all the politicians voting to borrow more and more money that cannot be repaid should lose everything. It should become a crime for a country’s politicians to do this in the future. Now there is a real solution.

Posted by M.C.McBride | Report as abusive

Felix, admit it. You wrote this piece of scrofulous doggerel while wrestling with your meusli. Except the children had finished with the milk and you had to make do with water and found yourself poking at this soggy mess.

“But Greece being Greece, of course; Olympian forces; hubris, inexorable nemesis; classic hubris, skeptics (sic)”.

Put out an extra bottle of milk and lay off the Greek tragedy.
It’s not as if you care.

Posted by scyth3 | Report as abusive

The problem with transperancy is if you saw the real balance sheet and the details of the real expenditures, so could all the corruption, favortism and self-serving waste there really is, you would leave screaming and looking for the first politician to strangle.
Greece will eventually fail, but Italy is too big to fail and would bring down the EU, because like the US Fed, there are no more bullets left in their guns.

Posted by EagleDriver | Report as abusive

Leverage in the system is a mere fraction of what prevailed in 2008. Allow, for a moment, an alternate path:

Jon Corzine is the sacrificial goat of the market (and nearly looks the part). Italy sees the discord that prevails in Greece and decides to play the game straight. The bad outcome doesn’t occur, and the massively negative sentiment combined with years of pent-up demand in the US fuels a stronger economy leading to a catch-up rally that goes to and past the old highs. NOBODY is positioned for that!

Posted by RichL40T | Report as abusive

it is simply amazing how politicians can talk all around a problem and never address the real issues. How many proposed solutions to the Greek debt crisis have there been so far? Are not all of them simply perpetuating the existing problem of too much DEBT?

Have you heard even ONE banker or politician even suggest that just maybe there is a problem with our whole debt based monetary system? Could the fact that all currencies are FIAT and have no intrinsic value since departures from the gold standard in 1971 be pat least part of the problem? Until you identify HOW we got here, how can we possibly change the future if we simply continue down the same path of new layers of debt?

Below is an essay that at least looks at the FACTS on a mathematical basis instead of “pie in the sky” solutions that merely perpetuate previous mistakes.

Subject: Myron’s Musings – Compounding in Reverse

The essence of capitalism is embodied in the well known phrase, “the magic of compounding” and any economist worth his salt has used it to promote various and sundry financial instruments that have proliferated over the decades. I could give myriad examples of the difference in results over 20 yrs. or 40 yrs. of simple things likes cutting mutual fund fees by a quarter percent, or a mortgage rate by 2 or 3/10th percent for example. For many people that may seem insignificant, but can make a dramatic difference over a long enough period of time. This premise was the foundation of the popular, but now severely flawed mantra to “Buy & Hold” put out by Wall St. & Bay St. to keep people invested in their products, like mutual funds for example. As we will learn, there is a darker side that is only now being exposed.

Suffice it to say that in past decades, under the capitalist system, it indeed made sense to SAVE and put aside money regularly as soon as possible in your working or business career. The more you saved, the sooner you saved, the greater the compounded result. This was in preparation for a secure retirement, and it worked for many people for the past few decades. The truth today is it is almost impossible to find a debt instrument that will pay a true return in excess of actual non manipulated government statistics on inflation, but who understands and has explained WHY?

Today we face a totally new paradigm most investors and average income earners have not yet grasped or adjusted too. Given current economic conditions in the world I think it is time we took a long hard look at the opposite side of the equation of the popular mantra referred to as, “the magic of compounding” through investment in debt instruments.

With interest rates at basically ZERO, even below the rate of inflation, the incentive to save has largely been removed, to say nothing of people being enticed to borrow at “teaser interest rates” making instant gratification almost ir-resistable for people wanting all the new toys, big screen televisions, I Pods, I Pads ad infinitum. It is so painless until you over extend yourself as we now see even governments have done. Politicians tend to promise the world to get elected and then run deficits to keep at least enough of their promises to get re-elected.

This train of thought was triggered while reading an excellent essay by John Mauldin on the potential for hyper inflation, and while he concludes it will not happen here, I am not as certain as he is. The subject is much in the news these days with the sovereign debt problems in Europe engulfing half a dozen nations, to say nothing of the profligate uncontrolled spending creating a fiscal dilemma for the United States that can also have world wide implications. I highly recommend you read Mr Mauldin’s article for balance, which you can access at the following URL: from which I quote: “to understand the incomprehensible scope of the German inflation, maybe it is best to start with something basic — like a loaf of bread. (To keep things simple we will substitute dollars and cents for marks and pfennings. You’ll get the picture.) In the middle of 1914, just before the war, a one pound loaf of bread cost 13 cents and 2 years later it was 19 cents.
Two years more and it sold for 22 cents. By 1919 it was 26 cents. (Double in value on a mere 12% compound inflation – JM). Now the fun begins.

In 1920, a loaf of bread soared to $1.20, and then in 1921 it hit $1.35. By the middle of 1922 it was $3.50. At the start of 1923 it rocketed to $700 a loaf. Five months later a loaf went for $1200. By September it was $2 million. A month later it was $670 million (wide spread rioting broke out). The next month it hit $3 billion. By mid month it was $100 billion. Then it all collapsed [as if a roughly 8 billion times rise in cost wasn't already collapse! Hint of irony here. – JM] ” COMMENT: Indeed, talk about a snowball rolling down hill, note the rapid escalation once inflation took over the market!

These statistics are readily available, and have been quoted by many writers, but the interesting thing is that in all the reams of words and debate over the weeks and months about how to SOLVE our current financial problems it all seems to revolve around creating even MORE DEBT, when excessive DEBT is already the problem.
I have not heard of anyone in positions of power and ability to make constructive changes ask questions about whether “excessive debt” is an indication of a STRUCTURAL PROBLEM with our monetary system? All solutions proposed it seems to me, are attempts to “save the system” while using demonstrably FAILED tactics that do not deal with fundamental flaws in the system. Brings to mind one definition of insanity; “doing the same things and expecting different results” and I could elaborate extensively on that, but wish to stay focussed on my titled thesis.
I submit that the German experience in the 20′s is a classic example of “compounding in reverse” the dark side of the fractional reserve, fiat, debt financing system, that lacks “checks and balances” since we went off the gold standard in 1971. WHY are economists not thinking outside the box and asking whether growth has to be financed by debt instead of savings? Has anybody ever suggested government on behalf of the people extend credit for needed infrastructure using our natural resources and available labour, taxing it back interest free over the life of what is created, instead of in-debting people to private bankers to finance it with DEBT, and ending up paying DOUBLE?
They might also ask, WHY do a certain class of people have a monopoly on essentially counterfeiting actual money (gold and silver) with what are in effect debt based I.O.U.’s created out of thin air? There are better ways of structuring our financial system that are simply not being explored because of powerful financial interests that benefit from our debt enslavement.
Now comes the controversial statement establishment trained and educated thinkers will at first have trouble comprehending, and will probably vehemently protest it as preposterous and disparage it as nonsense, but simple mathematics says otherwise.
WHY you ask, very simple, because under the fractional reserve system “every bank loan is a new creation of money, and when it is paid back it ceases to exist” testimony of Graham Towers then Governor of the Bank of Canada in 1939 before a Parliamentary Committee under oath. What this means in practical terms, is that since ONLY the principal is created when the loan is made, but over the course of a 25 year mortgage at average rates, an EQUAL amount is paid back in interest, as well as the original amount of the loan being cancelled out.
“Net result, on average over 25 years, TWICE as much currency is taken out of circulation as was originally created out of thin air as DEBT that must be repaid with interest. This is only possible through continual and growing indebtedness on a collective (societal) basis. The bankers get a free ride, while we the taxpayers (through bailouts) pick up the tab for their profligate unsound loans and generally risky behaviour, if not criminal attempts to keep us enslaved to a monopolistic and corrupt system of perpetual debt, cleverly disguised and deliberately mislabelled as CREDIT! ”

Practically then, the only way that uncreated interest can be paid, is by an exponential increase in the number and size of loans. In other words, the uncreated interest simply accumulates into an ever growing pyramid of debt that ultimately becomes un-payable because eventually banks run out of viable collateral against which to make new loans. Equally relevant, it says nothing about a lack of bank reserves to do so, because people are unable to save under this very oppressive system. It is not only unconstitutional as Ron Paul consistently points out, but I contend should be outlawed for the Ponzi scheme that it so obviously is, and the perpetrators charged with FRAUD!
I submit based on the evidence of our economic situation today that we have reached, if not surpassed, that point of no return where the system is no longer viable in its present form. In other words, the “magic of compounding” has now turned against us, and what we are compounding is now “DEBT” constantly adding new layers stacked upon previous layers that can not be paid, and at best keep getting rolled over into a growing debt pyramid.
That can not continue much longer since we have progressed (sic) from a family living comfortably on one salary, to barely being able to make ends meet at near zero interest rates, when BOTH parents are working. With rising taxes (as high as 50% disguised interest) maybe even adult children are living at home to make ends meet while they pay off student loans, a recent layer of new debt that can not be discharged in a bankruptcy, so they are stuck for life as a debt slave, and some may not even be able to find a job and end up recruited as cannon fodder in some new war contrived as a pretext to revive the economy.
SCARY when the only solution being offered is additional new layers of debt the politicians and bankers want to saddle the taxpayer with for endless generations. All to try and save a system that has made them rich and turned 95% of the population into debt slaves with an increasing number of people impoverished, if not outright destitute as they lose jobs and homes, to say nothing of the plight of retiree’s on fixed incomes.
The architects of this pyramid scheme are running scared because they are beginning to grasp that once the dominoes begin to fall it could quickly be curtains for their nefarious scheme and it could well be triggered by derivatives which famous investor Warren Buffet correctly labels as “financial weapons of mass destruction”!
My conclusion is that: “the magic of compounding ” is quickly turning into the nightmare of fiscal collapse.

Posted by thinker75 | Report as abusive

“WHY are economists not thinking outside the box and asking whether growth has to be financed by debt instead of savings?”

Debt and savings are flip sides of the same coin. When I buy a bond that you have issued, the bond represents my savings. It represents your debt.

The primary alternative to debt is to give those who hold the capital an equity interest in any new business. The other alternative is to have a stagnant economy in which the people with savings have no effective way to connect with the people who NEED the savings. (We are seeing some of that today and it isn’t pretty.)

Posted by TFF | Report as abusive